ESG Weekly News Update: June 18, 2021
Patagonia, South America
General ESG News
Fast-paced and disjointed ESG developments have left compliance teams in a difficult position, though President Biden has signed ESG-related executive orders and the SEC is considering ESG disclosure rules, so guidance may be on the horizon.
Companies can prepare for new requirements by implementing ESG policies, assessing risks, and setting the right tone for change. Companies should not treat ESG as a passing trend.
Regulatory compliance processes are a good starting point for addressing ESG risks.
ESG activists have been gaining momentum with recent successes, and they are integrating criticisms of ESG failures into their campaign narratives, allowing them to gain more traction.
Institutional investors have been increasingly developing ESG-themed investment products, and sustainable equity funds outperformed their traditional counterparts in 2020.
Investors are lobbying governments and regulators for further disclosure requirements.
At this point institutional investors who turn their backs on ESG-themed activism risk facing criticism from the general public. However, activists can harm their campaigns if they seem disingenuous.
The “new age” of ESG is also placing a renewed focus on governance, specifically with regard to how ESG oversight is allocated. A further stage in ESG activism is the incorporation of social concepts into activism strategies.
Companies should review their ESG disclosure practices and take action to ensure that rating agencies do not deem them as laggard.
Venture Beat: How stakeholder capitalism and AI ethics go hand in hand
Stakeholder capitalism requires business activity to benefit all stakeholders associated with a business -- employees, shareholders, customers, the community, the environment, etc.
Artificial intelligence technology is in a similar place, where the goals are moving from maximizing accuracy to goals around being inclusive and responsible.
For both businesses and artificial intelligence, it is critical to have a set of ethical principles in place, especially as proposed regulation increases in both areas (e.g., the U.S. Department of Defense’s AI ethical principles, announced in February).
JD Supra: Climate Change, ESG, and Materiality
One existing myth around ESG disclosure is that ESG matters material to investors are already required in disclosure -- this is untrue, and materiality has no bearing on disclosure requirements. Materiality can also be subjective, and even where there are federal disclosure obligations, businesses may not be making the disclosures.
Additionally, disclosure rules do not have to be limited to materiality, and ESG matters have the potential to be material to both investment and voting decisions.
Shareholders are entitled to know how the resources of the enterprise they invest in are being used, and companies need to answer the question of how to use shareholder money in the areas of climate change and ESG.
ESG Disclosures, Standards, Rankings, and Reporting
While investors and public-interest groups are calling for increased regulation, and the SEC has announced that it may propose new rules in October, companies and corporate lobbying groups are pushing back and requesting the SEC give them broad discretion for their ESG disclosures.
The challenge is to find a balance between establishing clear definitions and meaningful metrics for sustainability while also allowing companies the flexibility to address risk and report on the most material aspects.
The recently collected public comments will help inform the SEC’s decisions and rule-making, and it is important for the agency to “get it right” as more wealth is funneled into ESG-focused investing.
Environment + Energy Leader: Data Shows Broad Differences in ESG Reporting Between Europe and the US
Intercontinental Exchange recently announced that its ESG reference data platform now includes coverage of major European public companies, and the data shows major differences between the U.S. and Europe:
European companies are almost twice as likely to have identified the UN Sustainable Development Goal (SDG) of Climate Action as a business objective, and they are also significantly more likely to identify the SDGs of Gender Equality and Responsible Consumption and Production as an objective.
European companies are more likely to report on greenhouse gas emissions, and significantly more European companies have defined supply chain and sourcing policies.
Investors’ gains so far this year have already been astonishing, and experts predict this will be the year that investors start to reap the rewards of Biden’s “green presidency.” This year, the administration will funnel even more money into the clean energy sector.
The ESG investing boom began before Biden came to office as investors realized that a lack of sustainability was too much of a risk for shareholders.
ESG funds are still seeing record inflows, and companies with strong SEG performance are seeing higher returns and larger dividends. Experts note that ESG could become a $1 trillion category by 2030.
Facedrive, the company that brought electric vehicles to the ridesharing industry, is an excellent example of a company that has been capitalizing on the current trajectory of the ESG investing market, including taking a hands-on approach to dealing with the COVID-19 pandemic.
Chicago Booth Review: What green investing means for companies, shareholders, and society
“Brown” firms are companies that are widely considered to be socially irresponsible, and they are generally more vulnerable to climate risks, while “green” firms are typically better suited for dealing with climate shocks and are therefore safer investments. Because of this, investors are willing to pay more for green firms and accept lower returns.
Green firms also tend to invest more into their social impact. When a manager make a firm “greener,” they make it more valuable as well, leading to further investment and positive social impact.
Experts expect ESG investing to continue to grow, especially because it is the younger generations that show the most interest in green investments. However, ESG investing, alone, will not solve the world’s problems -- government action is also essential.
Citi names green energy, equal access to education and technology, cybersecurity, and social justice as ‘unstoppable’ investing trends over the next five to ten years, especially among younger investors.
The new generation of investors is concerned with how a company treats the environment and its employees, as well as how it engages with politics, when making investment decisions.
The Principles for Responsible Investment (PIR), established in 2006, includes a set of six voluntary investment principles that incorporate ESG issues into the investment process. The organization just added its 4,000th signatory.
The achievement also comes as the organization’s CEO, Fiona Reynolds, announced her decision to step down after seven years with the PRI.
The PRI also recently launched its three-year strategy for fostering a sustainably global financial system, prioritizing climate change and human rights.
Fidelity launched five new ESG funds, including two equity mutual funds, one bond mutual fund, and two equity ETFs, bringing the firm’s total to eleven ESG-focused mutual funds and ETFs.
The funds aim to invest in “high-quality companies” that are addressing climate change, advancing women’s leadership, and/or that have proven sustainability practices.
Canada announced plans for its first issue of sovereign green bonds, aiming to raise $5 billion to support the country’s climate and environmental goals (including achieving net-zero emissions by 2050).
HSBC and TD will be the structuring advisors for the issuance and will help develop the country’s ongoing green bond program.
The UK, Italy, and Germany have all recently issued their first green bonds, and the European Union is expected to become a central region for sovereign sustainable finance.
Companies and Industries
The Wall Street Journal: Companies Spend Big on ESG Investments, Hoping for Long-Term Payoff
Companies are increasingly investing in things like electric vehicles and renewable energy (e.g., wind and solar), and these projects are expensive and long-term, with returns that may be difficult to quantify.
However, companies that are not making such investments are already paying the price in their reputation and credit outlooks.
These investments come as policymakers are paying more attention to ESG issues. Companies need to start investing now to remain relevant and competitive, but it could take more than a decade for these types of investments to generate returns.
The EU’s Sustainable Finance Disclosure Regulation becomes mandatory for all financial market participants in 2022. To help companies meet the requirements, Moody’s launches a dataset covering more than 2,500 entities across 11 mandatory indicators (and will eventually be expanded) to ensure market participants and advisers have access to accurate data for advancing sustainability objectives.
Also covered in ESG Today: Moody’s Launches ESG Data Solution to Help Meet SFDR Requirements
JPMorgan has stated that both oil majors’ scores fell below a required threshold and they are expected to be removed from the index in June.
Petronas and its affiliates were flagged for activities in “high-risk regions,” and Pertamina’s score decline was partly due to a refinery fire in West Java.
PwC plans to invest $12 billion over five years to create 100,000 new jobs with the purpose of helping clients deal with climate and diversity reporting, as well as artificial intelligence. The new hires will come from mergers and acquisitions, as well as direct hires from competitors.
PwC’s leaders state that ESG will be embedded into the firm’s work, and every employee needs to be familiar with the issues, especially as the U.S. prepares for what will likely be more ESG regulatory oversight.
PwC is increasing training for its staff in ESG areas, and it is setting up leadership institutes to help executives, boards of directors, and C-suites to manage in uncertain times.
Bloomberg: Exxon Won’t Be Last Shock Win for Activists
Activists’ recent win in Exxon’s board is a template for shareholder campaigns, and it demonstrated to companies that their financial performance is not enough to protect them.
Activist campaigns increased 36% year-on-year in the first quarter of 2020, and investors are backing them at least partly because of new data showing that companies with high ESG ratings have a lower cost of capital.
Activist momentum is building around climate change (especially for the oil and gas industry), race and gender, and employment policies. Companies are facing increased scrutiny for their working conditions and lack of diversity in leadership.
Now, the pressure is not just to match general projections -- companies are expected to anticipate changes in consumer behavior and proactively combat issues like inequality.
Critics are accusing Amazon and other large companies like Trillium and Marathon Petroleum for concentrating their pollution in communities of color as the environmental justice movement gains momentum.
In response to this pressure, companies are checking their risk levels, releasing public policies, making charitable donations, and incorporating environmental justice into their existing ESG programs.
Amazon’s facility location choices were advertised as bringing jobs to the areas, but they are now generating opposition from both employees and activists due to their high emissions and particularly large environmental footprint in areas of color.
Amazon is also facing backlash for illegally retaliating against and terminating employees who have spoken out and organized against the company’s policies and activities.
The new Nasdaq investor portal (part of the Nasdaq Sustainable Bond network) will allow investors to “generate impact reports, run allocation reports, and find new sustainable investments.” It will include more than 6,500 bonds from 600 issuers in 51 countries.
Moody’s expects the sustainable bond market to exceed $650 billion in 2021, and the new portal is meant to help investors manage the explosion in ESG investing products on the market.
The Nasdaq Sustainable Bond network follows a similar path to the Luxembourg Green Exchange for helping climate-aligned issuers and their debt securities.
BlackRock will integrate Baringa’s Climate Change Scenario Model into tis existing Aladdin Climate Technology to help clients understand the potential impacts of climate change on investments and portfolios.
Under the new agreement, the companies have formed a long-term partnership to set the standard for modeling the impacts of climate change and a low-carbon transition on financial assets; the capabilities will be used by governments, financial services, regulatory bodies, and clients across all sectors.
The market for sustainability linked debt is rapidly growing in the U.S. and abroad, and these types of loans/securities tie interest rates and discounts to the issuer’s achievement of certain sustainability performance targets.
HSBC just launched its first sustainability linked loans for commercial banking clients, and it will structure the loans in accordance with the voluntary Sustainability Linked Loan Principles set by the Loan Market Associations.
The House passed legislation that would require public companies to report on ESG metrics, with specific expectations for climate risk, political spending, CEO pay, and taxation.
Provisions in the bill package would mandate quarterly and annual reporting of certain indicators, and proponents of ESG disclosure argue that even if the Biden administration issues its own reporting rules, congressional action would help speed the process.
The effort faces opposition from Republicans, with arguments that the requirements are an attempt to “name and shame” companies. The package will now go to the narrowly divided Senate, where some Republicans argue that companies should not be required to report on financially irrelevant information, because it will ultimately harm investors and undermine the reliability of the SEC disclosure framework.
The Business Journal: Energy Secretary Says U.S. Wants ‘Responsible’ Lithium Mining
The Biden Administration is calling for lithium used in electric vehicles to be mined in a way that respects the environment and Native American tribes.
Lithium mining can be a source of job creation in Nevada, which is home to the only large-scale lithium mine operating in the U.S. Plans for other mines are currently facing legal challenges and resistance from conservationists.
The mines are a test of the Biden administration’s goals of protecting the environment and public lands while also pushing clean energy targets.
There is currently a project in California working to extract lithium from brine in the Salton Sea, which appears promising and sustainable.
The SEC released its rulemaking plan that outlines its intent to propose new climate and workforce disclosure rules by October of this year. Final rules are expected in 2022.
The agency is also looking to enhance rules of disclosures around cybersecurity risks and special purpose acquisition companies (SPACs). The SEC has issued multiple warnings to companies about the risks of using SPACs to go public.
The SEC plan also includes a rule to address listing and trading Chinese companies with auditors that aren’t inspected by U.S. regulators.
The new bill requires German multinational corporations to be held legally responsible for any human rights or environmental violations across their global supply chains.
Companies that fail to meet the new regulations could be forced to pay fines up to 2% of their annual global turnover. However, from 2023, only companies with more than 3,000 employees in Germany will be affected (this will expand to 1,000 employees in 2024).
Daimler AG is one major corporation that stands to be affected by the new regulations, but it has stated that it welcomes the new progress and the Supply Chain Act, although it opposes the potential 2% sanction and instead proposes actions companies must take in cases of deficiencies.
Coastal Review: EPA revives climate change website, adds ‘indicators’ data
The EPA climate change website, archived under the Trump Administration, has since been rebooted and now includes new indicators and several years of data on greenhouse gases, weather and climate, oceans, snow and ice, societal health, and ecosystems.
The climate indicators show the urgency for action as sea levels rise and growing seasons change. According to the indicators, 2010-2020 was the warmest decade on record, leading to an increase in heat-related illnesses. Rising sea levels erode shorelines and contribute to coastal flooding.
The Biden Administration has made several climate commitments, including a goal to reduce greenhouse gas pollution by 50-52% by 2030, and rejoining the Paris Agreement.
The National Law Review: SEC Commissioner Roisman Suggests Safe Harbor for ESG Disclosures
Republican SEC Commissioner Elad Roisman suggested that the SEC consider a “safe harbor” for companies that are trying to provide the required ESG information under new regulations, along the lines of what is available for companies’ forward looking statements.
This is a shift from Roisman’s initial opposition to the new SEC disclosure rules, signaling the inevitability of the regulations. Also, Roisman recognizes that the new disclosure requirements will likely lead to an increase in securities litigation, and his suggestions are an attempt to mitigate this costly outcome.
At the recent G7 summit, COVID vaccination and economic recovery were top priorities, as was climate action. G7 leaders committed to increase their public finance climate contributions, and they backed private sector climate initiatives. They also expressed their support for moving toward mandatory, TCFD-aligned climate reporting.
The G7 leaders highlighted actions for specific, high-emitting or vulnerable sectors like the energy industry, transportation, agriculture, forestry, and other land-use sectors. The leaders urged companies to focus on accelerating renewable energy, transitioning to electric vehicles, and promoting conservation and sustainable production.
Another key focus area at the G7 summit was forced labor in supply chains, especially state-sponsored forced labor of vulnerable groups in the solar, agricultural, and garment industries.
The U.S. Department of Energy (DOE) announced its $200 million investment into electric vehicles, batteries, and connected vehicles, as well as new partnerships for advancing electric vehicle innovations.
The DOE is also working to strengthen the lithium battery supply chain, since these batteries are essential for electric vehicles and grid storage, but there are concerns about lithium mining practices in vulnerable areas.
This announcement also coincides with the DOE’s $62 million investment to reduce carbon emissions in trucks, cars, and off-road vehicles.