ESG Weekly News Update: January 22, 2021
Devetashka Cave, Bulgaria
General ESG News
In addition to ESG metrics, there are now more calls for corporations to make their leadership ranks more diverse.
In 2020 only 11% of activist-appointed board directors were ethnically diverse, and only 24% of directors were women, both of which lagged new board members for S&P 500 companies by roughly half, according to Lazard data.
“The rise in the launch of ESG-related funds and campaigns focused on sustainability issues enables activists to improve perceived ESG weaknesses in businesses but also bolster fundraising by branding themselves as forward-thinking and socially conscious,” Lazard writes.
Harvest Business Review: Boards Are Obstructing ESG — at Their Own Peril
PWC’s 2020 Annual Corporate Directors Survey found that only 38% of board members think ESG issues have a financial impact on a company.
The lack of ESG expertise among board members is a main part of the problem.
Several solutions to bring boards along with the ESG revolution include recruiting directors with ESG experience; requiring the board to identify material ESG issues; and board members should require executives to report on the financial impact of their ESG investments.
Waste 360: A Shifting Focus on Climate Change
There are valid reasons why European countries, in particular, are more intently focused on climate change than we are in the U.S. Importantly, it is also clear that awareness and attention on climate action in the U.S. is increasing.
Climate change went from being an unseen, theoretical threat in most U.S. communities to wielding its wrath across large swathes of the country. In 2020, it became impossible to ignore the potential for the threat to our lifestyles – and even our lives -- associated with changes in our climate.
Understanding and preparing for climate change is important to our customers and to the investment community since disasters such as storms, floods, extreme heat, drought and wildfires affect business operations and corporate profitability. There are a growing number of examples of companies that were not prepared for the impact of climate change, and whose customers and investors have suffered as a result.
Bas Sudmeijer proposes building CO2 networks: partnerships between cities around the world that would share the cost and geological resources needed to trap emissions deep in the earth.
Over the past 40 years, damage from major weather and climate disasters has cost the United States nearly $2 trillion dollars. A closer look at the data reveals that recently the cost of such incidents has been escalating quickly, due in part to human-caused climate change.
"The most extreme events have been intensifying more rapidly as a result of climate change, and this is a pattern that is true across the country, even in regions where average precipitation has not changed or has decreased slightly," explains the study's lead author, Frances Davenport, a PhD student at Stanford Earth.
With much more climate heating anticipated in the future, the team says the proportion of costs due to extreme events will only get worse.
The New York Times: When Business and Politics Mix, ‘Character Really Counts’
Lloyd Blankfein, the former chief executive of Goldman Sachs, was never a fan of President Trump, and was one of the few top C.E.O.s to say so early on. In a candid conversation, he offered some provocative thoughts on the lessons learned for the business world.
Business leaders owe their platform to their company, and therefore they shouldn’t appropriate it for personal things, but rather they should take positions on those issues where it’s in the wheelhouse of the company’s expertise and their expertise.
The real accomplishment will be to make people engage with each other and hear different things. I think there’s value in us having a country that could pull together. Not to be trite, but what better quote is there — biblical and then repeated by Lincoln — than “A house divided against itself cannot stand.”
ESG Disclosures, Standards, Rankings, and Reporting
Investment information service and rating company Moody’s announced today the launch of two new ESG score types for sovereigns, including issuer profile scores (IPS) and credit impact scores (CIS).
Moody’s released a report highlighting the impact of ESG factors on sovereign credit. The factors most commonly have a negative overall impact on sovereign credit quality.
Of the 144 sovereigns covered by Moody’s scores, ESG considerations were found to have a “Very Highly Negative” credit quality impact on 20.
The Global Reporting Initiative (GRI) announced its support for a proposed governance change by the European Financial Reporting Advisory Group (EFRAG), that would introduce a two-pillar structure for financial and non-financial reporting.
It was proposed that EFRAG establish two pillars, one for financial reporting activity, and another for nonfinancial reporting standard setting (NFR).
Companies disclosing their impacts through the world’s most widely used sustainability reporting standards are to adhere to three new and updated standards, for reports they publish from this year onward.
These three GRI Standards now in effect will be applicable to many organizations around the world, helping them respond to the emerging demands of their stakeholders. From tax transparency to employee wellbeing and water stewardship, they cover crucial issues that illuminate corporate contributions to sustainable development.
Financial Times: ESG accounting needs to cut through the greenwash
The accounting of ESG issues has to become a lot more serious, which means incorporating the features of high-quality accounting rules.
First, there should be having a higher threshold for recognizing positive claims than for negative ones.
Second, dual reporting is required. A firm should be reporting both of its greenhouse gas emissions in a given period and its cumulative greenhouse gas emissions over prior periods.
Third, ESG accounting needs benefits matching. For example, $1bn building cost of a new factory is not simply recorded as an expense but gradually recognized in the income statement as depreciation during the asset’s life. This matters because it encourages investments in the future.
Expect more transparency about political donations going forward. In the 2020 proxy season, some 22 resolutions filed by the Center for Political Accountability asking companies to disclose election spending were supported by an average 42% of shareholders.
More than half the companies in the S&P 100 index already disclose or have agreed to disclose their political spending. There are already signs that companies are open to it. Recently Chevron filed a report on its climate lobbying after a resolution to disclose lobbying won 53% of the vote.
Climate change is now the lens through which Blackrock, and everyone following the world’s largest asset manager, will need to assess its next investment.
BlackRock has promised to screen all investments against sustainability criteria and to begin divesting from companies such as thermal coal producers.
This year, BlackRock said all its active portfolios and advisory strategies will account for ESG, and it will continue to generate and share more data on companies’ ESG performance.
BlackRock stated that it will integrate Clarity AI’s capabilities, a sustainability analytics and data science platform, in the firm’s end-to-end operating system for investment professionals, Aladdin.
Over the past year, Aladdin has added 1,200 sustainability metrics and has established data partnerships to help investors understand ESG and physical climate risks and opportunities.
Clarity AI uses big data and machine learning to create actionable sustainability and impact insights and expand these to a uniquely broad universe of companies, countries and local governments.
One way to take advantage of this megatrend is the SPDR S&P 500 ESG ETF (EFIV). The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of an index that provides exposure to securities that meet certain sustainability criteria (criteria related to environmental, social, and governance (“ESG”) factors) while maintaining similar overall industry group weights as the S&P 500 Index.
The fund is up 17% within the past year and with a 0.10% expense ratio, investors get performance at a low cost.
Companies and Industries
Fitch Ratings: Oil Companies Among Most Vulnerable to Long-Term ESG Risks
Exposure to the energy transition places the global oil sector among the most vulnerable to long-term ESG risks. This vulnerability extends to oilfield service, refining and liquids transportation.
Oil production will be among the sectors most severely affected by long-term ESG trends, second only to coal. There are two main regulatory forces that will reduce global oil consumption: the internal combustion engine car sales ban and carbon pricing.
Oil, liquefied natural gas and chemicals are globally traded commodities. The regional differences in the scope of the energy transition in terms of the levels of disruption are likely to be less pronounced than in more domestically focused sectors, such as utilities.
“Stakeholder capitalism” has made headlines over the past 18 months as the World Economic Forum, the Business Roundtable and others have called on corporate leaders to include the voice of stakeholders in their decision making.
How can companies embrace the theories of stakeholder capitalism to drive long-term value creation and sustainable growth? They must address two pressing challenges: measuring and reporting stakeholder practices on a consistent basis on the one hand and the imperative to embed stakeholder governance in corporate decision making on the other.
There is not a “one-size-fits-all” approach to stakeholder governance. Instead, each company must embark on its own stakeholder governance journey, guided by its purpose.
It used to be that accountability ended at the limits of a company’s own perimeter. But now, businesses are feeling the pressure when it comes to being accountable for the totality of their supply chain.
Investors are using advanced data analytics, AI-assisted software, and cloud business intelligence tools to gain a sophisticated view of supply chains.
This comes as no surprise when you consider that supply chain compliance is one of the biggest emerging concerns for investors.
The Wall Street Journal: Companies Brace Themselves for New ESG Regulations Under Biden
Companies are bracing for further regulation under the Biden administration. One area that could affect across all industries: potential new requirements related to diversity, carbon emissions, and other types of sustainability metrics.
One of the biggest areas to be addressed is disclosure. Currently public companies must disclose ESG information only if they deem it material to investors’ perception of the business. Investors are expecting SEC to require public companies to disclose climate-related financial risks and greenhouse gas emissions in their operations and supply chains.
A number of industries that are likely to be affected by any new ESG rules say they have made headway with ESG efforts of their own in recent years. Several banks and financial-services firms say they have met with Biden agency review teams on matters including potential ESG risks.
The American Petroleum Institute’s manager of climate and ESG policy says that it is ready to engage with the Biden administration on ESG issues and that it has already made progress on those issues, including sustainability-reporting guidance, workforce-diversity efforts and emission-reduction initiatives.
The National Law Review: ESG in the First 100 Days?
There are some indications that a Biden administration — especially coupled with a Democratic Congress — may seek to amplify ESG reporting in the U.S. Here are some initiatives to watch out for early in the Biden administration:
Rejoining the Paris Climate Accord – President-Elect Biden has pledged to rejoin the Paris Climate Accord immediately upon taking office.
Steps to Temper the Effect of DOL Rule - Some expect the Biden administration to soften the effect of a Final Rule, requiring fiduciaries subject to ERISA to evaluate investment opportunities based upon financial performance factors, rather than ESG.
New SEC Requirements - Many expect the new SEC leadership to prioritize ESG disclosures, especially disclosures of climate-related risks, including greenhouse gas emissions, and diversity issues.
Executive Actions Aimed at Reducing Fossil Fuel Reliance by the Federal Government - President-Elect Biden reportedly has planned a series of executive orders to address climate-related issues by encouraging production of clean energy and zero emission vehicles, and ensuring the government buildings and facilities are more energy efficient.
A large degree the success of these and other ESG initiatives hinges not on market conditions, investor demand, or even on legislative action, but instead on the decisions of unelected agency administrators.
Over the last few months of President Donald Trump’s administration, political appointees at the Securities & Exchange Commission and the Department of Labor have issued new rules to curtail ESG-related investment activity, often over the objection of Democratic appointees to those agencies.
Given the current political polarization and Biden’s razor-thin margins in each chamber, there is a significant risk that it will be portrayed not as facilitating corporate or investor choice, but as promoting “politically correct” outcomes. Biden’s agency appointees will have to determine whether or not to expend time and effort to reverse these rules now, which will likely provide an opportunity for attacks by political opponents.
Joe Biden is preparing to deal with climate change in a way no U.S. president has done before – by mobilizing his entire administration to take on the challenge from every angle in a strategic, integrated way.
A coordinated approach also helps ensure that vulnerable populations aren’t overlooked. Biden has committed to help disadvantaged communities that have too often borne the brunt of fossil fuel industry pollution, as well as those that have been losing fossil fuel jobs.
The best way to tackle these would be a comprehensive climate bill that uses some mechanism, like a clean energy standard, that sets a cap, or limit, on emissions and tightens it over time. Here, the problem lies more in the politics of the moment than anything else. Biden and his team will have to convince lawmakers from fossil fuel-producing states to work on these efforts.
Treasury Secretary nominee Janet Yellen pledged to appoint a senior level official at Treasury to lead the department’s efforts on addressing climate change, at her nomination hearing before the Senate Finance Committee.
Yellen’s comments mark another indication on the emphasis the incoming administration will place on climate change.