ESG Weekly News Update: March 12, 2021
General ESG News
The COVID-19 pandemic has led to a renewed interest in resiliency and business continuity, not just agility.
Current and upcoming changes investors can expect include increased ESG disclosure and goal-setting, a focus on regulatory compliance (especially in the supply chain), and potentially even litigation related to climate change regulation.
The biggest impediment to risk management is the “siloing” of information within a company -- leaders need to be open to dissemination, discussion, and an “all-hands-on-deck” approach to preparing for the future
Harvard Business Review: An ESG Reckoning is Coming
In recent years, the publicity and “buzz” around ESG efforts has outweighed actual performance and results, which erodes the public’s trust and sparks backlash against reform.
Three main accountability measures recommended by the authors are: 1) requiring companies to report on their ESG impact with clear & standardized metrics, 2) urging consumers, investors, and employees to push for accountability, and 3) encouraging companies to become certified as benefit corporations.
Public support for capitalism in the U.S. is on the decline, and companies that don’t adapt will eventually find themselves at odds with their target audiences.
ESG Disclosures, Standards, Rankings, and Reporting
A new study shows that confusion around firms’ ESG practices/impacts are causing them to lose investors, despite more money than ever being funneled into ESG investing.
One major source of confusion is disagreement between ratings platforms, which can lead to higher market premium, lower investor demand, and lower company share prices (thereby limiting companies’ ability to make further progress toward ESG goals).
Environment + Energy Leader: Global ESG Study Shows Miserable Environmental Transparency for Dow Jones Companies
Results from a new GEM survey show that `9 of the 30 companies in the DJIA fell in the bottom 50% of 140 companies analyzed worldwide for non-financial ESG reporting. Four U.S. companies in the bottom five rankings are McDonald’s, JP Morgan Chase, Honeywell, and Microsoft.
Only Walgreens received a “passing grade” for its sustainability report, and 23 of the 30 companies received what would be equivalent to an “F.”
The survey involved a GEM proprietary analysis that evaluated the comprehensibility, transparency, measurability, comparability, timeliness, adequacy, and reliability of the companies’ ESG reporting.
The IFRS has unveiled details about the direction of the new board (consultations about which took place late-2020). The board would focus on material information for investors, lenders, and creditors, and would initially focus on climate-related reporting.
The board would build on existing frameworks like TCFD and ally with standard-setters from key jurisdictions to create a globally consistent reporting baseline.
ESG Today: SIX Launches Gender Equality Index
SIX launched the SPI Gender Equality Index to track Swiss entities based on exposure to gender equality.
Components are selected from the largest 100 companies in the Swiss Performance Index (SPI) and must have between 20% and 80% women in the BoD and between 15% and 85% women in the management board.
In 2020, active ETFs hit a record high in assets, as did ESG ETFs (i.e., funds that select based on companies’ ESG practices), and the growth is expected to continue.
Some ESG funds focus solely on ESG criteria, expecting higher returns based on improved ESG performance, while other funds also consider factors like price-to-earnings ratios.
Portfolio managers’ ESG policies can have a big impact on fund performance, with the opportunity to outperform comparable funds that are not based on ESG criteria (or vice versa).
Financial Advisor: SEC Bulletin Warns ESG Investors to Look Before They Leap
The recently released SEC investor bulletin points out that just because a fund is ESG-oriented does not mean its performance will exceed comparable funds, or even match it. ESG funds also tend to have higher expense ratios.
Some factors in ESG investing are not defined by federal securities law and can be subjective. The SEC advises investors to determine the types and weight of criteria (both ESG and non-ESG) used in securities selection before investing in an ESG fund, as well as considering how the fund’s ESG practices impact the performance and risk of the fund
Currently, 20 of the top 50 asset managers use data from at least four external ESG research/ratings providers, while the other 30 have developed proprietary ratings systems; pressure is increasing for companies to report on ESG metrics and fill out agency questionnaires
43 of the top 50 asset managers support TCFD, 23 support SASB, 36 are members of Climate Action 100+, and nine are part of the Net Zero Asset Managers Initiative.
There has been a shift away from reliance on the GRI toward targeted material reporting frameworks; fortunately, there is some overlap between many of the major frameworks.
Immediate actions companies can take include mapping their current disclosures to TCFD and SASB standards and identify gaps in reporting.
The Asset: Breaking the ESG myths
ESG funds are not necessarily “ethical” funds, and funds that invest in things like renewable energy are not necessarily ESG funds.
Responsible investing and sustainable investing are generally synonymous in terms of ESG considerations, while impact investing is specifically focused on investing in companies with products designed to tackle an underserved need.
It is currently difficult to compare ESG funds across standard criteria (especially across markets), but governments and regulators are working to address this problem.
The government is currently looking to scale back previous ESG policies that make it difficult for 401(k) plans to invest in EGS-oriented funds.
Lobbyists and money managers have been actively pushing the Biden administration to review this policy -- it was flagged for review in January.
Institutional Investor: ESG Index Funds Are Outperforming (Mostly)
Morningstar’s ESG-screened indexes outperformed in 2020 over the last five years (75% beat 2020 benchmarks), and offered more downside protection (91% lost less than their broad market equivalents during downturns in the past five years).
ESG screens have been more successful outside the U.S., while the U.S. sustainability index underperformed in 2020 (but was still less risky than the larger market).
Renewable energy indexes have sharply outperformed in the last year, and Morningstar’s findings indicate that the overall outperformance in the indexes is not simply due to sector bias.
The materiality of ESG investing is established by the fact that ESG-compliant companies have outperformed S&P 500 index members, on average. Additionally, ESG metrics are more reliable indicators of a company’s future earnings than conventional financial ratio analyses.
The current state of the global environment poses an opportunity for organizations to mobilize resources for ESG initiatives, specifically aligning with UN Sustainability Targets.
Investment in renewables has yielded significant returns; companies with strong human rights and safety policies have seen a boost in output -- ESG compliance and investing has multifold benefits.
Investor demand for ESG funds has grown in recent years, and the rule issued in October requires employers to only consider fund risk and return factors when selecting 401(k) investment options (i.e., not ESG factors).
The Labor Department also explicitly forbids employers from automatically enrolling workers into ESG-oriented funds.
Money managers are lobbying the Biden administration to review the rule, eliminate it, and/or choose not to enforce it. The rule was placed under review in January.
Cevian notes that many companies claiming to set ESG targets were merely “box checking” and few display a proper link between ESG performance and executive pay.
Cevian plans to incentivize management teams to embrace ESG considerations by urging incorporation into pay plans, and is requesting proposals in time for annual meetings in 2022.
Of the top 50 global asset managers, 90% clearly disclose their approach to integrating ESG factors into fixed income, 60% have their own internal ESG ratings, 83% are TCFD signatories, 54% are SASB supporters, and 40% disclose their ESG engagements with companies.
SquareWell has created a dedicated ESG Research team to create ESG strategies for stakeholders.
The Wall Street Journal: Climate Change Emerges as a Compliance Focus for SEC
The SEC plans to boost examinations of fund managers that claim to focus on ESG funds and focus on gaps, such as funds claiming ESG focus but that invest mostly in polluting industries.
The SEC will also be checking on how ESG funds vote on environmental matters, and can order such funds to fix compliance deficiencies.
Regulators are currently working on new guidelines for how companies should discuss climate-change-related risks; the new agency chairman Gary Gensler plans to enforce these efforts
ESG bonds can have project-based structures or target-based structures, and they are gaining attention in financial markets from both companies and investors.
Green bonds/climate bonds require proceeds to be spent on ESG projects with associated reporting requirements (which can be burdensome), and most target climate change mitigation and adaptation.
Sustainability-linked bonds (SLBs) have increased in popularity just over the past year due to their more flexible reporting requirements, and that they can be used for any general corporate purpose.
Issuers commit to future improvements in sustainability outcomes within a specified time frame.
Official Monetary and Financial Institutions Forum: Biden impact on ESG investing will go deeper than climate
Biden’s executive order empowered all regulators to ensure alignment with his overall climate agenda, paving the way for the rollback of constraints on lending criteria and investing that make it difficult to incorporate ESG criteria into selections.
Change will most likely not come through direct regulatory intervention, but will likely produce guidelines and rankings and lessen the regulatory burden for ESG choices.
Biden will likely encourage a deepening of the ESG marketplace beyond just climate-related issues, which may even result in a mismatch in supply and demand of SEG assets in the U.S. (temporarily).
About 79% of Asia-Pacific investors increased their ESG investments in response to COVID-19 (compared to 77% globally), and 57% expect to significantly incorporate ESG issues into their investment decision-making process in 2021. 50% currently consider climate change metrics in decision-making (compared to 42% globally).
Other drivers include the increase in values-based investing, a generational shift, and the increasingly favorable economics of investing in renewables.
China remains the world’s largest GHG emitter, but has pledged to become carbon neutral by 2060; Japan and South Korea have since followed suit.
The Net Zero Investment Framework aims to guide asset owners and managers to align investments with net zero emissions; 36 investors are currently using the Framework.
The Framework helps investors decarbonize their portfolios and increase their investment in climate solutions.
The Net Zero Asset Owners Commitment outlines specific actions for owners to align their portfolios with Paris Agreement targets.
The ESG fund ratings will allow Simfund users to evaluate the performance of equity and bond funds across major ESG themes. The tool uses 1,000 data factors per fund and includes analytics ranging from aggregated ratings/scores to more detailed carbon intensity analyses.
The program is expected to mobilize 400 billion EUR from 2021 to 2027 for sustainable investment, innovation, and job creation in Europe.
At least 30% of EU funds will be spent on climate objectives by 2027; the investment allotment for policy objectives include 38% for sustainable infrastructure, 25% for research, innovation, & digitalization, 26% to SME, and 11% to social and development skills.
Over five years, proceeds from the bond will be allocated toward micro, small, and medium-sized women-owned businesses in Canada (these have been among the hardest hit by COVID-19 related closures).
The bond is part of BMO’s Sustainable Financing Framework, which defines the eligible criteria for proceeds from sustainable finance issues
The Wall Street Journal: More ESG Shareholder Proposals Could Reach Ballots Under New SEC Leadership
Since the Biden administration has made climate change and DE&I issues more of a priority, the regulator could enable more shareholder resolution proposals to reach ballots for stockholder voting.
The SEC currently doesn’t block proposals, but it does allow companies to leave issues off ballots with “no-action” letters, meaning companies are not forced to address important issues.
The new SEC chairman Gary Gensler supports more SEC guidance on climate change disclosures (as these issues are commonly left off of ballots), and the SEC will likely be issuing fewer no-action letters in the future (meaning fewer resolutions will be thrown out).
Companies and Industries
Companies in “heavy” industries are turning to AI, IoT, and other digital solutions to improve equipment energy efficiency, predict failures (a major source of GHG emissions for oil & gas companies), improve safety, and minimize travel.
Companies are also increasingly using advanced technology to create ESG dashboards to collect and report data, thereby enhancing their ESG messaging.
Climate Solutions products are aimed at providing market participants with enhanced risk measurement evaluation tools, incorporating physical & transition risk into economic models.
The suite contains risk assessment for thousands of companies, on-demand scoring for listed and unlisted companies, TCFD reporting analytics, long-term Climate Risk scenarios, tools for credit impact analysis, and more.
Journal of Accountancy: New SEC enforcement task force to focus on climate, ESG compliance
The SEC is creating a Climate and ESG Task Force in the Division of Enforcement to identify initiatives, find gaps in disclosure, and analyze compliance issues and whistleblower complaints on SEG-related issues.