ESG Weekly News Update: July 09, 2021
General ESG News
Fitch Ratings: Non-Financial Corporates ESG Relevance Heatmap -- 2Q21
Fitch Ratings published a report in which it discord ESG risk elements against related corporate coverage to determine how relevant they are to rating decisions.
Also covered in Fitch Ratings: Fitch Ratings Updates Its Corporate Interactive ESG Dashboard and Relevance Map for 2Q21
Fitch Ratings: Fitch Publishes Report on ESG Influences on NBFI Ratings
Fitch Ratings has published a new report on how ESG issues affect its non-bank financial institution (NBFI) ratings, and it found that governance is the most important factor in its ESG ratings. Social issues have a smaller impact, and environmental issues have a minimal direct impact on NBFI ratings
The Biden Administration has recently launched a series of ESG-related initiatives and has signaled impending regulatory action for climate and human capital disclosure. At the same time, investors are increasing their focus on social issues.
Additionally, the EU is leading the way in ESG legislation and regulation. As activists and investors continue to push for human rights and supply chain action, we can expect to see increasing ESG convergence on both sides of the Atlantic and worldwide.
Corporate Secretary: Greenwashing biggest challenge of ESG investing say institutions
A new Schroders survey indicates that nearly 60% of institutional investors view greenwashing as a challenge when selecting sustainable investments, and the challenge grows as ESG concerns become mainstream and the number of ESG-related investment products increases.
While regulation is expected to increase, there are concerns that poorly designed regulation will actually make it easier for greenwashing to occur.
Concerns about ESG investing performance are decreasing, and the study found high investor confidence in the mid-term outlook for their sustainable investments.
One question that remains for investors is whether to invest by theme and global super trends or to diversify into the fast-growing areas of private assets, private equity, real estate, or infrastructure debt.
The episode explores sustainable finance topics in the UK and Europe, including COP26, climate science, green bonds and loans, nature-related risks, new disclosure requirements, and disclosing climate risk in line with TCFD recommendations.
The episode features UKSIF’s chief executive James Alexander, ING’ global head of sustainable finance Leonie Schreve, and Energy’s director of ESG disclosures Rosemary De Vos.
World Economic Forum: Why it’s time to change the way we talk about climate change
As regions face unprecedented temperature spikes, it’s important to shift from the ‘information deficit model’ of climate change discussion -- assuming that people will take action if they hear more about climate change -- toward having more conversations about how people are working to solve climate change and how they are improving their quality of life.
To engage the public and develop a sense of efficacy, people need to believe that climate change directly affects them.
Instead of only communicating risks, communicators should rely on ‘descriptive social norms,’ or describing behaviors that others are doing and how they are beneficial.
National Law Review: ESG and the Sustainable Economy - Diverse and Inclusive Businesses
The driving forces behind blue-ribbon corporate governance and behavior now stem from the companies' employees, service providers, vendors, consumers, shareholders, non-governmental organizations, and other advocacy groups, all of which are increasingly questioning the C-suite about ESG- and sustainable economy-related issues.
Many laws concerning diversity and inclusion have been enacted worldwide, though these laws vary significantly depending on the enacting jurisdiction and its cultural and racial composition.
Some instances include: Sweden has required companies to promote gender equality since 2009 and the state of California in 2018 passed a law mandating that public companies headquartered in California have at least one woman on their boards of directors by the end of 2019. More recently, California enacted a law requiring that, by the end of 2021, publicly held companies headquartered in the state must include members of underrepresented communities.
Extreme weather events in all seasons have been disrupting power grids at unprecedented rates in recent years, and this is beyond the increasing demand for energy to keep people warm or cool throughout the year as temperatures fluctuate more widely.
Aging infrastructure and ‘patchwork’ oversight also pose a challenge for the grid. While the grid still relies heavily on coal power, it is also dependent on natural gas and an increasing share of renewable sources.
Extreme temperatures serve to drive up demand and make power plants less effective, such as by causing failures.
The Biden Administration supports deploying smart grid technology to make the grid more resilient. The Administration also freed up $8 billion to boost grid capacity to support renewable energy, and the government has plans to build thousands of miles of new transmission lines to expand renewable energy.
Real improvement will also require equipment updates at the regional and local level, as well as government regulation to ensure companies put the sustainability of the U.S. power grid ahead of their bottom lines.
Claire Hedley, executive director of the alternative investment and manager selection division of Goldman Sachs Asset Management, believes there are three sets of dynamics at play- changing preference of millennials, growing consequences of negative actions, and improved economics: efficiency, innovation, and growth.
Previously seen as a "nice to have," social considerations have become a core operational value affecting a company's bottom line.
Moving into an ESG 2.0 era, where companies need to prevent greenwashing and investors need to be more careful by focusing on evidence and not on narrative, should understand the company well, ensure ESG assessment appreciates financially material risks, and spot selective disclosure practices or generic reporting in integrated reports of companies.
Korean Times: Biodiversity becoming next keyword in ESG disclosures
During the "2021 Europe-Korea Virtual Business Conference" in Seoul, participating experts agreed that large business groups should cope with both global and domestic issues at the same time when it comes to ESG management.
For listed firms, ESG management is becoming increasingly crucial concerning their share values. Large companies in Korea will be required to disclose mandatory ESG reports from 2025.
Experts asked the companies to pay close attention to the task force on nature-related financial disclosures (TNFD) that would be relevant soon.
National Law Review: ESG and the Sustainable Economy -- The Ethical Supply Chain
Efforts to address social issues like modern slavery and human rights abuses in global supply chains have become prominent, both for mitigating risk and improving reputations.
Two types of legislation are now emerging -- disclosure-based requirements and obligations for companies to incorporate human rights due diligence into their supply chains.
It is important to note that legislation is only as effective as its enforcement mechanisms. Litigation is an effective incentive since it poses a business risk for companies that fail to meet established standards.
Without a uniform set of standards/criteria, companies and investors are left to create their own policies and investment strategies. Reliable and broadly accepted reporting metrics are necessary to make supply chain metrics have a material impact.
ESG Disclosures, Standards, Rankings, and Reporting
Some activist investors want corporations to disclose how much they pay in taxes and where they shift their profits, but critics argue that this is simply a continuation of the narrative that America’s biggest corporations don’t pay their fair share of taxes.
There are currently bills in Congress that would, among other provisions, require public companies to disclose where they hold subsidiaries, earn profits, and pay taxes. The bill faces significant odds, but it does have private-sector support.
Additionally, voluntary tax reporting standards from the GRI took effect this year. The push for transparency in the U.S. stems from recent pressure to get companies in the oil, gas, and mining sectors to publicize what they pay in taxes to foreign governments.
The U.S. still lags behind the EU and other countries in ESG disclosure regulation, but it is expected to catch up as pressure increases from activists and investors demanding that companies explain how their tax policies and practices align with their sustainability commitments.
Duff & Phelps recently published research showing that almost half of valuation experts see the lack of standardized reporting systems as the biggest threat to ESG disclosure; no single system received a clear majority of popular votes among those surveyed. Respondents also cited indifference from business leaders as another major threat, as well as limited checks on greenwashing and too much regulation.
There is also a lack of consensus on motivations for adopting ESG controls, ranging from reputational drivers to increasing company valuation and a sense of moral obligation.
Where there is generally a consensus is the agreement that the status quo needs to change, but until there is a standardized reporting framework, companies will continue to “mix and match” various guidelines.
Financial Times: Letter: Transparent reporting on ESG can only be helpful
Jeffrey Ellis issued a letter in response to the Financial Conduct Authority’s plans to bring climate reporting into businesses’ financial statements, and his concern is that “climate reporting creates more heat than light,” prompting companies to go private to avoid disclosure.
His concerns may be misplaced, as the UK has plans to make climate-related financial reporting mandatory across the entire economy by 2025.
National Law Review: Will Mandated ESG Disclosures Lead to Increased Litigation Risk
Companies are continuing to press the SEC for flexibility in upcoming mandated reporting out of fears of increased litigation risk.
A letter filed by tech giants including Amazon, Alphabet, and Facebook urges the SEC to require companies to ‘furnish’ their climate change disclosures with the SEC, not file them publicly. Furnished disclosures are exempt from significant liability if deemed false or misleading, though the companies would be liable for certain misstatements/omissions relating to the purchase or sale of securities.
Some SEC Commissioners are in favor of instituting a ‘safe harbor’ for companies genuinely trying to disclose forward-looking ESG information.
Other companies, like Walmart and Chevron, support a hybrid approach to ESG disclosure, including a mix of furnished and filed disclosure.
The fund is designed to generate balanced and consistent returns across market cycles for investors who want equity diversification with higher yields. The fund aims to provide a total return of capital and income through a variety of strategies.
The new fund is categorized as Article 8 under the EU’s Sustainable Finance Disclosure Regulation (SFDR), and it builds off of the launch of BlackRock’s U.S. “sister strategy” that is managed by its $82 billion Systematic Fixed Income business.
Also covered in Citywire Selector: BlackRock launches ESG fund for $82bn systematic bond team and Funds Europe: BlackRock launches liquid alternatives ESG fund
SEC Commission Chairman Gary Gensler has asked his staff to research climate and workplace metrics to determine which are most critical for investors, which could ultimately narrow the ESG trade and help investors understand how ETFs market themselves as ESG-focused.
Some ESG funds have narrow, thematic approaches, while others take a “sector-neutral” approach with risk and return profiles similar to their non-ESG counterparts.
Many activist investors, such as Engine No. 1, are choosing to invest in companies with poor ESG performance and transform them from the inside, promoting ESG values without setting official guidelines.
SASB and the IIRC merged to form the Value Reporting Foundation, which signals the larger trend of ESG reporting measures being consolidated. Experts note that firms will be required to produce auditable non-financial material.
SASB and IIRC have also joined with the CDP, GRI, and Climate Disclosure Standards Board to set new climate-related disclosure standards, and the IFRC launched a paper on universal sustainability reporting guidelines.
Currently, the UN Principles of Responsible Investment (PRI) have had the biggest influence on private equity’s ESG compliance, but some suggest that simply being an UN PRI signatory will not be enough.
Private equity managers will be expected to show how their ESG initiatives deliver nonfinancial returns and increase the financial value of the company.
Institutional Investor: The ESG Fixed-Income Universe Is Growing Rapidly -- But Green Bonds Are Still Being Overlooked
Fixed income makes up 27% of the overall fund market, but ESG bonds currently only account for less than 20% of total ESG fund assets. This is due, at least in part, to the inherently complex nature of bond markets that makes ESG integration difficult.
Green bonds are the most popular investment vehicle within the ESG bond universe, but they struggle to compete outside of that niche market.
Green bonds currently only represent 0.2% of the assets in fixed income investment funds globally, and it is concentrated largely in Europe.
Green bonds carry more credit risk when compared to traditional bonds, and investors generally also earn less yield. This makes them less of a ‘replacement’ for traditional bonds and more of a vehicle specifically for funding sustainability projects.
IFA Magazine: A multi asset approach to ESG integration
The shift of ESG investing becoming mainstream has also driven a shift toward the inclusion of material ESG issues in investment strategies.
ESG factors can alter economic beliefs and shape the risk/return profile of investments. For example, ESG risks might be higher in emerging markets than developed markets.
Additionally, as the availability of ESG investment products increases, ESG integration into investment strategies grows, as does the availability of ESG data used to make better investment decisions.
CIBC Asset Management Inc. (CAM) announced the launch of CIBC Sustainable Investment Solutions, providing access to actively managed strategies that seek to align with the investing values of socially responsible investors.
A portion of CIBC's revenues (5% of the management fees earned) from managing these environmental, social, and governance (ESG) solutions will be donated to organizations supporting climate transition activities.
CIBC offers mutual funds and all-in-one balanced solutions; these solutions are actively managed funds that integrate a socially responsible approach to investing while providing a range of income and long-term capital growth outcomes. An ETF series of all six solutions will be launched in the coming weeks.
Also covered in ESG Today: CIBC Asset Management Launches Suite of ESG Investment Funds
Financial Times: ESG outperformance looks set to end, study suggests
Abraham Lioui, professor of finance at Edhec Business School and an expert in the strategy of ESG investing, believes he and his co-authors have found signs that the ESG market is reaching maturity and could become a victim of its success.
The study believes we will be at the stage where the relationship between ESG and performance will be negative. This because ESG buzz resulted in exponential growth in ESG and impact investing, partly due to a considerable rise in passive investments.
Lioui and his fellow academics also found that according to most data sets, the accumulated alpha, or outperformance, for the E and S pillars of ESG was above one percentage point per year, supporting the thesis that companies can do well by doing good.
The partnership aims to address major global health and environmental challenges, and the intersection between nutrition, health, biodiversity, and climate. The investment strategy will be available to Credit Suisse’s wealth management clients.
FTSE Russell launched the FTSE EU Climate Benchmarks Index Series, which is aligned with the Paris Agreement and aims to achieve 50% in carbon emissions reductions over ten years.
The index tils exposure toward or away constituents based on their climate risk exposure, allowing investors to reallocate equity and/or fixed income portfolios to achieve climate objectives.
FTSE Russell also plans to launch a suite of equity indexes aligned with the EU Climate Transition Benchmark later this year.
Companies and Industries
Market Watch: Blackstone Group to Buy ESG Software Company Sphera
Blackstone Group is buying Sphera, which is an ESG software company that helps organizations handle sustainability, health, safety, and environmental risks. The deal now values the firm at $1.4 billion.
The acquisition signals that ESG issues are growing in importance to global businesses, and with the deal, Sphera will expand its ESG digital solutions.
Also covered in Environment + Energy Leader: Record-Breaking Sphera Acquisition Signals Growing Importance of ESG Issues
Glass Lewis recommends that Adani shareholders vote out one member of the board’s risk committee who is up for re-election after an Australian court found that an Adani coal export terminal in Queensland engaged in monopolistic business practices. An Adani spokesperson argued that the terminal was a separate company.
After recent shareholder actions taken against companies like Chevron and ExxonMobil, companies are seeking law firms’ help in assessing their risks and ensuring ESG compliance.
The law firms are noting that ESG integration requires true operational expertise and leadership commitment, and their job is to help companies manage ESG liability, not redefine a company’s operations.
One main challenge is the lack of a standard ESG taxonomy for ESG reporting as the firms try to ensure that there is not a gap between what companies are saying and what they’re doing.
Major events impacting oil, gas, and energy include Engine No. 1 winning seats on ExxonMobil’s board, Chevron’s shareholders backing a resolution demanding the company cut its emissions, and a Dutch court ruling that Shell is contributing to climate change and must also cut its emissions.
These events are expected to have impacts across Europe and the U.S. (especially when paired with recent SEC actions), as activists gain confidence and companies become exposed to unprecedented risk, pressure, and consequences.
A recent S&P report found that ESG will be one of the most significant issues with implications for the IT industry, especially for large and public organizations. The report identifies more than 30 trends in IT that relate to ESG, including:
Supply chain governance
Consumer data privacy
Dependence on ‘smart’ technology
As ESG concerns rise to the forefront of corporate and public consciousness, and as the cannabis industry grows rapidly, companies in the industry face stakeholder demands for ESG action and disclosure.
The cannabis industry is largely supported by millennials (including investors, customers, and the workforce), who are more inclined to align their investments with their values than previous generations.
With increasing stakeholder pressure also comes increasing governmental pressure both for public and private companies. While the cannabis industry is largely overwhelmed with issues around legalization, taxation, compliance, etc., it also needs to pay attention to mounting ESG concerns.
Nasdaq launched an ESG Data Hub, which features ESG risk data on more than 175,000 companies provided by ESG data science firm RepRisk, among data from other providers.
Through this hub, Nasdaq is providing actionable market insights for industry professionals. It will enable clients to access ESG data provided by leading experts from disciplines across the ESG spectrum, including reputational risk, gender diversity, biodiversity, and carbon.
RepRisk daily updates proprietary ESG risk metrics and analytics for public and private companies from every sector and market across the globe. It supports alignment with and reporting on various sustainability frameworks and regulations and this would support Nasdaq's commitment towards providing investors relevant information on the ESG front.
Demand for carbon offset projects is expected to increase as companies continue to set net-zero targets, and research forecasts an increase in the price of carbon as the inventory of voluntary carbon credits decreases.
With this new projects, the banks aim to increase the delivery of high-quality carbon offset projects and create a transparent carbon credit marketplace with price certainty, as well as to develop tools to help clients manage climate risk.
The pilot project is built on the Ethereum platform with blockchain-focused software. The marketplace includes full traceability for owners and price discovery through posting executed trade sizes and prices to the market.
There is an impending period of ESG disclosure reform, and while there are “mixed signals” coming from the SEC Commissioners, market participants need to pay attention to emerging regulatory frameworks and requirements.
The SEC’s Division of Examinations will likely play an important role in the agency’s ESG initiatives, and its examination of firms will focus on portfolio management, performance advertising and marketing, and compliance programs, with a particular focus on private equity firms.
The SEC’s competing voices on disclosure requirements create added risk for market participants, and currently, three of five sitting members of the Commission appear to favor a more robust regulatory framework.
Market participants should prepare for increased SEC examination and enforcement, as well as an increase in shareholder litigation.
SEC Commissioner Hester Peirce will share her perspective on how public policy and financial regulation should affect ESG concerns in a Brookings event on July 20.
At the Society for Corporate Governance, SEC Commissioner Lee noted that climate change and other ESG risks should be a primary focus of corporate board agendas.
Commissioner Lee (D) is also supporting the SEC agenda of ESG disclosure, but her Republican colleague Commissioner Roisman is criticizing the initiative.
Directors have fiduciary duties that require them to be informed, which may require them to do a ‘deeper dive’ into climate change and other ESG issues as the regulatory landscape evolves.
In recent months, the SEC has created a Climate and ESG Task Force, issued its 2021 Examination of Priorities Report, and called for public comment on ESG disclosure. President Biden announced a new emissions reduction target and issued an executive order on climate-related financial risks.
In June, the House of Representatives voted to pass the ESG Disclosure Simplification Act of 2021, which would require the SEC to define ESG metrics, direct the agency to establish a Sustainable Finance Advisory Committee, require issuers to disclosure SEG metrics and the link between these metrics and their long-term business strategies, and more. Currently, it is uncertain whether the Senate will approve the bill.
By Jessica Camus, Chief Corporate Affairs Officer at Diginex. While financial and reputational stakes are high, many companies suffer due to the lack of standardization in ESG reporting.
Governments, most notably the EU, are beginning to take action to solve this. The UK was the first country to make the TCFD mandatory.
“Mandating ESG reporting is a cornerstone policy for demonstrating that [governments] are responding to consumer concerns and positioning themselves as attractive locations for ethically minded businesses.”
An important next step is coordination at the international level to ultimately achieve global reporting standards.