ESG Weekly News Update: July 16, 2021
General ESG News
The New York Times: Hydrogen Is One Answer to Climate Change. Getting It Is the Hard Part.
Governments, environmentalists, and energy companies are coming to the consensus that carbon emissions reductions will require large amounts of clean fuel like hydrogen, with uses ranging from train and air travel to home heating and cooking.
Hydrogen is the most abundant element in the universe, but to use it for energy, we have to separate it from other substances like water or fossil fuels, which causes greenhouse gas emissions.
Emissions-free hydrogen is expensive and difficult to produce, but some companies are making breakthroughs in this area, and investors are noticing and getting on board. Some experts believe that green hydrogen will be inexpensive enough by 2030 to compete with other energy sources. Until then, clean hydrogen projects require government subsidies and customers who are willing to pay more for their energy.
Former sustainability executives like Tariq Fancy (formerly at BlackRock) note that in discussions with prospective clients, sales personnel focus more on marketing than truly explaining how sustainable investment products can contribute to the fight against climate change.
The emphasis on sustainability reporting has had the effect of delaying urgent climate action. Critics argue that ESG ratings only explain “who is best in class of those that say they became less bad.”
The sustainability “veterans” are forming the consensus that to make real progress, there need to be aggressive government policies, such as carbon taxes. Reporting impacts and investing in low-carbon funds will not be enough to radically change corporate behavior.
Climate change is affecting (or can be expected to affect) virtually every part of the global economy, and companies will face new legal and regulatory risks like mandatory disclosure, risk assessments, new regulations, increased enforcement, new litigation risks, evolving sustainable finance programs, reputational risk, shifting consumer preferences, and more.
Pressure to develop ESG and climate change strategies is coming from governments, shareholders, consumers, employees, and supply chains. In response, companies have increased the volume of their voluntary disclosure.
It’s not just about disclosure -- stakeholders want to see clear, customized, and adaptive strategies for addressing climate change and achieving net-zero emissions throughout company operations and value chains.
Companies that adopt robust ESG strategies will mitigate their risk while enhancing their resiliency, ensuring compliance, protecting their reputation, and achieving long-term value creation.
National Review: On ‘Capitalism, Socialism and ESG’
The ESG investing movement is replacing traditional socially responsible investing (SRI), transitioning from voluntary social investments to active and coercive ESG action, without sacrificing returns.
Rupert Darwall of the RealClearFoundation published the report “Capitalism, Socialism and ESG” with four parts: an overview of key ESG claims, a section examining ESG’s risk-adjusted returns, an examination of the legal context of the Trump Labor Department’s 2020 ERISA rule, and a section placing ESG in the debater on capitalism and stakeholders.
Darwall notes that the foundation of ESG investing is based on the idea that usurping shareholder rights is justified because doing so will create sustainable change and produce equivalent (or higher) returns than traditional investments. There are several criticisms to this idea, including the arguments that ESG investment strategies really only increase the cost of management for investors and that the exclusion of “sin stocks” lowers portfolio returns.
The new proposals for the Corporate Sustainability Reporting Directive (CSRD) will have an impact on internal processes for business performance reporting, building on the existing Non-Financial Reporting Directive (NFRD) and will apply to all large companies and all listed companies in the EU (from 11,000 to nearly 50,000 companies)
It’s important for companies to invest the time and resources to deliver an accurate representation of finances, including revenues, expenses, profits, capital, and cash flow.
Companies’ ability to secure capital is increasingly dependent on their ESG performance.
In his 1970s essay, Friedman argued that businesses shouldn’t need to go against their best financial interests to improve society because they aren’t people with real beliefs or morals.
Fifty years later, companies like Starbucks and Costco are acting as citizens working to better their communities. Some are doing so with hopes of long-term value creation.
Modern corporate employees — especially Millennials — want to be part of an organization that shares their values and supports their people and their communities. This shared sense of purpose improves employee morale, pride, and participation.
When dealing with supply chain disruptions, consumer demand, and volatile markets, building supply chain resiliency and operational efficiency should be top priorities, especially for midsize businesses.
Key tools/capabilities for working toward these objectives include extended planning, strong business networks, and industry 4.0 technologies.
The SEC is increasing its examination of registered funds for adequate and consistent disclosures around ESG investment strategies, and it is also examining policies and procedures for false or misleading statements.
With increased demand for ESG investments, firms must ensure they can balance the growing market with the increased regulatory scrutiny around ESG disclosure. Boards should ask the following questions (and more) when thinking about a fund’s ESG investing:
Does the fund have ESG in the name? Does its disclosure state that it considers ESG factors in investment decisions?
Do the fund disclosures accurately reflect the fund’s mandate and ESG practices?
Are there controls, policies, and procedures in place for ensuring management acts consistently with disclosures and preventing federal law violations?
Do the compliance professionals have sufficient ESG insights to be effective?
The Science Based Targets initiative (SBTi) launched a renewed strategy aiming to accelerate the fight against global warming, and it will soon only accept targets aligned with its 1.5°C ambition (in accordance with the Paris Agreement).
The change is in part due to the fact that SBTi research found “no major G7 index is currently aligned with Paris goals.” The initiative also aims to create an independent standards board to act as the decision-making body for the technical components of its certification framework.
SBTi will also appoint a CEO to strengthen its leadership team.
To date, more than 1,600 companies have partnered with SBTi to set climate-aligned decarbonization targets and plans.
ESG Disclosures, Standards, Rankings, and Reporting
The SEC currently requires the disclosure of information that would be material to investors, and in 2010 they issued guidance on disclosing climate risks. An increasing range of companies in all industries have begun reporting on their physical and transitional climate risks.
The House bill passed in June of this year would give the SEC two years to develop rules governing climate risk disclosure.
President Biden’s May Executive Order directs certain government advisors to formulate a strategy for identifying and disclosing climate-related risks of government programs, assets, and liabilities. It also seeks recommendations from regulators on how to improve climate risk disclosure.
Furthermore, the SEC’s regulatory agenda (announced in June) states that rulemaking concerning climate-related risk disclosure will be a top agency priority.
Though the SEC is planning to develop rules around climate disclosure, this lags behind existing stakeholder demand for companies to take action.
The SEC might mandate a specific framework for climate change and ESG disclosures or recommend several frameworks (leaving the final choice to individual companies), but the task of compliance will remain the same.
Disclosure will rely on both internal and supply chain operations, but the question remains of who exactly “owns” climate change disclosure responsibilities.
Yahoo! Finance: GRI to 'Co-Construct' New EU Sustainability Standards
GRI will be collaborating with the European Financial Reporting Advisory Group (EFRAG) Project task Force to create new EU sustainability reporting standards.
Currently, about 54% of EU companies use the GRI Standards to meet their non-financial reporting requirements. The goal of the new standards is to build from and contribute to the existing, widely used frameworks.
Amid increasing interest in environmental and wider social issues, the industry regulator has published a Statement of Intent on Environmental, Social and Governance challenges outlining areas where there are issues with ESG information and its plans to help address these issues.
The Financial Reporting Council (FRC) warns that there can be a lack of data maturity and credibility in ESG information.
In 2020, the FRC issued a statement on non-financial reporting that encouraged public interest companies to use them and called for better communication of SASB standards.
Nearly a quarter of all euro corporate bonds issued in the past year have been ESG-related, largely due to the marketing benefits of being seen as contributing to the “green finance revolution.”
ESG bond activity has strengthened the hand of bond investors due to market crowding, but the intense competition means that in many cases, issuers are getting their sustainability linked bonds/loans signed before the lenders have even seen their sustainability KPIs.
While the explosion of ESG investing is generally a positive, it’s important to make sure that the pace of the market does not lead to an erosion of sustainability standards.
An Invesco survey found that around a third of central banks and sovereign wealth funds have increased their ESG focus over the past year, and more than 60% said they felt that tackling climate change fell within their mandate. More than half said they had specific ESG policies.
The COVID-19 pandemic has highlighted issues like unemployment and inequality, leading to a greater social conscience. Fund managers are increasing their share of sustainable investment opportunities.
More than half of survey respondents said their current motivation for adopting ESG policies was improving returns, and risk was cited as the second biggest driver.
Much of LFIS Capital’s work centers on how ESG metrics can be improved to generate portfolio returns. However, hedge fund strategies that use computer-based trading algorithms face the obstacle of inconsistent ESG data.
Data exhaustivity is another issue; as companies report varying amounts of ESG data, it makes fair comparison difficult. Additionally, ESG data is not subjected to official auditing processes, which can raise questions of validity.
LFIS Capital has chosen to launch a research axis to look at applying alternative intelligence and machine learning to textual ESG data. It has also developed alternative ESG data that is designed to be more predictive and transparent. LFIS Capital supports efforts to create a universal framework for ESG measurement to make data and reporting more reliable.
Environment + Energy Leader: As Investors Focus on ESG, SEC Committee Recommends Guidelines
In the investment community, there is a growing consensus that U.S. regulators are falling behind on ESG in the global investment landscape (especially compared to the EU). As a result, the SEC faces pressure to standardize regulations for ESG disclosure.
Without standardization and regulation, the variety of data and topics makes it challenging for companies to accurately report the necessary information to investors. This has been a top-of-mind challenge recently, as the SEC’s Investor Advisory Committee recommended guidelines for ESG disclosure in May of 2020.
The Committee also pointed out that ESG factors impact more than just investments; ESG perceptions about a company can directly affect its stock price and access to capital.
While increased regulation looms, companies can take action now to ensure the quality of their ESG data by obtaining third-party assurance for specific metrics.
Sustainable investing equates to lower performance: Research shows that incorporating ESG factors can enhance a portfolio’s returns by reducing volatility and providing protection in bear markets.
Sustainable investing means excluding securities from portfolios, therefore reducing opportunity sets: Exclusionary screening is just one sustainable investing approach; there are several other approaches that proactively select sustainability leaders.
Sustainable investing is solely focused on climate and the environment: Social and governance factors are top-of-mind for clients as well, and they merit consideration in the analysis of companies and funds.
Sustainable investing is just a passing fad: According to Schroeder’s 2019 Global Investor Study, more than 60% of respondents under age 71 said that all investment funds should consider sustainability factors when making investment decisions.
Sustainable investing is expensive, and requires a large asset base: There are a growing number of sustainable investing funds, and many carry small minimums. Investor demand for less expensive funds and ETFs is driving flows and shaping asset growth.
Companies and Industries
The ESG Score Predictor provides financial institutions with risk management data and helps companies monitor ESG risk across global supply chains.
Disclosure limitations and a lack of standardized metrics continue to affect data quality, but the ESG Score Predictor uses advanced analytics to provide 56 ESG scores and sub-scores for any given company.
Business Insurance: Enterprise risk controls key to managing ESG concerns
ESG issues vary for different types of insurers, but weather-related losses and enterprise risk management are the two ESG factors that are typically primary factors in rating changes for insurers.
Governance is always a key element in insurer ESG ratings, including management governance, risk management and mitigation, and compliance issues.
The European Central Bank (ECB) plans to incorporate climate change further into its core policy decisions, including adjusting the framework for allocating corporate bonds. It will align its frameworks with EU legislation implementing Paris agreement commitments.
The move earned backing from WWF, with the note that implementation of the commitments must be fast and must apply to all ECB operations.
The new focus will also include climate change models, stress tests, a plan from 2022 onward requiring climate change disclosures, and more.
The dashboard shows the distribution of Fitch’s ESG Relevance Scores for 2,750 issuers and transactions across the Global Infrastructure Group, International Public Finance Local and Regional Governments,
IPF Government Related Entities, and U.S. Public Finance Tax Supported and USPF Revenue sectors.
The dashboard and associated heatmap has been updated for 2Q21.
The ESG Score Predictor aims to enable real time ESG assessments for SMEs, as well as to monitor global supply chain risks. It looks at more than 50 predicted metrics, including energy transition scores, physical risk management scores, and carbon emissions footprints.
Manaos (a subsidiary of BNP Paribas) enables investors to connect to ESG fintechs and data providers. It has partnered with Util and V.E. (from Moody’s ESG Solutions) to further develop its data and analytics offerings and to provide investors with a better view of their portfolios’ exposure to ESG risks and opportunities.
Arabesque’s Climate and Regulatory Solutions suite to help investors and companies capture net-zero opportunities, ensure regulatory compliance, and meet growing climate commitments.
The suite includes disclosed and validated greenhouse gas emissions data for more than 7,000 companies, 120 climate-specific metrics, and a Green Revenue Module for mapping companies generating revenue partly or fully by green business models (like renewable energy).
PNC has joined the Partnership for Carbon Accounting Financials (PCAF), committing to measuring and disclosing the impact its loans and investments have on climate.
PCAF includes more than 140 financial institutions working to develop a harmonized approach to assessing and disclosing the greenhouse gas emissions associated with loans and investments.
PNC states that joining the partnership marks the latest step in its journey to understanding, measuring, disclosing, and mitigating its environmental impacts in ways that are “decision-useful” for the company and its stakeholders.
The Net-Zero Insurance Alliance (NZIA), launched at the G20 Climate Summit in Venice, aims to help accelerate the global transition to net-zero greenhouse gas emissions through insurance underwriting and risk management practices.
Signatories commit to setting science-based targets and reporting their progress, as well as setting underwriting guidelines for reducing emissions and collaborating with clients on decarbonization goals. The NZIA also supports a corporate disclosure framework like the TCFD.
The NZIA aims to join the Glasgow Financial Alliance for Net Zero (GFANZ), which brings together several net-zero focused industry alliances. The NZIA also plans to become part of the UN Race to Zero campaign.
The UK Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), and the Bank of England (BoE) launched a paper outlining policy options for increasing diversity and inclusion in the financial service sector. The joint discussion paper is open until September.
According to the regulators, increased diversity and inclusion will result in “improved governance, decision-making, and risk management within firms.”
The regulators recommend collecting workforce data directly from firms to evaluate progress over time.
A new BNP Paribas AM survey found that institutional and wholesale investors have increasing interest in thematic investing, especially ESG and sustainability. This indicates a shift away from focusing on asset classes and business sectors.
Within the top categories of ESG and sustainability, specific preferences focused on the UN Sustainable Development Goals, climate change solutions, and renewable energy.
National Law Review: ESG, A New Value Creator
India: The Securities and Exchange Board of India (SEBI) has the Business Responsibility and Sustainability Reporting by listed entities framework that mandates that the top 1,000 listed companies by market capitalization meet certain ESG disclosure requirements.
Singapore: The Singapore stock exchange (SGX) introduced sustainability reporting on a “comply or explain” basis in 2016, requiring all listed issuers to report on sustainability annually. The SGX also has ESG stock rating indices.
EU: It legislated the Non-Financial Reporting Directive (NFDR) and the Sustainable Finance Disclosure Regulation (SFDR), requiring large companies to disclose environmental and social challenge management, and it is working on an EU-wide taxonomy for environmentally sustainable economic activities.
In a communique issued from Venice, Italy, G20 finance leaders cited carbon pricing among a “wide set of tools” countries should coordinate on to lower greenhouse gas emissions. Other tools mentioned include investing in sustainable infrastructure and decarbonization technologies.
The carbon pricing mention marks the influence of the Biden Administration. However, at the same time, U.S. Treasury Secretary Janet Yellen called for better international coordination on carbon-cutting policies in the interest of avoiding trade frictions.
My Wabash Valley: Yellen: US regulators to assess risk posed by climate change
U.S. Treasury Secretary Janet Yellen says she will lead an effort with top regulators to assess potential climate change risks to the U.S. financial system. The Financial Stability Oversight Council will examine whether lending institutions are properly assessing financial stability risks.
Banking executives are concerned that the increased regulatory oversight will lead to increased costs of doing business, thereby lessening their ability to execute loans.
The U.S. will also work with the World Bank and the International Monetary Fund to focus more resources on combating climate change, especially in developing regions.
The Racial Equity Index measures racial inequities at companies based on workforce composition, wages, and regional racial distributions, according to the Pact for the Promotion of Equity.
The index is voluntary, but the group of companies and institutions that created it are expecting a “ripple effect” as companies ask their suppliers and value chains to join.
The index will also score the investments companies are making to reduce gaps in Brazil’s education system.