General ESG News
In 2022, stakeholders have increased their expectations around progress on things like climate pledges, biodiversity, social justice issues, employee wellbeing, and more. The ESG trends that are expected to be highlighted in 2022 – listed below – should be considered in relation to each other as companies and governments face greater pressure for accountability and action:
Pressure will grow on corporate boards and government leaders to enhance their ESG skills.
New regulations and reporting standards will demand more credible corporate disclosures.
Governments and companies will face the challenge of turning net zero pledgers into near-term action.
Climate transition strategies will increasingly embrace social issues.
Climate stress testing will gain prominence in the financial services industry.
Assessing natural capital and biodiversity risks will continue to rise in importance.
Social issues in supply chains will command more attention.
The debate over divestment versus engagement will heat up.
The integrity of the growing sustainable debt market will be tested.
Sustainability Mag: How social enterprise procurement can help with ESG progress
Social impact initiatives are typically measured by their social value instead of their underlying business value, which makes it difficult for management to weigh these initiatives against other business needs.
World Economic Forum’s COVID Response Alliance for Social Entrepreneurs show that social procurement strategies might be effective for achieving ESG goals when paired with social impact initiatives. This is especially important in the context of organizations dismissing their doubts about how social enterprises operate and their capacity to be effective.
A 2021 World Economic Forum study reveals that social enterprises have shown growth on top of their commitment to ESG goals (especially those aligned with the UN Sustainable Development Goals).
Social enterprises have also demonstrated their capacity to do business with multinational corporations, and investors are increasingly willing to back their long-term potential.
Corporations are encouraged to be more flexible with social enterprises, especially in terms of payment and delivery, to help them be more effective business partners.
Human Resources Director: Gen Z: How to attract the next generation of employees
Bloomberg reports that Gen Z accounts for 32% of the population (more than millennials), and by 2025, Gen Z is expected to make up 27% of the workforce. Gen Z was expected to inherit a strong economy with record-low unemployment, but the COVID-19 pandemic has forced the generation to deal with an uncertain future.
Gen Z has been found to be more realistic and cautious in the workforce after seeing millennials deal with instability and the Great Recession. Gen Z also processes information differently, and they tend to be more resourceful and tech savvy. The following trends have been found to attract Gen Z applicants:
o Transparent leaders and communication on all levels
o A diverse and inclusive workplace
o Proper work-life balance
o Career growth, development, and job stability
o Benefit and perks
GlobalData’s 2021 ESG Strategy Survey reveals that while businesses are becoming more attuned to the importance of ESG, many are not prioritizing the “G.” Most of the focus and investment is going toward environmental issues, and majorities said that governance is less important and less of an investment focus. As a result, governance factors are most in need of improvement.
While climate change risks and threats are of immediate concern, it is important to recognize that good governance is needed to enact change in any ESG area.
Companies must establish a clear mission, vision, and values, develop a team to drive ESG performance, incentivize ESG progress, and embrace transparency. Increasing board-level diversity also allows for greater diversity of ideas throughout the organization.
Coca Cola lists 45 risk factors, 14 being ESG related risk factors, in their 2020 10-K. The contributor on this article, Shivaram Rajgopal, lists out the most interesting pieces of their 10-K. It consists of five ‘E’ factors, three ‘S’ factors, and six ‘P’ factors, ‘P’ meaning the impact of the product on society. After analyzing what progress initiatives Coca Cola has laid out, Rajgopal asks: “is [this] a year, a decade, or a generation away?”
Rajgopal believes mapping risk factors to the sustainability report is likely to be far more productive. Connecting the 10-K based risk factors with the sustainability report will be imperative for the integration of ESG factors and financial analyses.
The SEC’s 2021 report stated that by adding ESG factors rating firms might deviate from their usual methodologies and policies which may not properly be disclosed to investors. The transparency and consistency of ESG investment ratings have faced increased scrutiny. The SEC is currently developing new rules for disclosing information on ESG issues.
Over the past year, chief compliance officers have been swept into the growing ESG movements, and many have been asked to take on new responsibilities. The article author believes CCOs have a major role to play in ESG (especially governance issues) but cannot be responsible for the overall program.
CCOs are encouraged to generate “culture data” and report on this to senior management and the board, and to manage the corporate culture based on this data. The author argues that CCOs are the “natural protectors of a company’s culture.”
An ethical company will face lower rates of employee misconduct, increased productivity, and improved performance.
International Tax Review: Tax – the missing piece in ESG
Taxes have evolved from the cost of doing business to a payment for a company’s license to operate in society; taxes have become an important metric that helps to empirically test a company’s positive social and environmental contributions.
ESG also plays a role in sustainable tax management and creating meaningful tax transparency beyond mandatory tax disclosures.
Taxes are a way for governments to direct and incentivize behavior, especially toward climate action. Tax professionals are encouraged to assess their company’s tax policies and contributions to ensure they align with its ESG goals. In the coming years, it is expected that there will be a “greenification” of existing taxes like income tax and VAT, as well as a wave of new taxes.
Accounting Today: Auditing ESG Reports on Climate Change and Sustainability - Podcast (17:18)
Marie-Laure Delarue, global assurance vice chair at EY, discusses how accounting firms can provide audit and assurance services to help companies with their ESG reporting. With reporting, companies can use their ESG goals to measure metrics and goals, helping them make positive progress to society at large as well as helping them stay accountable to these goals.
Upon retirement, Kate Emery, founder of Walker Group, discovered the perpetual purpose trust (PPT) that would ensure her company's values would remain in place long after she left. A PPT is a non-charitable trust that is established for the benefit of a purpose. Walker Groups PPT states one third of the company’s profits must go to its employees.
People think of PPTs as the new employee stock ownership plan (ESOP). PPTs also have minimal crossover to private equity, and they are attractive to mainstream investors.
One in five UK CEOs currently have their personal annual bonuses and long-term incentives linked to their greenhouse gas reduction targets, according to PwC’s 25th annual CEO survey. As more firms push for implementing ESG principles, many questions around pay and incentives arise.
o Key ESG negative remuneration findings
§ Firms that grant a large part of CEO’s remuneration in the form of long-term incentives have lower ESG performance
§ Accounting focused incentives and environmental based KPIs were found to have negative relationships with ESG performance
o Key ESG positive remuneration findings
§ Strategic KPIs in bonus systems positively impacted ESG performance
§ Younger and inside-hire CEOs were linked with better ESG initiatives
The Globe and Mail: How Are Corporate ESG Reports Evolving?
On January 28th, 2022, The Global and Mail hosted a webcast that explored themes of how corporations are changing the ways in which they measure, value and report on their ESG risks and progress. The full video is available for free here (1:00:45)
Diversity, Equity, and Inclusion
Channel Futures: How Tech Companies Can Raise Diversity, Equity & Inclusion Awareness
Xperteks CEO Marcial Velez has shared some of the steps his company has identified for building out a robust DE&I program; these steps include:
o Staying on the alert for unconscious bias
o Encouraging pay equity
o Being more inclusive (of people, backgrounds, ideas, etc.)
o Recognizing holidays of all cultures
o Interacting about bias management and cultural humility
It is important to note that there is no “finish line” in pursuing DE&I, and it can take years to make the necessary structural, procedural, and cultural changes in the workplace.
Companies must ensure age is incorporated into their diversity, equity, and inclusion strategies to address workplace ageism.
Ageism vs. Ableism means judging someone on how old we think they are versus Judging someone based on how we assume their minds or bodies function. These preconceived notions can increase the impact across other dimensions of diversity as well.
Companies can invest in tactics to address this with things such as educating and training their employees on unconscious decisions, behaviors and how to actively combat age bias.
Investing time and money into meaningful change management regarding diversity, equity and inclusion can become complicated. Despite the article title, below are six techniques to rally executive and leadership buy-in to invest in DEI strategies:
1. Make it personal
2. Create opportunities for advocacy
3. Do not be afraid to give feedback
4. Approach DEI as a key business function
5. Highlight the risks of inaction
6. Suggest immediate next steps
Sustainability Magazine: Data Shows Diversity Progress Has Slowed – Here’s What to Do
The increase of DEI strategies in the workplace is driven by calls for racial justice, greater demand from candidates and employees to build sustainable workplaces, and the changing demographics of the workforce.
Data from employee experience platform Culture Amp shows that many companies still have gaps between what they say they want to or are doing and what they are actually doing.
Collecting data to build an ESG plan, setting diverse and inclusive ESG visions, and creating an ESG plan, while also investing thoughtfully, are sure ways to get companies on the right track to genuinely integrating DEI into their businesses.
ESG Disclosures, Standards, Rankings, and Reporting
Responsible Investor: Environmental disclosure – so much progress, but so far still to go
CDP Founder Pail Dickinson reflects on how climate change concerns have become mainstream since CDP launched over two decades ago. In 2002, 245 companies responded to CDP carbon disclosure requests, backed by just 35 investors. In 2021, 13,132 companies disclosed on climate through CDP (as well as 3,368 on water and 864 on forests).
Dickinson urges that disclosure does not end at carbon, and momentum continue to grow around other environmental concerns, such as water, deforestation, waste, biodiversity, and more.
Corporate disclosure still faces many challenges; for example, while 2021 saw record disclosure rates, 16,870 companies still failed to respond to requests for information from their investors and clients.
Dickinson also notes that “disclosure is just the foundation, not the destination.” He urges companies to set science-based targets throughout their value chains, despite the fact that regulation is not yet equipped to hold companies accountable for their commitments.
Chief Executive: ESG Reporting: Deciphering the Alphabet Soup
Many companies are now expected to release ESG disclosure reports, but which one should you choose? The author decodes sixteen of the leading reporting standards and frameworks organizations. As there is still not an official convergence and widespread ‘main reporting framework,’ the best thing to do is to understand which frameworks are most prevalent and chart a course that meets term needs but allows for opportunity as the industry evolves.
Steps for preparing for ESG reporting
1. Understand why you are reporting
2. What do you report?
3. Compile relevant data
4. Build linkage to pull data together
5. Choose frameworks that work best for your stakeholder investors and industry peers
6. Publish your report
7. Prepare for unified reporting standards, publicized by regulatory agencies
Companies are expected to continuously broaden the quality and scope of their ESG disclosures. To continuously deliver enhanced reporting, companies can transform their financial operating model, and put increased focus on leveraging advanced data analytics, futureproofing talent strategy, and collaborating across the business.
The batteries in electric cars, like the ones Tesla manufactures, require cobalt, a mineral found in the Democratic Republic of Congo (DRC). While electric cars are important in combat against climate change, there are many credible reports of serious human rights violations at cobalt mines in the DRC. There are also reports of child labor and unsafe labor conditions for workers. Considering this, and considering Tesla is still a major stock pick of funds that market themselves as being ESG conscious, does Tesla deserve to be treated as a great ESG-conscious company?
Investment sector actors ought to work with companies and use their power as stakeholders to determine what practices they should engage in and what social standards and metrics they should assess and integrate into their business models.
Data from the Institute of International Finance shows the growth rate of ESG bond sales was 97% in mature markets in 2021, compares to 227% in emerging economies. Total ESG issuance in developing and frontier markets reached $230 billion in 2021. Socially responsible capital raising around the world is expected to reach $1.8 trillion in 2022. This all points to the world getting in on the sustainability trend, hopefully genuinely and for the long term.
Robert Gauvreau, FCPA, founder of Gauvreau, the ‘Million Dollar Year’ Coaching Program and the Ascent Summit, shares tips on how companies can create a sustainable growth-oriented blueprint to help achieve professional and personal goals faster.
1. Set your short-term targets, work backwards from your long-term goals.
2. Create high-performance departments, it is crucial to have a financial department.
3. Align your strategy with your goals, continuously revisit your strategy and vision.
4. Make a solid, detailed plan to achieve your goals.
After a record year for sustainable bonds in 2021, a new Moody’s report indicates that sustainable bond issuance is expected to hit $1.35 trillion in 2022.
Despite the anticipated growth, growth rates are expected to decline a bit as the market matures and new policies and regulations put pressure on the larger bond market.
The fastest growing sustainable bond segment in 2021 was the sustainability-linked bond market, and they are expected to remain the fastest growing in 2022. The Moody’s report forecasts continued strong growth in the green bond market, but social bond volumes are expected to decline after dramatic growth over the past two years.
Lightsmith Group has announced that it has raised commitments of $186 million for the closing of its Lightsmith Climate Resilience fund, which will invest in growth-stage technology companies. This is the first private equity fund focused on climate resilience.
The group’s managing director said that climate resilience technologies represent an “overlooked, multi-billion-dollar investment opportunity that will just keep growing.”
The new fund will focus on six technology areas: water efficiency and smart water management, resilient food systems, agricultural analytics, geospatial intelligence, supply chain analytics, and catastrophe risk modeling and risk transfer. It aims to scale up companies and apply their technologies to help businesses and communities adapt to climate change and expand their networks.
The Green Climate Fund (GCF) is the largest investor in the Lightsmith fund with a commitment of $46 million.
The consequences of Covid-19 have made it abundantly clear that our species can no longer afford to live the way we have been living, and we need to make drastic changes to help ourselves as well as all the other beings that live on this planet.
Nitin Rakesh, CEO and Executive Director of Mphasis, discusses a few main points to show how imperative this change is and what we can do to continue the forward momentum.
o Changing mental models (e.g., people, planet, profit)
o Incentivizing impactful living
o Embracing the change customers want
o Driving sustainability through emerging technologies
The Institutional Investors Group on Climate Change (IIGCC) has published its first proposed guidance for private equity investors to align their portfolios with net zero goals. The guidance was published as a new component for the Paris Aligned Investment Initiative (PAII)’s Net Zero Investment Framework (NZIF).
The new component provides the most comprehensive private equity guidance currently available for both GPs and LPs. It also expands the list of asset classes covered by the NZIF to five: listed equity, corporate fixed income, sovereign bonds, real estate, and private equity.
Corporate profits are their highest in seventy years. Many Americans remain somber about the economy because their real wages continue to go nowhere. The Bureau of Labor Statistics suggested profit-sharing as a means of reducing disputes between workers. Profit sharing gives workers more of an incentive to do the work. Many companies have shifted to profit sharing only at top levels of the company, creating this immense gap between the c-suite and other employees.
Profit sharing could be encouraged through reductions in corporate taxes on companies that share profit with workers and increasing taxes on those that do not.
Engine No.1 rose to investor fame last year when they won the battle for seats on Exxon’s board and as of Thursday, launched Engine No.1 Transform Climate ETF (NETZ). This ETF aims to provide investors with exposure to companies that will drive energy transition. It will invest across multiple industries including transportation, energy, and agriculture and will leverage Engine No.1’s Total Value Framework to link companies ESG impacts to their valuation.
BlackRock pledged to guide and advise investors through net zero transitions. This will help protect portfolios from climate-related risks and identify and invest in opportunities from the decarbonization drive. The firm stated its efforts will be driven by a newly developed transition framework, key elements being navigate, drive, and invent.
BlackRock has become the leading voice on the need to integrate climate and sustainability considerations into the investment process. BlackRock CEO Larry Fink and his letters to CEOs have been another prominent force in this push as well.
Companies & Industries
Forbes: ESG is Banking’s Next Big Thing
Financial institutions have been shifting their priorities from shareholder to stakeholder for several years, and the Net-Zero Banking Alliance, formed in 2021, has included ESG aspects in a commitment by banks that represent more than 40% of the world’s banking assets.
A recent PwC survey found that 83% of consumers believe companies should be actively involved in creating ESG best practices, and 76% said they would discontinue relationships with organizations that treat the environment, their employees, or the community poorly.
The financial industry also faces exposure to climate-related risks and risks related to the global energy transition and how it impacts capital markets and banks.
Making ESG a priority and using ESG initiatives can help banks create market advantages and business opportunities. To succeed, these initiatives must be supported by the right skills and technologies including data and analytics capabilities, risk management, and automation where possible.
Days after pledging to cut fossil fuels at the COP26 conference in Glasgow, the Biden administration held the largest oil and gas lease sale in U.S. history. Eighty million acres were put up for auction, but oil and gas companies ended up bidding on just 1.7 million acres.
However, this week, a federal judge invalidated that sale in the Gulf of Mexico, stating the administration did not appropriately consider the cost to the global climate. The decision represents a major win for the coalition of environmental groups that challenged the controversial sale.
Roughly one-quarter of greenhouse gas emissions in the U.S. come from fossil fuels extracted from public lands, and the U.S. District Court of the District of Columbia’s decision reaffirms that the country needs to seriously commit to reducing reliance on fossil fuels.
Sustainability has long been the main buzzword in the beauty industry, but biodiversity is rising in recognition and importance, especially due to the fact that the industry relies on raw materials from nature as product ingredients. Many beauty brands champion “hero” ingredients in their products and may cite their origins but concerns about the biodiversity of the sourcing regions have been largely overlooked.
The Union for Ethical BioTrade (UEBT) promotes “sourcing with respect” and is working to give consumers a positive choice of products that respect biodiversity.
One example of a company leading the charge with biodiversity focus in its sourcing procedures is Fresh. The company takes steps to educate its consumers about the rarity of some of the ingredients in its products, and it is putting funds toward reforestation in its sourcing areas to help promote the longevity of some of its key ingredients.
The Global Biodiversity Agreement is set for adoption across the globe in 2022, and it is similar to the Paris Agreement for Climate Change.
Commercial Observer: With ESG, Commercial Real Estate Needs to Take a Much Broader View
The industry's primary focus is on environmental impact, especially the reduction of property-related carbon emissions to net-zero. The small, yet meaningful decisions about where and what to build need to be discussions at the forefront of decision making. Decisions like these have an impact on neighborhoods and communities, not just the buildings themselves.
Transportation is another major factor to be taken into consideration. Transportation was the single largest contributor of greenhouse gases in the US in 2019. Buildings that are constructed with transportation accessibility in mind can also help with reducing overall carbon emissions.
A recently published paper from Henly Business School, Climate Risk and Commercial Property Values, found that “valuers are increasingly aware of heightened climate risk but are generally not explicitly incorporating it into market valuations.” The authors also found significant knowledge gaps and difficulties in estimating future asset values. Insurers are also a big player in this. They tend to use historical data to determine insurance costs and deductibles which will have to change as future projection data becomes more readily available.
Real-estate-focused ESG data management solutions provider Measurabl has announced its partnership with Nasdaq to help provide companies using Nasdaq’s OneReport platform with expanded sustainability data tracking and reporting capabilities to meet reporting requirements and optimize ESG performance.
The proceeds of Citi’s new $2.5 billion bond are earmarked for the financing of construction, rehabilitation, and preservation of quality affordable housing for lower-income populations in the U.S.
Citi worked exclusively with five Black-owned firms to develop the issuance and underwrite and distribute the bonds. The issuance follows the bank’s announcement in November of 2021 that it has invested $1 billion in strategic initiatives that help close the racial wealth gap and increase economic mobility in the U.S.
The issuance is also part of Citi’s commitment to achieve $1 trillion in sustainable finance deployment by 2030.
Wall Street Journal: Wall Street's Green Push Exposes New Conflicts of Interest
In the past two years, U.S. firms in the financial services sector have spent more than $3.5 billion buying green rating companies and data providers. PwC has made an investment plan of $12 billion, with ESG as its focus. Responding to demands of regulators, investors, and other stakeholders, many firms are beginning to invest substantial amounts of profit into ESG related issues.
Bryon Lake, head of Americas ETF distribution at JPMorgan Asset Management states “we estimate there needs to be $140 trillion investment in energy and global infrastructure in order to get to some of the net-zero targets that many of the countries and regions are talking about for 2050.” JPMorgan has created JPMorgan Climate Change Solutions ETF (TEMP), the first active climate solutions strategy to come out in an ETF.
Over 70 private equity firms have signed an agreement to collect and report data on a variety of ESG issues. The coalition has agreed to standardize how ESG reporting is done. Members of the group will collect various ESG metrics and will also use investor templates for requesting information from asset managers.
ESG Playbook and Carbonfund.org Foundation have announced their partnership to deliver solutions that enable companies to launch their ESG strategies and initiatives, including reporting and emissions reductions.
Under the new partnership, ESG Playbook will offer its clients carbon offsets and reduction services through Carbonfund.org Foundation’s renewable energy, forestry, and energy efficiency projects. Carbonfund.org will refer business partners to ESG Playbook for advancing their ESG reporting and program management.
The Uyghur Forced Labor Prevention Act, which takes effect in June of this year, adds a presumption under the U.S. Tariff Act that goods sourced from or produced in Xinjiang are made from forced labor. To import products from this region, companies will have to document that they are not sourced from forced labor.
The law is meant to push China to end what the U.S. and other countries call its “repression” of Uyghur and other Muslim minorities, but China’s foreign ministry denies these allegations and argues that the measure will undermine the stability of global supply chains.
So far, companies have been turning to things like genetic testing of textiles to third-party audits to ensure products are not derived from forced labor. However, many companies do not have the resources or leverage over their supply chains to gather reliable data. Implementation of the law will require a more in-depth understanding of supply chain inputs and increased traceability.
The law may create more demands from investors and consumers for ethical product sourcing, and it will likely increase the amount of information that companies choose to disclose as “material” to investors.
Unfortunately, where there are significant risks in taking no action, taking action presents its own business risks. Some companies have already faced backlash for asking suppliers not to use products or labor sourced from Xianjing. Going forward, a credible third-party audit will likely be the most effective means of assurance.
Yahoo! Finance: Proposed DOL Rule a Big Step Forward for ESG in DC Plans
In October of 2021, the U.S. Department of Labor (DOL) proposed a revised rule that clarifies fiduciary responsibilities when selecting investment options for defined contribution (DC) plans and ultimately encouraged fiduciaries to consider ESG factors when designing plans.
The proposed rule would supersede a previous iteration of the rule from late 2020 that eliminated any references to strategies with an ESG theme in ERISA plans. The revision would explicitly recognize that a plan fiduciary making an investment decision can consider ESG factors material to the risk/return analysis.
The new rule would also eliminate proxy voting provisions that could have kept plan fiduciaries from exercising their ownership rights as shareholders.
Keeping the rule broad to encompass any material financial factor would give plan sponsors more flexibility in considering ESG topics in plan design.
The California Senate passed the Climate Corporate Accountability Act (CCAA) by a 23-7 vote, and it is the first law in the U.S. that will require large companies (over $1 billion in gross annual revenue) to disclose all their greenhouse gas emissions.
Several jurisdictions around the world have announced moves toward mandatory sustainability disclosure, and the U.S., SEC is currently examining rules for mandatory climate risk reporting.
The EU’s publication of the Taxonomy Complementary Climate Delegated Act proposes criteria for including investments in natural gas and nuclear-based energy in the list of sustainable activities under the new EU taxonomy classification system.
The EU Taxonomy regulation went into effect at the beginning of 2022, starting with the first two objectives of climate change mitigation and adaptation.
The proposal has met opposition from groups warning that including nuclear and gas could risk undermining the sustainable Taxonomy framework and could include activities that are not aligned with Europe’s environmental goals.