ESG Weekly News Update: June 04, 2021
Bachalp lake, Bachalpsee, Switzerland
General ESG News
Environmental Leader: ‘Sustainability’ Could Become Perilous as ESG Terms Evolve, Report Warns
The financial services company Jeffries recommends distinguishing between ESG investing, sustainability, and sustainable development. With evolving language, there is a concern that companies can lag behind if they rely solely on the term “sustainability.”
Climate change related lawsuits are growing, as are the risks associated with confusing concepts like “net-zero,” “sustainability,” “materiality,” and “ESG.”
The associated report outlines a “CEO Checklist” focusing on five strategies for ESG investing, sustainability and sustainable development.
Financial Times: How should companies decide on their ESG goals?
Simply put, companies should embrace ESG objectives whenever it is good for business, and when they would negatively affect the bottom line, companies should turn to shareholders to determine how much profit to sacrifice, and for which objectives.
One key argument is that in general, it is often cheaper for society not to pollute (rather than to pollute and then clean up).
Experts note that boycotting and divestment are unlikely to drive change, and that the best decision makers (who should have the most significant voting rights) are the stakeholders with the least money at stake.
A solution is for mutual funds to implement ESG strategies into their voting behavior to allow well-diversified investors to have a vote. The main challenge here is that most investors are unaware how their votes are cast; to drive change, investors need to demand that mutual funds vote according to their preferences, and if the funds do not comply, they should move their money into funds that do.
Customer Think: Why socially responsible marketing is more important than ever
Socially responsible marketing ventures prove profitable, and ultimately, these ventures put people first, ensuring that messaging is meaningful and relatable. A few key strategies to consider in socially responsible marketing include:
Remember that people still buy from people
Use a modern voice
Offer celebration and support to customers
One challenge to socially responsible marketing is the fact that targeting a message to a specific audience can seem exclusionary, and this is an area that must be navigated carefully.
Waste Dive: Moving from value to values: an ESG assessment
Public awareness and regulator attention are increasing around ESG issues, and there is a value-to-values shift occurring, driven by three main factors: the COVID-19 pandemic, politics, and the realization that ESG considerations are altering consumer behaviors.
As most major companies report ESG metrics annually, the main challenge is to create a consistent framework for the metrics, and there is positive momentum in the areas of controllership and accountability, both from regulators and independent standards-setters.
CFOs should create a new agenda around risk, regulation, and returns as they attempt to quantify the potential impacts of an ESG agenda. They should then consider how to embed the new insights into an ongoing, sustainable business strategy.
A recent Moody study found that 38% of the 5,300 largest publicly traded companies operate at least one facility causing habitat loss. Regulators will increasingly incorporate biodiversity measures into reporting requirements, which will put pressure on companies to address their impacts on biodiversity.
The study also found that companies’ efforts to reduce biodiversity harm have fallen short of the commitments made in public disclosures.
Moody’s flagged “urban sprawl” as a major threat to biodiversity in the U.S., with the growth pattern that leads to developing low-density, single-story buildings in vegetated and undeveloped land.
JD Supra: Compliance, Data Analytics and ESG
Compliance personnel have access to relevant sources of data about the monitoring and testing of policies, controls, and transactions, and the Department of Justice has made it clear that data analytics are now a mandatory part of every compliance function.
As ESG and digitalization have moved to the forefront of the minds of corporate America, the convergence of the two is “producing a digital transformation in three areas that influence market conditions: investor behavior, urbanization, and economic demand.”
ESG had become an issue not just for the C-suite, but for boards and directors as they provide oversight of compliance programs, and increased data analytics and digital tools will help answer important questions as stakeholders’ ESG demands continue to grow.
Building on insights from more than 60 leaders in 14 countries, the new tool is meant to provide companies with guidance on strengthening business culture, ethics and performance and supporting public institutions, laws and systems.
The main philosophy promoted is “transformational governance,” which calls on businesses to be more ethical, accountable, inclusive, and transparent.
Compounding crises in recent years have highlighted the need for strong governance, as well as the fact that businesses do not operate separate from society. The framework guides businesses in playing their part in promoting ethical leadership and building trust between public and private institutions and society.
In a recent poll, Gallup found that three-quarters of U.S. adults care about a company's impact on the environment when making purchase decisions, and 68% value efforts to promote diversity and inclusion in a company's workforce and customer base. More than 80% consider a company’s efforts to promote employee health and well-being. These are ESG-related initiatives, but the term still remains unfamiliar to the majority of those surveyed (with just 36% stating they are “familiar” with the term).
There is slight variation in values among different gender, race, political, and age groups.
Of the many objectives of the ESG framework, the three most important to the public are how a business treats its own employees, its impact on its local community, and the ethics and transparency of how the business operates.
1. Environment issues take on new importance. Customers want to do business with brands whose values align with their own.
Customers know sustainability is the right thing to do. Business of all sizes can be impactful, and customers are demanding it.
Customers support brands that consider community impact.
The customer journey is enriched by technology and sustainability.
ESG Disclosures, Standards, Rankings, and Reporting
Some auditors think ESG reporting will become mandatory for certain companies and sectors, and stakeholder pressure (not government entities) have been the main drivers of change.
While there has been demand for improved ESG reporting in the U.S., progress in the U.K. (Including the EU SFDR) and elsewhere has been significant, accelerated by organizations like the United Nations, the World Economic Forum, and the International Financial Reporting Standards. Adoption in the U.S. has been slower.
President Biden issued two recent executive orders: EO 13990, which directs all federal departments and agencies to act to confront the climate crisis, and EO 14008, which states that climate change should be incorporated into U.S. foreign policy and national security considerations.
Currently, about 90% of S&P 500 companies issue corporate sustainability reports, but only 16% refer to any ESG factors in their regulatory filings.
As laws and regulations increase, the enforcement potential for public ESG reporting and disclosures is growing. Internal audit can help the board understand the importance of getting ESG reporting right.
Journal of Accountancy: Auditors may see increased demand for ESG attestation
Recent SEC actions indicate the growing attention being paid to ESG disclosure, and there are conversations around the role of independent auditors.
New rules are typically burdensome for financial reporting, but in the case of ESG, where demands have originated from all corners of the market, the development of a standardized set of rules may serve to simplify the reporting process.
Most large companies are obtaining some form of assurance on portions of their reported ESG data, but only a small percentage are relying on company auditors for this assurance. Experts foresee an increasing pushl from audit committees to join the process, as positioning ESG data for easy access and consumption adds direct value to companies.
FINMA (Switzerland’s independent financial-markets regulator) announced that the country’s banks and insurers will be required to disclose their exposure to climate risk, and their processes for assessing and managing those risks, based on TCFD recommendations.
Entrepreneurship, although traditionally viewed as positive and progressive, can have disruptive impacts on employment, local communities, and the environment. Consequently, some venture capitalists are placing increasing importance on how startups are scoring on their ESG practices.
While low ESG scores may not deter investors, they may lead investors to educate entrepreneurs and small startups that are not yet in the position to hire, for example, a Director of Sustainability.
Important ESG elements for startups to consider include their energy use and storage, employment practices, and diversity, equity, and inclusion. Governance tends to be less of an issue as businesses have advisors, but it is still very important.
Does ESG investing generate higher intrinsic returns to investors? Time and experience are needed to determine a clear answer to this, and greenwashing can muddle some of the data.
Does ESG investing generate higher overall returns to investors? Generally this can be expected, if ESG concepts are standardized and the investing represents a form of goodwill advertising.
Should investment managers concern themselves with something other than returns to investors? Directors have the obligation to focus on maximizing shareholder value or risk facing legal action, and investment managers embracing ESG for reasons other than maximizing value need a lawful basis for doing so.
Who’s greenwashing whom? It is difficult to tell with so much wealth being funneled into the ESG investing space, and things like confirmation bias and “ethical fading” may even be unconscious.
The growing realization that ESG investments can also outperform and provide high returns has sparked surging demand for ESG investment products from both family offices and institutional investors.
One problem specifically affecting family offices is the lack of clearly defined values and objectives with which investors can align; firms need to establish a well-defined investment policy to help dictate which ESG opportunities to provide.
Terminology continues to be an obstacle in ESG investing -- sustainable, ESG, impact, and SRI all mean different things across family offices, banks, and other financial institutions. This leads to differences in screening processes, fund selection, and investment strategies.
ESG investment approaches can take numerous directions, from excluding certain industries to including companies with the aim of facilitating ESG progress as shareholders. Family offices need to establish a clear investment policy / impact thesis to guide their approach and offer transparency for investors.
Environmental Leader: Survey Shows Financial Advisors Using ESG Principles at Higher Rates
For financial advisors, ESG investing is heavily focused on equities over fixed income, real estate, and infrastructure. A recent study found that 91% of financial advisors chose equities as an asset class where they integrate ESG factors (compared to 80% of all U.S. respondents) and only 55% of financial advisors surveyed incorporated ESG in fixed income.
Financial advisors generally adopt ESG as an investment decision rather than the result of requirements from shareholders investment guidelines. Only 20% of advisors stated they incorporate ESG because they are required to do so, while about half cite lower risk and increased returns.
About half of the financial advisors surveyed reported being “very” or “somewhat” satisfied with the amount and the quality of ESG disclosures, compared to all U.S. respondents (41% and 38%, respectively).
Citywire Selector: Private market investors shift focus to ESG outcomes, LGT report finds
LGT Capital Partners’ report found that 68% of managers now have strong ESG practices in place, which is an 18% increase compared to 2016. However, only about 30% address climate change and assess climate risk within their policies, while 50% have DEI policies.
Private debt and hedge fund managers are following a similar trend of increasing their ESG focus; hedge funds have been slower to adopt but are catching up, and 25% have achieved top ESG ratings in 2021 (up 8% from 2020).
The U.S. has seen a dramatic increase in sustainability linked loans (SLLs), which link the borrower’s loan pricing and incentives to its performance toward predetermined sustainability performance targets (SPTs).
SLLs offer some flexibility in lending (they are not linked to specific projects) while still offering transparency to investors, and the borrowers can benefit from a positive reputational impact when they meet their SPTs.
Borrowers report annually on their progress, and if they fail to meet their SPTs, they will not receive discounted pricing, but they typically will not default on the loan.
Sustainability washing can occur when sustainability credentials are inaccurate/misleading (e.g., when fund managers make exaggerated claims about their ESG credentials in an attempt to muscle in on the market). To avoid this, funds should ensure that they are transparent and that their SPTs are ambitious, meaningful, and properly reported.
Investors are funneling money into sustainable funds in the U.S. as performance over the past three years shows they haven’t had to sacrifice returns when buying assets in line with their ESG criteria. Funds labeled “sustainable” have grown faster, almost doubling assets in the U.S. over the past year, according to Deutsche Bank.
Deutsche Bank’s research indicates that currently, passive ESG funds may be the best route for returns. However, in comparison to non-ESG funds, actively managed ESG funds have still not sacrificed on returns.
The U.S. still lags behind Europe’s ESG initiatives, though there is evidence that more Europeans are willing to sacrifice returns for the sake of sustainable investing.
Companies and Industries
The MPower Partners Fund will focus on investing in Japanese startups and early-stage overseas firms like healthcare, fintech, and sustainability, with the purpose of helping the companies enhance their ESG values.
Current investors are Dai-ichi Life Insurance Co. Sompo Holdings, and Sumitomo Mitsui Trust Group; Kathy Matsui is a general partner in the fund.
The Wall Street Journal: Marsh’s New Top Lawyer Takes on Race, Climate Challenges
Marsh & McLennan’s compliance team created a report detailing how the group plans to address ESG issues, and it signals part of a broader shift from designing comprehensive policies to “communicating values and influencing behavior.”
This shift also points to two larger trends: businesses are increasingly being measured by their ESG performance, and compliance officers are taking on responsibilities beyond simply telling employees what they cannot do.
The report highlighted Marsh & McLennan’s diversity efforts and its commitment to reducing its carbon emissions by 15% by 2025.
Activist hedge fund Engine No. 1 recently won at least two seats on the ExxonMobil board. This happened despite the fact that in January of 2021, Exxon published a sustainability report that Lloyd’s Register Quality Assurance found to have clearly defined and communicated metrics (including for climate change), adequate review processes, clear responsibilities established, active stakeholder engagement, and more.
It may be possible that the Engine No. 1 success resulted more from the aggressive campaign and investor activism than from any systemic ESG failure on the part of ExxonMobil.
Sourcing Journal: Does Sustainability Need Financial Metrics?
While the COVID-19 pandemic has caused financial setbacks across industries, it has highlighted the importance of sustainability initiatives, and millennials are leading the movement.
ESG has become embedded in some financial institutions’ due diligence processes, but some issues (e.g., social) are difficult to quantify. Experts are calling for companies to translate sustainability into financial metrics for investors, but they still need to answer to consumers.
Collaboration across sectors and with organizations/think tanks is crucial to success in sustainability. For example, organizations are collaborating to help companies in the fashion industry manage things like circularity and raw material sales.
When in doubt, robust data and strong baselines are a good starting point for driving and communicating sustainability progress.
Citywire Selector: ESG Head: not a single oil and gas major has credible net-zero plans
No oil and gas companies have credible plans for achieving net-zero emissions by 2050, and they also lack associated short- and medium-term science based targets, as well as the necessary capital expenditures.
The recent Dutch court ruling that ordered Shell to cut its emission by 45% by 2030 could inspire others and result in legal consequences for other oil and gas companies.
Several shareholder initiatives and resolutions were presented in May, and pressure is rising for the oil and gas industry to not only set targets, but establish realistic plans for mitigating their environmental impacts.
Companies need to move away from the mindset that ESG is merely a compliance issue, though a main challenge is the abundance of competing and non-standardized ESG standards.
Digbee ESG is currently developing a comprehensive ESG disclosure platform for the mining industry, and it will also provide local stakeholders with access to this data.
Digbee’s framework for exploration companies is already live, and the technology side of the platform is currently being tested and is expected to be completed in the next four to five weeks.
Foreign Policy: Big Oil’s Tobacco Moment
A Dutch court ruled that Shell is at least partially responsible for climate change and must cut its emissions by 45% by 2030, though it’s unclear how the court will enforce the ruling.
This is significant because the court ruled that the multinational corporation must abide by the same rules that countries adhere to under the Paris Agreement, and because it may be the “breach of the dam” for big oil and its impacts on global climate change, as companies in the industry are already facing increased pressure and activism.
It’s likely that oil and gas companies will now accelerate their efforts to reduce their carbon footprint with the threat of legal consequences looming, and there will also likely be increased pressure on policymakers to take a tougher stance on fossil fuel production.
Also covered in World Oil: Shell loses precedent-setting climate change case in Dutch court
Harvard Business Review: How the Insurance Industry Could Bring Down Fossil Fuels
Last year, Lloyd’s of London announced plans to stop selling insurance for some types of fossil fuel companies by 2030. This follows the trend of increased client discussions about ESG and the coverage of insurers and reinsurers.
Some reinsurers are moving away from fossil fuels simply to avoid the loss history (which has been significant over the past 30 years).
Insurers now need to replace the revenue from fossil fuels, and the renewable energy space would need to grow significantly to provide adequate replacement. Additionally, while green energy tends to be safer, it comes with the added risk of being relatively new and lacking a strong track record.
While major improvements in the solar industry look promising, the sector’s volatile history is alarming.
The development of industrywide insurance data assets could make a difference. The renewables space could benefit from the same sort of centralized loss data aggregation seen in traditional energy insurance markets.
S&P Global and Advent International just announced a collaboration to develop sustainability best practices at Advent and participating portfolio companies.
Advent is the first private equity firm to work with S&P Global Sustainable1 on promoting key ESG practices, and it enables its portfolio companies to benchmark industry best practices, set ESG baselines, and develop sustainability roadmaps.
Puro.earth is the world’s first B2B marketplace, standard and registry focused solely on carbon removal. Demand for carbon offset projects is expected to increase as companies make net-zero commitments.
Puro.earth was previously owned by Fortum, which will remain a minority stake in the company now owned by Nasdaq.
Moody’s recently announced the expansion of its ESG profiles and credit impact scores to include global pharmas, medical device companies, regulated electric and gas utilities with generation, U.S. states and large U.S. cities and counties.
The new Moody’s report includes two ESG scores: issuer profile scores (IPS) and credit impact scores (CIS).
The report found that ESG factors have a mostly neutral to low credit impact on U.S. states, cities and counties, a negative to neutral impact on global medical products and devices issuers, and regulated electric and gas utilities, and on overall credit negative impact on global pharmas.
Howden announced the launch of Parhelion, the world’s first fully sustainability focused insurer providing new ESG products that meet the risk financing needs of a green economy.
Parhelion will provide both traditional risk coverage and ESG-specific products, and it will include ESG metrics in the underwriting process.
The aim of the group is to support clients exploring energy transition alternatives, and it follows BMO Financial Group’s announcement of its climate ambition, which includes a net-zero financing pathway and sustainable finance targets, as well as the establishment of the BMO Climate Institute.
The main proposed climate spending areas include:
$10 billion for clean energy innovation
$7 billion for NOAA research
$6.5 billion for rural clean energy storage, transmission projects
$4 billion for advancing climate research
$3.6 billion for water infrastructure
$1.7 billion for retrofitting homes and federal buildings
$1.4 billion for environmental justice initiatives
The budget also includes $2 billion to employ electricity laborers in clean energy projects and $580 million to remediate oil and gas wells and reclaim old mines. It calls for $815 million to incorporate climate change risk and disaster planning.
Senate Republicans have issued a counteroffer that slashes Biden’s electric vehicle and climate spending, but the White House has not yet budged on its climate policies. Since Democrats control both chambers of Congress, the president has a good chance of enacting major parts of the new infrastructure bill.
The president’s target to reduce emissions by 50% by 2030 doubles the prior U.S. commitment, but the country is currently not even halfway to meeting the Obama Administration’s goal of cutting emissions by 26% to 28% by 2025 (from 2005 levels).
The Partnering for Green Growth and the Global Goals 2030 (P4G) even aims to boost market-based partnerships and rally political and private sector action around COVID-19, climate change, and the UN Sustainable Development Goals (SDGs).
There is still an emissions gap that needs to be closed as more companies commit to achieving net zero emissions by 2050, and the first priority should be stopping plans for new coal plants and phasing out the use of existing plants, according to UN Secretary-General Antonio Guterres.
There is also concern about “finance and adaptation gaps,” as developed countries have failed to deliver financial commitments toward climate action and supporting vulnerable communities.
Guterres warns that there is no global partnership while so many are still left struggling and unsupported in the COVID and climate crises, and while governments still fail to embrace the same goals.
The National Law Review: SEC’s Division of Examinations Issues Risk Alert on ESG Investing
In its April risk alert, the SEC noted that figure ESG examinations will focus on ESG investing policies, use of terminology, regulatory filings and sponsors, compliance policies, and more.
Deficiencies identified upon examination included inadequate ESG investing controls, inconsistent proxy voting, lack of clear ESG policies, compliance personnel lacking adequate ESG knowledge, and misleading ESG claims.