Ama Dablam on the way to Everest Base Camp, Nepal
General ESG News
ESG is becoming a core factor in company decision-making processes, and insurers are even using negative screening for investment & underwriting in oil, coal, and gas.
In the U.S., the NY Department of Financial Service (NYDFS) and National Association of Insurance Commissioners (NAIC) are setting frameworks, and the NYDFS is expected to release its ESG guidelines this year.
The NAIC Climate and Resiliency Task Force is working on a Climate Risk Disclosure survey.
Companies are increasingly addressing ESG issues, but it’s difficult to determine if there are genuine commitments/efforts or if these are empty statements (i.e., greenwashing).
Greenwashing can also refer to only making ESG-related changes if they reduce costs or outsourcing production processes to “hide” carbon footprints.
Europe leads the way in regulating ESG claims, and portfolio managers are expected to apply safeguards to determine companies’ seriousness about ESG claims by the end of 2021.
Clients across all industries are demanding more accountability in the CSR + ESG space, and it is permanently changing investment priorities, shareholder values, etc.
In 2021 and beyond, companies will need to address investor expectations, employee demands, community needs, and consumer feedback to avoid both legal and reputational risks.
Impact Alpha: Greening sovereign debt to tackle converging crises
The “Nature and Climate Sovereign Bond Facility” was proposed by Finance for Biodiversity to create nature-performance bonds and other instruments to align with environmental outcomes.
This tool could also help low-income countries restructure their loans from the pandemic-induced debt crisis -- aligning sovereign debt relief with climate solutions.
Investor interest in green investments has grown, but the sovereign debt market has been slow to integrate ESG factors.
ESG Disclosures, Standards, Rankings, and Reporting
Finextra: The Future of Pricing ESG Risk
The current lack of transparency and mandatory ESG reporting make it difficult to price risk accurately, but the rise of digital platforms and the pervasiveness of issues like climate change will likely lead to more mandatory reporting and more easily accessible data.
Incentivizing collaboration between business owners and their supply chains is one way to facilitate the accessibility of data collection tools and reporting.
Gaining credibility in the marketplace requires businesses to be genuine and strategic in their ESG efforts.
Four main events in 2020 caused a permanent shift in investment priorities: COVI-19 pandemic, economic crisis, global racial justice movement, intense weather events.
An RBC Wealth Management study in the U.S., found that female clients are almost twice as likely to prioritize ESG factors in their policies and investment decisions, while male clients are more likely to prioritize financial performance.
Wall Street Journal: Tidal Wave of ESG Funds Brings Profit to Wall Street
ESG-focused funds have significantly higher fees than standard ETFs, which leads to revenue possibilities for large firms, despite the fact that the funds aren’t actually more expensive to manage.
Investors are driving the demand (either out of genuine concern or hedging), and a record number of sustainability-focused ETFs were launched last year.
Long-term returns aren’t certain with these funds, though recent returns have been tied to the fact that many major ESG funds have a high number of technology stocks, which have been outperforming.
On 3/10/21, the DOL announced that it will not enforce the recent regulations that deter retirement fund managers from selecting ESG investments, and there will likely be further guidance to support such investments.
These regulations would create the perception that including ESG factors in investment planning puts fiduciaries at risk. Although they’re not being upheld, the regulations do still pose a litigation risk
The DOL has stated that it intends to conduct more stakeholder outreach to establish more “ESG-friendly” investment rules.
LIOR Global Partners plans to identify directional, relative value, and thematic investment opportunities to generate absolute returns for the ESG-focused fund. The founders committed to distributing 10% of net profits to charity each year.
The fund creators stress the importance of global macro in delivering positive returns despite market volatility, and incorporating ESG into the investment process can further reduce risk over time.
The ESG fund uses Sustainalytics data, with the aim of outperforming the ESG score of the fund’s asset allocation.
Environment + Energy Leader: The Center for ESG and Sustainable Investing Launched by AIF Institute
The Center will launch this year to provide research in key ESG focus areas across the public and private sectors, through the lens of risk management and investment opportunity.
The center will include innovation labs, where investors can engage with AIF Institute faculty to develop education to help meet changing portfolio needs.
Impact investing is not new, but its ability to generate returns while creating meaningful change is a recent development.
Impact investing differs from ESG investing and socially responsible investing because it is not just for risk management or financial returns, but it is meant to promote investment in companies that are adding societal value.
Vanguard currently lags behind other major firms in attracting ESG money; it recently created an ESG product category team.
Money in ESG investing has and continues to increase, and most new ESG funds are ETFs.
Vanguard mostly uses exclusionary screening for its ESG funds (due to inconsistent and low-quality data). The firm is doing more research into ESG strategies, and may be inclined to launch more funds like the Wellington-advised Global ESG Stock Fund, which adopts a more inclusionary approach.
The Economist: Regulators want firms to own up to climate risks
The SEC has created an ESG task force and appointed a climate tsar, and it may introduce rules forcing firms to disclose climate change risks.
Many financial firms are supporting TCFD’s reporting standard, though currently only 7% of big firms disclose the climate-based scenario analysis.
However, until reporting is mandatory, firms risk scaring off investors by voluntarily reporting on climate risks.
March 10, 2021 marks the introduction of the first level of the Sustainable Finance Disclosure Regulation (SDFR) for firms wanting to promote products to European investors.
Main focuses of the regulation include disclosure obligations, combating “greenwashing,” fund classification as solely focusing on ESG or simply promoting ESG, and making all necessary actions/document revisions by the 3/10/2021 deadline.
The International Finance Corporation (IFC) and Global impact Investing Network (GIIN) together launched the Joint Impact Indicators (JII) to help impact investors measure and report on investment activities.
The release of clear, common indicators is meant to promote the market for impact investing and is the first step toward identifying a core set of indicators for measuring and reporting all impact investors.
Goldman Sachs plans to use Moody’s Sovereign Climate Risk Scores to evaluate sovereign risk, combined with its own proprietary Sovereign ESG framework. The scores are the only known dataset matching physical climate risk to population location, GDP, and agriculture.
The scores will help institutions price climate risk in sovereign bonds, as well as help direct financing toward climate adaptation and resilience.
Companies and Industries
The solution is built on the Enablon cloud software and provides organizations with reporting capabilities that align with most of the relevant frameworks.
The solution focuses on enhanced disclosure content (with updated indicators from the major frameworks), climate risk (with a risk management module aligned with TCFD), and integrating leading ESG practices (with issues tracking, stakeholder engagement, and materiality assessment capabilities).
The project is expected to span more than 1,200 miles of CO2 gathering and transportation pipelines across the midwestern U.S., and the eventual potential to sequester up to eight million metric tons of CO2 per year.
Navigator is expected to lead the construction and operations, and Valero will be an anchor shipper. The pipeline is expected to begin operation in late 2024.
Nike launched its Purpose 2025 Targets, and it will link executive compensation to the company’s performance on ESG goals.
2025 targets span the areas of DEI, pay equity, labor practices, health and safety in the supply chain, community investment, and climate and environmental commitments.
Nike will also be aligning with Science Based Targets and the UN Sustainable Development Goals (SDGs)
The collaboration aims to help asset managers meet growing regulator and investor demands for greater ESG fund transparency.
Linedata will use the Arabesque S-Ray technology to integrate sustainability data for more than 8,000 of the largest global companies into its portfolio, and it will enable users to score ESG performance.
Canada’s six largest banks have added ESG components to CEO compensation frameworks (compared to just 9% of the 2,684 companies in the FTSE All World Index that have done so). As a country, Canada also has the second highest percentage of companies with compensation tied to ESG criteria (16%).
This is meant to increase accountability and measurable action, and it enables shareholders to engage with boards.
Some companies, such as the Canadian Imperial Bank of Commerce (CIBC) have even tied ESG measures to compensation at other employee levels.
Yahoo! Finance: BlackRock to Press Companies on Human Rights and Nature
BlackRock has stated that it plans to request companies to provide robust disclosures related to human rights, environmental sustainability, and governance.
The firm will place particular focus on deforestation, water and energy usage, as well as supply chain impact on communities.
Criticisms of BlackRock’s actions include the firm’s lack of transparent expectations, timelines, or consequences for company inaction.
The formation of the council follows the firm’s acquisition of Legg Mason, which has resulted in an extensive network of ESG leaders within the industry.
The council will connect ESG leaders across the firm’s 19 investment managers to guide best practices, with a focus on data requirements, transparency, and reporting.
The task force will be led by Kelly L. Gibson (the Acting Deputy Director of Enforcement) and will have 22 members.
The task force will coordinate efforts between the Division of Enforcement, the Office of the Whistleblower, and other agency units.
The initial focus of the task force will be to identify material gaps or misstatements in climate risk disclosures, as well as to analyze compliance issues.
InvestmentNews: DOL won’t enforce Trump-era ESG rules
The DOL plans to take a hands-off approach to the rules making it difficult for retirement funds to select sustainable investments, and it will likely publish further guidance on the rules.
This points to the clear trend recognizing that ESG is a material risk and opportunity, and is tied to financial performance and future returns.
The new Climate and ESG Task Force in the SEC Division of Enforcement will be aimed at detecting ESG-related misconduct as investors make the conscious decision to align investments with ESG priorities.
The SEC also appointed Satyam Khanna as a Senior Policy Advisor for CLimate and ESG -- another signal that the SEC plans to take a more active role in tackling ESG issues.
However, it’s important to note that the task force will be limited to enforcing existing disclosure requirements, not creating new disclosures.