ESG Weekly News Update: February 12, 2021
General ESG News
According to a recent Deloitte poll, financial executive singled out ESG issues as their top risk, followed by cybersecurity and credit matters, Bloomberg reports
When gauging the potential impact of regulatory and supervisory changes over the next two years, risk managers believe cybersecurity rules will be most important, with ESG coming in fourth. The findings may indicate the financial industry sees regulators are closer to coming up with stronger rules on cybersecurity than on ESG issues, especially in the U.S., according to Caldwell
Apart from equity and fairness considerations, a few financially challenged GSEs (Government Sponsored Entities) might manage to attract more ESG capital. If investor taste functions have indeed changed and become more ESG friendly, the marginally solvent municipality or town, which communicates its ESG credentials, might be able to not only attract more investors to its bonds, but entice a nation’s top, young talent to stay. The case for these government entities to publish their sustainability reports is strong
There remains one sector not subject to ESG impact and risk disclosures: responsible artificial intelligence and autonomous systems (AI systems). To overlook AI systems in any material dataset of ESG metrics can be likened to building the spine of responsible business and omitting the spinal cord at its center
Harmful AI deployed inside a company’s supply chain by vendors, third-party suppliers and contractors can cause a spectrum of data and intellectual property harms, loss of confidence in the integrity of the company and/or exploitation culminating in losses and/or business failure. If your company’s products and processes are heavily reliant on AI systems in the supply chain, the impact of malevolent AI will be amplified, increasing the risks
As the prospect of a single, coherent, global system of ESG reporting appears on the horizon, there’s never been a better time to ensure that the impacts of unethical AI on consumers and citizens are recognized and the risks to companies (as major users of AI systems) are mitigated through timely disclosure
President Biden’s administration is openly signaling that it will prioritize ESG investing over the next term. the European Union (EU), which enacted a regulation on sustainability-related disclosures in the financial services sector that will create an ESG landslide as it requires sustainability reporting on nearly all products from EU asset managers and advisors
Larry Fink, CEO of BlackRock, recently stated in his annual letter to global CEOs, “Better technology and data are enabling asset managers to offer customized index portfolios to a much broader group of people — another capability once reserved for the largest investors.”
As more digital tools become available for direct indexing and storytelling, and the regulations support rather than discourage flows, a torrent of advisors are likely to embrace values-based investing as an attractive solution for their clients
Culture has become a strategic priority with impact on the bottom line. It can’t just be delegated and compartmentalized anymore.
Board of directors: Guide the definition and development of the desired culture, ensuring that it aligns with business goals and meets the needs of all stakeholders.
CEO and senior management team: Define the desired culture and cultivate it through leadership actions including setting objectives, strategies, and key results that prioritize culture-building; and designing the organization and its operational processes to support and advance the company’s purpose and core values.
Compliance, Risk, and Ethics department: Provide input to the CEO and senior management team on the definition of the desired culture from the perspective of ethics and risk
Middle managers: Deliver employee experiences that interpret and reinforce the desired culture.
Employees: Provide input to the CEO and senior management team on the definition of the desired culture and culture-building programs and tactics by providing insights on how the desired culture aligns with or differs from the actual culture, customer perspectives, and employee needs and expectations.
Green Biz: The ‘S’ in ESG gains currency
Companies are making progress in disclosing their environmental impact and governance standards, but social factors have not been given the same attention — until now. Social factors include how a company manages relationships with its workforce, the communities in which it operates and the geopolitical environment
Social sustainability factors are material issues for many industries, however, and their management is directly linked to a company’s reputation and brand equity. Companies are showing a growing awareness that good social performance can translate into improved business performance and better relationships with customers and local communities
Two important areas are gender equality and human rights. Gender diversity enhances corporate governance, talent attraction and human capital development — all important factors driving long-term competitiveness. Corporate policies promoting gender diversity are a reflection of a well-managed company that realizes diversity’s value in stimulating creativity and increasing productivity, in tandem with employee well-being
There likely will be growing pressure on companies to consider social factors in their longer-term plans and goals for senior management and to disclose how they are performing year over year.
Pressure on organizations to address ESG-related issues comes from multiple stakeholders, including customers, employees and outside activists
Morningstar reported that sustainability-focused index fund assets had doubled in the past three years to more than $250 billion as of mid-2020. Highly influential institutional investors have been outspoken on their support for ESG disclosures
Companies that prioritize ESG performance fare better in the stock market. In fact, according to S&P Global Market Intelligence,14 out of 17 ESG-focused exchange-traded and mutual funds outperformed the S&P 500 from January 2020 to May 2020
If you view ESG reporting as a risk-management and check-the-box exercise, you'll miss out on the opportunity to use it to improve your company's performance. ESG presents leaders with an opportunity to look under the covers of your business and seek opportunities to build resilience
ESG Disclosures, Standards, Rankings, and Reporting:
Financial markets data and infrastructure provider Refinitiv announced today a partnership with Freedom Seal Global aimed at helping to eliminate modern-day slavery from corporate supply chains around the world, utilizing risk intelligence data on human trafficking
According to the companies, the partnership with Refinitiv will enable Freedom Seal to use Refinitiv’s World-Check Risk Intelligence data to screen suppliers and vendors on behalf of their clients to identify potential connections to human trafficking
The joint committee of Europe’s three primary financial regulatory agencies, the European Supervisory Authorities (ESAs), announced that it has delivered to the European Commission a report including the draft Regulatory Technical Standards (RTS), on the content, methodologies and presentation of disclosures under the EU Regulation on the upcoming EU Sustainable Finance Disclosure Regulation (EU SFDR)
The new regulations will require financial market participants and asset owners to provide disclosures including the manner in which sustainability risks are integrated into their investment decisions, and assessments of the likely impacts of sustainability risks on the returns of financial products
Among the new rules are requirements for financial market participants to disclose on their websites the principal adverse impacts that investment decisions have on sustainability factors, based on a list of indicators encompassing climate and environment, as well as social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects
The Journal of Accountancy article noted that the “IFRS Foundation Trustees also are considering creating a board to create a set of sustainability accounting standards that could be applied worldwide in a uniform fashion.”
Environmental, social, and governance (ESG) investing is no doubt gaining in popularity. However, with that popularity spike comes a degree of accountability, which is causing ESG data to make its way into financial reporting.
The Securities and Exchange Commission (SEC) has recently been looking to add more accountability measures to its programming. In a recent move, the SEC recently appointed Satyam Khanna as a senior policy adviser to address climate and ESG issues
Today Solactive, ISS ESG, and Morgan Stanley announced the launch of the Solactive ISS ESG Future of Plastic Index – a publically listed index consisting of global companies with leading performance in innovation and implementation of plastic waste solutions and efficient material use.
the Solactive ISS ESG Future of Plastic Index avoids companies with low liquidity, major environmental, social, or governance (ESG) risks, and companies with ties to products contributing to marine ecosystem degradation, such as microbeads or significant single-use plastic packaging.
The index is constructed by investing in the equally weighted basket of the 50 “leaders” stocks ranked at the top of the proprietary scoring methodology.
Wall Street Journal: Providing Timely ESG Information Is Becoming More Crucial for CFOs
Providing frequent updates about the sustainability of their business is becoming more crucial for finance chiefs, as analysts and investors increasingly rely on this information when evaluating a company’s outlook and its creditworthiness
Financial analysts these days often consider companies’ ESG performance when recommending whether to buy or sell a stock. Asset-managers need frequent data updates from companies to inform real-time investment decisions, said Rick Redding, chief executive officer of the Index Industry Association representing index providers. Lenders are also taking a closer look at sustainability metrics when they provide loans to companies or underwrite their bonds
As a result, companies across sectors are disclosing more insights into their ESG performance than ever before
Bloomberg: The Boom in ESG Shows No Signs of Slowing
Governments, corporations and other groups raised a record $490 billion last year selling green, social and sustainability bonds. A further $347 billion poured into ESG-focused investment funds—an all-time high—and more than 700 new funds were launched globally to capture the deluge of inflows
In 2021 Moody’s Investors Service expects sustainable-debt issuance to reach $650 billion while money flows to ESG funds show no signs of slowing. This will be the year of “green stimulus as major economies attempt to integrate their economic recovery and job creation initiatives with their longer-term efforts to reduce carbon emissions,” Moody’s wrote in a recent report
Sustainable funds in the U.S. attracted $51.2 billion in 2020, more than double the previous calendar-year record of $21.4 billion set in 2019, according to researchers at Morningstar Inc. Still, the American market remains a fraction of the size of Europe’s, which accounts for about 81% of the $1.65 trillion of global assets in sustainable funds
SEB Investment Management, the fund company of Nordic financial services group SEB, announced today a new sustainability policy applied to the company’s investments, along with a new climate strategy. The new policy gives increased weight to sustainability criteria in security selection and management, including the adoption of a fossil fuel exclusion across all of the investment manager’s funds
SEB will implement a new model used to analyze all of the companies in its investment portfolio, which will include a focus on material sustainability risks, as well as opportunities, including investments in companies that contribute to solutions or enable transition. The company will also extend exclusions that it had previously applied only to sustainable and ethical funds across all portfolios, such as fossil fuels, tobacco and commercial gaming operations
“Risks related to climate change and social issues will intensify the most in the next two years, finance executives predicted in a survey, and firms will have to find ways to cope,” the article said. “Environmental, social and governance issues topped the list of risk managers’ concerns in a Deloitte poll to be released on Monday, followed by cybersecurity and credit matters
With ESG coming to the forefront in pandemic-ridden 2020, it only makes sense to see what opportunities exist in the ETF space. One of those funds focuses on the S&P 500’s best and brightest in ESG: the SPDR S&P 500 ESG ETF (EFIV).
The fund seeks to provide investment results that correspond generally to the total return performance of an index that provides exposure to securities that meet certain sustainability criteria (criteria related to ESG factors) while maintaining similar overall industry group weights as the S&P 500 Index
31% of the largest institutional investors say climate change will have the biggest impact on the way their organization invests over the next three to five years
The survey of sovereign wealth funds, insurers, endowments/foundations, and pension funds found that over three-quarters (77%) of investors increased ESG investments "significantly" or "moderately" in response to COVID-19
78% said they said they would increase ESG investment either significantly or moderately as a response to COVID-19, while the figure was 79% and 68% in Asia-Pacific and EMEA, respectively.
The reality is, climate change links to a rapidly shifting social context that in turn drives changes to investor demands, all within a very dynamic regulatory environment. These trends are amplified by technology innovation, adding significant cost and time pressure. Quite simply, investing has never been a more complex ecosystem," Baer Pettit, President and Chief Operating Officer, MSCI
Wall Street Journal: ESG Metrics Help CFOs Attract New Investors, Reduce Costs
Chief financial officers are embracing sustainability measures as a way to attract new investors, lower their companies’ borrowing costs and cut operating expenses.
These kinds of environmental, social and governance promises put pressure on finance chiefs across industries to square company finances with sustainability metrics.
Finance chiefs at South Korea’s LG Electronics Inc., Chinese utility provider CLP Holdings Ltd. and French electric equipment maker Schneider Electric SE all said that they consider sustainability metrics a priority.
They said they are seeing the benefits of investing in initiatives that provide cost savings and can make their businesses more resilient against the effects of climate change, such as droughts and floods.
Investor demand is another factor driving a lot of CFOs to focus on sustainability metrics. Global assets under management in funds that weigh sustainability factors grew to $40.5 trillion last year from $22.9 trillion in 2016, according to Opimas, a consulting firm.
Biz Journals: How to show investors proof of progress on ESG promises
Nearly 90% of limited partners (LPs) say environmental, social and governance (ESG) is a factor when evaluating private equity managers, according Private Equity International’s 2021 survey
While the “old-school” alternative investment industry is quickly becoming more socially conscious, it’s also undergoing a digital transformation, embracing new tools that enable firms to directly show investors how they’re tracking on ESG goals, within individual funds or inside specific portfolio companies.
it’s important to choose a software solution that can be used to track firm-wide ESG initiatives and assist with automated reporting that keeps LPs — and the internal team — up to date
Being able to quickly access real-world data that demonstrate how your firm is advancing on the environmental, social and governance fronts can be a critical tool in enhancing your reputation when caught in the media spotlight.
Finally, better insight into ESG across the portfolio can improve investment and operations strategies. This requires accurate ESG data, which can all be accessed quickly via a single, centralized location.
Companies and Industries
RigZone: The Rise of US Energy ESG and More
The Biden administration is revoking dozens of invalid drilling permits issued by agency workers, Bloomberg highlighted, adding that the move is likely to further sour relations between the Biden administration and the oil sector
Texas Governor Greg Abbott issued an executive order relating to the protection of Texas’ energy industry from federal overreach
Biden may have given the U.S. oil and gas industry the go-ahead to show just how agile it is, according to one of Rigzone’s regular market-watchers
Society of Environmental Journalists: "Biden’s EPA Nominee Vows ‘Urgency’ On Climate Change"
Michael Regan, President Biden’s choice to lead the Environmental Protection Agency, told lawmakers Wednesday that he would “restore” science and transparency at the agency, focus on marginalized communities and move “with a sense of urgency” to combat climate change
Facing a Senate panel where half of the members are Republicans wary of the EPA’s authority and its reach into much of American life, Regan appealed to a collective sense of duty.
National Review: Voluntary ESG Disclosure Not Enough for the Feds
Dozens of companies, including some of the best-known consumer brands, recently signed on to a new system of rules for reporting on environmental, social, and governance (ESG) topics. These charter supporters of the “stakeholder capitalism metrics” have pledged to disclose firm-level information on everything from workplace injuries to greenhouse-gas emissions.
But Biden administration nominees may be about to push through federal mandates at exactly the time that voluntary industry agreements are making them unnecessary
Despite major moves among the world’s largest companies (which had been in the works well before her op-ed on the topic), to accomplish the very goals she describes voluntarily, Commissioner Lee and other ESG advocates are still insisting on costly mandates