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ESG Weekly News Update: July 23, 2021

Herzogstand, Bavaria, Germany

General ESG News

Forbes: An Investment In ESG Is An Investment In Humanity

  • ESG no longer only applies to large, global corporations demonstrating their emissions reductions and community giving. An increasing number of organizations are realizing that ESG is the right thing to do for business growth and employee retention, as well as to improve the overall human experience.

  • Smaller companies can take actions like installing solar panels and purchasing electric vehicles, improving their product designs, embracing diversity and inclusion, and demonstrating a commitment to being “good corporate citizens.”

JD Supra: Crypto, Meet ESG; ESG, Meet Crypto

  • Environment: In regard to environmental topics, cryptocurrency faces concerns about energy use, with potential solutions in “green energy mining” and Proof of Stake models, which reduce the energy needed to process transactions.

  • Social: Ransomware payments and damages are a persistent and increasing problem in crypto, as are human rights concerns in crypto mining regions. However, some crypto proponents point out its potential to “bank the under-banked.”

  • Governance: Crypto faces concerns about diversity, but there are growing initiatives and organizations dedicated to mitigating this.

GreenBiz: Inside the war for ESG talent

  • The demand for analysts, strategists and others knowledgeable about ESG issues is higher than it has ever been, but there simply aren’t enough qualified individuals to meet the demand.

  • To solve this problem, firms are focusing on recruiting top talent and developing talent where they can.

  • The conflation of terminology (such as “ESG” and “sustainability”) makes data about the growth of ESG-labeled jobs difficult to compile and evaluate.

  • The “war” for ESG talent is permeating all levels of employment from entry level to executive, and roles and responsibilities are in constant flux. As with any supply-demand imbalance, salaries are competitive for ESG positions.

  • Companies and recruiters are primarily looking for business experience, adaptive and critical thinking, a multidisciplinary systems perspective, and passion.

Pensions & Investments: BlackRock: Companies making progress on climate risk, but not diversity

  • BlackRock expanded its climate focus to more than 1,000 carbon-intensive companies in 2021, and 65% made meaningful progress on energy transition planning.

  • The firm has also been pushing for companies to disclose their approach to board diversity, as insufficient board gender diversity was the top reason for voting against directors in the U.S. last year. BlackRock notes that while most companies are responsive, they are behind the trends and investor demands.

Pro Bono Australia: From sustainability and CSR to ESG

  • ESG and sustainability have some similarities in that they address the environmental and social aspects. However, there are differences; sustainability may mean different things to different organizations, but ESG is about the specific set of criteria denoting environmental, social, and governance. ESG focused more on disclosure and benchmarking data.

  • CSR typically deals with social issues, and ESG data elevates these issues to the investor consciousness. ESG is the quantifiable measure of a company’s sustainability and societal impact.

  • The transition from sustainability and CSR to ESG indicates a maturation of business practices to a more precise and data-focused measurement of performance.

SDC Executive: Are Your Suppliers Green or Are They Greenwashing?

  • Greenwashing accusations against companies are intensifying. Corporate and industrial operations are now responsible for their entire supply chain, so business leaders need clear oversight to hold partners accountable for greenwashing.

  • To identify greenwashing in supply chains, organizations can look at the motivations behind suppliers’ green choices. A supplier overstating the value of a sustainable product or service without offering information to validate it is also a red flag.

  • Keeping an eye on long-term sustainability is critical when removing greenwashing from supply chains, and an AI-enabled platform can provide a transparent and simple process for reaching long-term sustainability targets.

ESG Disclosures, Standards, Rankings, and Reporting

GreenBiz: Can ESG disclosures get you sued?

  • While many companies support mandatory ESG disclosures, there are concerns about including the information in filings like 10-Ks, because these disclosures rely on estimates/assumptions and expose the companies to liabilities and lawsuit risks.

  • However, many experts argue that consumers and investors have the right to know how the companies they support are impacting the environment and conducting their business. These risks and practices have become relevant to companies’ financial performance.

  • It is also worth noting that historically, lawsuits against companies making vague/aspirational statements do not typically succeed in court. If forward-looking statements are carefully worded, accusations about them being false or misleading are generally not actionable.

JD Supra: Potential New Corporate Disclosure Requirements of ESG Activities

  • SEC disclosure requirements have historically been based on materiality, and Commissioner Allison Herren Lee and Chair Gary Gensler seem to favor a broad definition of materiality, also suggesting that disclosure requirements should not be limited to material information, citing investor interest in ESG topics.

  • The agency is expected to push for increased human capital reporting (which is already required), as well as climate, demographic information, and inclusion practices.

  • SEC Commissioners are also pushing for standardization of disclosures and sustainability terms.

Fitch Ratings: ESG Relevance Scores for Sovereigns

  • The Fitch Ratings ESG Relevance Scores for sovereigns are available for download. They aim to clearly and consistently display the relevance and materiality of ESG issues in rating decisions.

CFO Dive: Corporate ‘greenwashing’ poses growing threat to ESG goals: report

  • U.S. regulators have increased efforts to ensure that companies are responding to climate risks and providing associated disclosures. Federal agencies are establishing committees for ESG oversight and noticing that some companies have significant gaps between their long-term climate goals and short-term action plans.

  • Regulators note that consumers are faced with confusing and sometimes misleading sustainability claims from companies, and even carbon offset programs are overstating their benefits for combating climate change.

  • The SEC has also found instances of potentially misleading statements about ESG investing practices and adherence to global frameworks.

Investment Trends

Plan Sponsor: Pensions’ Long-Term Approach to ESG Risks Hinges on Engaging With Companies

  • Research from the Pension Research Council finds that pension funds face enhanced exposure to long-term effects of ESG risks. The council notes that the best way for sponsors to manage their ESG investments is to fully understand each individual company’s approach to its ESG responsibilities.

  • The main ESG risks pension plans face are related to reputation, human capital management, litigation, regulation, corruption, and climate. These risks are already priced in the market, and overall, investors are increasingly adopting the policy of mitigating risk rather than divesting.

Plan Sponsor: ESG Funds Could See More Interest in 2022

  • As the Biden Administration works to roll back Trump-era limitations on ESG investing in fixed income, the financial services industry is expected to see a surge in ESG investing options, and the largest defined contribution retirement savings program (the Thrift Savings Plan) will make ESG funds available starting in the summer of 2022.

  • Experts anticipate that organizations/companies that previously avoided adding ESG funds to their offerings will likely reconsider in the coming years, especially as plan sponsors realize they can still fulfill their fiduciary duty by adding ESG funds.

  • The generational wealth transfer to Millennials is expected to drive ESG investing, as well.

Corporate Knights: ESG BS Detector: Do new “green” funds support the carbon transition?

  • BlackRock launched the U.S. Carbon Transition Readiness ETF -- praised as being a “green” ETF -- though the fund has holdings in more than a dozen laggard energy companies, and eight of its holdings have been actively blocking climate change policies.

  • Instead of excluding companies based on ESG performance, the fund aims to take an underlying equity index and assign a carbon transition readiness score to the companies, then distribute investments accordingly.

  • The ETF is expected to be an active fund for institutions facing pressure to lower their carbon risk exposure.

Private Equity Wire: “ESG screen” grows in importance for private equity investments

  • 62% of GPs have declined to invest in a company due to ESG considerations in 2021, which is up from 55% in 2020. Larger funds are more likely to reject investments for ESG concerns, and infrastructure energy funds are the most likely to do this.

  • There is divergence based on geography, GP demographics and seniority, and firms’ core values. North American GPs are the most likely to cite their firm’s core values as the biggest influence on their ESG investment policies.

IR Magazine: ESG on the rise in asset management industry, finds report

  • Client demand is asset managers’ primary driver for ESG integration, but the poor quality of public data poses challenges, according to an Index Industry Association (IIA) report. 85% of report respondents said ESG plays an important role in their company’s overall investment strategy.

  • Respondents noted that the biggest ESG challenge they face is the lack of transparency in public disclosure, as well as “regulatory disconnect” and constantly evolving regulations.

  • 87% of the report’s respondents believe that ESG is going to become much more important in the next five years.

Investment Week: ESG assets on track to exceed $50trn by 2025

  • According to a report by Bloomberg Intelligence, after surpassing $35trn in 2020, ESG assets are on course to exceed $50trn by 2025, making up more than a third of the projected $140.5trn in total global assets under management.

  • Experts note that ESG is “reshaping” the financial industry due to increased scrutiny from regulators, increased market sensitivity, and asset owners appointing managers on the basis of ESG.

Financial Times: The private equity backlash against ESG

  • Private equity is becoming increasingly reactionary and conservative against some of the “progressive constraints of public company assistance,” rebelling against the growing demand for ESG standardization. ESG remains a fringe topic in the industry.

  • Social issues tend to be antithetical to private equity, which remains a “safe space for the hard-nosed.”

  • However, it is in the environmental space where some private equity firms are supplying the most skepticism and backlash.

ESG Today: CIBC Asset Management Launches Sustainable Investment ETFs

  • The CIBC Sustainable Investment Solutions ETF series includes six new ETFs that track the firm’s suite of ESG-focused investment funds. The solutions aim to have a lower carbon footprint and energy sector exposure than broader market indices.

  • CIBC stated that a portion of the revenue from managing the funds will be donated to organizations supporting climate transition activities.

ESG Today: S&P DJI and NZX Launch ESG Version of S&P/NZX 50 Portfolio Benchmark

  • The new S&P/NZX 50 Portfolio ESG Tilted Index uses the stocks from the S&P/NZX 50 Portfolio Index, applying a 5% cap on the float-adjusted market capitalization. The new index adjusts the weights of constituents based on their S&P DJI ESG Score and applied eligibility criteria based on companies’ business activities and their alignment with UN Global Compact Principles.

  • The five-year annualized return of the new index has outperformed the Portfolio Index as more NZX companies become focused on ESG performance.

ESG Today: ASI Launches Funds Targeting Climate Solutions and Opportunities

  • Aberdeen Standard Investments (ASI) launched the ASI Climate range, a suite of three climate-focused funds targeting investments in companies that are leading in emissions reductions and benefiting from opportunities resulting from the global energy transition.

Companies and Industries

Visual Capitalist: Tracked: The U.S. Utilities ESG Report Card

  • The National Public Utilities Council published a report card tracking the 50 largest utilities companies in the U.S.

  • There are many inconsistencies in ESG reports from U.S. utility companies. Scope 3 emissions are not clearly defined, and companies don’t report all of the same metrics (e.g., internal energy consumption, waste generation, internal vehicle electrification, etc.) These inconsistencies and the lack of standardization are obstacles to establishing clear strategies for reducing environmental impacts.

PR Week: ESG ‘top priority’ for firms, say corporate affairs chiefs

  • The University of Oxford conducted a study that found that among 228 senior corporate affairs practitioners across the globe, 46% chose ESG performance as their most pressing risk (from a list of 10). Pandemics took second place, followed by geopolitical risk and uncertainty.

  • This research suggests that there is an increase in the proportion of corporate affairs leaders who believe their organizations are now trusted by society.

  • The study also found that 73% of respondents believe their organization has either “some” or a “strong” appetite for corporate activism (excluding the financial services sector, where the appetite is slightly lower). The appetite is highest in Latin America and lowest in Europe.

Bloomberg: Climate Talk Overtakes ‘Growth’ on Fossil Fuel Conference Calls

  • According to an analysis of conference calls from the top 25 biggest fossil fuel producers in the world, mentions of environmental buzzwords like ‘carbon’ and ‘renewables’ overtook mentions of ‘growth’ this year for the first time ever. Other words with record numbers of mentions include ‘methane,’ ‘climate change,’ and ‘net zero.’

  • Beyond conversations, actual ESG progress has been varied among these companies.

CNBC: Activist investor collaborates with company to boost profits, improve working conditions for women

  • The activist hedge fund Impactive Capital has just over a 5% stake in Asbury Automotive Group (ABG), and it has been helping the company solve operational problems like labor shortages by reaching out to women-led companies and bringing more women mechanics into collision centers.

  • Although it was a relatively quiet shareholder for years, Impactive seems to enjoy a great relationship with the ABG board and management, who have shown that they are receptive to considering reasonable shareholder suggestions.

ESG Today: M&G Announces Investments in Carbon Capture and Storage Companies

  • M&G announced new investments in Storegga Geotechnologies and Summit Carbon Solution, made through the 143 billion euro Prudential With-Profits Funds.

  • Storegga develops infrastructure across the carbon ecosystem for capture and transport, and Summit connects industrial facilities with strategic infrastructure to permanently store CO2.

ESG Today: BlackRock Stewardship Report Highlights Engagement and Voting on Climate, Diversity, Governance

  • BlackRock released its 2021 Voting Spotlight, which indicates an increased focus on engagement for BlackRock Investment Stewardship (BIS) on topics like climate and natural capital, as well as an increase in votes against management.

  • Votes against directors were mostly prompted by corporate governance concerns. Other key areas of focus for BIS are climate issues and diversity at the board and company level.

ESG Today: Pension Insurer Rothesay Commits to Net Zero in Investments and Operations

  • UK-based Rothesay has announced its plans to become net-zero emissions by 2050 in its “Pathway to Net Zero” program and its first ESG report. Its goals also include becoming carbon neutral or negative in its operations by 2023.

ESG Today: S&P Global Names Richard Mattison President of New ESG-Focused Unit Sustainable1

  • Sustainable1 is an integrated group for S&P’s full suite of sustainability offerings and a single source for its ESG products.

  • Prior to his appointment, Mattison served for 20 years as CEO of Trucost, a leading carbon and environmental data and risk analysis company (which S&P acquired in 2016). Earlier this year, he was serving as Chief Product Officer for Sustainable1.

Government Policy

JD Supra: ESG Disclosures, Congress, and the SEC

  • In June, the House of Representatives voted to pass H.R. 1187 that, if fully passed, would require public companies to make certain disclosures like climate change, human capital management, diversity and inclusion, cybersecurity, and workforce health and wellbeing.

  • The bill gives the SEC authority to enforce the required disclosures and define ESG metrics, building on the SEC’s current efforts to establish rules for ESG disclosure, specifically around climate change.

FCPA Blog: The EU is expanding ESG requirements, and due diligence needs to keep up

  • Human rights protection is currently a main focus in the EU, which is currently working on a Corporate Due Diligence and Corporate Accountability directive.

  • The EU Commission and the European External Action Service (EEAS) have already issued guidance on due diligence for EU companies to address the risk of forced labor in their operations and supply chains.

  • While some compliance officers disagree, an ethics & compliance program is now seen more often than not as a component of a broader ESG program.

ESG Today: China Launches World’s Largest Carbon Market

  • China launched its national carbon emissions trading scheme (ETS), aiming to contribute to the country’s carbon emission reduction efforts. China is the largest global greenhouse gas emitter, nearly double the U.S.’s emissions (in second place).

  • The new carbon trading system will not apply an absolute cap, but instead it will apply a cap based on the total allowance of allocations that adjusts over time based on production levels.

  • The ETS carbon price is significantly lower than other carbon markets. Chinese commodity buyers have already begun seeking out supplies to offset emissions, with the ETS launch potentially adding incentive to look for suppliers with lower environmental impact.

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