ESG Weekly News Update: May 14, 2021
Dolomite mountains near Misurina, Veneto - Italy
General ESG News
Dame Vivian Hunt, a Senior Partner at McKinsey, argues that “resilient companies are prepared for bad times, are relentless about improving performance, and make decisions skillfully.”
Hunt also does not believe that business leaders need to make a trade-off between making money and operating in a socially responsible way.
According to Hunt, the first two steps in implementing stakeholder capitalism are understanding who the stakeholders are, and then in turn working to build trust among those parties by acknowledging and addressing their needs.
Hunt notes both PayPal and Costco as examples of companies that have made a clear commitment to “doing better,” and that have seen financial success because of it.
Shareholders put pressure on companies through resolutions, but disjointed voting processes make these easy to resist. Additionally, the desire of companies to report on their “best” areas makes ESG data/disclosures inconsistent.
Regulators may also compete with each other, giving companies the freedom to choose which standards to adopt.
The path forward should involve working together to mitigate voting fragmentation, avoid the proliferation of initiatives, and increase pressure on regulators to adopt standard ESG objectives.
GreenBiz: Net zero faces fierce criticism
Renowned environmental campaigners and scientists have begun pushing back against net-zero pledges, with criticisms about net zero not being true zero, about 1.5C being a fantasy target, as well as about communications about targets drowning out any real action.
There is legitimacy to the criticism that negative emissions techniques can be used to justify continued investment in fossil fuels, and that many targets lack the credible evidence and comprehensive strategies for shifting toward renewable energy at a sufficient pace.
Defenses of net-zero targets include the fact that the campaign invigorates the sustainable business community, as well as the fact that net-zero is a scientifically sound target.
Two-thirds of the global GDP is now generated by economies with some sort of net-zero target, and putting these targets into statute books produces real impacts on day-to-day policy decisions. It also signals to both companies and investors that the energy transition is inevitable, sparking competition among companies hoping to outperform their rivals.
Ultimately, even incomplete and potentially misleading net-zero targets can help drive down emissions.
Supply Chain Dive: Responsible sourcing is key to rid labor abuse from PPE supply chain
With the explosion in demand for PPE, there has been a corresponding increase in labor issues in face mask production, with supply chain ties to the U.S.
The U.S. has proposed legislation about ensuring the country’s future to supply PPE in the event of another crisis, and while the U.S. doesn’t have the same human rights issues as some other countries, there have been recent cases of labor abuses and a renewed interest in unionization.
Solutions include robust supplier surveys/due diligence processes, as well as pursuing B Corp certifications that ensure ethical sourcing.
Stanford has issued $375 million in bonds with climate and sustainability designations, and proceeds from the bonds will be used to finance campus renovation projects.
The bonds were verified externally by both the International Capital Markets Association’s Sustainability Bond designation and the Climate Bond Certification (which are both based on the UN’s Sustainable Development Goals).
The renovation projects funded by bond proceeds are aimed to accelerate Stanford’s transition to net-zero emissions by 2050, as well as its social efforts to provide more affordable housing, increase healthcare access, and increase diversity.
ESG Disclosures, Standards, Rankings, and Reporting
Financial Advisor: Goldman Laments 'Noise' Of ESG Data Barrage Spurred By New Rules
Many companies are now over-reporting on ESG data, and investors feel they are losing sight of what is most impactful.
Emerging regulations, metrics, platforms, etc. can end up being counterproductive and send mixed messages to companies trying to stay current with their reporting.
Standards-setting authorities around the world agree that more coordination is needed.
Mergers & Acquisitions: ESG Metrics Remain Elusive for Private Equity Firms
As companies increase ESG reporting, limited partners with positions across multiple funds are bombarded with inconsistent reports and no way to aggregate and compare data.
It is important to keep in mind that company commitments vary by industry, and ESG metrics and regulations are still in their infancy.
Experts argue that linking companies’ ESG missions to investment processes can help simplify data collection, and coming to a consensus on metrics will help facilitate real progress.
Experts at Brown Brothers Harriman note that “virtually all” stakeholders are attributing importance to ESG issues, and prioritizing ESG will be critical for maintaining relevance in the fluctuating marketplace.
ESG data variation and challenges will persist, so this should not be a deterrent to new market participants. Fin techs are expected to improve ESG data maturity.
ESG has gone from being a product value proposition to a value driver.
A recent Morningstar survey found that 61% of investors surveyed felt that ESG issues should be addressed in their funds’ proxy voting and 75% indicated they would like to have more of a say in how their funds voted.
Despite the fact that the number of ESG funds available in the industry tripled from 2014to 2020, Morningstar found that less than 5% of DC plans include at least one sustainable fund, and that many of the funds with the most 401(k) assets typically vote against key ESG resolutions on corporate proxy ballots.
Regulatory initiatives could raise the profile of fund ESG proxy voting, as the SEC pushes for more transparency in proxy voting (specifically in retirement investing).
ESG funds are already on track for a record year of inflows in 2021. One current strategy in ESG investing is for firms to offer products similar to traditional “core” portfolios, but that have an ESG focus without sacrificing performance.
It is also worth noting that index providers are the ones defining ESG criteria and also deciding how to classify companies, and they may not always agree. It is important for investors to know exactly what is in their portfolio.
Morningstar: Morningstar Moments: 3 Things You May Have Missed
Analysts advise that investors use proxy voting to exercise their power and make their voices heard by the companies in which they invest.
A Morningstar contributor argues that the best way for advisors to open their firms to more diverse clients is through genuine education.
Experts also urge investors to use Biden’s new capital gains tax proposal as an opportunity to evaluate their own portfolios and potentially give up long-held positions.
Interactive Investor: Liontrust to launch ESG investment trust
The trust -- Liontrust ESG (ESGT) -- will launch with a 150 million Euro initial public offering, and the portfolio will include mostly companies in developed markets.
This will be Liontrust’s first closed-end investment trust, and it will be concentrated and able to invest in small-cap stocks not currently available to the firm’s other open-ended ESG funds.
The trust will come with a fee of 0.65%, but 10% of the management fee will go to funding research to “develop financial instruments covering the UN Sustainable Development Goals that are currently uninvestable.”
The Fintech Times: Millennials, ESG & the Rise in Ethical Investing
One reason for the increase in ESG investing is the realization of the financial benefits -- higher returns and lower risk -- tied to investing in companies with high ESG scores.
Millennials are beginning to lead investment markets, and they are clearly prioritizing ethically focused products and services. This is leading to the introduction of new fintech products, which are then attracting the attention of large corporations.
90% of companies in the S&P 500 now release annual sustainability reports, and experts believe that eventually, all publicly listed companies will report some form of ESG information.
The SEC mentioned climate-related risks first in its list of 2021 priorities for examination, and the creation of the Climate and ESG Task Force signals further emphasis on ESG disclosure.
Strong ESG performance can improve a company’s operations, attract investors, and reduce cost of capital, but it’s also important to keep in mind the risk of divestment that comes with a lack of action and reporting.
According to Bank of America analysts, the next wave of companies supporting ESG investments is likely to include companies in high-emitting sectors like energy, metals, and mining that are making sustainable reforms. Other experts also favor companies that are switching from coal to sustainable energy.
Bank of America also notes potential in firms in the chemical, fertilizer, and plant industries that are making climate improvements, especially those that are targeting short-term emissions reductions.
About 86% of investors indicate that climate change will be a major factor in their investment decisions over the next two years (compared with 33% just two years ago), signaling even further momentum in the already compelling growth of ESG investing.
401(k) Specialist: How Proxy Voting Could Help 401(k) Participants Meet ESG Priorities
Despite the rise in ESG investing in recent years, just 3% of 401(k) plans currently offer an ESG option. A recent survey found that a majority of investors believe ESG issues should be addressed in their funds’ proxy voting, and that they would like to have more of a say in how their funds vote. A major challenge is that a few firms dominate the 401(k) space.
The SEC’s interest in increasing proxy voting transparency comes with a specific focus on retirement savings contributions to index fund investing.
Morningstar’s Sustainability Rating may provide a way for investors to include ESG considerations in their strategies, as the vast majority of DC plans offer at least one fund with a high Sustainability Rating.
A new PwC study shows that private equity (PE) firms are increasingly incorporating ESG into their investment processes, shifting from a compliance concern to a central consideration.
The study also found more of an ESG influence on business strategy, from portfolio risk assessments to management strategies and value creation.
Other key findings include 36% of respondents reporting that they consider climate risks when making investment decisions, 46% having set diversity and inclusion targets, and more than 50% stating they believe responsible ESG investing lies with the firm’s partners.
Morningstar launched its ESG Commitment Level and ESG Risk Rating Assessment to provide assessments of asset managers and companies. This launch follows the company’s recent acquisition of Sustainalytics and efforts to include Sustainalytics research into its equity research.
The Morningstar ESG Commitment Level provides assessments for nearly 900 funds and more than 70 asset managers, and the Morningstar ESG Risk Rating Assessment contextualizes risk for 13,000 companies across numerous industries.
The EnCap Energy Transition Fund 1 has officially closed, with $1.2 billion in commitments from corporate and government pension funds, sovereign wealth funds, endowments, foundations, family offices, and individuals.
The new fund aims to invest in companies working to advance the transition to a low-carbon future, especially through wind, solar, and energy storage enterprises. It has already deployed capital in the battery storage, distributed power, and utility-scale wind and solar sectors.
Companies and Industries
ESG disclosure regulation and oversight are expected to increase in the U.S., and lenders may face increased pressure to shift away from poor sustainability performers.
As government policy objectives begin to align more with climate objectives, it becomes more difficult for banks to take on the risk of lending to companies that lag behind.
One potential approach would be for banks to require ESG data in borrowers’ existing reporting, which will create the need for mature reporting architecture and data consistency.
Pensions & Investments: Investors call out companies over human rights risks
The Investor Alliance for Human Rights sent a statement to 106 companies that earned a score of zero on the 2020 Corporate Human Rights Benchmark Report.
Automotive manufacturing was the worst-performing sector on the report (with nearly two-thirds of companies scoring a zero in human rights).
One important factor to note is that some companies may be making progress but failing to adequately report it.
Fitch Ratings: ESG Factors Affect All US Public Finance Sectors
Governance is the most influential factor for U.S. Public Finance (USPF), and environmental factors have increased in importance even over the past two years.
Many social factors have negative rating effects for USPF sectors and credits, though it’s worth nothing that social factors have a positive influence on community development and social lending credits.
Financial Times: Business schools wake up and smell the (ESG) coffee
After facing criticism about the environmental impact of its aluminum pods, Nespresso turned to the NYU Stern School of Business to create a course to help employees understand sustainability. Other companies are following suit.
Some critics claim that business schools are at least partially to blame for business leaders focusing solely on shareholders and not long-term societal interests.
Business schools are beginning to implement executive courses a, but the demand is currently outpacing the supply.
Sustainability linked loans are emerging in the North American oil industry, signaling that there may be a shift in ESG investors’ current reluctance to invest in fossil fuels.
Oil companies have also begun linking their credit facilities to their sustainability targets in an effort to show commitment to sustainability/ESG.
This unnamed community bank, which had already received positive press coverage for being environmentally friendly due to its primarily online presence, explains its process of gathering environmental benchmarking data and assessing its risks.
The full downloadable report describes how the bank used S&P’s range of digital tools.
Mining Review Africa: No lack of enthusiasm for ESG principles
Mining companies are becoming increasingly invested in “doing better,” from meeting new regulations to improving stakeholder relations to moving toward industrial peace. One major area of focus is community impact.
Particularly in South Africa, despite recent efforts, there are lasting impact from Apartheid and even recent cases of human rights violations in mining communities. The industry is lacking a systematic approach to monitoring efforts and building a framework to collect data and improve future interventions.
With competing stakeholder priorities, a unified vision and coordinated strategy are critical for making meaningful progress.
For the new investment mandate, Natural Trust is aligning its investment and climate change strategies, as Robeco works to achieve its commitment to become carbon net zero by 2030.
The investment will provide assets for Robeco’s new Climate Global Credits Fund, which invests in global corporate bonds with climate targets and Paris Agreement alignment, aiming to decarbonize by 7% each year.
The project will be called Porthos, and it could store approximately 2.5 million tons of CO2 per year, storing and transporting carbon captured in Rotterdam port (from companies like hydrogen producers and refineries).
The CO2 will be fed to a pressurized pipeline to a platform in the North Sea, then pumped in an empty gas field more than three kilometers beneath the North Sea.
The project is backed by Shell, ExxonMobil, Air Liquide, and AIr Products, and a final decision for the project is planned for 2022.
ESG Today: EY US Announces ESG Leadership Appointments
The new appointments come amidst increasing focus on ESG issues, and include the appointment of Orlan Boston as Americas ESG Markets leader, Velislava Ivanova as Americas Chief Sustainability Officer, and Megan Hobson as US Corporate Sustainability Leader.
The National Law Review: SEC’s Focus on Climate and Environmental, Social and Governance Issues
The SEC’s recent appointments, Task Force launch, and other actions signal more of a focus on ESG issues, particularly the environment.
Currently, companies are required to report on things like costs associated with environmental law compliance, certain environmental litigation, and significant risk factors. This guidance leaves many unanswered questions about climate-related disclosure.
Recent public comments to the SEC regarding climate disclosure have been varied, but the SEC has stated that it will pursue tips/complaints from whistleblowers on ESG-related issues.
Currently, all conflict mineral regulations focus on tin, tantalum, tungsten, and gold; however, the scope of minerals is likely to expand due to increasing demand for minerals like cobalt and lithium (for use in things like electric batteries).
The U.S. has been the earliest adopter of new legislative responses, requiring companies to undertake a suitable due diligence process when using minerals mined from conflict zones and that are necessary to production.
To ensure compliance, companies must first gather Reasonable Country of Origin Inquiry (RCOI) data for all vendors and suppliers, survey suppliers in covered countries, compare with approved smelters, and validate conformance with auditing standards.