ESG Weekly News Update: March 10, 2023
General ESG News
Forbes: ESG Includes An ‘E’ And An ‘S’ -- So Let’s Act Like It
The principles of ESG and sustainability require the world to consider social-based risks as well as environmental-based ones. While the SEC’s proposed climate rules focus primarily on environmental factors, there is still a lack of consensus on what social factors to measure.
More than half of the UN Sustainable Development Goals (SDGs) deal with how humans interact with one another and how we ensure certain standards of living for all humans, but this link is sometimes overlooked.
Previous efforts have focused on natural conservation and biodiversity, but going forward, there will need to be more of a focus on environmental justice and climate equity – paying attention to the plight of communities disproportionately impacted by climate change.
The SEC, alone, cannot be responsible for developing the metrics, data sets, standards, and technology needed to measure and disclose all relevant ESG topics. The proposed rules are an important and necessary step, but they should serve as a challenge to champions of ESG and sustainability.
Sustainable Brands: How Costa Rica’s Decarbonization Plans Aim to Protect ‘Pura Vida’
Costa Rica ranks 61 out of 182 countries as highly exposed to climate change risks, and the changing climate will have a significant impact in the next 50 years. Costa Rica is set to experience average temperatures up to 6° Celsius warmer by 2070 and more unpredictable rainfall, which would affect crop yields and quality. The country may also experience lower worker productivity, the spread of tropical diseases, and the devastating effects of landslides.
Under former President Carlos Alvarado Quesada, Costa Rica is leading a quiet revolution in how it adapts to incoming climate changes and reduces greenhouse gases.
Over the last decade, Costa Rica had ambitious climate change mitigation goals, and its policies are catching up. Finance is also key. Costa Rica is the first country to benefit from the International Monetary Fund’s new Resilience and Sustainability Facility (RSF) that will help pay for the necessary reforms.
Forbes: Leveraging Digital Towards Improving Sustainability
Over the past several years, the green and digital transitions have been two of the most significant global business trends. Both need each other to be successful as digitalization is a way for a company to improve environmental performance.
Companies with a strong strategic focus on digital technologies tend to have better innovation and adaptability to changing market conditions. They also tend to use resources more efficiently, resulting in lower costs and less environmental impact.
Digital sustainability makes a positive impact on society, too. As companies become more sustainable and efficient, they encourage consumers to reduce their environmental impact, creating a more sustainable future for all. Companies can catalyze positive change in their wider ecosystems and down their entire value chain, which would ultimately contribute to a more sustainable future for society.
Bloomberg: A Landmark UN Treaty Is Poised to Curb Exploitation of the Ocean
UN members have reached an agreement on the wording of a treaty to protect marine biodiversity, and delegates will reconvene at a later date to formally adopt the text of the treaty. Then, the treaty will go to the UN General Assembly for approval.
The treaty allows for the establishment of marine protected areas on the high seas (where fishing can be banned), but it does not regulate overfishing. It also requires environmental impact assessments for potentially harmful activities.
Treaty talks have been fractured along a “North/South fault line” -- small island states and developing countries are dependent on the ocean and are pressing for help in dealing with the loss of ocean biodiversity caused by developed nations.
The wording of the treaty has not yet been released, but it has been noted that various provisions of the treaty will be decided by majority vote (rather than consensus), to avoid serious delays or halts by a single country.
KnowESG: ESG Software and Management in High Demand: IDC Survey
According to a new survey from the International Data Corporation (IDC), companies with advanced ESG strategies are increasingly adopting software solutions to help address their reporting and data management needs. This signifies a shift toward independent ESG program management and a decreasing reliance on service providers and consultants.
ESG software adoption has been primarily driven by data and risk management needs and has been seen more in companies with high levels of ESG maturity. The top four priorities for software adoption across industries, according to the report, are improved compliance, improved financial performance, improved brand perception/customer loyalty, and improved operational efficiency.
Diversity, Equity, and Inclusion
GreenBiz: We can’t fight climate change without Black voters
Research from the Pew Research Center, Yale, and exit polls of 2022 midterm voters reveals that Black political interests are more closely aligned with fighting climate change. Black individuals are more likely to be “alarmed” or “concerned” about global warming than those who identify as white.
However, with aspects of the Voting Rights Act currently up for debate by the Supreme Court, and without strong voting protection laws and mechanisms, we risk losing representation of these interests.
The article’s author argues, “Dampening Black voter turnout thwarts our ability to use the fundamental tools of our democracy to develop the systemic institutional change we’ll need to build a more sustainable, equitable world.”
Recent Supreme Court decisions, such as Brnovich v. Democratic National Committee, have been slowly eroding voting rights protections. This decision in 2021 makes it more difficult for voting rights plaintiffs to challenge racially discriminatory voting laws in court.
Additionally, proposed changes to voter ID laws and polling location consolidation, as well as restrictions on Sunday voting, have already been especially harmful to the turnout of racial and ethnic minorities.
Sustainability professionals should be particularly supportive of collective action to increase voter participation in marginalized communities.
ESG Disclosures, Standards, Rankings, and Reporting
KnowESG: First Court Case Alleging Greenwashing Filed by ASIC
The Australian Securities & Investments Commission (ASIC) has initiated its first legal action regarding alleged greenwashing behavior against Mercer Superannuation. The specific allegations are about the potentially deceptive assertions regarding the environmentally sustainable properties of certain investment options.
ASIC alleges that members who invested in certain ‘Sustainable Plus’ options had holdings in companies associated with excluded industries, such as thermal coal, carbon-heavy fossil fuels, gambling, and alcohol.
The aspect of greenwashing that applies here, according to ASIC, is that Mercer made false claims and did things that could confuse the public.
KnowESG: The Evolution of ESG: Mandatory Reporting
Mandatory reporting of audited details on resource use flows is the first step in establishing clear data to use as references for sustainability claims.
The EU passed the Corporate Sustainability Reporting Directive (CSRD), which governs ESG reporting across a wide spectrum of public and private organizations, to establish comprehensive, audited, public, and comparative reporting procedures. The CSRD replaces and expands on the Non-Financial Reporting Directive (NFRD), and nearly 50,000 EU corporations must disclose their environmental and climate impact according to the specific reporting requirements.
The CSRD holds “double materiality” as companies will be required to disclose both the substantial effects on people and the environment and the financial impact that ESG concerns have on their operations.
ESG Today: Over Half of Companies Potentially Greenwashing Says Australia Competition Regulator
The Australian Competition and Consumer Commission (ACCC) said it will be investigating companies over potential greenwashing after it conducted a study that found concerning sustainability-related claims for more than half (57%) of the 247 businesses reviewed.
By sector, the highest proportion of concerning claims was in the cosmetics, clothing, and footwear sector, as well as the food and drink sector.
In addition to the investigations and potential enforcement actions, the ACCC also plans to conduct educational activities with businesses to help improve the integrity of sustainability claims.
Investment Trends
Bloomberg: ESG Funds Hit by ‘Staggering’ Inflows Face Issuance Freeze
According to lawyers and analysts advising the industry in Europe, Article 9 funds have drawn in too much client cash to handle, especially as restrictions tighten and the pool of Article 9 products continues to shrink. Asset managers removed the label from 40% of the market in Q4 of 2022, alone.
Managers are avoiding Article 9 due to its level of scrutiny and the possibility of greenwashing accusations, but clients are still drawn to the fund class.
An analysis into Article 9 funds found that they tend to favor large corporations, as well as those that score well on climate metrics (giving less weight to topics like human rights).
The industry is still waiting for further regulatory clarification, so some asset managers may target Article 9 designations in the future, but some experts warn that there is not time to simply let the coming consultation run its course. They argue that the EU should revert to previous legislation while they resolve issues with the Sustainable Finance Disclosure Regulation (SFDR).
Forbes: Debt Financed ESG
Accounting for 78% of total financing in non-financial companies, debt capital markets are more dominant in the U.S. whereas equity issuance barely accounts for 14% on average.
Tax savings are benefits of debt as interest cost is deductible for tax purposes, but dividends to shareholders come out of after-tax profits. Conversely, too much debt increases the probability of financial distress or makes managers risk averse as they under-invest in the company's future.
A company’s asset structure in corporate America is largely financed by debt, which is substantially cheaper than equity financing a project. Another advantage is the ability of financiers to write detailed covenants or conditions that specify what management can and cannot do with the capital received from financiers.
Debt-financed ESG makes more sense when the debt is of longer duration since ESG issues usually manifest in the longer run.
Reuters: U.S. Congress votes to block ESG investing, Biden veto expected
Republicans cleared a bill through Congress that would prevent pension fund managers from basing investment decisions on factors like ESG and climate change, and President Biden is expected to veto the measure.
The resolution overturns a Labor Department rule that makes it easier for fund managers to consider non-financial factors in investment decisions, and it highlighted Republicans’ willingness to oppose even their allies in corporate America who they consider to be adopting “woke” practices.
According to the Republicans, the rule would politicize investing by allowing plan managers to pursue ‘liberal’ causes and agendas, which would then hurt performance. The party argues their resolution would prevent fund managers from making ESG factors the primary consideration in investment decisions; it would make financial returns the primary criterion.
Companies and Industries
Bloomberg: Billion-Dollar Power Lines Finally Inching Ahead to Help US Grids
The biggest obstacle to the U.S. achieving a clean power grid is the current lack of transmission lines, and for more than a decade, multibillion-dollar power line projects have been delayed and halted for a number of reasons. Finally, several of these projects are progressing.
While there’s no guarantee that the next generation of power lines won’t run into the same obstacles that existing projects are facing, they are advancing at a time when there is an increasing understanding that there is an urgent need to move toward both cleaner energy and more durable electric systems.
Rob Gramlich, founder of Grid Strategies, LLC, has a new mantra -- “There is no transition without transmission.”
The Inflation Reduction Act is serving as a catalyst for some power line projects to get permitted and approved, as it helps make building transmission a top priority for renewable industries and incentivizes solar and wind projects.
KnowESG: Yamaha Adopts Green Aluminum for Motorcycles
Yamaha has signed an agreement with a supplier to procure “green aluminum,” marking the first time the material is being used in Japanese motorcycles.
Green aluminum is aluminum that has been refined using renewable energy sources, which results in lower CO2 emissions during production. Since aluminum typically accounts for about 12-31% of the total weight of a motorcycle, the adoption of green aluminum is a good approach for reducing the overall emissions from the product manufacturing stage.
Yamaha has also been promoting the use of recycled aluminum, which now accounts for about 80% of the company’s total aluminum usage. The green aluminum will be used for the parts that cannot be made using recycled materials and will help the company meet its goal of achieving carbon neutrality across its entire supply chain by 2050.
Universal Hydrogen is a startup focused on aviation and building a hydrogen logistics network. Last week, Universal Hydrogen completed a test flight of a 40-passenger regional airliner using hydrogen fuel cell propulsion. The test was the largest-ever hydrogen fuel cell-powered airplane to fly and the largest airplane to cruise principally on hydrogen.
The company is backed by several high-profile strategic investors as well as major hydrogen producers and aircraft lessors.
The aviation industry is a significant source of greenhouse gas emissions. Hydrogen may be a more promising long-term solution with its energy attributes and potential to be produced through carbon-free methods.
ESG Today: Climate Tech Startup BlocPower Raises $150 Million to Expand Low Income Building Decarbonization
BlocPower has announced that it raised more than $150 million, with proceeds going toward financing the development of its platform that focuses on the decarbonization of buildings in low-income communities.
The company also runs a green workforce development initiative called Civilian Climate Corps that is focused on training and hiring at-risk individuals in vulnerable communities.
ESG Today: RBC Ties Incentive Comp for CEO, Top Execs to Climate Strategy
Royal Bank of Canada (RBC) has announced its plans to include climate considerations in its medium- and long-term incentive plans for top executives. The incentives will relate to the progress made against the priorities in the company’s Climate Blueprint strategy.
Objectives include “helping clients as they transition to net zero” and “advancing net-zero leadership in our own operations,” as well as a commitment to reducing GHG emissions by 70% by 2025 and achieving net zero lending by 2050.
Government Policy
Bloomberg: UK Regulator Bans Lufthansa Ad Over Misleading Climate Claims
The UK’s Advertising Standards Authority (ASA) recently banned Lufthansa from using an ad that suggests the airline is protecting the planet and urged the airline not to mislead consumers about air travel and its impact on the climate. The ASA stated, “currently no environmental initiatives or commercially viable technologies in the aviation industry which would substantiate the absolute green claim” that Lufthansa is protecting the world’s future.
European regulators are increasingly cracking down on corporate “greenwashing.” The EU is considering legislation to ensure promises and claims are supported by evidence of action.
Aviation currently accounts for around 2% of global emissions and will likely reach 22% by 2050. Lufthansa initiated a “Green Fares” option for travelers, which adds a surcharge to purchase sustainable aviation fuels and carbon offsets. Lufthansa plans to reduce carbon emissions by buying newer, more efficient planes, making alternative fuel purchases, and utilizing carbon offsets. However, offsets for air travel have faced criticism.
Reuters: China plans to create new regulator for data governance – WSJ
China is planning to create a new government agency to centralize the management of the country’s data stores, in an attempt to address data security practices and streamline regulatory structures. The new agency will be discussed and approved at the National People’s Congress next week.
The new national data bureau would set and enforce rules for the collection and sharing of data by businesses, and it will decide whether or not multinational companies can export data generated by their operations.