ESG Weekly News Update: January 15, 2021
Yosemite National Park
General ESG News
Corporate governance is increasingly scrutinized by investors and stakeholders. The topic also regularly attracts adverse media attention.
Several recommendations for companies seeking to improve their corporate governance framework include increasing board diversity and representation; ensuring a strong compliance function in place; bolstering reporting lines and risk management procedures; and guaranteeing opportunities for stakeholder engagement.
Companies must be capable of demonstrating good governance practices as a baseline to meet the requirement of a sustainable investment; on the other side of the table, investors should be mindful of the governance practices adopted by companies in their portfolios.
Waste 360: Year-End Round Up – ESG in Focus
According to a KPMG survey of 5200 companies, 80% report on sustainability globally (90% in North America), and 65% of large companies seek to reduce their carbon footprint.
The waste management sector has attracted a significant amount of ESG investor interest over the last year, despite a negative perception of landfills in certain circles. In light of this, there has been a significant uptick in sustainability reports produced within the sector, such that by 2020, all the publicly-traded, as well as a few of the larger private companies, produced sustainability reports, with increasing amounts of information disclosure as well.
What has been noted by a number of industry analysts and observers is that the solid waste industry probably needs to do a better job of touting and elucidating its ESG credentials (particularly the E) and developing and promoting more accurate data—particularly with regard to landfills and their environmental benefits, which many players feel are underappreciated.
Forbes: 2021 Focus On The “E” In ESG
While plastics blanket the planet, the food and beverage industry is looking at how to make sustainable packaging— recycling, reusing and (sometimes) replacing plastic. Companies are turning to renewable energy, investing in startups that make new packaging, tapping regenerative agriculture, planting millions of trees and eyeing a second bottom line: sustainability.
Break Free From Plastic in its annual audit late last year ranked Coca-Cola the biggest plastics polluter in the world, followed by Nestlé and PepsiCo. Its volunteers collected litter around the world and counted how much came from each company.
There’s also a push toward regenerative agriculture: If farming depletes resources and destroys soil, nobody benefits.
Will consumers pay more for environmental products? A National Retail Federation and IBM study of shopping habits in late 2020 makes it sound like they might. The survey found 80 percent believed sustainability is important and nearly 60 percent would change shopping habits to reduce environmental impact.
Nasdaq: How to Operationalize ESG
Start by capturing the information you already have in house and communicating this in your annual report, CEO letter, website and proxy. There are many ESG frameworks. The stock exchange data seems to show that the SASB framework in combination with the MSCI rating agency seems to correlate to very high returns. Additionally, Larry Fink of BlackRock endorses SASB and MSCI.
ESG reporting is not a one and done. It should be part of your company’s annual reports to your different stakeholders that show your progress towards its ESG goals. ESG is not just for public companies. Private companies are well served to integrate ESG into the overall strategy
When it comes to ESG, 85% of European investors compared to 49% of US investors say they are incorporating ESG factors into their investment analysis.
This global crisis has been an opportunity for companies to operationalize their culture and has highlighted the need to focus on employee wellness and reevaluate how to best meet the needs of customers.
ESG Disclosures, Standards, Rankings, and Reporting:
Bloomberg and Rockefeller Asset Management announced the launch of the Bloomberg Rockefeller U.S., an index that ranks a company's improvement in performance on material ESG issues relative to industry peers.
This multi-factor index combines the Rockefeller ESG Improvers Score TM, an uncorrelated and proprietary alpha enhancing factor, with quality and low volatility factors to pursue outperformance over traditional market-cap weighted indices.
Independent research and advisory firm Verdantix announced today the launch of an expanded ESG and sustainability research practice.
Verdantix ESG and sustainability research will cover four segments: ESG products and services targeted at financial markets participants, ESGtech digital solutions at the interface of corporate sustainability disclosures and ESG financial ratings, climate change and ESG and sustainability consulting across management and technical and investment markets, and Digital technologies that enable corporate sustainability disclosures, risk management and performance improvement.
Investors are turning to the United Nations' Social Development Goals (SDGs) for direction to dealing with social inequality within the ESG framework.
Social bonds are considered for emerging financial instruments to address systemic social issues. Over the past year, there has been an explosion of social bond offerings, many of which have focused explicitly on mitigating the negative impacts of the pandemic.
Green finance is a rapidly growing market. The sales of certified green bonds were up by 53 percent, and almost US$400 billion of green, sustainability and social bonds were issued in 2019.
Policy will continue to be an important driver of the climate finance market. More governments are committed to financing the greening of their economies. Central banks and financial regulators are working on new rules and tools to help financial institutions understand and act upon climate risks.
Investment opportunities exist along the entire value chain of low-carbon technologies. In the case of EVs, this includes semiconductor manufacturers, battery material suppliers, battery manufacturers, charging infrastructure as well as car manufacturers.
Within fixed income, there are significant opportunities in ordinary bonds issued by companies working to improve their environmental performance, in addition to those created by certified green bonds.
Many businesses in carbon-intensive sectors such as oil and gas are now pursuing transformational carbon-reduction strategies. Climate investment needs to capture and support these transitions.
A recent survey completed by the CFA Institute found that 85% of CFA Institute members now take ESG factors into consideration in their investing and that client demand for organizations to consider ESG factors rose to 65% in 2020. The survey further shows that 76% of institutional investors and 69% of retail investors have interest in ESG investing. Finally, a staggering 90% of investment professionals expect their firm’s commitment to ESG research will increase going forward.
78% of practitioners surveyed believe there is a need for improved standards around ESG products to mitigate greenwashing.
The fundamental problem lies in a lack of consistent, reliable data. The CFA Institute’s report finds that, “ESG data are substantial and fast growing, but unwieldy.” Better data will need to come from a mix of clearly defined government reporting standards and consistent aggregation of company data by private industry.
Wealth Management: ESG Investing Outlook and the Benefits of Tax Credits
According to recent research, U.S. companies on the S&P index that are ranked among the top five in ESG investing performed better than their counterparts in the bottom five by at least three percentage points each year for the past five years.
Experts are anticipating half of all professionally managed investments to be comprised of ESG-mandated assets in the U.S. by 2025. ESG-mandated assets are expected to grow almost three times as fast as non-ESG-mandated assets.
ESG investing can reduce the tax liability for companies/investors, while also improving the wellbeing of communities, the nation and the world.
Pensions and Investments: Investors see ESG conundrum – survey
Most institutional investors use internal research along with third-party sources to identify material ESG risks, but do not see ESG being widely implemented in investment decisions, according to a Bank of America survey.
More than 80% saw ESG as helping to improve management of investment risks, double the rate of investors using ESG as part of their fiduciary duty. Yet Two-thirds of respondents believe that less than 50% of global investors are implementing ESG in their investment process, and that only one-third in private markets are doing so.
The "Global Environmental, Social & Governance (ESG) Market Analysis by Investor (Retail, Institutional), Fund, Sector, Region and Country (2020 Edition): Market Insights, COVID-19 Impact, Competition and Forecast to 2025"report has been added to ResearchAndMarkets.com's offering.
Among the Investor segment in the Environmental, Social and Governance market (Retail and Institutional) Institutional Investor segment leads the market. Institutional investors increasingly play a crucial capital allocation role in modern capital markets. Strong ESG performers will be better placed to reshape competitive advantage and, ultimately, create long-term value for the institutional investors.
Based on Fund (Public Equity, Fixed Income, Real Estate, Private Equity and Others), Public Equity segment gains a considerable share. In the Public Equity industry, ESG is becoming an important part of the decision-making process for investments.
Based on Sector (Information Technology, Healthcare, Finance, Communication Service, Consumer Staples, Industry and Others), Information Technology segment gains a considerable share. Technology is enabling a transformational shift in ESG.
Investment Centre: Climate, governance, supply chains top ESG topics in 2021
During Bank of America’s (BofA’s) global ESG conference, 49% of institutional investors thought oil and gas had the biggest room for improvement in terms of ESG, followed 44% for utilities, 34% for consumer discretionary, and materials at 31%.
Asia (41%) offered the biggest opportunities for outperformance from ESG improvement. Both corporates and Governments are expected to play influential roles in shaping ESG during 2021,” BofA said.
“Over 80% of respondents say ESG has a role in better management of investment risks. This was double the rate of those who use ESG just as part of fiduciary duty and highlights the role non-financial considerations can play in managing volatility.”
Over the longer term, the top-performing ethical/sustainable global equity fund was Pengana High Conviction Equities A at 194.62% over the five years to 30 November, 2020.
“ESG factors outperformed the market in 2020 more than a typical year and even on a sector neutral basis,” BofA said.
National Association of Plan Advisors: The ESG Evolution
Weaver, chief executive officer at LeafHouse Financial in Austin, Texas, sees potential for ESG funds in some plans’ core menu, but also for ESG funds to be utilized within target date funds, and especially for ESG analysis as an overlay to broader fiduciary investment analysis of all funds.
Companies and Industries
Automative News: Biden era holds big promise for future of electric vehicles
As Biden prepares to swear in as president this month, Tesla’s valuation stands at more than five times the value of Ford Motor Co., General Motors and Fiat Chrysler Automobiles combined.
There's no doubt now that the technology works, that the consumer demand exists and that the world is moving rapidly toward an EV future. There'll be relatively little resistance to Biden's plans to accelerate America's transition away from gasoline vehicles.
The U.S. auto industry as a whole is much better prepared today to adapt to this shift. GM alone plans to introduce 30 new electric models globally by 2025, having announced in November a $7 billion expansion of its EV investment plan.
Lately, oil and gas companies are increasingly taking preventive actions to contain their carbon footprint.
The increasing customer preference to low-carbon energy sources is driving a change in the industry outlook. Additionally, companies are also trying to address the concerns raised by environmental organizations.
This involves changing the established procedures and incorporating new strategies, such as planned reduction in gas flaring.
Investors managing ESG-related funds have until Jan. 1, 2022, to explain how they use an ESG classification system, or taxonomy, to determine the sustainability of their investments. They will also have to disclose what percentage of their investments are in line with the taxonomy. The new regulation is expected to radically change how investors and companies report on their environmental performance, but data is set to remain patchy in the coming years.
Investors are likely to take a more nuanced view in the New Year about which gas utilities are truly exposed to climate policy and energy transition risk, some analysts said.
In the wake of January 6th events, the American Sustainable Business Council released a statement from CEO Jeffrey Hollender and President David Levine denouncing the assault on the Capital of the United States and calling on Congress to impeach and convict Donald Trump of his crimes.
Many investors are integrating ESG and climate considerations across their portfolios in response to changing attitudes and regulations. The Securities and Exchange Commission could put into place guidelines on the federal monitoring of environmental, social, and governance issues as a Biden administration places greater focus on the climate change agenda.
Congressional Democrats have been promoting legislation to require companies to disclose ESG-related risks. In 2019, Senator Elizabeth Warren submitted S.2075, the “Climate Risk Disclosure Act of 2019,” which would have the SEC “require an issuer of securities to annually disclose information regarding climate-change related risks.
Representative Juan Vargas introduced a bill for public companies to disclose ESG metrics. The bill ” would establish a Sustainable Finance Advisory Committee within the SEC to “submit to the Commission recommendations about what ESG metrics the Commission should require issuers to disclose.”
The SEC recently introduced new disclosure requirements as part of its efforts to modernize Regulation S-K, which are intended to provide additional insights into human capital considerations. Specifically, in certain SEC filings, reporting companies are required to disclose certain human capital matters (if material), including: the number of employees and description of human capital resources; and any human capital objectives.
Based on a review of publicly-available statements, the current SEC Commissioners appear to differ on whether and how to proceed with more prescriptive requirements (disclosure or otherwise) for reporting companies, asset managers and/or registered funds in the context of ESG and diversity matters.
The ESG Subcommittee’s draft recommends that the SEC should mandate the adoption of standards by which issuers disclose material environmental, social, and governance risks; Utilize standard setters’ frameworks to require disclosure of material environmental, social and governance risks; and require that material environmental, social and governance risks be disclosed in a manner consistent with the presentation of other financial disclosures.
Bloomberg Green: Blue Wave Is Seen Jolting Environmental and Social Bond Sales
The shift of U.S. government control to the Democratic Party this month could give an added jolt to sales of corporate bonds that finance environmental and socially responsible projects.
Overall green, social and sustainability-linked bond issuance could rise by about a third in 2021 driven in part by government sales, said Marilyn Ceci, global head of ESG debt capital markets at JPMorgan Chase & Co.
Money managers’ demand for ESG notes is growing, as social and racial issues that were amplified during the pandemic have focused more investors on how their money might make the world better while earning a return. That growing demand is already showing up in issuance data. Companies raised a record $55 billion in dollar-denominated ESG notes last year, almost double the roughly $30 billion raised in 2019, according to data compiled by Bloomberg.
ESG corporate bond issuance is dominated by blue-chip utilities and banks but Karp expects more high-yield companies to tap the market as buyers seek greater returns.
The fastest-growing part of the ESG market this year will probably be sustainability-linked bonds, according to Steven Nichols, head of ESG capital markets for the Americas at Bank of America.
Look for Biden to leverage the market forces growing behind the ESG movement. The most direct way to do this is to require, and establish standards for, companies to make the disclosures sought by BlackRock and other investors. This would provide a tool for the Biden Administration to significantly change the environmental behavior of businesses without making direct changes to the environmental regulations themselves.
Mandatory reporting could have profound impacts across the economy. For one, it will raise the number of companies making such disclosures (which has been increasing but is not yet universal). It will also allow investors to make apples-to-apples comparisons of companies within the same industry sector and thereby identify those better equipped to weather turbulent times (and thus more deserving of their investment dollars). Moreover, it will likely lead to cheaper capital for companies who compare favorably to their peers.