ESG Weekly News Update: March 26, 2021
General ESG News
Corporations have made progress in improving their ESG communications, but the authenticity behind ESG messaging is difficult to substantiate.
The focus is now shifting away from simply communicating ESG policies, and toward accountability / framework standardization.
New SEC/government regulation may also be forthcoming to address ESG reporting for investors, and it is likely that there will also be increased self-regulation within industries.
3BL CSRWire: Black Lives Matter & Business -- Report
The UN Global Compact Network UK issued a briefing explaining the steps businesses can take to be anti-racist and promote the BLM movement, including common challenges, practical actions, and resources for combating systemic racism.
Environment + Energy Leader: Ready or Not, the Pandemic Informed ESG Trends for 2021, Including Stronger Board Management
Current and growing ESG trends identified by S&P Global are increasing diversity, climate change readiness, board effectiveness, shareholder activism, and government regulation.
Boards are facing pressure of post-pandemic economic recovery as well as addressing societal challenges/systemic crises highlighted in 2020 (especially climate change).
CSOs are broadening their skill sets to adjust to changes in corporate ESG driven by consumers, regulators and investors; weak ESG performance can have a direct negative impact on financial risks and funding costs.
CSOs are no longer the “sole owners” of ESG in a company -- directives are permeating all levels and other C-suite positions, and the CSO role is evolving from a public relations focus to a strategic focus while working more closely with finance departments.
CSOs are working to establish: standard ESG criteria, a control framework, a global operating model, technological enablement, and a culture shift toward ESG at their companies.
Climate protests occurred in 68 countries on March 19 (organized by Fridays for Future); the latest campaign highlights a new scientific framework for evaluating whether companies’ net-zero emissions targets are impactful or “empty.”
Scientists and activists argue that meaningful targets should have a clear scope (i.e., what gases are included, what activities are covered, and a set timelines), they should be fair and comparable across industries and companies, and there should be a clear roadmap to the target.
One particular protest in the Philippines on 3/19 targeted the discrepancies between the bank Standard Chartered’s climate goals and its actions.
Supply & Demand Chain Executive: Procurement: The Secret Weapon in the Global Fight Against Climate Change
Historically, CSR policies did not extend to sourcing, and procurement teams’ decisions were primarily cost-driven; however, this is shifting with the focus on supply chain/Scope 3 emissions.
Climate is a macro-level threat to business health, and research on economic fallout from the COVID-19 pandemic shows that companies with a sustainability emphasis have performed better than their peers.
Customers seeking out sustainably-sourced products are generally willing to pay more for them, and improving environmental performance can have other financial benefits for a company -- procurement teams can use sustainability initiatives to ultimately boost their bottom-lines.
Companies need to set clear ESG goals, assess all aspects of their operations, establish priorities, incentivize sustainable sourcing, work with suppliers to help them meet their own sustainability goals, and promote an enterprise-wide culture of sustainability.
Martin Haese, CEO of Business SA, explains that ESG policies are already having an impact and are primarily being driven by customers (not government), and it’s becoming increasingly important for smaller businesses to address ESG issues.
Nearly 90% of millennial investors are interested in pursuing investments that align with their values, so ESG policies will increase in importance as the new generation of business leaders enters.
Although ESG initiatives can require an initial investment, the changes can end up saving businesses money in the long-term while simultaneously decreasing carbon footprint and making the business more attractive to investors.
ESG Today: SEC Launches Climate and ESG Webpage
The new page highlights the “all-agency” approach to addressing investor demand for climate and ESG disclosure.
The page features several current issues under SEC consideration, the recent request for public commentary, an educational bulletin, and other announcements, such as the launch of the Climate and ESG Task Force.
ESG Disclosures, Standards, Rankings, and Reporting
The National Law Review: SEC Underscores ESG Disclosure and Compliance Priorities
In its statement on March 15, the SEC claimed that ESG is its most pressing priority, and the perceived barrier between social value and market value is breaking down.
The SEC is working to create a comprehensive ESG disclosure framework and has called for public comment on the topic, and its new task force will focus on identifying gaps in companies’ disclosures and actions.
Companies face the risk of class-action lawsuits and litigation for inadequate ESG disclosures, which can be avoided by updating risk assessments regularly, addressing gaps, conducting peer analyses, and making accurate public-facing statements.
Financial Advisor: Yes, ESG Can Be Quantified
The number of U.S. ETFs and mutual funds tied to ESG/sustainability increased 30% from 2019 to 2020, and ¾ of sustainable equity funds finished in the top 50% of their investment category last year, but ESG investing is still considered a “gray area.”
The TrueShares ESG Active Opportunities ETF (ECOZ) is an example of a fund that has produced solid performance results and that has a strong emphasis on carbon footprint and intensity, since emissions are one of the most urgent and quantifiable ESG issues.
The fund creates its own carbon intensity score by providing merits/demerits based on the intensity ratings and reporting frequencies of the companies in its portfolio, helping to emphasize the companies making the “right steps.”
Chief Investment Officer: AIF Institute Launches Center for ESG, Sustainable Investing
The center is intended to promote academic research and thought leadership in private and public investment centers; BlackRock and Natixis will serve as founding faculty members.
Sharmila Kassam (executive director of the AIF Institute) will lead the development of the Center, and intends to focus on climate factors, measurement and data, benchmarking, implementation models and ESG investing policies.
The Treasury Department and regulators are in the early stage of developing measures to improve companies’ environmental disclosures, specifically addressing carbon leakage and green investments.
The intent is to boost climate change action while preventing “greenwashing.” Experts warn that strong oversight will be needed to enforce stricter standards.
Biden is expected to announce a 2030 pollution reduction goal next month to align with Paris Agreement targets, and the Administration’s green finance framework should take shape this summer.
Mondaq: United States: SEC Acting Chair Lee Recommends Better Disclosure On ESG In Proxy Voting
SEC Acting Chair Allison Herren Lee asserted that it is important to develop a system for disclosing funds’ voting records on ESG issues, given current investor demands.
Lee also advocated for the SEC to require funds to disclose how investors voted on ESG-related shareholder proposals.
ESG loans are also known as sustainability linked loans (SLLs) and incentivize the borrower’s sustainability commitments using discounts when certain KPIs and sustainability performance targets (SPTs) are reached.
SLL funds do not need to use used for “green” directives, but they hold borrowers accountable and offer transparency for investors. Failure to meet KPIs means losing access to the discounted fund pricing.
Funds can avoid “sustainability washing” (i.e., exaggerating sustainability credentials) by setting ambitious targets and making sure progress is properly monitored and reported.
The SEC issued a statement requestin public comment on climate disclosure (in response to investor demand for ESG focus). Assets in sustainability focused funds have increased 70% since 2019.
ESG funds are particularly rare in retirement investments, mostly because these are not target date funds, despite the fact that adding ESG risk analysis to a fund helps with long-term outlook.
Bringing ESG funds into retirement savings will involve changing the narrative that ESG is only about values and not financial performance; this is helped by recent ESG fund performance success, as well as the Biden Administration’s plan to not enforce ESG-inhibiting rules in 401(k) investing.
Pensions & Investments: Accenture takes stake in ESG data firm Arabesque S-Ray
Accenture’s investment grants the company full access to Arabesque S-Ray’s ESG data solutions, and the companies will work together to develop new tools for ESG data capture and reporting.
The HSBC Real Economy Green Investment Opportunity GEM Bond Fund (REGIO) had its final close with total commitments of $538 million.
The fund, which is comprised of mostly emerging market green bonds and similar bonds, claims to enable investors to align financial objectives with the Paris Climate Agreement and UN Sustainable Development Goal agenda.
The fund focuses on impacting lower Gross National Income countries and helping the most threatened economies transition to a low-carbon future.
The survey included 300 institutional wholesale investors in Europe, North America, and Asia Pacific. The results concluded 86% of investors report that climate change will be at the center of their investment policy going forward (compared to 33% just two years ago).
Interest in net-zero investing policies will likely grow over the next few years, with more than half of respondents expecting to set a target in the next five years, and 19% expecting carbon-related divestments.
Other key findings include that investors generally believe the Paris Agreement global warming target are reachable, increased use of renewables will likely be the largest decarbonization driver, there are knowledge gaps regarding climate change regulatory risks, and lack of consistent reporting is seen as one of the biggest obstables to decarbonization.
The working group will be chaired by the IFRS Foundation and will include participation from the foundation’s independent International Accounting Standards Board (IASB)>
Other participants include the TCFD, the Value Reporting Foundation, the International Integrated Reporting Council (IIRC), the Climate Disclosure Standards Board (CDSB), the World Economic Forum (WEF), and SASB.
The Internaional Organization of Securities COmmissions (IOSCO) will also participate as an observer, and the group will engage closely with the GRI and CDP.
Invstors, NGOs, and scientists have signed onto an open letter calling for fossil gas projects to be excluded from the EU Taxonomy that classifies sustainable investments (part of the EU Action Plan on Sustainable Finance).
A new proposal would allow gas cogenertaion plants to be counted as “green” until the end of 2025 if they replace closing coal plants, and the letter warns that this proposal ignores methane gas released from extraction and could result in significant envrionmental damage.
The letter also warns that the proposal could lead to the taxonomy becoming a greenwashing tool, which is the opposite of its intended purpose.
The market for sustainability linked bonds (SLB) could grow “20-fold” this year due to increasing demand, and sustainability linked bonds are attractive to firms because the funds don’t have to be spent on “green” projects (firms simply need to meet sustainability targets).
SLBs are still new and investors are more familiar with green bonds, the market for which is also expected to grow significantly this year. The overall market for green/sustainable/social bonds is expected to grow around 50% this year.
Companies and Industries
Yahoo! Finance: Big fashion companies lag behind on green targets
According to the Business of Fashion, the 15 largest fashion companies are lagging behind social and environmental targets, and the industry is responsible for at least 4% of global GHG emissions.
The report found that companies were more likely to disclose information on targets than actions taken toward fulfilling them -- working practices were described as “opaque.”
Overall, companies performed worst on waste and workers’ rights. Kering generally ranked the highest among the fashion companies, while Under Armour ranked the lowest in all categories except workers’ rights.
In January, a Brazilian federation lobbied directly to BlackRock regarding illegal deforestation, human rights violations, and more issues, stating that BlackRock was financially enabling several companies to abuse Indigenous peoples’ land rights.
The creation of an Indigenous right policy would benefit BlackRock’s bottom-line and reputation risk, and it would set an example to other asset managers that they are responsible for their investments.
BlackRock has positioned itself as a climate change leader, though it has fallen short in combining rhetoric with action and connecting climate change resilience with Indigenous peoples.
Investors are looking at the management of conglomerations’ entire supply chains, and SME contractors have emerged as risks to the larger companies’ ESG ratings.
While large corporations are making ESG efforts, smaller companies are seen as more indifferent -- the larger corporations are being urged to warn their subcontractors about receiving disadvantages if they fail to satisfy ESG criteria.
SK Telecom has been an early adopter of such practices, and offers online lectures to support its suppliers in ESG management
ESG has become an integral part of every investment discussion, but there is the potential that pushing for ESG standardization can hamper the intended results.
While the tobacco and mining industry are not considered “green,” companies in the industry can still rank high in ESG scores if they’re trying to “do good” and contribute positively to the E, S, and G.
Climate policy is becoming mainstream and oil and gas companies are talking about about ESG strategies while still churning out emissions.
Discussions are focused on more spending commitments to lower emissions, highlighting improved metrics, and creating new corporate strategies. Still, the majority of companies haven’t made significant net-zero targets.
Experts warn that these companies may be greenwashing themselves a bit as their discussions and claims outpace their real commitments and actions.
Politico: The Long March to ESG
The SEC is still unsure about what ESG regulation should look like, and fundamental disagreements over things like green energy and diversity still aren’t resolved. The market, however, is not waiting for regulators to make up their minds.
Corporate marketing has been eclipsing action, and investors, consumers, and politicians have started delivering backlash, further politicizing ESG and making corporations ultimately less sustainable.
The lack of a global regulatory consensus had led to a “free-for-all” for ESG consultants, data experts, and others looking to profit off the ESG “trend” by helping companies meet the never-ending stream of demands from raters, investors, and consumers.