ESG Weekly News Update: July 02, 2021
General ESG News
After recent successes, such as Engine No. 1 winning seats on ExxonMobil’s board, activist investors are becoming more aggressive, with threats of targeting the board to get companies to engage with their proposals.
However, it’s important to note that Engine No. 1 succeeded in a unique situation, especially the fact that Exxon was previously unresponsive to its shareholders’ frustrations.
Pressuring companies to make changes to their board (as opposed to directing a full-on takeover) may be a more effective approach for getting companies to make real progress.
Activist investors have already submitted a record number of proposals this year for improving diversity and equality, and they have achieved an unprecedented level of success.
The Hill: 3 ways the US can finance the future
First, the Biden Administration needs to ensure that investors have access to information about how ESG factors affect the companies they invest in, likely through standardized/mandatory ESG reporting.
Second, the Administration needs to acknowledge the dangers of greenwashing and implement safeguards to protect investors, especially as the demand for ESG-related investment products grows.
Third, the Administration should align domestic policy with global best practices within the international finance community.
Money Marketing: Governance regarded as ‘most vital’ ESG factor
According to a recent Architas study on ESG investing, “honest and transparent accountancy” was ranked the most important ESG factor in 10 of the 11 global markets surveyed. Improved transparency was the top call to action in both Europe and Asia. This challenges the existing idea that the environment and climate change are the most important factors.
As ESG considerations become more “mainstream,” the report also notes that the investing industry needs to work to understand and meet its clients’ ESG needs.
Investors have noticed the successful performance of ESG funds over the past year, and about half of investors in both Europe and Asia said they expect an ESG fund to outperform a non-ESG fund of the same risk level.
Global Americans: Why ESG for Latin America?
Latin America has lagged in ESG awareness and practice, with well-known institutional weaknesses that increased during the COVID-19 pandemic. At best, public and private sectors in Latin America have undertaken scattered and unsustained ESG efforts.
Currently, European countries are encouraging ESG awareness in Latin America, including working with stock exchanges and national regulators.
Historically, short-term concerns over profitability, corruption, and insecurity have overshadowed ESG concerns in the region. Efforts to launch sustainable financing have been limited, but some countries are beginning to link financing to ESG risk criteria.
The shift of North American supply chains from China and East Asia to the Western Hemisphere will provide an incentive for ESG integration in Latin America.
Governments, businesses, and societal leaders in Latin America must work together to form a close public-private partnership and strategy for integrating ESG into decision-making and planning processes.
Businesses in India are facing pressure to adopt ESG standards and practices, and experts note that it is encouraging both to see companies embracing global reporting standards and voluntarily publishing integrated reports.
Investors in the region are also shifting their preferences toward firms viewed as sustainable/responsible.
Currently, 41 out of the 50 Nifty companies voluntarily report their ESG compliance data, and this is expected to increase after the Securities and Exchange Board of India releases its guidelines for Business Responsibility and Sustainability Reporting (BRSR), which will be mandatory from FY23 onward.
A recent survey found that workers are more than twice as likely as employers to report that their health and safety are not prioritized over profits. Companies must secure the health and safety of their workplaces, but they also need to consider their impacts in the surrounding communities.
JUST Capital’s new running of the Top 100 Companies Supporting Healthy Families and Communities lists the companies leading the way, including Nvidia, JPMorgan Chase, and Workday.
With the immediate dangers of the COVID-19 pandemic receding, it is important for companies to continue the momentum toward taking better care of their workers and communities.
Competence greenwashing refers to the intentional or negligent misrepresentation of knowledge/skills/competencies related to ESG activities. Currently, many financial institutions are struggling to hire talent to keep pace with SEG regulatory and market developments.
Many companies are simply promoting internally and adding “ESG” or “sustainability” to job titles, and those that do hire externally are not always looking beyond candidates with a finance background.
Many ESG topics require both financial and scientific expertise, and professionals seeking a career in sustainable finance should seek out a robust curriculum and avoid presenting things like an online certificate as subject matter expertise.
Investors are unaware that many organizations are unable to provide ESG data simply due to external factors that make it difficult for them to report on their impact. Cost is typically the main obstacle, but those unable to provide ESG data will also limit their market opportunities and access to capital.
To solve this, the financial community can encourage companies to produce ESG data and help them find the right tools to accelerate the process.
Jones Day provides a white paper, available for download, that addresses how regulators are responding to increasing investor demand for climate change risk management.
Business success now requires companies to focus on nonfinancial “health” metrics like ESG, DEI, cybersecurity, climate, data privacy, and third-party risk. New focus and disclosure requires new tools and systems for companies to track risk, compliance, and ESG data over time for the purpose of setting targets and tracking progress.
New technology and software are already “changing the game,” and companies will need to adapt as shareholder capitalism gains more ground.
Corporate Secretary: Professionals see evolving ESG links to executive compensation
Connections between ESG and compensation are actively evolving, and although there is room for qualitative links, investors are likely to be expecting quantitative connections with meaningful impacts.
Exact figures/incentives can be difficult to define, so another approach is to tie compensation to a company’s financial performance but modify it based on ESG performance.
The ESG Disclosure Simplification Act of 20021 passed through the House of Representatives last week, and if passed, it would require specific reporting instructions for climate risk, political spending, CEO pay, and taxation.
SASB and TCFD have dominated voluntary reporting in the U.S., largely because they encourage companies to report what they can without requiring them to respond to every question in its entirety.
It’s worth noting that ESG reports led by legal and investor relations teams are different from those led by communications and philanthropy teams. Forthcoming SEC guidelines aim to define and structure ESG reporting.
It is becoming increasingly important to integrate ESG into reporting and business strategy. For example, this does not mean “inserting a two-pager on ESG performance in an annual report.”
ESG Disclosures, Standards, Rankings, and Reporting Real Clear Markets: Putting Limits on Mandatory Climate-Change Disclosures
Beyond the existing investor protection disclosures, it is unclear what the parameters should be for general climate-change disclosures. The article’s author argues that disclosure should be mandatory if it is proven to actually reduce climate risk (or has a valid expectation of doing so), making it of public interest.
Reporting data to facilitate ESG and set up ESG funds does not actually serve to mitigate climate change, so the question remains as to whether or not it should be mandatory.
The compliance bill for mandatory disclosures may also be significant, so the SEC needs to be mindful of what disclosures will actually create value for investors and the public.
Strategy + Business: How environmental, social, and governance reporting grew up
To make real change, many experts and business leaders note that reporting is not the same thing as progress, and voluntary disclosure may not be enough to get companies to actually improve their sustainability profiles.
In the past two to three decades, the idea of materiality has come into focus: what are businesses doing that is relevant to investors? ESG was another iteration of this concept, taking into account nonfinancial concerns as well.
The United Nations has driven much of the progress behind responsible investing, but the challenges of what data to collect, how, and how to make sense of it persist.
It is expected that increased transparency with material ESG issues will also increasingly affect asset values and access to capital (especially in high-risk sectors), but there is currently no transparency in how rating agencies compile ESG scores.
As the field of ESG matures from “box-ticking” to integration in the decision-making process, efforts to regulate disclosure will increase, but one question still remains: “will it actually promote a more sustainable future for generations to come or just give investors more oversight of their risks?”
While the vast majority of companies provide some sort of ESG reporting, only about half of companies surveyed by the International Federation of Accountants (IFAC) back their sustainability reports with assurance. One major challenge is the patchwork of reporting systems CFOs must navigate.
Globally, governments and industry groups are working to harmonize reporting systems, and the SEC warns about the lack of consistent ESG definitions.
With investors increasingly incorporating ESG and sustainability into their investment decisions, low-quality assurance (or a lack of assurance altogether) presents an issue for global investor protection.
IOSCO announced the publication of its Report on Sustainability-Related Issuer Disclosure, highlighting the need to improve the consistency and reliability of sustainability reporting.
IOSCO also announced its support for the IFRS project to establish an International Sustainability Standards Board.
The report highlights several key areas for reporting improvements, including selective reporting, inconsistency, limited quantitative metrics, and a lack of meaningful connection between companies’ financial and nonfinancial performance.
The Wall Street Journal: The New Math of Socially Responsible Investing
As research continues to show that focusing on material ESG issues can drive better financial performance, more companies and investors are embracing ESG investing. New ESG investors have high expectations for both societal impact and financial performance.
While ESG-focused investments are currently outperforming their counterparts, these funds also tend to have higher fees, which reduce returns.
One main concern around ESG investing is the lack of transparency and measurability of metrics, but regulators are making efforts to standardize disclosure requirements.
Additionally, investors are now more than ever scrutinizing executives to see if they deliver on their ESG promises.
ESGB is an actively managed ETF that incorporates MacKay’s ESG analysis framework to seek total returns across a portfolio of fixed income securities.
MacKay aims for ESGB to serve as a solution for “income generation and capital appreciation for both retail and institutional investors.”
In response to increasing demand for ESG investment options, Latin American companies have been improving ESG standards and credit rating agencies have been assessing companies’ ESG performance.
Latin American governments have also been using ESG investing to address social and environmental consequences of COVID-19.
Sustainable bonds are becoming more popular in some countries like Brazil and Colombia, and Mexico became the first country in the world to issue a Sovereign Sustainable Development Goals Bond in the fall of 2020.
The growth of ESG investing in Latin America is expected to result in standardization of frameworks, which will then make ESG investments even more reliable and lead to a more investor-friendly regulated market in the region.
The new platform will connect investors with ESG data sets to support them in their sustainable investment decisions; all data in the platform is connected to the United Nations Sustainable Development Goals (SDGs).
The platform includes data from Equileap, Ecogain, RepRisk, Munich Re, Inrate, Upright Project, and Clean Tech. The Data Hub is meant to respond to the growing interest in ESG data from investors, and Nasdaq will continuously add new data partners.
Also covered in Business Wire: RepRisk Partners With Nasdaq to Add World’s Largest ESG Dataset on 175,000 Companies to ESG Data Hub
Also covered in ESG Today: Nasdaq Provides Single ESG Data Source for Investor with New ESG Data Hub
Wealth Professional: Despite rising ESG acceptance, advisors’ understanding remains limited
A new study from Platforum indicates that the majority of advisors have updated their propositions with ESG offerings, and ESG funds are no longer viewed as involving a trade-off between sustainability and economic returns.
The study also shows that advisors still have a “poor understanding” of responsible investing, and there is much variation in definitions and strategies.
Experts note that incorporating values into investing portfolios also leads to changes in underlying economic characteristics; conventional asset allocation models are not compatible with ESG funds.
Global issuance of ESG-related bonds from January to June 2021 was more than three times what was issued during the same period of 2020, and the highest growth was seen in green bonds.
Europe led the world in SEG corporate bond issuance, with Japan and the U.S. also seeing significant increases.
1. Alignment: people invest in companies with ESG performance that aligns with their values, increasingly expressed by reporting alongside the United Nations Sustainable Development Goals.
2. Sentiment: Public policy positions on ESG topics are reflected in governmental actions and public retirement systems in the U.S., and as public sentiment in favor of responsible investing grows, ESG adoption by public retirement systems is also expected to grow.
3. Regulation: The EU led the way in this area, but the SEC has also signaled its intent to publish ESG disclosure guidelines for public companies.
FTSE Russell: How is corporate ESG data impacting capital flows?
ESG metrics can dictate under- or overweighting in indexes and portfolios, and the incorporation of ESG factors into investment strategies is causing capital to shift toward better-performing companies.
However, many companies do not understand how their ESG data is used by investors and analysts for incorporation in indexes.
FTSE Russell provides a breakdown of how ESG factors impact the weighting of RWE Power, Orsted, Ferrari, and Daimler in its FTSE TPI Climate Transition Index.
Greenlight, launched by ESG Investing, gives fund providers the opportunity to have their products be assessed by a panel of experts in regard to the materiality of its reported sustainability.
According to Jim Biss, Director of ESG Investing, “Accreditation from Greenlight means that our experts believe that your fund’s impact is positive and significant.”
Sustainalytics launched its EU Taxonomy Solution to give institutional investors insights into companies’ sustainability activities to assess alignment with the EU’s climate change mitigation objective.
The Solution aims to help companies fulfill regulatory reporting requirements, engaging companies that do not comply with certain sustainable portfolio criteria.
The BNP Paribas Easy Low Carbon 300 World PAB UCITS ETF, which tracks the Low Carbon 300 World PAB Index, aims to provide investors with exposure to a global portfolio of companies that are reducing emissions and providing low-carbon solutions.
HSBC has acquired a minority stake in the firm, which will be relaunching as RadiantESG Global Investors. It is female-owned and focuses on “next generation ESG investment opportunities for institutional and wealth management clients globally.”
Companies and Industries
JPMorgan Chase has agreed to buy OpenInvest, acting on its commitment to being more aggressive in searching for potential takeovers and “fend off threats from fintech and Big Tech players alike,” as the traditional banking industry has begun to fall behind other tech-based consumer finance brands.
This acquisition will help the bank customize its clients’ investment portfolios in ESG; OpenInvest pulls data from more than 35 sources to feed decision engines that can help clients make personalized, values-based portfolios.
OpenInvest was one of the first venture-backed startup companies that received the public benefit corporation designation, and it chose to join JPMorgan to accelerate their mission to “bring ESG investing into the mainstream.”
Also covered in ESG Today: JPMorgan Acquired ESG Investing Fintech OpenInvest
Lookout Santa Cruz: Oil firms and others face unprecedented pressure to come clean on climate change
In May, Chevron’s shareholders voted that the company needed to substantially reduce its greenhouse gas emissions, supporting a policy that was at odds with the company’s business model.
These demands are now being made of manufacturers, retailers, banks, and other industries as investors want to know how companies are preparing for and working to mitigate climate change.
The new generation of investors comes with a new set of values, and the market is shifting to prefer sustainable business practices. This is also contributing to the drastic increase in ESG investing in recent years.
ESG-related shareholder resolutions are passing at unprecedented rates, and companies face reputational and financial risks if they ignore such proposals.
With its new climate strategy, Generali pledged to reach zero thermal coal exposure by 2030. In its investing activities, the company aims to achieve carbon neutrality in its direct investment portfolio by 2050, and it plans to allocate between 8.5 and 9.5 billion Euros to green investments between 2021 and 2025.
Generali is targeting climate neutrality by 2023 in its operations, with the goal of becoming climate negative by 2040.
EQT has appointed a Global Head of Sustainable Transformation and a Head of Sustainability for its Private Capital business line, who will be responsible for integrating the company’s sustainability efforts and collaborating with investment advisory teams on sustainable values development.
Government Policy MSNBC: U.N. climate change report vindicates Biden’s climate infrastructure plan
There is currently debate over whether a potential bipartisan deal would decrease planned investment toward mitigating climate change, and some members of Congress may withhold their votes from any deal that doesn’t deliver on climate action.
ESG Today: EU Adopts 2050 Climate Neutrality into Law
The European Council set the European climate law (with the EU goal to become climate neutral by 2050) into legislation as part of the European Green Deal.
The new legislation also sets a goal to reduce greenhouse gas emissions by 55% by 2030 (from 1990 levels), and it establishes a European Scientific Advisory Board on Climate Change.
HM Treasury and the UK Debt Management Office announced the UK Government Green Financing Framework with plans to issue at least 15 billion pounds in green gilt in its 2021-2022 fiscal year budget.
The National Savings and Investment (NS&I) will also issue a Green Savings Bond this year.
The Framework will outline how the green investments will finance initiatives toward handling climate change, biodiversity loss, and other environmental challenges while creating jobs across the region.