ESG Weekly News Update: February 26, 2021
Lake Eibsee, Germany
General ESG News
If data is the new oil, then effectively managing its security and defending against an influx of cyberthreats may determine the sustainability of Big Tech’s halo.
Any organization without a clear strategy in place to safeguard the most valuable commodity in a knowledge-based economy faces the risk of commercial repercussions.
As industries evolve, whatever their state, ESG evolves with it, unearthing specific vulnerabilities vital to stakeholders and, as such, enterprise itself. Just yesterday it was energy. Tomorrow it may be technology.
Personnel Today: Why ESG should be high in HR’s priorities
On the one hand organizations would invest in and conduct business for the benefit of the wider community, while at the same time ensuring that those initiatives did not have an unintended negative effect. This middle point is now referred to as sustainable investing or, in wider terms, ESG (Environmental, Social and Governance) considerations.
Equally, the effectiveness of shareholder control over executive pay as a corporate governance tool depends on compliance generating increased value for shareholders.
Suppliers, customers and investors now consider diversity issues when making decisions about who gets their business has helped to make those issues a commercial priority. If progressing the ESG agenda depends on the value the market attributes to it, the market will materially influence the pace of change.
World Economic Forum: COVID-19 is forcing us to rethink responsible approaches to business
There are four strategic areas to focus on, including recovering revenue, rebuilding operations, rethinking the organization, and accelerating digital solutions.
Therefore, companies with robust governance and a responsible business approach are likely to dominate their sectors after this recession.
Simultaneously, developing effective corporate measures against disruption on the current scale requires complex and long-term strategies that rely on a systems-level approach from companies and governments worldwide.
Governance professionals in 2021 will be focusing their attention primarily on Environmental, Social and Governance (ESG) matters, remote working risk, climate change and diversity this year, according to a poll by ICSA: The Chartered Governance and governance recruitment specialist The Core Partnership. Of these, ESG is seen as the top priority, with the majority of respondents stating that it would be the biggest area of governance focus for 2021.
CSR, which stands for “corporate social responsibility,” has been on the business radar for years and refers to “softer,” qualitative issues. As time went by, social issues came into focus, and technology advanced, it has become possible (and desirable) to quantify a company’s use of natural resources, conflict minerals, social composition and impact, and good governance. ESG data elevates these issues to the investor position, while technology has made it possible to gather more granular reporting data. ESG is the quantifiable measure of a company’s sustainability and societal impact, using metrics that matter to investors.
The Jakarta Post: Adopting Human Rights Due Diligence is Good Business for Companies
The ongoing COVID-19 pandemic has made us reexamine where we stand as an integrated global community. Consumers and producers worldwide are now calling for the reshoring of production, particularly among critical industries, while highlighting the negative impact of long tail supply chains on the planet’s resources.
UNGPs and its guidance in conducting Human Rights Due Diligence have gained new currency among business leaders, trade and investment policy analysts. Widely regarded as the world’s most authoritative, normative framework guiding responsible business conduct, the UNGPs articulate the shared responsibility of government and business in ensuring human rights in business operations are protected, respected and promoted. .
Despite the trendlines, the practical implications of HRDD for business are not well understood. At its core, HRDD is an ongoing assessment that helps businesses to assess and mitigate threats to the lives and dignity of stakeholders, including employees, vulnerable groups, communities, and consumers. In carrying out HRDD, businesses need to assess the risks, act upon the findings, track performance, and communicate the results to the public.
The case for businesses to embrace UNGPs and its guidelines on HRDD is clear. Though HRDD is focused on risks to people and not centered on profitability, conducting HRDD would help companies avoid reputational and operational harm that might for example, accompany charges of forced labor.
ESG Disclosures, Standards, Rankings, and Reporting:
ISS ESG is launching 19 industry-specific scorecards, with more industries expected to be added in the future, facilitating industry-specific scoring of a private company’s ESG risk profile.
ISS ESG, announced today the launch of ISS ESG Scorecards, aimed at enabling financial institutions, to conduct custom and comprehensive ESG performance and risk assessments of private companies
Kristina Rüter, Managing Director and Global Head of Methodology at ISS ESG said: “The methodology takes into consideration the entire value chain and materiality is reflected in the configuration and weight of each element while standardized assessment factors facilitate consistent and comparable assessments.”
The Global Reporting Initiative (GRI), announced the launch of a new collaboration aimed at helping organizations get more out of their reporting and assessment tools.
GRI Chief of Standards, Bastian Buck, said: “Both GRI and B Lab share the strong belief that a deep understanding of impacts is the enabler for change. Bringing together our unique strengths can further empower companies around the world to effectively communicate how they are impacting people and planet.”
Dan Osusky, Director of Standards at B Lab, said: “By creating a linkage between B Lab’s BIA and the GRI Standards, businesses are now able to actively manage their impacts as well as report on those impacts with two best in class frameworks.
S&P Global Platts, and fintech developer Viridios Capital announced today a new agreement to launch a series of Artificial Intelligence (AI)-driven carbon indices, aimed at enhancing transparency into the complex voluntary carbon credits and co-benefit markets.
Projects are verified and validated by a set of independent standards created by coalitions of NGOs and market participants. The voluntary carbon markets are increasingly used by investors and corporations as a tool for financing the reduction of emissions.
Refinitiv, a provider of financial markets data and infrastructure that has served more than 40,000 institutions in over 190 countries, recently announced the rollout of MarketPsych ESG Analytics, a new analytics tool to provide numerical ESG insights on companies and countries based on news and social media monitoring.
Refinitiv then revealed that the MarketPsych ESG Analytics may be used in a host of applications and quantitative investors may deploy the data to enhance alpha generation and risk management.
Leon Saunders Calvert, Head of Research & Portfolio Management, Refinitiv, stated: “Refinitiv MarketPsych ESG Analytics augments Refinitiv’s ESG company disclosed data with sophisticated AI tools to create high frequency sentiment data on ESG considerations based on news and social media.”
A 2020 OECD study on global ESG practices noted enhancement in data availability and analysis but said further strengthening of ESG practices was needed. Currently, ESG scores depend only on non-standard, limited data making this difficult to analyze. ESG scores across geographies need to be consistent, comparable and of the same quality. Some elements of this study, like common core metrics for E, S, and G being consistent across industries and size as well as sector specific metric, were echoed by industry leaders in a January 15, 2021 conference held at SEBI.
While there is an attempt to standardize the metrics to some extent, there should be regulatory guidance and clarity on how to apply these metrics and bring about uniformity in data collection practices.
Formation of ESG implementation team with internal and external stakeholder engagement, investing in assessment tools based on global leading practices, and appropriate trainings for people on ground will help in establishing long term gains for the corporates through ESG reporting and scoring.
The S&P MidCap 400® ESG Index and S&P SmallCap 600® ESG Index represent a new sustainable frontier in a space left largely untouched by ESG indexing to date. Scant reporting of sustainability metrics among smaller-sized firms has thus far dampened ESG efforts below a certain cap size. But thanks to the rules-based selection process and direct company engagement of the S&P annual Corporate Sustainability Assessment (CSA), the methodology is uniquely positioned to: Educate smaller firms on sustainability topics of growing importance to investors; and Raise the bar on sustainable business practices as companies compete to join the ranks of the ESG indices.
Today S&P Global has released two additional levels of ESG information that inform a company's ESG Scores, providing deeper layers of insights and expanded transparency. An additional 400 data points have been made available for each company, based on their applicability and relevance to informing a company's overall scoring assessment. The additional data points will help markets better understand companies' environmental and social impact as well as its governance standards.
The additional data points will provide clients with a better understanding of companies' environmental reporting disclosures, biodiversity commitments, its direct and indirect CO2 and greenhouse emissions, waste/hazardous disposal, energy consumption and water usage.
For the Social dimension it will now be possible to determine whether companies in their social reporting activities disclose safety policies, human rights commitments, code of ethics and whether social reporting disclosures have been independently audited.
The new data sets will also provide greater insights on the Governance & Economic dimensions and help obtain better understanding of companies' codes of conduct and policies addressing anti-crime, corruption & bribery, governance of the board and executive compensation, ownership, diversity, materiality disclosures, risk and supply chain management, and tax strategy and reporting.
JD SUPRA: ESG: Many Demands, Few Clear Rules
Boards can expect investors and regulators to demand increased disclosure of ESG metrics.
With no uniform set of ESG standards, companies with global operations may face a hodgepodge of disclosure requirements.
Investors will push for ESG to play a role in executive compensation.
Directors need to be fluent in these topics when engaging with shareholders.
BNP Paribas Asset Management (BNPP AM) announced today the launch of BNP Paribas Inclusive Growth, a fund aiming to generate returns through investment in companies with a proactive approach to reducing inequalities in income, education, gender, ethnicity, geographic origin, age or disability.
The strategy includes protecting the most vulnerable members of society, promoting social mobility, developing a quality offering accessible to the greatest number of people, respecting business ethics, and promoting decarbonisation and biodiversity.
Delphine Riou, ESG Analyst at BNP Paribas Asset Management, said: “The BNP Paribas Inclusive Growth fund is a continuation of BNPP AM’s work on the social theme and responds to the demands of our clients. We believe that companies that implement the best practices of diversity and inclusion with their employees, their customers or their suppliers can achieve better financial results.”
Clermont Partners: E&S Metrics In Executive Compensation: What Do Investors Really Care About?
Companies will need to enhance disclosure of E&S compensation metrics in executive incentive programs in next year’s proxy, and better show how executives are compensated against ESG goals, not simply financial performance.
Within the “E” dimension, investors have cited poor performance on SASB-defined material ESG issues (e.g., XPO logistics), requesting that boards clearly integrate ESG metrics into executive incentive programs.
Within the “S” dimension, investor requests have largely centered around reporting on a company’s global median pay gap across gender, race, or ethnicity (e.g. Amazon.com, American Express Company, and Intel Corporation), or requesting compensation committees evaluate pay grades and/or salary ranges of all classifications of employees when setting CEO compensation targets (e.g. 3M Company and The TJX Companies).
In a statement released by the group, the investors call upon developed economy leaders to fully finance the ACT Accelerator and to deploy adequate funding to ensure fair and equitable access to COVID-19 tools globally.
Additionally, the group recommends exploring the use of innovative finance mechanisms for national and global COVID-19 response, such as vaccine bonds or social bonds.
Damiano de Felice, Director of Strategy of the Access to Medicine Foundation, said: “On the equity side, they can speak directly to the senior management of their investee healthcare companies and ensure that essential COVID-19 tools are developed as rapidly and distributed as widely as possible. On the credit side, they can deploy billions of dollars to support the global economic recovery through innovative finance mechanisms that fund public and private programmes dedicated to pandemic response and preparedness.”
While investor demand has elevated ESG interest and practices amongst publicly traded companies, this survey revealed the focus on ESG extends to privately held companies as well. 88% of publicly traded companies have ESG initiatives in place followed by 79% of venture and private equity-backed companies and 67% of privately-owned companies, according to respondents.
The majority of respondents (81%) said their company has a formal ESG program in place. But there is not a high level of confidence that companies are effectively performing against all of their stated ESG metrics
Millennials were also most likely to consider ESG factors in their own stock purchasing decisions. Forty-five percent said ESG ratings would influence their stock buying decisions, vs. 37% of Gen X respondents and 36% of older respondents.
According to the global consulting and audit firm, Protiviti, 90% of S&P500 companies issued ESG related reports in 2019, up from 75% five years earlier. BlackRock and other investment management firms expect even more ESG data from issuers and will demand more over the coming years.
62% of the public company directors surveyed, agreed that organizations should prioritize a broader group of stakeholders, beyond just shareholders. They understand that long-term value can be created by better serving all stakeholders, including investors, employees, customers, communities, and suppliers.
When seen through a lens of ESG-related values, can broaden traditional thinking about strategy to involve all stakeholders that must become part of the CEO’s dashboard. A refreshed analysis of how company purpose and values align with strategy can provide new thinking about the development of additional markets.
Baer Pettit, chief operating officer of MSCI (ticker: MSCI), said in an interview with Barron’s. Approximately $200 million of the firm’s revenues are now “tied to ESG and climate,” and are growing “in the 30 percentages in this area,” Pettit said.
MSCI is one of the most prominent firms in ESG ratings and has ridden the growing interest in sustainable investing. Money has flooded into the category, with U.S.-domiciled sustainable investments totaled $17.1 trillion at the beginning of 2020, up 42% from two years earlier, according to trade group US SIF.
A recent MSCI survey of 200 institutional investors across the globe, 73% plan to increase ESG investment by the end of 2021.
Think Advisor: Aite Warns Wealth Managers: Embrace ESG or Lose Market Share
Among 31 global wealth managers surveyed by Aite in May 2020, 44% reported an increase in client demand for ESG assets, led by U.S. and Canadian wealth managers. The COVID-19 pandemic contributed to that demand, acting “as a strong impetus to invest better,” according to Aite.
Along with this growing momentum in favor of sustainable investing, Aite forecasts a bigger push for more data that can gauge, quantify and measure the impact of these investments for sustainability beyond the information currently available.
Aite expects the engagement of wealth managers with ratings agencies on sustainability issues will lead to consolidation among ratings firms, which will deepen the remaining agencies’ power and influence over the sustainable investing market.
BIS indicates that it expects companies to disclose a plan, integrated into company strategy, for how their business models will be compatible with a low-carbon economy, i.e. where global warming is limited to well below 2° C.
BIS expects “directors to have sufficient fluency in climate risk and the energy transition to enable the whole board—rather than a single director who is a ‘climate expert’—to provide appropriate oversight of the company’s plan and targets.
BIS advises that “comparable, consistent, and comprehensive information” is necessary to allow investors “to assess companies’ long-term transition plans and near-term actions,” to make informed asset allocation decisions and to more accurately price in the impact of climate change.
Bloomberg Opinion: BlackRock Wagers on ESG. Now It Needs the Bet to Pay Off.
Investors are finally embracing strategies that take so-called environmental, social and governance, or ESG, risks into account. They poured billions into ESG funds last year, including BlackRock’s, which is among the biggest players in the space. But they most likely won’t stick around if ESG doesn’t perform.
It’s not yet clear whether investors understand the strategy. Contrary to popular perception, ESG isn’t about values or promoting change. Instead, it’s a quantitative strategy positing that companies with fewer environmental, social and governance risks have a less volatile or better-performing stock, or both.
For now, neither the confusion around ESG nor its mixed record appears to be holding back investors. ESG exchange-traded funds took in about $8 billion in 2019, according to Bloomberg Intelligence, outpacing the money they raised from 2001 to 2018 combined.And last year, they attracted a whopping $31 billion in new investment. Much of it went to BlackRock, which oversees well more than half the money in ESG ETFs.
Uncertainty around the standards or methodology for measuring and determining ESG-alignment may create risk for financial institutions.
Financial institutions face litigation and regulatory risks based on their own ESG positioning as well as their role as financial market participants in ESG-related financings and transactions.
Certain litigation risks may be mitigated by engaging in a careful and deliberate review of ESG-related disclosures and commitments as well as utilizing forward-looking statements to articulate aspirational objectives.
Journal Pioneer: Asset manager Amundi to seek climate specifics from companies
Amundi, Europe's biggest asset manager, said on Thursday it would seek more specifics from companies at upcoming shareholder meetings about their plans to reduce emissions.
Amundi said it had written to 500 firms this week detailing priority issues that would guide its voting plans, including a call for companies to release specific reduction targets not just long-term ambitions to reduce greenhouse gas emissions.
Amundi's focus on shorter-term target setting is likely to be an increasing focus for asset managers this year. It mirrors Wednesday's warning from BlackRock, the world's biggest asset manager.
Data from Morningstar suggests that sustainable investors are not giving up returns, as the majority of the 745 European ESG stock funds studied outperformed non-ESG funds over multiple time frames.
It is difficult to build a framework for scoring companies on their ESG strengths and weaknesses. Most companies divulge water and energy use, which could help define an environmental score, at least partway. Some businesses seem obviously at odds with the environment. There are accepted principles of corporate governance and checking adherence to these could help with the ‘G’ part of ESG, but it’s a lot of work. Assessing a company’s social performance is even more of a struggle.
The analysis of ‘E’ addresses how the natural environment in which an entity operates can influence its credit profile. On one hand, it involves a review of the potential impact natural events and conditions may have on a business activity. On the other, it entails an assessment of the natural resources used by an entity, the waste and polluting gases produced, and how these factors may ultimately impact an entity’s reputational, legal, and regulatory risks and costs.
Environmental-related risks are increasingly affecting credit risk and corporate failures, and one of the main challenges for businesses today is to transform environmental factors from risks and costs into opportunities and benefits. From a credit point of view, default observations linked to environmental issues are still limited, making ‘E’ more difficult to capture, measure, and integrate in a structured way into credit analysis than other credit factors.
Incorporating material environmental risk factors into credit analyses strives to evaluate how these factors can potentially impact the credit risk of the counterparty being reviewed. The impact of environmental factors will depend on how prepared the entity is to manage potentially disruptive trends, such as fines or changes in consumer preferences, technologies, products, and regulations.
Middle Market Growth: A Perspective on ESG and Private Equity
Namtse Namgyal, head of institutional sales for North America at S&P Global Trucost, addressed a number of questions we asked about the relevance of ESG to private equity firms. Trucost assesses risks relating to climate change, natural resource constraints and broader ESG factors, working with clients across numerous industries, including private equity.
Companies and Industries
Mondelez International is launching a platform to incubate, finance and support self-sustaining ventures that address key challenges in the world, including climate change, the company said in a statement.
The Sustainable Futures platform aims to invest in social ventures that improve livelihoods and build healthy communities. Mondelez said it intends to invest in projects that protect forests, reduce carbon emissions or increase resilience in areas where it sources raw materials.
The first social ventures the platform will support include a nongovernmental organization in India that will set up a sustainable, women-owned social enterprise to upcycle multilayered plastic packaging into board for different uses. Another will assist INMED Aquaponics Social Enterprise in South Africa in helping agro-entrepreneurs in climate-smart food production.
JPMorgan Chase announced the launch of a series of new initiatives, aimed at strengthening minority-owned and diverse-led financial institutions by providing additional access to capital, connections to institutional investors, specialty support for Black-led commercial projects and mentorship and training opportunities.
The new initiatives include the launch of Empowering Change, a unique program supported by Google and in partnership with MDIs and diverse-led CDFIs to provide economic opportunity to underserved communities, enabling MDIs and CDFIs to offer new investment products to their customers, boost their technological capabilities and develop new revenues through fund distribution.
Other initiatives announced today by JPMorgan Chase include $40 million of direct equity investments and commitments in several minority-owned and Black-led MDIs
Talking on ‘Reimagining the Future: Leading Change with Responsible Business’ at Nasscom’s Technology and Leadership Forum (NTLF-2021) on Friday, Julie Sweet said companies that combined sustainability with their business plans and strategies were found to be 2.5 times more successful than those who had not.
Commercial Property Executive: CRE, Decarbonization and the ESG Challenge
Participation in the Global Real Estate Sustainability Benchmark (GRESB), which was launched in 2009, grew 18 percent in 2019 alone. In 2020, more than 1,700 participants representing $5.3 trillion in assets under management reported to GRESB, which has become the go-to resource for climate-minded investors as they evaluate managers.
With buildings accounting for about a third of carbon emissions in developed economies, the commercial real estate industry has a major role to play. It’s time we take decisive action to reduce carbon emissions from our buildings.
Joan Coates, A new U.S. Securities and Exchange Commission official said the agency “should help lead” the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations
Coates said his view does not imply the SEC should mandate rigid, specific disclosures that he said could soon prove outdated.