ESG Weekly News Update: January 8, 2021
Nā Pali Coast State Park, Kaua’i
General ESG News
ESGToday: 2021 ESG Outlook – Part 1
ESG Regulations: In November 2020, the Federal Reserve recognized climate change as a near-term financial stability risk, leading us to expect more principles-based guidance coming from the Fed in the near to midterm on monitoring and reporting of climate risks.
Sustainable Finance Action Plan: EU regulation on sustainability-related disclosures in the financial services sector, or SFDR, will go into effect on March 10. It imposes new transparency and reporting requirement at the product and firm level in the investing communities.
Growing ESG Trends in Emerging Markets: EU and China are leading the development of the Common Ground Taxonomy under the auspices of the International Platform on Sustainable Finance (IPSF), an initiative backed by IMF and member countries including Argentina, Canada, Chile, China, India, Kenya and Morocco. The Taxonomy is expected to be developed by mid-2021.
ETF Trends: The 5 Keys to Good Corporate Governance
If a company has good leadership that supports policies ESG investors care about, it becomes easier to articulate why that company should be held in an ESG portfolio.
To better understand how Sage evaluates corporate governance, we have created “the 5 C’s” framework – compensation, composition, competency, clarity, and consistency.
The Wall Street Journal: CFOs in 2021 Will Keep an Eye on These 10 Things
Here are 10 things that could be top of mind for CFOs in 2021: Economic Recovery, Corporate Tax, Regulation, Trade, Cash and Capital Expenditures, Mergers and Acquisitions, Listings, Remote Work, Dividends and Share Buybacks, ESG Disclosures, Libor Transition.
As Australia's key thermal coal customers adopt carbon neutrality goals, new project financing may be threatened as the Big Four banks in the world's second-largest thermal coal exporter continue to distance themselves from the increasingly contentious commodity.
Amid the pandemic, companies and investors increasingly emphasized social issues such as worker safety. The past few years brought a wave of leadership changes at European power and gas companies as the industry shifted away from fossil fuels and embraced renewable energy.
ESG Disclosures, Standards, Rankings, and Reporting
Investor Daily: Why ESG scores don’t tell the whole story
Using an external score helps research teams develop a deeper understanding of the methodology and its limitations. ESG ratings do not always impact a credit rating directly, but understanding ESG risks and opportunities helps credit analysts form a holistic view.
However, each ratings provider uses a different methodology, which results in a low correlation between ratings that supposedly measure the same thing.
Another important aspect is the ability to look at the momentum of a company’s ESG practices. When an ESG analyst assesses a company, they will assign a point-in-time opinion and a trend opinion. Some may incorporate a rate-of-change perspective. This allows portfolio managers to not only hold strong ESG performers, but also those with a strong improving trend.
Asian companies should consider better environmental disclosure, including exposure to risk from the changing climate.
For companies today, substantive environmental disclosure should report the company’s CO2 emissions—preferably its direct and indirect ones, including those of its supply chain, and its product’s emissions once sold in the market.
Disclosure standards like those of the Task Force on Climate-related Financial Disclosures (TCFD), recently adopted by Japan, are intended to help build consideration of the effects of climate change into routine business and financial decisions.
Companies that disclose their environmental impact tend to be better run because good measurement leads to good management. They are more prepared for the transition away from carbon-based energy sources.
In the Public Equity industry, ESG is becoming an important part of the decision-making process for investments. In 2017, the world’s largest pension fund (Japan’s Government Pension Investment Fund) with AUM of over 1.5 trillion announced their strategy to incorporate ESG factors as a top priority.
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.
BlackRock’s researchers found that survey respondents plan to double their environmental, social and governance assets under management by 2025, with growth in sustainable assets being most pronounced in the UK and Europe.
BlackRock found that global demand for sustainability is driven regionally by different regulatory environments, public perceptions, board and management oversight and awareness of performance benefits.
More than half (53 per cent) of global respondents to the BlackRock survey cited concerns about “poor quality or availability of ESG data and analytics” as their biggest barrier to adopting sustainable investing, higher than any other barrier that was tested.
With some assistance from the Federal Reserve's purchases of corporate bond ETFs, five of 2020's top 10 asset-gathering ETFs are bond funds.
Thematic ETFs seek to capture investment opportunities in companies or sectors created by long-term structural trends. Examples include demographic and social shifts such as diversity, inclusion and equality; disruptive technologies such as cloud computing; geopolitical changes such as globalization; and environmental pressures such as climate change.
By the start of the next decade, environmental, social and governance (ESG) funds are forecast to be a multi-trillion asset class as more institutional and retail investors alike place emphasis on issues such as climate change, equal pay and more.
ESGToday: Top ESG Investing Stories of 2020
Investor Initiatives. Professional investors and major investment managers have become increasingly active in joining sustainability initiatives and engaging issuers on improving sustainability practices and transparency over the past year.
Sustainable Finance. The sustainable finance world grew up in a big way in 2020, as financial innovation proliferated with companies increasingly linking financing terms with sustainability goals, and governments issuing tens of billions of dollars in sustainable finance instruments in order to help offset the social and economic impact of the pandemic.
ESG Tools and Services. With investor focus shifting heavily towards sustainability factors, data, research and service providers have stepped up with a proliferation of ESG investing tools and services.
Energy Transition. Climate change is likely to remain top of mind as a key focus for sustainable investors, as hundreds of billions of dollars flow towards renewable and clean energy solutions.
Private funds have traditionally remained ‘private’ and have been somewhat reluctant to report to the market on both financial and non-financial metrics. But we have seen 2020 mark a significant change in the way private markets consider ESG.
Drivers of greater ESG awareness and transparency can be broadly categorised into ‘push’ and ‘pull’ factors. The dominant driver is that stakeholders are demanding greater non-financial disclosure and ESG reporting. Secondly, supranational bodies and economic unions are introducing new regulation. Finally, private funds are facing pressure from employees who are seeking action from the inside out to make changes which will benefit people and planet, as well as contribute to the financial bottom-line.
Companies and Industries
COVID-19 has broken the rut of ‘business as usual’, and with companies reassessing the future, ESG is standing out as a core priority for many. ESG was seen as an annual consideration – a page in the annual report; a carbon target for the coming year – it is now very much a real-time necessity.
The size and frequency of these big ticket ESG announcements suggest that corporates are fully aware of the pressure that they are now under to comply with the needs of their stakeholders to a far greater degree than before COVID-19.
To compare fund ratings in an apples-to-apples fashion, one must not only compare methodologies, but also at how the underlying holdings are treated in terms of rating distribution; carbon intensity; transition risks to clean energy.
Another thing to consider when comparing ESG ratings is materiality. Material issues for Exxon include green house gas emissions (environmental), community impact (social), and political lobbying and spending (governance). In the case of Facebook, social material issues have more to do with product and stakeholder impacts, diversity issues and data privacy.
The SEC could establish rulemaking and guidance on the federal monitoring of environmental, social, and governance issues. The decisions could come as a result of ongoing complaints from investor advocacy groups over inconsistent disclosure practices.
The regulatory framework would help provide more systematic guidelines that would also attract more investment money. Members of the Investment Company Institute formally called U.S. public companies to provide ESG disclosure consistent with standards set by the Task Force on Climate-Related Financial Disclosure (TCFD) and Sustainability Accounting Standards Board (SASB).