ESG Weekly News Update: May 07, 2021
Teton Range, a mountain range of the Rocky Mountains, Wyoming, USA
General ESG News
Alyssa Martin, National Strategy Leader, Large Market, and Public Entities at Weaver, along with Greg Englert, Partner and ESG Service Leader at Weaver, lead a discussion about current trends in ESG and gaps in reporting standards.
Sustainability reporting began with the goal of addressing perception issues faced by industries with particular exposure to environmental impacts. Now, companies that do not publish sustainability/CSR reports will face scrutiny and potential divestment.
The discussion covers investor sentiment, disclosure frameworks and policy, and ESG risk management.
Market Scale: Crafting a Profitable ESG Message & Strategy
Amy Stutzman, Managing Director, and Reid Brooks, Director of Opportune LLP’s Complex Financial Reporting Practice provide insights about how companies can create ESG messaging and why this is important for long-term investment and performance.
The pair discuss changing reporting standards and guidelines, maximizing growth and profitability, and strengthening ESG goals around best practices to make meaningful impacts over time.
Millennials are leading the next generation of investors, and they are both value-led and climate-conscious investors. This, combined with increasing institutional pressure for ESG investment options, means more ESG goals and initiatives across the board.
There is also increased pressure to quantify ESG outcomes, and this is an area where the SEC is placing increased focus.
As companies push ESG efforts, DEI is going to be crucial for innovation, since this is where customers’ minds are focused.
Responsible leadership in the current dynamic world will involve tackling three main emergencies and mitigating shareholder impacts: the climate, biodiversity, and the growing socioeconomic divide. Simply “doing less harm” will not be sufficient.
It is important to realize that economic growth and competitiveness can be achieved without destroying the natural environment or exploiting workers.
Major disasters like the COVID-19 pandemic can serve as catalysts for change, and leaders now have the opportunity to rebuild a more resilient and equitable world that goes beyond bare minimums and legal requirements.
ESG Disclosures, Standards, Rankings, and Reporting
Accounting Today: How useful is ESG reporting?
Experts at Sensiba San Filippo argue that at its core, sustainability and ESG reporting are about cost-cutting, operational efficiency, risk management, and in most cases, increased profitability.
Though the environment is an important topic, it is also important to focus on the “S” and “G” pillars and report on associated policies and initiatives, which are critical to attracting and engaging top talent.
The International Federation of Accountants (IFAC) announced the publication of its roadmap for providing a global sustainability reporting system. This comes at the same time that the IFRS is exploring global company sustainability reporting standards.
IFAC stated that it will support a new standard-setting board under the IFRS to coordinate baseline reporting and requirements.
The IFAC roadmap promotes reporting that focuses on investors and companies’ stakeholder impact, with standards that could include sustainability reporting initiatives like the GRI.
S&P Dow Jones Indices announced a number of additions and deletions to the S&P 500 as part of its April rebalancing. Notable additions include Tesla, Walmart, Marathon Petroleum Corp., Fifth Third Bancorp, Ford Motor Co., and FirstEnergy Corp. Notable removals include Facebook, Costco, Vulcan Materials, and Wells Fargo.
Private Equity Wire: Maximizing ESG impact in private equity: Part Three -- The keys to future success
Pillar one: Build the culture. ESG can become stuck in a mess of well-intentioned but under-delivering impacts if not fully embedded within a business and supported with the necessary resources.
Pillar two: Establishing best practice. Employees at all levels have the opportunity and responsibility to share their knowledge and experience and shape ESG direction within a company.
Pillar three: Going beyond reporting. ESG is about impact, not box-ticking, and KPIs are meant to be the measure, but not the goal. It is important to minimize the burden of reporting and use reporting to highlight the work and impacts that are being achieved.
Buffett and the Berkshire Hathaway board opposed two shareholder resolutions that would call for annual climate change and DEI reporting, and it is becoming evident that even renowned investors cannot remain immune to market trends forever.
Buffet’s argument is that due to the company’s decentralized business model, it would not make sense to impose “one-size-fits-all” reporting standards.
BlackRock has criticized Berkshire Hathaway for its lack of ESG action and disclosure, though the company is setting some environmental targets.
According to a recent Refinitiv study, the best-known ESG funds invest in big tech companies like Google, Apple, and Facebook, which have (assumed) small carbon footprints and high returns. One critique of this trend is that the focus on carbon emissions can overlook other critical ESG issues (where some of these companies are deficient).
The lack of standardization in ESG investing makes forecasting virtually impossible, since funds can suddenly claim that they will be using ESG in their investment process.
In general, the financial market is more prepared to deal with climate change than other ESG issues, because environmental metrics are easier to quantify.
The EU is pushing more ESG regulation legislation, and as disclosures become more standardized, it is likely that the trend will continue in the U.S.
The newly launched S&P ESG Aristocrat index (U.S.-focused) is culled from the major S&P indexes. The S&P ESG High Yield Dividend Aristocrats Index is more selective of dividend yields, but companies also receive an ESG score. Another new index focuses on developed markets.
As companies recover from the COVID-19 pandemic, dividends are expected to increase.
Companies and Industries
The Reporting Exchange is a free online platform for finding comprehensive and reliable ESG reporting requirements for more than 70 countries, as well as a global database of sustainability rankings and indices. Arabesque plans to enhance the platform’s capabilities.
Financial Times: BlackRock accused of ESG inconsistency over Indonesia palm oil
BlackRock supported a shareholder protest of Procter & Gamble’s sourcing of palm oil from an Indonesian company (Astra Agro Lestari, a subsidiary of Astra International), despite holding a significant stake in the company. The company is accused of being involved in land grabs from local farmers and having poor environmental standards.
Critics are pressing BlackRock to make requests to the company and to divest if timely changes are not made. However, as a passive investor, it is not easy for BlackRock to sell its holdings across its funds if it believes there are problems with the business.
Astra Agro Lestari is not a member of the Roundtable on Sustainable Palm Oil, and P&G has since asked its supplier to launch an investigation into the company.
Engineering News-Record: Women AEC Leaders See Key Role in Industry’s COVID Reboot
The construction is preparing for record-setting post-pandemic growth and will need to fill major workforce gaps, and C-suite executives are confident that a federal infrastructure bill will pass.
Additionally, experts note that firms that meet ESG standards for issues like climate change and workforce diversity are getting “more attractive valuations.” The new remote business landscape has also provided flexibility for new AEC leaders, especially women.
Obstacles still facing women in the industry include the fact that while studies have found women hold more advanced degrees, have larger professional networks, and hold more positions on the way to senior jobs than men, they still only fill just over 14% of leadership positions in the industry.
This month, Fitch Ratings will start distributing ESG-enhanced questionnaires as part of its U.S. Residential Mortgage-Backed Security (RMBS) reviews, with the purpose of providing deeper insight into industry ESG developments.
The new questionnaires will have open-form ESG items including company ESG strategy, ESG reporting, ESG impact assessments, environmental impact, and originator/aggregator and servicer ESG policies.
Fitch believes these items will become increasingly important to business and operations in the industry, but perhaps not to credit risk for RMBS bonds.
The Peninsula Qatar: Growing energy transition to drive energy sector
Oil and gas companies are expanding their portfolios, and companies in other sectors are expanding into “greener” energy, creating more opportunities for individuals in the renewable energy industry.
There is a challenge in balancing the need for maintaining and expanding reliable energy worldwide while reducing environmental impacts. Living standards need to increase with the population, which places more of a burden on companies looking to reduce reliance on oil and gas.
The renewable energy industry as a whole is recruiting talented young professionals with interests in virtually anything, including communications, economics, data analytics, artificial intelligence, and machine learning.
Buffett and the Berkshire Hathaway board opposed the shareholder request for climate change reporting, despite growing scrutiny from investors that the company’s stock is lagging, as is its ESG performance.
Berkshire Hathaway claims that it is already addressing climate change, decarbonizing its businesses and making goals to close all coal units by 2050.
Several ESG funds hold stake in big oil producers, and as oil prices have rebounded, these funds have performed well -- analysts are not immune to the irony.
Many ESG funds aim to include companies with “positive ESG characteristics across all sectors,” instead of immediately screening out fossil fuel companies.
The inclusion of oil companies in “green” funds also points to the lack of a clear definition (in the U.S.) of what actually counts as ESG investing.
Bank of America believes that the next companies that will attract ESG dollars will be firms that are currently high carbon emitters in the metals, mining, and coal industries but that are reforming and switching to sustainable energy.
Nearly 86% of investors say that climate change will be a major factor in the policies in the next two years, and the increase in ESG assets in the past year has significantly increased company valuations.
Bank of America also sees potential growth in companies making environmental strides in the chemical, paint, and fertilizer industries, and companies with near-term emissions reduction targets (and associated action plans) are more appealing to investors.
The surge in ESG assets is also likely to significantly affect fixed income (e.g., green bonds).
The Wall Street Journal: BlackRock Starts to Use Voting Power More Aggressively
The firm has increased support for shareholder ESG proposals and has published criticisms of companies that have not complied, while implying that it will use its voting power to push ESG changes and vote against directors.
This comes at a time when the SEC has said that it will pay closer attention to whether fund managers are voting as they claimed they would, and amidst criticism that BlackRock has an inconsistent voting record.
Some companies have complained that BlackRock’s recent votes have come without warning or proper explanation -- it is important for these voting decisions to be predictable, consistent, and well-defined within company policies.
Large corporations have typically taken the initiative to help companies track CO2 emissions, but Diginex Solutions has launched a self-guided tool that claims to generate ESG reports six times faster than competitors. The tool is certified by the GRI, and is currently raising venture backing from corporate investors.
The Coalition United for a Responsible Exxon (CURE) published a paper highlighting sustainability related issues at ExxonMobil and recommending steps to improve the company’s ESG performance.
Additionally, several major pension funds have announced support for a new group of directors at Exxon as the current directors display a lack of action on the energy transition.
The CURE paper links poor oversight to poor financial performance, and it urges Exxon to set a net zero emissions goal by 2050 and to establish a Paris-aligned lobbying position.
JD Supra: SEC Risk Alert on ESG Investing
The SEC risk alert identifies growing demand for advisory and investing in ESG activity, as well as the risks around the lack of standardization of ESG definitions, and the dangers of misrepresentation.
The SEC examinations review a firm’s ESG investing policies and procedures, due diligence for selecting and monitoring investments, and consistency in proxy voting and decision-making processes.
The risk alert cited that many portfolio management practices were inconsistent with firms’ ESG approach disclosures/claims, and that internal controls were deficient in monitoring ESG investing activity.