ESG Weekly News Update: June 11, 2021
Tatra Mountains, Slovakia
General ESG News
The Wall Street Journal: Why Doing Good Is No Longer Bad Business
So far this year, there have been 610 news releases from current S&P 500 members mentioning ESG principles, which is more than double the rate from last year.
While the socially minded initiatives from big corporations may seem performative, in the current climate, the “feel good” stories are what consumers and investors want. The value of a product is now not just about how it functions, but about its origin story.
Now, if executives want their company’s stock to have inflows, they need to show ESG alignment; access to capital now relies on commitments to responsible business and ESG.
Environmental Leader: Sustainable-Minded Customers: The New ‘Era of Sustainability’
A recent Nielsen study found that 81% of global respondents felt strongly that companies should help improve the environment. Half of respondents said they would pay higher prices for products with higher quality/safety standards or that are socially responsible, environmentally friendly, etc. Globally, people are ‘voting with their wallets.’
According to the U.S. Chamber of Commerce, U.S. consumers will spend $150 billion on sustainable products by the end of 2021 (25% of all goods sold).
Sustainability is no longer a “siloed” conversation, as sustainably minded consumers amplify their voice and demonstrate their values through their purchasing power.
Nielsen published its 2021 Interim Responsibility Update, focusing on the following key highlights:
Expanding commitments to diversity, equity, and inclusion
Prioritizing employee health and safety around the globe
Achieving the environmental goal of 0% electronic waste
Donating more than $25 million in pro bono work, volunteering, and in-kind giving (more than doubling the annual goal of $10 million)
1. Build back greener. Climate change remains at the top of the political agenda in 2021, and greenhouse gas emissions and biodiversity loss will be key issues that present critical economic and societal risks.
2. Build back stronger. This year, companies will face increased pressure to take greater accountability for the welfare of their workforce, supply chains, and the greater community.
3. Build back inclusively. In 2021, the use of digital channels will likely increase, drawing more attention to digital ethics, including data privacy, cybersecurity, online welfare, ethical artificial intelligence design, and more.
Crowell Moring: ESG from a European Perspective
In April of 021, the European Commission presented its new Sustainable Finance Package with the aim of improving the flow of money to sustainable activities in the EU.
The 2019 Communication on the European Green Deal is the EU’s response to climate and environmental challenges, aiming to transform the EU into a net-zero emission, resource-efficient economy by 2050, with a focus on shifting resource-intensive industries toward a circular economy.
European legislators have developed common language around what is “sustainable” in the EU Taxonomy Regulation to incentivize ESG commitments and investments.
The Sustainable Finance Package also aims to promote the adoption of a legal framework to create a sustainable financial EU ecosystem, and it requires companies to provide valid sustainability information.
It is likely that the “sustainable finance taxonomy” will become a global standard for green investment.
In 2018, in partnership with Nasdaq and other global exchanges, Swedbank Robur began launching ESG futures on major indices.
The collaboration led to the development of the OMXS30ESG future, which allows Swedbank Robur customers to have ESG exposure and allows the company to manage daily cash flows.
Swedbank Robur currently stands for more than one-third of the volume in all exchange-listed ESG derivatives.
Financial Executive: ESG Oversight -- New Focus for C-Suites, Boards, and Finance
A powerful ESG message is one way for companies to distinguish themselves when competing for capital; ultimately, investors are seeking decision-useful information despite the confusing reporting landscape.
CDP, GRI, CDSB, IIRC, and SASB recently announced a joint “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting”
Additionally, there is potential (now expected) SEC action toward further regulation of climate and workforce disclosures.
To help companies in their journey, DFIN (in partnership with the G&A Institute) developed a five-step engagement process.
The Economic Times: ESG: a marathon, not a sprint
Companies with a strong ESG track record show resilience and outperform others; 88% of sustainable funds outperformed their counterparts in the first quarter of 2020.
Additionally, there is evidence that better ESG propositions translate into lower capital costs, and companies of all sizes are increasingly shifting their ESG strategy from being compliance- to performance-driven. This is accompanied by increased communication with internal and external stakeholders.
Holistic ESG transformation will be a multi-year process, impacted by economic realities, continued dependence on non-renewable energy sources, and access to technology.
A recent lawsuit filed against Vital Farms argues that it markets its practices as more ethical/humane than they actually are.
Due to inconsistent terminology and standardization, it is difficult to classify companies as sustainable/ethical; fossil fuel companies can invest in ESG initiatives, and renewable energy companies can have problematic practices. Accurate reporting and marketing are crucial for avoiding litigation and accusations of greenwashing.
Investors have the responsibility to do their own due diligence, and to check regularly to ensure a company’s ESG practices remain impactful. It’s also important to compare companies against their peer groups to see who is actually performing.
Experts note that one way to avoid greenwashing is to focus on ESG integration, not just creating ESG investment products.
Utah Business: New survey shows more companies prioritizing ESG efforts
A new survey from Avetta shows that about 79% of companies prioritize employee health and safety, and 63% say reducing their environmental footprint is very important.
One out of four respondents plans to prioritize ESG supply chain issues, which have been exacerbated by things like the COVID-19 pandemic. However, many companies fail to recognize that most of their impact is in their supply chain.
The responses highlight the need for companies to integrate their ESG goals throughout their value chains.
Financial Times: Sustainable investing boom and net zero pledges drive ESG talent war
More than one in five of the world’s largest companies made net-zero commitments, driving a surge in demand for professionals with ESG expertise. Demand currently outstrips supply, which means there will be a “war” for talent.
In-demand positions include chief sustainability officers, heads of ESG, accountants, and auditors.
With impending ESG disclosure regulation, companies are preparing their staff to deal with increased scrutiny from investors.
The National Law Review: The ESG Movement: Why All Companies Need to Care
The COVID-19 pandemic raised awareness of global interconnectedness, driving social impact programs from “transactional” to “transformational” -- with larger, collaborative purposes.
Lawyers in every industry are in a position to encourage ESG improvements, manage risks, and minimize company exposure to liability.
As companies become more deliberate about ESG, it is becoming increasingly important to develop comprehensive standards, language, and metrics.
Experts insist that climate change is an issue where businesses are the most equipped to help and where the cost of inaction is the highest.
Financial institutions are facing increasing pressure to assess the impact of the transition to a low-carbon economy.
UN Secretary-General Antonio Guterres has called on insurers to introduce net-zero pledges into their underwriting practices, particularly regarding fossil fuels.
ESG Disclosures, Standards, Rankings, and Reporting
Bloomberg Tax: SEC’s ESG Balancing Act: Investor Needs vs. Company Hassles
Changing investor expectations have blurred the line between financial materiality and other types of materiality.
Chairman Gary Gensler has stated that the commission will focus on issuing guidelines for climate change and workforce disclosures initially, while other commissioners note that companies should already be disclosing any material information in routine filings.
There is debate over whether new disclosure regulations will place undue burden on public companies.
Investment News: Mandatory ESG disclosures are a political inevitability
Political tensions are rising over ESG regulation as Republic representatives question whether the SEC is the right agency to require disclosures, and whether ESG disclosures are actually material to a company’s financial performance.
Currently, it is at least expected that the SEC will develop new ESG rules, and some major lobbying groups like the Investment Company Institute have already provided their comments/letters in support of mandatory climate and workforce disclosure.
Experts explain that the pushback from the Republican SEC commissioners and other representatives is an effort to “put their mark” on ESG regulations, and that they won’t be able to stop the inevitable increase in disclosure regulation.
Pensions & Investments: Corporate ESG reporting remains patchy -- report
A recent Morningstar report argues that ESG information will remain “haphazard” as long as it remains voluntary, and the U.S. lags far behind EUrope in material disclosure rates, especially for social indicators.
Politics and lobbying information are most disclosed by U.S. companies, while carbon and emissions data is prevalent in Europe.
The report reinforces the argument for mandatory minimum ESG disclosures to help inform investors and avoid inconsistency.
Financial Executive: How Boards Should Prepare for Updated ESG Standards under New SEC Leadership
The SEC is expected to issue new reporting guidance for climate change and human capital, but companies can be taking steps now to integrate ESG into their business strategies and improve their sustainability commitments.
Board oversight and transparency are key for all steps of the ESG reporting process, and boards should focus on ESG messaging, risk assessments, long-term strategy, and reporting to meet stakeholder demands.
Despite increased pace and pressure, the focus should still be on creating sustainable change and value, not simply ‘checking a regulatory box.’
Journal of Accountancy: Internal audit has pivotal role in ESG reporting
Amidst mixed messaging from stakeholders and the current lack of standardized ESG reporting guidelines, internal auditors can help in the following areas:
Meeting the demand (i.e., requests from customers, banks, investors, etc.)
Remembering the audience (and making the reporting understandable)
Monitoring consistency and comparability
The G7 announced that it supports mandatory climate-related financial disclosures in line with the TCFD framework, and this comes at a time when other countries (both inside and outside the G7) are also moving toward mandatory disclosure systems.
G7 ministers also backed the momentum toward the creation of global sustainability reporting standards (such as the IFRS initiative to create an International Sustainability Standards Board)
SASB and IIRC have officially merged and launched the Value Reporting Foundation; this comes at a time when companies are facing increased pressure to make and report on ESG performance but lack consistent standards to measure progress.
The Value Reporting Foundation aims to bring together a range of factors driving enterprise value and making it easier for businesses to communicate their long-term ESG strategies to investors.
Fund managers, including BlackRock, Neuberger Berman, and Vanguard, are currently more vocal than ever about how they plan to vote in annual shareholder meetings, and they are backing shareholder resolutions against company efforts to resist change related to ESG issues.
Proposals currently have about 34% support so far in the year, compared with an average of less than 29% last year.
This trend tracks the large investment flows into ESG funds and the impending regulatory mandates.
Entrepreneur: The Role Of B Corporations For Investors
B Corp certification occurs when an organization meets a minimum assessment score completed by an independent nonprofit, makes the report results transparent, and amends its governance documents to declare the importance of purpose alongside profit. The certification can help businesses implement and codify sustainable business practices.
For investors who want to align their investments with their values, it may be worth working with a B Corp advisor that can help align options with investor values for employee treatment, community impact, etc.
However, it’s important to keep in mind that just because an investment manager is B Corp certified doesn’t mean investors should overlook other crucial questions, such as about fee structures and investment philosophies.
ESG-related issuances in Asia-Pacific have outpaced those by U.S. issuers for the first time in two years, and bankers say the trend will continue.
Of the $69.1 billion in ESG bonds issued in Asia-Pacific so far this year, green bonds were the most common (70%), then sustainability linked bonds (20%). Chinese entities issued just over half the ESG bonds in the region.
There have been 234 ESG-linked bond issuances in Asia-Pacific this year, compared to just 86 in the U.S.
ProcureAM and LGBTQ Loyalty Holdings launched the LGBTQ100 ESG ETF this week, including 100 companies that align with the group’s ESG goals.
Ultimately, the development of the ETF came down to demand from the new wave of younger investors, as well as the recognition that as the companies included in the fund support diversity and inclusion, they will attract top talent and perform better, making them solid investments.
Asian Investor: Why superficial engagement raises ESG investing risks
Some analysts are questioning whether there is real engagement between global institutional investors and the Asian-Pacific companies in which they invest; the volume of engagement has increased, but surveys reveal a lack of active voting and policy depth.
While governance is sometimes seen as table stakes in ESG strategy, experts emphasize the role of strong corporate governance in ESG strategy and reporting; some Asia-Pacific countries are already revising their corporate governance codes to align with best practice.
Across Asia, AGM attendance is low, despite the fact that there is value in attending AGMs to raise questions and engage executives and auditors.
ETF Trends: Lean on Green: The Growing ESG Bond Market
The boom in ESG investing is making its way into bonds, benefitting assets like the Vanguard ESG U.S. Corporate Bond ETF (VCEB); at least 80% of the fund’s assets are invested in bonds included in the Bloomberg Barclays MSCI US Corporate SRI Select Index.
VCEB excludes bonds from companies involved in things like alcohol, tobacco, weapons, GMOs, nuclear power, and coal, oil, and gas.
UBS predicts the green bond space could soon reach $1 trillion; green bonds are sensible products for clients concerned about risks who also want some positive ESG impact from their investments.
The new generation of executives at big mutual fund firms is driving an uprising toward environmental and social justice. This year, companies have begun publicizing how and why they voted on ESG issues, which was not previously done.
Investors are voting down CEO pay plans, and major firms are backing board challenges against some of their largest holdings.
Mutual fund firms are also increasingly relying on ESG-focused funds for part of their fee revenue and are being pressured to take active stances on pressing issues.
Many of the new executives driving this change are new to big funds in general, and come from industries like banking and government.
While some firms have not yet faced much pressure to act, they do face pressure to compete with the firms that are making significant strides in ESG.
The new growth equity platform aims to promote continued growth of private markets and pre-IPO value-creation opportunities.
The new platform is being launched as companies are increasingly choosing to remain private longer and seek partners that can add significant value.
Companies and Industries
As demand for lead-acid and lithium-ion batteries increases with the low-carbon energy transition, child labour and other human rights issues in the battery supply chain are escalating.
The Global Battery Alliance (GBA) made a 2021 Action Pledge to end child labor in the battery supply chain, focusing on developing a battery passport, contributing to responsible artisanal and small-scale mining, raising money for the Fund For the Precention of Child Labour in Mining Communities, and working with policymakers to adopt best practices.
Entrepreneur: Measured Steps Toward and ESG Standard
As a significant contributing source of carbon emissions, the commercial real estate industry is under increasing pressure to demonstrate measurable ESG action.
Lenders and investors want to know how a property will affect the sustainability of their overall portfolio, and there is a need for an industrywide reference.
Previous sustainability focus was on new construction, but now, occupiers are driving sustainability demands, forcing landlords to get on board.
In the U.S. there are the Green Building Council’s LEED criteria and the EPA’s ENERGY STAR certification program, which are good starting points for understanding the comparative value of sustainability improvements.
The Responsible Minerals Assurance Process (RMAP) ESG Standard leverages the RMI’s minerals supply chain assurance with internationally recognized frameworks, and includes criteria relevant to mineral processors, smelters, and refiners in all countries.
The ESG Standard focuses on site-level facility operations, and facilities that undergo the standard will be publicly recognized on the RMI website.
Using a five-point Credit Impact Score (CIS), Moody’s found that ESG considerations have negative credit implications for most electric utilities that own generation. In some cases, ESG considerations are “key drivers” of credit ratings.
Utilities with generation have the highest exposure to physical climate risks due to the increasing frequency/severity of extreme weather events and the risks these pose to the sector.
In general, governance risks are low for utilities, despite some scandals with companies like Exelon and FirstEnergy.
Accounting Today: Auditors focusing more on ESG risks
As more organizations face pressure to publish ESG reports and regular updates, internal auditors are becoming more crucial to help provide assurance and advice on ESG matters.
Internal audit departments can help management assess ESG risks and effectively report on concepts (i.e., social issues) that have not yet found their way into standards/metrics.
The IIA plans to continue working on ESG issues and disclosure standards with the IIRC, the International Federation of Accountants, and other groups.
Accenture launched the myNav Green Cloud Advisor to help enterprises teach their sustainability goals through efficient cloud and technology infrastructure.
Research shows that shifting from on-site data centers to the public cloud can reduce an enterprise’s energy use by 65% and cut carbon emissions by more than 84%.
Accenture also announced its collaboration with a research team at Carnegie Mellon University to develop a carbon emissions score and certification for green cloud solutions, as well as a new cloud training program.
The BNP Paribas Ecosystem Restoration Fund will provide investors with exposure to companies involved in ecosystem and natural capital restoration and preservation.
The fund has 40-60 holdings and invests in global equities in thematic areas like aquatic ecosystems, terrestrial ecosystems, and urban ecosystems.
The fund was created in response to growing client demand for biodiversity and restoration initiatives, and BNPP also partnered with CDP last month to explore the development of corporate biodiversity reporting metrics.
The National Law Review: Biden Administration ESG Activity Accelerates
President Biden issued the Executive Order on Climate-related Financial Risk, directing the National Economic Council and the President’s National Climate Adviser to develop an associated strategy within 120 days. It also directs the Treasury Secretary to assess climate-related financial risk in the U.S. and issue a report within 180 days.
The order also directs the Department of Labor to rescind/revise any rules prohibiting ERISA plans from considering ESG factors.
The SEC will soon release a notice of proposed rule-making for climate-related disclosures.
The UK Department for Works and Pensions (DWP) released new legislation that would require pension schemes with more than five billion euros in assets to report on their climate-related financial risks, aligning with TCFD recommendations by late 2022.
TCFD alignment will mean reporting on the actual and potential impacts of climate-related risks, including scenario analyses.