ESG Weekly News Update: June 25, 2021
Milford Sound in New Zealand
General ESG News
Climate change could potentially leave more than 130 million people in poverty by 2030, and could lead to severe heat waves, rising sea levels, water scarcity, and lower crop yields, ultimately leading to significant loss of life. Company leaders can no longer ignore their environmental impacts.
Developing nations and regions relying on natural resources for survival are the most vulnerable to the effects of climate change, and the United Nations has stated we have only until 2030 before “irreversible damage” sets in.
Ultimately, real change will require effort from all stakeholders in an organization, not just business leaders.,
Ad Law Access: New ESG Lawsuit Targets Aspirational Statements
Lawsuits regarding false or deceptive ESG claims are common, and the newest wave of lawsuits targets the aspirational and forward-looking statements many companies make in their sustainability reports.
In early June, the nonprofit Earth Island Institute filed a lawsuit against Coca-Cola for this very thing -- making statements about aims/goals/future action that can deceive consumers about the company’s actual impact and sustainability actions.
Representatives from NAVEX Global, Applied Materials, and PwC collaborated to discuss the relationship between ESG and ethics & compliance in a webcast.
The speakers discuss how ESG intersects with risk, ethics, and compliance, how corporate teams are incorporating ESG across their business, and how companies can act on ESG plans.
The EU’s European Central Bank (ECB) has a Guide to Fit and Proper Assessments that expects management bodies to consider the knowledge & experience of its members regarding climate and environmental risks.
While recently coming to focus, the concept of individual board member accountability is not new. The understanding is that ESG issues are financially material, and therefore consistent with fiduciary duties.
When embedding ESG at the board level, corporates should consider the reputational/commercial risk, litigation risk, and regulatory risk of its board members’ competencies.
U.S. lawmakers and regulators have signaled new rules for ESG disclosure, and for many companies, ESG policy is a roadmap for responsible business practices. As stakeholders and regulators increase their scrutiny, companies have responded by boosting their voluntary ESG policies and reporting.
Increasing ESG expectations have been compounded by recent events like the COVID-19 pandemic and social and racial justice movements. Companies will not be able to “check the box” on issues of diversity and inclusion, employee wellbeing, etc.
Lawmakers and agencies are also responding to the growing demand for ESG accountability by proposing new executive orders, committees and task forces, and impending regulations.
In addition to the ethical importance of sustainable business, studies also show that being identified as a “sustainable brand” attracts customers and improves a business’s bottom line. A few key steps in the implementation of a sustainability strategy include:
Defining sustainability for the business
Engaging staff and stakeholders
Setting clear, actionable goals
Establishing effective processes
Tracking and monitoring progress
Property Week: When it comes to ESG, focusing on ‘S’ and ‘G’ is vital
While larger firms have the resources to hire heads of sustainability to monitor their ESG score cards, it is important to note that significant impact comes not from the size of a company’s resource pool, but how well its resources are used to drive change.
The real estate industry is in a unique position to leverage the skills of its employees for good, making financial contributions and investments but also connecting people and organizations to support social impact ventures.
According to KPMG, the materiality assessment is a strategic business tool with uses beyond sustainability reporting because it highlights risks, opportunities, trends, and areas that are of the most interest to stakeholders. Materiality assessments can also show companies where they are creating or reducing value for society.
The basic steps in conducting a materiality assessment include:
Identifying internal and external stakeholders
Conducting initial stakeholder outreach
Identifying and prioritizing what to measure
Designing the materiality survey
Launching the survey and collecting insights
Converting results into action
ESG Disclosures, Standards, Rankings, and Reporting
The National Law Review: The Public Weighs In On How the SEC Should Regulate ESG Disclosures
The majority of the comments submitted during the SEC’s 90-day period for public comment on climate change disclosure, from large companies to investment firms, were supportive of the SEC’s plan to mandate disclosure for climate change risks.
Many comments focused on how the SEC could set up effective reporting standards without imposing undue burden on public companies (e.g., creating industry-specific rules). Many also encouraged the SEC to pull from existing ESG reporting frameworks.
Some comments warned against a “global” framework and the risk of aligning with international standards setters, which could stifle innovation.
There was some disagreement over disclosure logistics, specifically, whether to incorporate climate risk disclosure into existing filings or require a separate filing (the majority recommended the SEC make it a part of the Form 10-K).
Furthermore, some comments argued that the SEC mandating climate risk disclosure would be an overreach by the agency, and that the disclosure requirements would be burdensome and could potentially misinform investors.
Financial Times: Why we need a global ESG standard
A recent Fidelity survey found that while many companies report their ESG activities accurately, some are overselling/greenwashing, and there is no universally accepted reporting standard or ESG definitions.
The survey also found that North America has the highest proportion of companies presenting their ESG efforts in the best possible light (i.e., citing large percentage changes without context). U.S. companies also tend to make ambitious forward-looking statements that may take a long time to realize.
The survey found, surprisingly, that nearly half of Fidelity analysts think companies in Europe overpromote their ESG activities, as well. Companies also use resources to score highly on third-party rankings but never truly adopt ESG principles.
JD Supra: ESG Regulation Is Coming. Are You Ready?
Activists, regulators, and legislators are all beginning to consider regulating climate risk reporting on top of the already impending disclosure regulations. On June 16th, the House of Representatives passed the Corporate Governance Improvement and Investor Protection Act that, among other things, would require public companies to link their ESG metrics to their long-term business strategy.
The Act would also create a new Sustainable Finance Advisory Committee of the SEC. It is unlikely that the bill will pass as currently structured, but it shows legislative interest in ESG regulation.
The SEC, after its period of accepting public comment on climate change disclosure, will likely issue rules/standards for climate change reporting.
Financial Times: Top tech groups try to dilute ESG disclosure rules
Microsoft and Alphabet (which owns Google) have pushed back against calls to include ESG disclosures in regulatory filings, citing potential legal risks since the data are subject to more scrutiny than the disclosures currently required in 10k filings.
The companies argue that climate disclosures rely on estimates/assumptions with inherent uncertainty, companies need to be protected from liability and should publish separate climate reporting.
The resistance sets the companies up to clash with large asset managers like PIMCO and Invesco that want ESG information to be included in 10ks.
Critics note that Microsoft and Alphabet, who position their companies as sustainability leaders, should support mandatory ESG disclosure.
As ESG investing continues to increase at a rapid rate, the SEC has begun the process of disclosure rulemaking.
Financial Management: 6 ways to start the ESG reporting journey
Experts note that at some point, “every publicly listed organization will more than likely report some form of ESG information.”
ESG reporting needs to be effective and accurate, which means there needs to be internal control and agreement on the role of the board in overseeing it.
Many private companies have public company customers, so as pressure increases for public companies to report on ESG matters, private companies will also be held accountable.
While there are still no universally accepted standards, this year there has been progress toward a coherent sustainability reporting landscape.
Companies just starting along their ESG reporting journey should consider the following:
Understand what your company is already doing on sustainability
Evaluate how different sustainability standards would apply to your company
Look at your peers’ reports
Assess stakeholder ESG behaviors
Improve your ESG literacy
Don’t view sustainability as a cost
In May, the European Commission published draft rules for how corporates and financial institutions should report their alignment with the EU Taxonomy, and they are not easy to comprehend. Sustainalytics has clarified some of the key issues:
Implementation of the EU Taxonomy has been delayed by a year, but is still not aligned with financial institutions
Reporting for financial institutions would only include European large caps
Government bonds are entirely out of scope
Estimates appear to be no longer permitted
Europe may have reconsidered exporting its regulation to other countries, and the changes in the scope of application may also be to avoid corporates having to report under multiple taxonomies in the future.
The Financial Conduct Authority (FCA) released rules for extending TCFD climate disclosure rules to asset managers, life insurers, regulated pension providers, and equity issuers.
The rules aim to ensure that high-quality climate risk information is available throughout the investment chain, and they mark an expansion of the FCA rules released in December of 2020 that require TCFD-aligned reporting for UK premium listed commercial companies.
The new consultations are open for feedback until September 10, 2021, and the FCA plans to confirm its climate-related disclosure policy by the end of the year.
Forbes: Responsible Bondholders Welcome
Fixed-income instruments have been gaining the attention of ESG investors, as they place asset managers in a position to advocate for change. The global bond market is larger than the stock market but lack representation.
Credit investors tend to take a long-term view when evaluating issuers, and there is a great deal of required transparency in the market, which makes bonds good instruments for ESG investing.
Other fixed-income subsets also benefit from credit checks and ESG analyses -- “if the underlying issuer of collateral is exposed to structural ESG risks, then there is a broader risk overall.”
Bloomberg launched the Bloomberg Barclays MSCI Emerging Markets ESG Index Suite with 10 ESG indices, including the ESG Weighted Indices, SRI Indices, and Sustainability Indices.
As investor demand for ESG options continues to grow, Bloomberg and other firms are working to expand their offerings while also incorporating ESG data solutions to help investors weigh options.
Also covered in ESG Today: Bloomberg and MSCI Launch Suite of Emerging Markets Fixed Income ESG Indices
Chief Investment Officer: How Asset Owners Can Integrate ESG into Fixed Income
Investors in fixed-income instruments are already dealing with data that is far behind what is available for public equities, but this means that asset owners should start assessing how asset managers are incorporating sustainability into their fixed-income investments.
Some experts argue that instead of relying on third-party ESG raters, investors should judge assets based on their own knowledge of what a company is doing.
Corporate credit and green bonds have fairly straightforward ESG strategies to assess, but securitized credit has weak ESG integration, and more data is needed.
Private credit managers are leading the way in sustainability considerations by creating longer investment horizons and innovative asset classes.
Institutional Investor: ESG Has So Far Been a Rich World Phenomenon. But Emerging Markets Are Catching Up.
The COVID-19 pandemic has accelerated the adoption of ESG objectives (especially social) in emerging markets, which makes them a new and attractive option for ESG investors.
ESG is different in emerging markets, partially because of the “unwritten pact” between some private companies and the communities in which they operate. The companies often do their part to aid the poor countries they operate in. Investing in these companies can have a significant impact.
There are still ESG concerns in emerging markets, such as the inconsistency of disclosure and immature regulatory frameworks, and required ESG transparency varies by sector.
Last month, for the first time since January, the MSCI Emerging Markets Index outperformed the MSCI World Index, in no small part due to the increasing availability of high-growth companies in a wider variety of countries.
Though tied to sustainability KPIs, sustainability linked bonds come with no restrictions on how the funds can be used, unlike traditional “green” bonds. This flexibility makes them more attractive to a wider number of issuers.
Sectors like industrials and materials have been far more prominent in the sustainability linked bond market than in green bonds, and while the vast majority of sustainability linked bonds in 2020 were issued in Europe, Africa, and the Middle East, they are also gaining momentum in North American and Asia-Pacific.
On the investor side, general interest in the ESG financing market is also increasing. However, there is some skepticism over the “coupon step-up” for sustainability linked bonds, which imposes a penalty if the issuer fails to meet its established sustainability KPI, and this results in a monetary benefit for the investor.
Another issue is labeling inconsistency and the potential for greenwashing, as well as the concern over the credibility/robustness of sustainability targets.
MetLife has committed to originating $500 million in new impact investments by 2030, with 25% of investments allocated to addressing climate change, and other investments focusing on promoting the financial health of underserved people and communities.
The company has also committed to originating $20 billion in new green investments through MetLife Investment Manager by 2030.
Companies and Industries
Energy companies are under pressure from activists and shareholders to take ESG actions (specifically regarding climate change), and capital is flowing out of energy and natural resources toward industries like tech, financial services, and consumer products.
However, some experts note that increasing involvement and pressure on big oil and gas may have a greater impact than disinvesting. A new report from Bain notes that the relationship between investors and the energy and resource sector will likely shift toward collaboration to meet ESG targets.
Many companies in the industry still lack clear roadmaps for decarbonization, and to secure capital and meet targets, they will need to take measurable actions like linking executive compensation to ESG performance.
Bain’s report also explores the fact that new energy innovations will be required to meet net-zero carbon goals, and there are new markets where value can be created: hydrogen power, batteries, and smart automation.
Borneo Post: Palm oil’s tussle with ESG
Palm oil is the world’s most produced and traded edible oil, but the industry is often linked to issues like high greenhouse gas emissions, deforestation, and forced labor.
Despite the stigma, palm oil is actually the most efficient crop in terms of oil yield to land use, accounting for 35% of global vegetable oil production but only 10% of global land use (compared to soybean oil which accounts for 26% of global vegetable oil and 40% of global land use). Researchers argue that brands highlighting the exclusion of palm oil in their products are either greenwashing or are misinformed.
To boost its reputation and sustainability, Malaysia has developed a mandatory certification scheme for participants in the palm oil industry, and while education and compliance will take time, experts believe the industry is moving in the right direction.
The demand for “certified” palm oil is increasing across the globe, especially in Europe and North America, which is costly for producers, as certified palm oil only accounts for 19% of global production.
While farmers and plantations are making efforts, industry players have poor ESG exposure and visibility, and the most important areas for both action and disclosure/communication are greenhouse gas emissions, fire and haze, deforestation, and labor practices.
Business Standard: Only half of manufacturers on track for Paris Agreement goals: Capgemini
Currently, 20% of global manufacturing organizations have carbon neutrality goals and 40% are aiming for 100% renewable energy in their operations by 2030. Also, more than half of the organizations surveyed in a recent Capgemini report indicate that they are currently prioritizing the deployment of sustainability technologies.
Of the companies implementing sustainability initiatives, more than 80% have seen increases in their ESG ratings and more than 90% have seen a reduction in their greenhouse gas emissions.
Despite the apparent progress, only 11% of sustainability initiatives are actively being scaled across organizations, and only 20% of companies agree that sustainability is integrated into their manufacturing strategy.
BlackRock made a deal with Baringa Partners to incorporate the company’s climate change modeling technology into its Aladdin Climate module, ultimately bolstering BlackRock’s position in the ESG investing space.
The collaboration aims to improve climate change forecasting and the impacts on investing, as well as the effects of the transition away from a fossil fuel-based economy.
In turn, Baringa will have access to BlackRock’s Aladdin Climate tools for its own consulting business.
ING Group has closed a $33 million Green Incentive Loan with LMC aimed at improving property sustainability. The loan includes incentives for LMC to pursue green certification for its property, such as reduced interest margins.
The company believes it is one of the first times that a U.S. balance sheet lender has structured a green loan with clear financial incentives for the borrower to improve the sustainability of its real estate assets.
The foundations collaborated to establish a $1 billion platform focusing on distributed renewable energy and aiming to reduce one billion tons of greenhouse gas emissions and deliver clean, reliable power to more than 800 million people worldwide.
The platform will supply renewable energy from mini- and off-grid solutions (rather than centralized sources like power plants). This will allow efficient scaling and expansion of local renewable energy projects.
The acquisition is meant to represent an effort for JPMorgan to directly participate in the transition to a low-carbon economy and carbon offset markets (as this demand is expected to increase in the next several years).
All 150 Campbell Global employees will be retained, and the company manages more than 1.7 million acres of timberland worldwide, making JPMorgan a significant benefactor for forests around the world.
The Wall Street Journal: Biden Policies Would Help Unwind Destructive Forces of Inequality, Climate Change, Yellen Says
Treasury Secretary Janet Yellen has defended Biden’s proposed $6 trillion budget for FY22, calling for policies like paid family leave, modernizing infrastructure, emissions reduction, and affordable housing and education. Yellen notes that the private sector doesn’t invest enough in these areas to reverse the long-term, structural, economic challenges Americans are facing.
Republicans have pushed back and asked if the proposal will pile on more federal debt (which has increased during the pandemic), but the Biden Administration expects interest payments on the federal debt to remain below historic levels through the next decade.
The fiscal policy includes a “fairer tax code for a structurally sound economy,” and the U.S. will also continue working to get other countries to remove digital service taxes that affect U.S.-based companies operating overseas.
This week, Attorney General Maura Healey and eleven other attorneys general called on the SEC to require companies to disclose climate change financial risks, citing the need to protect residents and their savings.
Healey’s letter highlights existing economic damage as a result of climate-related events.
Last week, the U.S. House of Representatives passed the ESG Disclosure Simplification Act of 2021, which would, among other things, require the SEC to define “ESG metrics” to guide corporate reporting.
The bill would also require issuers to show a clear link between its ESG metrics and long-term business strategy.
The bill also notes that the SEC may incorporate any “internationally recognized, independent, multi-stakeholder environmental, social, and governance disclosure standards.”
While the passage of the bill is encouraging, it is important to note that it passed along partisan lines, and note one Republican representative voted in favor of it.