ESG Weekly News Update: March 5, 2021
General ESG News
The Economic Times: About time we learnt to build in ESG principles into our business
In the 1980s, companies pushed for low-cost manufacturing destinations, primarily China. Now, supply chain choices will be driven as much by ESG factors as cost factors.
Companies are reorienting their supply chains to align with ESG initiatives, which offers the opportunity for India to enter the global manufacturing supply chain.
India intends to promote socially sustainable business models and ensure reporting and compliance for relevant ESG issues (e.g., renewable energy use, GHG emissions, health and safety targets, gender equality, labor standards, etc.) with incentive schemes and, conversely, punitive tax structures for non-compliance.
Harvard Business Review: The Wrong Way to Respond to Employee Activism
The optimism bubble: The more senior a person is at their organization, the more optimistic they become, and the more likely they are to underestimate the challenges employees face when bringing up difficult issues and overestimate the level of comfortability in communication.
Many companies fail to realize that being apolitical is impossible, and inaction is a political stance.
Leaders often rush to quick fixes to dissolve ambiguity, when true change and adaptation needs to happen at the strategic planning level to ensure proactivity, and an understanding that organizational leaders are responsible for wider societal issues.
EFT Trends: Will Asia Become the World’s ESG Powerhouse?
The world’s second-largest economy and its Asian peers cornered 75 cents out of each dollar of capital invested in 2020 across emerging-market stocks compliant with environmental, social and governance norms, according to EPFR Global data. The balance is shifting further in the region’s favor this year, with its share growing to 83.33 cents per dollar
“There is a natural pull toward Asia,” said Claire Peck, a London-based investment specialist at JPMorgan Asset Management. “Technology companies are generally asset light businesses, which naturally mean they have better ESG credentials,” she said
One of the draws of investing in Asia is the potential for growth. According to the article, Asia, is expected to expand 5.7% this year, which is the fastest among other regions like Latin America, Eastern Europe, and the Middle East.
Raconteur: Linking executive pay to ESG goals
Although not yet widespread, the idea of tying executive compensation to environmental, social and governance (ESG) goals to help drive business sustainability is gaining traction. According to the latest Edelman Trust Barometer Special Report: Institutional Investors, more than two-thirds, up 17 per cent over 2019, would like to see this link in place. They now associate adoption of ESG measures with performance and growth and consider remuneration a useful lever to ensure it happens.
The perception is that linking executive compensation to well-formulated ESG goals can help to focus minds and mitigate organizational risk.
Whether or not remuneration-based incentives should be applied, there are currently two schools of thought. One says they should be linked to annual bonuses and the other to long-term incentive plans. Skylakaki’s preference is for the latter, not least because “the time horizon for ESG metrics is normally measured in years or even decades.”
The leaders of a coalition of sustainability-focused organizations have issued a call on business leaders to commit to climate action, including setting science-based climate targets for their companies, and align their lobbying practices with efforts to achieve net zero by 2050.
Signatories to the call include the heads of BSR, C2ES, CDP, Ceres, Climate Group North America, Conservation International, Environmental Defense Fund, The Nature Conservancy, Union of Concerned Scientists, We Mean Business, World Resources Institute and World Wildlife Fund.
The letter advocates several actions for the business leaders to help the US achieve net zero emissions by 2020, and to cut emissions at least 50% below 2005 levels by 2030. These include publicly supporting an ambitious 2030 goal (Nationally Determined Contribution) for the United States under the Paris Agreement, advocating for legislation and regulations to cut climate pollution, and aligning lobbying practices with a path to net zero by 2050.
A group of six major US utilities announced the launch of the Electric Highway Coalition, aiming to ensure that electric vehicle (EV) drivers have access to a seamless network of charging stations connecting major highway systems from the Atlantic Coast, through the Midwest and South, and into the Gulf and Central Plains regions.
The utilities, American Electric Power, Dominion Energy, Duke Energy, Entergy Corporation, Southern Co., and the Tennessee Valley Authority, plan to enable EV drivers seamless travel across major regions of the country through a network of DC fast chargers for EV, with each company taking steps to provide EV charging solutions within their service territories.
According to the new coalition, aims to provide drivers with charging options that enable long-distance EV travel. Sites along major highway routes with easy highway access and amenities for travelers are being considered as coalition members work to determine final charging station locations. Charging stations will provide DC fast chargers that are capable of getting drivers back on the road in approximately 20-30 minutes.
So instead of waiting for members to leave, companies could potentially add more board seats and fill those with diverse candidates. Companies could also install tenure limits to accomplish the same goal.
The chief executive role is a rarified position that also suffers from a lack of diversity, so using a feeder pool known for that is a bad place to start. Instead, companies should continue to look further afield for new board members.
Supply Chain Dive: 5 questions to answer when designing a responsible-sourcing strategy
Organizations that want to use sustainable sourcing to create a competitive advantage need to aim higher by, for example, collecting sustainability data (tier-1 focused) or ecosystem data (environmental-impact focused, beyond tier 1) from the supply chain.
The second step is to decide on the level of process rigor. Responsible-sourcing programs do not have unlimited resources.
Procurement organizations can positively amplify their impact by collaborating with third-party organizations.
Essentially unheard of a decade ago, investing strategies that screen holdings for adherence to Environmental, Social and Governance values have captured increasing investor interest.
Tony Campos, Head of Sustainable Investment, Americas, FTSE Russell, joins the podcast to explain how the process of ESG screening works at FTSE Russell.
Not wanting to leave things purely academic, we go under the hood of the two largest ETFs that track FTSE Russell Indexes, Vanguard's ESG U.S. (ESGV) and International (VSGX) ETFs.
ESG Disclosures, Standards, Rankings, and Reporting:
Currently, while some ESG disclosures expect companies to address risks, most annual reporting assumes stable business conditions for future planning.
Climate changes poses severe threats to water availability, agricultural production, human health, productivity, and other essential societal and business support functions -- supply chains need to adapt to improve resilience (despite already being over-extended as a results of the COVID-19 pandemic)
TCFD offers guidance on scenario planning, and companies (especially larger corporations) need to take climate change into account for facility-siting decisions, materials sourcing, distribution systems, and partnerships to ensure continuity.
Chief Executive: Why D&I Will Be a Critical Part of Your ESG Reporting
Topics within the “S” pillar are traditionally difficult to measure, with few consistent metrics; an added layer of complexity with D&I reporting is the difference between leader and employee perceptions of corporate culture.
Shifting the idea of D&I from a compliance exercise to an opportunity for communicating a company’s values, improving transparency and authenticity.
D&I initiatives should be embedded into a company’s broader risk management process, with cross-functional coordination and a data-driven approach.
Bureau Veritas, a world leader in testing, inspection and certification, announces the signing of an amendment to its EUR 600 million syndicated credit facility − originally signed in 2018 − in order to integrate Environmental, Social and Governance criteria.
Bureau Veritas' social and environmental performance will now be taken into account when calculating the financing cost of its syndicated credit facility. This will be measured against the quantitative ESG objectives that the Group has set for 2025.
Climate research provider and environmental disclosure platform CDP announced the release of A Wave of Change, its 2020 global water report. The report, based on data from 2,934 companies that disclosed through CDP’s water security questionnaire in 2020, found that the cost to companies of not addressing water risks stands to reach $301 billion in lost business value. By contrast, the report estimates the cost of addressing the risk at $55 billion.
The top water risks faced by companies, according to CDP, are increased water scarcity, flooding, drought, severe weather events, and declining water quality. The study found that the most frequently reported responses by companies to water risks include adopting water efficiency, conservation, reuse and recycling measures, and developing flood emergency plans.
While the report finds that companies are making progress in some areas on addressing water risks, action in some areas, such as water pollution is lacking.
According to CDP, investors are becoming increasingly focused on water risk issues, with over 590 investors with over US$110 trillion in assets requesting companies to disclose on water security impacts, risks and actions.
MSCI announced the release of its 2021 Global Institutional Investor Survey, with findings including an acceleration in ESG investing by institutional investors, particularly in the U.S.
For the study, MSCI surveyed 200 asset owner institutions, including sovereign wealth funds, insurers, endowments/foundations, and pension funds, with assets totaling approximately $18 trillion. According to MSCI, the survey revealed that the COVID-19 pandemic drove an increased focus on sustainable investing, with 77% of investors reporting increasing ESG investments “significantly” or “moderately.” The past year appears to have had a particular influence on U.S. investors with 78% saying they would increase ESG investment either significantly or moderately as a response to COVID-19.
ETF Trends: Data Will Dictate ESG Growth
A new Biden administration and a new head of Securities and Exchange Commission emphasize progress on clearer regulations and standardized reporting for environmental, social, and governance funds.
Cerulli Associates’ recent polling of institutional investors during the first quarter of 2020, 39% of respondents noted that companies limited, or selective ESG data disclosures were a significant hurdle in accurately assessing ESG metrics’ impact for the reporting companies.
Andrew Collins, director of ESG and responsible investing at San Francisco Employees’ Retirement System, believes that the data from companies’ individual disclosing their information needs to improve and become more standardized.
New Bain & Company report insists that ESG principles need to be proactively embedded within value-creation plans, and the U.S. is trailing Europe in this area.
Previous private equity focus on governance is now recognizing the high level of interrelatedness between all ESG topics millennials and post-millennials, in particular, flock to companies with robust CSR practices.
With or without ESG as a differentiator, PE firms are stepping up investments with the upcoming promise of economic recovery.
Institutional Investor: How the World’s Largest Asset Managers Are Finally Taking ESG Seriously
SquareWell Partners research shows that the top 50 asset managers are signing onto sustainability codes, publishing ESG papers and voting policies, and paying for ESG ratings providers; all but one (Charles Schwab) have signed onto the UN’s Principles for Responsible Investment.
30 of the 50 companies have their own ESG ratings systems, and 34 publish papers on ESG topics; 20 of the companies use at least four different ESG research and ratings providers, showing an interest in engaging more viewpoints.
Tax policy (specifically payment transparency) is emerging as an area of interest for asset managers, and only nine of the top 50 companies currently publish dedicated insights on tax policy.
BusinessDay: Will ESG investing decrease my returns?
Holding shares in many companies with poor ESG records can prove disastrous, because failures in these areas can (and likely will) have direct financial impacts on shareholders.
An inclusionary approach to ESG investing is favorable -- allowing investment in a company from an “undesirable” sector (e.g., oil & gas), so long as that company is trying to reduce its environmental impact and address other ESG issues.
However, as more capital crowds into sectors with strong ESG compliance (e.g., solar and wind energy), the returns for these sectors will decline; fund managers must be able to communicate their ESG policy and show that this policy will allow them to deliver returns.
January saw a number of sponsors turn to the increasingly competitive high-yield market to fund their buyouts
To date, all of the ESG-linked financings completed in the European leveraged loan space have been private equity-backed
Private equity firms' focus on ESG topics, the inclusion of ESG-linked ratchets on sponsored loan transactions is perhaps a natural progression for the market to adopt
Investment News: 2 new ESG ETFs bring small- and mid-cap stocks into focus
Xtrackers S&P MidCap 400 ESG ETF (MIDE), and Xtrackers S&P SmallCap 600 ESG ETF (SMLE) listed Wednesday applying sustainable investing screens to the popular indexes
Demand for ESG ETFs has been increasing the last few years but the focus has primarily been on large-cap securities. The expansion of products to mid and small caps tied to widely followed S&P benchmarks will make it easier for advisers to shift their model portfolios to an ESG approach
MarketWatch: Global Environmental, Social and Governance (ESG) Market – Analysis By Investor (Retail, Institutional), Fund, Sector, By Region, By County (2020 Edition): Market Insights, Covid-19 Impact, Competition and Forecast (2020 – 2025)
The Global Environmental, Social and Governance (ESG) market was valued at USD 38 trillion assets under management (AUM) in the year 2019 with Europe leading the regional market share.
Strong ESG performers will be better placed to reshape competitive advantage and, ultimately, create long-term value for the institutional investors. Increasing demand from institutional investors has contributed to the surge in the industry’s assets under management (AUM) and revenue.
In the Public Equity industry, ESG is becoming an important part of the decision-making process for investments.
Pensions & Investments: Asset managers facing more scrutiny on ESG issues – report
Demands on asset managers to consider ESG issues and be more transparent "has created a chain of scrutiny, with ultimate accountability falling on the shoulders of asset managers," the report said.
50 of the largest asset managers with a combined $60 trillion and found that 20 of them use at least four ESG research and ratings providers, and 30 have developed their own internal ESG ratings.
Financial Advisor: Blackrock Index To Power First Fixed-Index ESG Product
Fund giant BlackRock has teamed up with insurance company Midland National and annuity provider RetireOne to offer what they call the first ever environmental, social and governance (ESG) option available within a fixed-index annuity.
BlackRock’s index is called the “ESG US 5% Index ER.” It seeks exposure to companies with high levels of ESG risk controls in hopes of increasing the fund’s proportion of companies that are focused on lowering their carbon emissions, diversifying their workforces and improving data privacy and security.
“Companies with strong ESG policies are in an ideal position to perform over the long run, so it is imperative to include ESG principles in portfolio design,” said David Stone, founder and CEO of RetireOne, in a press release.
Early signs show that money managers wedded to environmental, social and governance themes are reluctant to buy into special-purpose acquisition companies before a target has been identified. That could potentially cut SPACs out of an investment class that’s on course to exceed $53 trillion by 2025, according to Bloomberg Intelligence.
“From an ESG perspective, it is quite difficult to invest in pre-deal SPACs,” said Ross Klein, founder and chief investment officer of Changebridge Capital, adding that without proper insight into the target acquisition, there is no way to assess the environmental or social impact of the business.
Those concerns haven’t stopped a flurry of SPAC listings, especially in the U.S. Since the start of 2020, blank-check companies have raised about $140 billion, according to data compiled by Bloomberg. And only a handful of these have been in Europe.
Companies and Industries
First social bond issues by a U.S. regional bank; $1.25 billion aggregate to support social programs, including affordable housing investments and enhancements to essential nonprofit services.
The bonds are issued in accordance with the Truist Sustainable Financing Framework, which addresses the core components of the International Markets Association (ICMA) Green Bond Principles.
Truist discloses its other ESG milestones in its Corporate Social Responsibility Report.
Insurance Business America: Insurers facing greater pressure to manage ESG risk factors
Credit institutions are facing pressure from external stakeholders to manage environmental risk exposure, and it is becoming more important than ever for property & casualty (P&C) insurers.
Global losses from natural disasters are increasing, and North America has been suffering the highest losses. Other major risks include weak corporate governance, data breaches, and failure to meet social risk factor expectations.
DBRS Morningstar is formalizing its approach to incorporating 17 key ESG factors into its ratings process, from the viewpoint of revenue, cash flow, and asset value (not necessarily sustainability).
The Environmental aspect is the most discrete factor here for property owners, who need to be aware of how their assets are going to be affected by near-future climate change and extreme weather events.
It’s worth noting here that ESG is just one among many considerations for investors. Investors can decide which data points are most important to them, and when it comes to ESG performance, whether a portfolio is above or below average may not always be the deciding factor.
ESG will become more standardized and, as investors target more ESG funds and corporate policies become solidified, we’ll be getting more data and insight as well.
A top priority for the new SEC chair (Gary Gensler) and the senior policy advisor for climate (a new position), must be a renewed focus on protecting investors & supporting ESG’s role in the investment process.
Within the investment community, one in every three dollars under professional management now uses ESG criteria.
Possibilities exist (and there is public support) for the SEC to create an external advisory committee to provide guidance, to establish a mandatory, comprehensive ESG reporting framework, and to reverse rules on proxy advisors and shareholder voting.
JD Supra: Expect ESG rule to be overturned
The Biden administration will review and likely overturn the DOL rule stating that ERISA plan fiduciaries cannot invest in “non-pecuniary” vehicles that take on additional risk or sacrifice returns.
Currently, this rule curbs the use of ESG funds within a retirement plan.
An early test for Coates on ESG will be how he handles Lee’s directive to increase his division’s climate disclosure focus. The SEC will look at how companies are using the 2010 climate guidance and consider ways to upgrade it, Lee said. But investors, environmental groups, and others have pushed the SEC to go further and create new rules that mandate climate reporting. The agency can help create a cost-effective and flexible disclosure system, he recently told financial industry members at a conference on climate
Coates, in his current role, also would help lead any SEC rulemaking on corporate political activity disclosures. Several studies have shown that corporate political activity generally doesn’t serve investors’ interests, Coates said in 2013. Political activity can cause reputational harm, dilute a company’s strategic focus, and lead to other problems, he said at the time.
Republican party's witness on the panel — a former CEO of a biotech company who is writing a book on the topic — claimed that disclosure mandates and the ESG movement more broadly threaten democracy by allowing rich investors and corporations to dictate what should be done on issues of morality and public policy.
Republican Bill Huizenga of Michigan, ranking member of the subcommittee, acknowledged that investor demand for ESG data has increased, but he asserted that keeping disclosures voluntary is appropriate. The disclosures are being used to name and shame companies and to create corporate villains in the public eye, Huizenga said.
The climate crisis poses a systemic risk to the health of companies and the broader economy, Ramani argued. And robust disclosure is key to helping corporations and others address those risks.