Vršatské Podhradie, Slovakia
General ESG News
Dan Hesse has been CEO of Sprint for seven years and has won awards for culture, diversity and inclusion, customers, planet, and investors. The company was ranked third of Newsweek’s list of 25 greenest companies and first on the S&P 500 in total shareholder return.
Hesse propelled Sprint into launching a 10-year plan with objectives in waste reduction, GHG emissions reduction, power usage, and cell phone recycling. The company has exceeded some goals already, and Hesse believes shareholders have already benefited from the green initiatives.
Hesse recommends that companies looking to make sustainability progress bring in qualified experts to educate leadership teams, set short- and long-term plans with quantifiable objectives, and do rigorous business cases for each sustainability investment.
An IBM study from 2020 found that nearly 80% of consumers say that sustainability is important to them, and companies are increasingly realizing that sustainability is good for business. Forbes notes several ways businesses can establish sustainable frameworks in a way that “makes financial sense:”
Taking advantage of tax breaks and evolving policy -- pro-sustainability legislators are setting policies that make it easier for businesses to implement green initiatives and more difficult to pollute
Fostering (and minimizing the cost of) sustainability through collaboration -- finding trusted allies to share data and experiences, including NGOs, academic institutions, private organizations, and more
Taking a systems approach to sustainable investment -- considering all of the UN Sustainable Development Goals and how to make progress on all 17 without compromising
Scientific American: What to Expect from the Next Major Global Climate Report
The IPCC plans to issue another report next month (following their initial 2018 warning) three months before the COP26 summit in Glasgow.
The UN-supported IPCC consists of government representatives who commissions environmental reports from academics around the world to produce assessments on a seven-year cycle. The latest assessment will include scientific advances and a better understanding of the human impact on climate change, as well as an interactive atlas and several emissions scenarios exploring the effects of rising emissions.
In comparison to the 2013 assessment, the latest assessment will reflect more granular information about extreme climate/weather events (including regional distributions) and damaging climate projections.
The main question that will result from the assessment will be whether or not countries and companies will translate the new science into action. There may also be issues around the carbon budget.
No one or two corporate functions are sufficient to handle ESG requirements, but the offices of General Counsels and Chief Ethics & Compliance Officers are uniquely suited to understand legal and regulatory requirements, assess risk, act as arbiters, collaborate cross-functionally, and act in the best interest of the company.
The GC and CECO also have the duty to educate and advise the board and employ subject matter experts to manage the workstreams, including a privacy lawyer, a DEI specialist, a sustainability lead, and a legal operations point.
Investment Week: Why ESG data gaps threaten SDG progress
Plugging ESG data gaps is necessary to help investors measure their portfolios’ progress toward the UN SDGs. Investors have the responsibility to encourage businesses, markets, and non-state actors to improve their ESG disclosure practices.
Businesses need a more integrated approach to ESG data collection, which will require buy-in from national statistical offices, Ministries of Environment, and agencies responsible for collecting/processing environmental data.
The Guardian: The truth behind corporate climate pledges
Unfortunately, even if all currently Paris agreement climate pledges are met, the world is still facing a temperature increase of about 2.4 degrees Celsuis by the end of the century, leading to severe climate impacts.
In response to this realization and the upcoming COP26, corporations have been putting out a flurry of climate commitments -- at least a fifth of the world’s 2,000 largest public companies have now made some sort of ‘net zero’ pledge and are investing billions in clean energy, electric vehicles, anti-deforestation, and advocacy.
Major challenges include rebounding economic activity leading to high carbon emissions, companies exceeding their carbon budgets, and companies failing to take any action whatsoever.
Corporate Secretary: How a materiality assessment can make you a sustainability leader
One major reason why businesses fail is not because they fail to foresee competition, but because they lack the imagination to conceive of a future different from the present. A materiality assessment can help companies see the major ESG risks and opportunities that lie ahead and link them to its core value proposition.
Conducting a materiality assessment helps clarify ESG risks and opportunities, it responds to stakeholder expectations, it provides structure for sustainability reporting, and it increases the value of sustainability.
Double materiality is the best method for integrating ESG into a company’s core strategy, including both financially material topics and “impact” material topics that have effects on people, the economy, and the environment.
ESG Disclosures, Standards, Rankings, and Reporting
Harvard Business School: What Does an ESG Score Really Say About a Company?
A recent study shows that the more ESG information a company discloses, the more disagreement there is among rating agencies about how well the company is performing. A 10% increase in disclosure is associated with a 1.3 to 2% increase in ESG score variation.
Divergent scores negatively impact investors, markets, and firms, and the effects appear to be worsening. When companies are more specific about their ESG policies and practices, there is more disagreement among raters.
The study also found that after a country implements mandatory ESG disclosure requirements, firms increase their ESG disclosure and see greater rating disagreement, leading to short-term stock return volatility and larger price swings.
The research highlights the need for clarity on what types of disclosure would make scoring more predictable and useful. Experts note that disclosing ESG outcomes is generally better than disclosing policies.
The Regulatory Review: Regulating Sustainability in Corporate Governance Standards
Some experts argue that the information needed to disclose all of the climate-related risks a company might create would surpass current law requirements for disclosing material risks. However, others argue it is impossible to have the clear, consistent, and comparable climate data the Biden Administration seems to be seeking.
Some experts say the SEC should mandate sustainability information in financial reporting, while others express concerns over “disclosure overload.”
Until reliable ESG data becomes available, regulators are essentially “regulating in the dark.” Some also note that the EU’s taxonomy regulation is a good blueprint for establishing the criteria for sustainable economic activities.
Global regulators have suggested formal oversight of a sector that helps bring trillions of dollars into climate-friendly investment funds. ESG raters and data providers are still largely unregulated and their methods are opaque.
Users have noted that having too many ESG ratings and data products can cause confusion, raising questions about reliability and greenwashing.
To mitigate this, ESG rating providers could consider making high levels of public disclosure an objective in their ratings, and they could maintain internal records to back up their ratings to give assurance that their scores are “free from political or economic pressures.”
IOSCO launched a new consultation report focused on ESG and ratings providers, which are playing an increasingly important role in investment markets as demand for ESG integration in investment processes grows. Raters’ activities are currently not well covered by securities regulators.
The IOSCO paper found several issues, including a lack of alignment on definitions on what ratings/data products are meant to measure, as well as little transparency with regard to the underlying methodologies. The report also raised concerns about potential conflicts of interests.
The report proposes regulatory considerations covering the providers’s lack of transparency, conflicts of interests, and policies and procedures.
The UK Financial Conduct Authority (FCA) announced changes to its Listing Rules with the purpose of boosting transparency into gender and ethnic diversity within public companies. The proposed rules would require companies to ensure their existing disclosures on diversity policies address key board committees and consider aspects like ethnicity, sexual orientation, disability, socio-economic background, and other diversity characteristics.
The regulator also established diversity targets for companies to report against.
A new survey from IIA shows that 56% of the 300 surveyed investment professionals in the U.S. and Europe are struggling to keep up with changing regulations, while 85% say ESG is a high priority for them. Social topics tend to give them the most trouble.
With social issues, there is less quantitative data available, and there are different regulatory approaches in different jurisdictions. Additionally, there is a lack of standardization in terminology (e.g., gender diversity).
The U.S. has seen more than 40% growth in ESG assets in the past two years and now accounts for $17 trillion (almost half the $35 trillion in global assets under management).
The European market for ESG assets actually decreased by $2 trillion (from $14 trillion to $12 trillion) from 2018 to 2020 after the introduction of new anti-greenwashing rules and classifications for responsible investments.
Regulators are increasing scrutiny as the demand for ESG investment products continues to grow.
ESG asset managers are increasingly using new climate investing benchmarks set forth by European authorities, suggesting that investors are looking for “guardrails” as they navigate markets and are concerned about greenwashing.
The new benchmarks mean that an index can’t be labeled as climate-transition or Paris-aligned without including a range of investible assets that have smaller carbon footprints and require annual emissions reductions.
Many asset managers rely heavily on ETFs to fill ESG mandates, but ESG ETFs don’t always integrate ESG to the extent expected by some investors.
Experts expect use of the benchmarks to increase, but not all teams will design their investment products around them.
New research finds that nearly 68% of fiduciary managers don’t have climate-related requirements for third-party asset managers, and 42% do not exclude managers with poor ESG ratings. This is happening despite the fact that 94% of trustees agree that ESG risks should be included in investment decisions.
Stewardship of investments is more robust, with 84% of managers monitoring the engagement/voting activity of underlying managers, and half-actively influencing voting.
Yahoo! Finance: Could ESG Investing Change the Business World?
A rising tide of investors are becoming increasingly concerned with businesses operating responsibly as corporate citizens, rather than just financial performance. Areas being altered by heightened ESG awareness include:
Board member composition
Investment manager Actions
StarTribune: How ‘greenwashing’ may be affecting your investments
Greenwashing has been able to persist in investment securities in part because there are numerous ESG data providers, and it can be difficult to know which to trust. Greenwashing can have the effect of resulting in some businesses like oil companies being included in funds that investors may not have expected.
A study from UK-based Quilter found that 44% of investors are concerned with greenwashing when considering ESG investments. Funds can increase their ‘greenness’ and reliability by publishing accurate ESG impact reports and working with third-party advisers to establish best practices.
Fidelity published its Sustainable Investing Voting Principles and Guidelines, stating it will “not support boards where companies do not meet our expectations.” Any companies that fall short of the firm’s minimum expectations can expect that Fidelity will vote against its management starting in 2022.
Fidelity is establishing minimum expectations regarding climate change and diversity goals, and it wants to send the message that “the climate crisis must not and cannot be ignored.”
Also covered in ESG Today: Fidelity International to Push for Portfolio Company Action on Gender Diversity and Climate
Investors are still relying heavily on brand perception over companies’ ESG-related policies, according to a recent report from Investopedia and TreeHugger. Respondents picked Tesla as the overall top ESG stock pick, while the company typically falls in the middle of the pack with ESG raters.
Investors are also prioritizing return when choosing ESG investments, though the younger generation of investors is much more interested in aligning their investments with their values.
The John Hancock Global Environmental Opportunities Fund, sub-advised by Pictet Asset Management, aims to invest in companies generating a positive environmental impact. The investment process identifies companies operating within “Planetary Boundaries” then screens them to find those contributing positively to the environment.
Key focus areas for investments include water technologies, energy efficiency, renewable energy, sustainable forestry, organic agriculture, pollution control, waste management, recycling, resource efficiency, and enhanced environmental quality.
Phoenix Group issued a letter to its asset manager partners outlining its ESG integration expectations, and it includes a request for support to help Phoenix reach its net zero goals (e.g., net zero in operations emissions by 2025 and in its investment portfolio by 2050).
To support its emission reduction goals, Phoenix has stated it will only partner with investment organizations that are also committed to achieving change. Phoenix also expects asset managers to be signatories of the Principles of Responsible Investment and other applicable stewardship codes.
PruFund Planet, an ESG-focused version of the firm’s PruFund range of funds, aims to combine smoothed market returns and positive environmental and social outcomes.
Key focus areas for the funds include circular economy, environmental solutions, climate action, social health and wellbeing, social inclusion, and better work and education.
The TPG Rise Climate fund had its first close with commitments reaching more than $5 billion. Subscribers to the new fund include several of the world’s largest institutional investors and major multinational companies.
TPG Rise Climate aims to build a portfolio of companies enabling carbon aversion, with investments focusing on climate sub-sectors like clean energy, decarbonized transport, agriculture, and natural solutions.
TPG also launched the TPG Rise Climate Coalition with more than 20 leading global companies doing work in building sustainability and climate action into their businesses.
The RobecoSAM US Green Bonds strategy, launched in partnership with Quintet Private Bank, is one of the first US-focused green bond strategies in Europe. The new strategy was launched ahead of the anticipated boom in green debt issuance in the US as the Biden Administration ramps up climate action and investments in the coming years.
RobecoSAM US Green Bonds will invest in USD-denominated green bonds issued by corporates, governments, and government-related agencies using a proprietary screening process to ensure the securities’ green credentials.
Moody’s released its quarterly sustainable finance update, forecasting an unprecedented $850 billion in green, social, and sustainability bond issuance in 2021.
The firm expects sustainable bonds to account for 8% to 10% of total global debt issuance this year and notes continued growth in the sustainability linked debt market.
Companies and Industries
Wall Street Journal: Big Oil Companies Push Hydrogen as Green Alternative, but Obstacles Remain
BP, Shell, and TotalEnergies are all pursuing large hydrogen projects (often with government support). However, current obstacles include the fact that most hydrogen is currently made with fossil fuels, it is explosive and difficult to transport, and it needs to be produced using renewable power on an industrial scale while still bringing costs down.
Green hydrogen and carbon-capture technologies are being explored by oil companies as longer-term goals. By the end of June, the Hydrogen Council noted 244 large-scale green hydrogen projects planned. However, most companies don’t expect green hydrogen to be a material part of their business until the 2030s.
Chevron is increasing its interest and initiatives in hydrogen, but VOlkswagen’s Scania brand is scaling back its hydrogen research to focus on batteries instead.
Corporate diversity has become the most popular sustainability metric used in setting executive pay. Among 61 ESG metrics used by Fortune 100 companies in setting executive pay, 14 are diversity metrics. 44 of the 100 companies currently use one or more ESG metrics.
The new attention to diversity metrics reflects events of 2020, including the Black Lives Matter movement and COVID-19 pandemic, which highlighted social stratification.
Shell is planning to appeal a ruling that orders the company to reduce its carbon emissions by 45% by 2030, though the company is already taking significant actions to reduce its emissions and invest in renewable energy. The oil giant’s chairman notes that singling out one company is not effective.
However, the company shows minimal signs of slowing down its oil and gas business. In 2015, Volkswagen faced similar pressure to reduce its emissions, and it responded defensively, trying to food the system through smart software.
Eventually, Volkswagen realized that the only way forward was to compromise and vow to electrify their entire lineup by 2030. Shell has the opportunity to become an industry leader in the fight against climate change, though there is limited confidence the company will do so.
Research from earlier this year damaged the ESG reputation of cryptocurrency, citing, for example, that bitcoin uses around 0.4% of global energy consumption. Further valuations and increasing familiarity with digital assets attract increasingly speculative participants.
Thankfully, some renewable energies are actually the cheapest forms of energy in many parts of the world. Additionally, the scaling of decentralized power generation will see localised and domestic clean energy hardware become more affordable. Both of these alternatives can help address concerns about the environmental impacts of crytpo.
Another way to address these concerns is for investors and miners to focus on “non-mined” digital assets like ripple, stellar, cardano, EOS, and NEO. These currencies rely on the proof-of-stake process, which uses far less energy than traditional transaction validation processes.
There is also a lineage of social and governance issues in crypto, such as money laundering, shadow banking for terrorists, and ransom hacking. Major crypto thefts, hacks, and frauds totaled nearly $2 billion in 2020, and the entire nature of the currency brings up questions of accessibility (i.e., people must have a smart phone and internet to access crypto investments).
There is currently no guarantee that investors would be willing to pay a premium for ‘green’ crypto, and proof-of-stake processing is slow in gaining prominence.
Columbus Business First: Fortune 100 company’s approach to corporate sustainability reaches beyond the environment
Nationwide has made substantial investments in renewable energy. Its approach is unique because it reaches beyond environmental efforts and it may set the pattern for how privately held firms are measured and held accountable.
Nationwide supports community efforts through its charitable giving arm, the Nationwide Foundation.
The Financial Services Task Force announced plans to support a “Sustainable Infrastructure Label” to accelerate capital flows and attract financing to sustainable projects.
The FSTF expressed its support for the initiative and pledged to work with FAST-Intra on its development, with estimates of nearly $7 trillion in annual investments needed to meet global development needs by 2030.
The new label aligns with existing standards and is designed to complement existing reporting requirements.
National Law Review: SEC Commissioner Pierce Criticizes Proposed ESG Regulations
Commissioner Pierce gave ten theses questioning the SEC’s focus on ESG rulemaking, including that many ESG issues lack financial materiality, “good” ESG is too subjective to capture in rule-writing, ESG issues are inherently political, ESG disclosure requirements could direct capital flows to favored industries, and more.
Many of the critiques identify potential legal flaws in the SEC’s ESG rulemaking approach, and the continued dissent shows that ESG regulation will continue to be a battleground for opposing (partisan) viewpoints.
One potential solution is to work within the existing regulatory framework (rather than establishing new, prescriptive rules) to provide updated guidance and work with investment advisers.
The SEC Asset Management Advisory Committee has adopted recommendations developed by the ESG Subcommittee for ESG disclosure. The recommendations direct the SEC to issue guidance for best practices around how issuers should incorporate ESG into their disclosures.
Other recommendations include encouraging issuers to adopt an ESG disclosure framework, initiating a study of third-party ESG disclosure frameworks, suggest best practices for investment products to describe each product’s approach to share ownership activities , adopting terminology that aligns with the Investment Company Institute ESG Working Group’s taxonomy, and more.
SEC Chairman Gensler strongly supports the recommendations, expressing specific concern about the range of terms and criteria for sustainable investment strategies. SEC Commissioner Crenshaw also provided support, while Commissioner Pierce expressed her continued concerns about ESG reporting standards.
SEC Commissioner Lee raised concerns that the recommendations may not go far enough in helping to provide investors with “consistent, comparable, and reliable information” for ESG disclosure.
The Biden Administration is attempting to “inject” concern for climate change and other ESG issues into different federal agencies like the SEC. Commissioner Herren Lee notes that corporations now have greater power than ever to influence things like social issues and climate change, and evolving social media platforms increase transparency and public response to ESG issues -- these have combined to create greater investor demand for ESG disclosure.
Within Commissioner Herren Lee’s vision of ESG, it is legally, financially, and ethically imperative for companies to comply with things like the TCFD and ESG disclosure and risk mitigation.
While non-partisan groups like the Securities Industry and FInancial Markets Association support ESG disclosure, all current ESG regulatory initiatives face political opposition.
The UN Climate Change Secretariat released the Climate Pathway 2021 to provide a roadmap for financial markets to align with global net zero goals. Key goals include ensuring that financial decisions incorporate climate change considerations, such as adjusting price signals and using tools like carbon pricing.
Each of the action areas in the roadmap include a set of near-, mid-, and long-term milestones like ending fossil fuel subsidies, developing standardized accounting for climate risk, and aligning executive remuneration with net zero targets.
SEC Chair Gary Gensler aims to propose rules for mandatory climate disclosure by the end of 2021, with benefits including information consistency and comparability and helping investor decision-making processes.
Gensler cited investor demand as the main driver toward revamping reporting rules, with 75% of review respondents supporting mandatory climate disclosure.