ESG Weekly News Update: May 20, 2022
General ESG News
InDaily: Engaging Stakeholders in The ESG Process
Josh Carver, Associate Director at BDO, says companies need to take the opportunity to begin ESG reporting now, instead of waiting for regulatory action. Proactive ESG action can lead to better lending conditions, access to new and emerging markets, and differentiation from the competition.
To focus ESG efforts, it is important to engage key stakeholder groups and identify high-priority and high-impact issues. Stakeholders can be grouped into tiers depending on their level of interest in and influence on the organization’s sustainability operations, and their opinions can be categorized accordingly.
Reuters: ESG Watch: New Study Sounds Alarm About Risk of Stranded Assets Due To Water Scarcity
There is little understanding of how overuse, pollution, and increasingly frequent extreme weather events are affecting water availability. A third of listed financial institutions do not assess exposure to water risk in their financial activities.
The United Nations is predicting a 40% global shortfall in water supply by 2030 if current consumption and production patterns do not change, according to a new report from CDP and nonprofit financial think-tank Planet Tracker.
This is an issue for all businesses and their investors. Water risks include the physical risks of extreme weather events such as droughts and floods, as well as transition risks including water-hungry products being banned, zero pollution laws such as those being introduced in the EU, and litigation risks arising from community opposition. Water is a business risk that companies’ investors can no longer ignore.
In the past several decades, countries and companies have operated under the belief that becoming mutual trading partners with economic interdependence fosters peace, leading to complex, global supply chains, reduced costs, and growing local economies.
However, this has also led to an explosion of CO2 emissions from industry and transportation, as well as substandard working conditions in many regions and supply chain tiers.
Ukraine has benefited from globalization and exports many materials that are critical to the global economy, especially wheat, steel, and neon gas. However, due to aggressive and targeted actions from Russia, the country is now at risk of food insecurity.
Ukrainian was formerly an IT community that was important to the global industry, and now uses this “IT army” to wage cyberattacks against Russian entities and to expose the country’s cruelty.
Some experts believe that globalization is at least partially responsible for the war and has led to uncontrolled corruption in Russia, China, and other regions.
The Logical Indian: Work From Home Or Office? Where Is the Future Work Culture Heading Towards?
Working from home provides flexibility in many areas, such as one’s daily wardrobe, transportation, schedule, family time, and finances. It also allows people to devote more time to improving mental health and reconnecting with others more often than when working in an office.
Recently, some employers required employees to return to the office while others declared working from home permanently. Data scientists from Ladders think working from home will continue to increase because they project that 25% of all North American professional positions would be remote by the end of 2022 and continue to grow through 2023. However, working from home will not completely replace working from the office.
Forbes: 4 Ways Companies Can Build Their ESG And Invest In Our Planet All Year Round
As ESG concerns have become priorities to both investors and consumers, companies are encouraged to be more transparent about ESG practices. Some ways for a company to get involved in ESG are to:
Measure impact and report progress for transparency.
Vote with dollars because consumers and investors want to see what a company is doing with its money.
Leave no stone unturned regarding sustainable alternatives in daily operations, such as environmentally friendly office supplies, coffee, light bulbs, and electronics.
Join a carbon offsetting program.
Morningstar: Sustainability or ESG? Do the Words We Use Make a Difference?
Sustainability and ESG are terms used almost equally now, but sustainability is a longer word. The author thinks many asset managers and intermediaries prefer ESG because it is values-neutral and broader to provide more flexibility in interpretation.
Investors are interested in sustainable investing although there is a wide gap between intentions and action. Because the majority does not know how to define ESG, using ESG challenges investors to act upon their intentions. Moreover, a poorly defined concept is vulnerable to opposition as frequently observed in politics. The author also cautions that “using the term ‘ESG’ rather than ‘sustainability’ may be obscuring more than it is clarifying. And that, in turn, may lead to less substantial outcomes than the world needs right now.”
Sustainability: Impact Travel Moves the Needle on Corporate ESG Programs
Some organizations have been supporting international and local impact projects to internalize sustainability and advance effective ESG programs. Impact travel involves team building and ESG travel. A five-step process to making ESG programs more effective through impact travel:
Understand the organization’s environmental and social footprints.
Develop ideas and solutions to reduce and offset environmental impacts and contribute to social initiatives.
Identify and prioritize impact projects in partnership with global and local non-governmental organizations and social enterprises.
Select top ESG contributors in the organization and take them on impact travel experiences.
Strengthen the company relationship with the project with continuous contact and communication of the positive impacts to the wider organization.
NPR: The U.S. Pledged Billions To Fight Climate Change. Then Came the Ukraine War
In 2021, the United States made promises to reduce greenhouse gas emissions within the next decade. The U.S. also owes developing countries billions of dollars of climate funding to help with clean energy transitions and protect communities from rising seas, heat waves, food instability, and other hazardous climate impacts. Developed countries are responsible for the large amounts of money owed to developing countries because they are the primary contributors to current global climate change issues.
The Russian invasion of Ukraine slowed down the U.S. efforts to satisfy these promises. The global economic inflation supports opposition to infrastructure legislation stuck in Congress that would help the U.S. invest in electric vehicles and energy-efficient buildings. The high gasoline prices are also encouraging fossil fuel companies to increase oil and gas production. Furthermore, U.S. policymakers are prioritizing their time and attention on the Ukraine war over climate initiatives.
Sustainability: Are Working-From-Home Sustainability Claims Fact Or Fiction?
The COVID-19 pandemic introduced working from home to many employees and decreased car, bus, and train travel around the world. The reduced traffic lowered CO2 emissions but likely increased energy consumption.
WSP UK, a London-based engineering consulting firm, found that remote work may only be more environmentally friendly in the summer in the UK due to several homes needing heat during the winter instead of one office building.
The pandemic also increased global sales of laptops, home office furniture, and home expansion construction, all of which induced greater energy consumption and pollution. Global Carbon Project’s recent paper disclosed that emissions are now close to pre-pandemic levels. All these effects would contribute to an organization's ESG efforts, especially Scope 3.
Entrepreneur: ESG Is the Next Frontier – a Conversation with Buro Happold’s Mike Stopka
Mike Stopka, an expert in ESG implementation who is now with Buro Happold, discusses how his clients are aware of ESG, but are all at different stages in their journey. Often, they are not equipped to sustain the change needed to achieve ambitious goals.
Companies are driven to seek help in their ESG implementation for different reasons. Some are fearful of regulation, others are receiving investor demands, and some want to become leaders in their industry.
Stopka finds that he often focuses his energy on helping clients tell an authentic and consistent story, not move up in the ratings and rankings. Additionally, he finds that staff members see opportunity – they want to work for an organization that stands for “positive change” – but the higher up you get, the more the conversation becomes about risk.
The ‘next frontier’ of ESG for companies is moving from the individual impact model, or the impacts within their direct control, toward a collective impact model, and working to address the impact to all stakeholders.
Main obstacles to success Stopka often encounters center around sustainability professionals lacking the ability to communicate from “a place of value that’s not their own.”
Lexology: A Fund Managers Guide to ESG Risks and Insurance – Why Do Insurers Care About ESG?
ESG subjects, such as greenwashing, and new reporting guidelines like the TCFD agenda, are now part of the insurance checklist for clients.
Insurance is taking into account ESG when evaluating potential and existing clients as part of their portfolio. The presence of transitional climate risks is real and will influence the value of investments. This will lead to creating exposure for asset managers and in turn insurers.
According to the 2021 EY Global Risk Disclosure Barometer, asset managers obtained the lowest score of those surveyed in terms of coverage and quality of climate risk disclosure when referring to TCFD recommendations.
Greenwashing concerns:
European Commission and consumer authorities screened websites to identify breaches of EU consumer law online and found that 42% of “green” claims were false or exaggerated
Reports suggest that nearly half (46%) of UK advisors think asset managers should be fined for greenwashing.
More regulatory actions towards asset managers as we have begun to see with the 2021 SEC probes against asset managers.
Lend Academy: ESG Presents Opportunities, Risks, and Greenwashing
New class of banking/financial players, digital eco-banks, encourages the industry to this more broadly about concepts of ESG.
CarbonPay is a purpose-driven, sustainable fintech platform that offers the market’s most impactful payment cards and more straightforward day-to-day climate action.
For every $1.5/£1 spent using a CarbonPay card, they automatically offset 1kg of CO2 at no extra cost.
Partnered with ClimateCare, a carbon finance for community development projects, develops aware-winning carbon reduction projects; SeaTree, a program under the nonprofit Sustainable Surf and Stripe Climate, a multidisciplinary group of top scientific experts to help find and evaluate the most promising carbon removal technologies.
Greenwashing can be an issue for companies like CarbonPay. It is important for the business model not to wrongfully conflate with greenwashing practices. The group of partners involved are actively combating climate change and investing in innovation.
RiskNet: Op Risk Data: Deutsche Greenwashing Fine a Regulatory Red Flag
Multiple financial institutions are now facing fines for wrongful market practices. Only in April of 2022, the 5 largest losses sum nearly $750 million based on sustainability, disclosure, and fiduciary activities: internal theft and fraud or unauthorized activity.
Thai subsidiary of French eyewear company, EssilorLuxottica, lost $272 million to international cyber criminals, who colluded with an Essilor employee in 2019 to withdraw funds from the subsidiary’s JP Morgan-help accounts in New York. EMTC claimed that JP Morgan missed various red flags that would have uncovered the fraud and it was liable for the loss – the basis of a suit against the bank.
Strategic Risk: Insurers Face Rising ESG Concerns
Environmental litigation in the US is becoming increasingly more common as well as globally with about 2,000 cases presently going through the courts worldwide says Deborah Newberry.
Just being perceived to be on the wrong side of the climate conversation is becoming more and more detrimental to a company's reputation, especially with the rise of younger more conscious consumers.
Allianz Commercial notes, “Reputations are built on many factors and there is no doubt that ESG initiatives have moved from ‘nice to haves’ to crucial business strategies. As much as it is an emerging opportunity, it is also a risk.”
Senior managers should be aware that they are increasingly being held personally accountable for governance failures relating to the financial consequences of climate change, they will be at risk if the company is found to have misrepresented themselves.
According to a blog published by broker Lockton, “Increased focus on ESG means insurers are taking a ‘more guarded approach’ to ESG policies, such as seeking more information on a company’s current and future strategies in terms of such issues.”
The Globe & Mail: The ESG Risk Is Real. Meet Three Women at The Forefront of Environmental Transformation
The Globe & Mail interviewed three women at the forefront of ESG transformation and these women are leading-edge legal minds from the global law firm Dentons.
Solving the ESG puzzle - Hazel Saffery:
She notes that for companies looking for a path to net zero, it is not a one-way path.
“More likely, it’s a combination of strategies, while ESG transformation can be complex, I thrive off solving the ESG puzzle.”
Leveraging a community of experts - Dina Awad:
“The network of people we can draw upon is a key to our success. Not all firms can do that – reach out with a question about another country and get an answer in 24 hours. We are able to track and build our understanding of legal developments globally with subject matter experts on the ground.”
Keeping a global perspective - Kelly Osaka:
“If clients can understand what kinds of litigation is happening across the country and around the world, they can take a larger view of their own operations. That might just prevent a lawsuit, or help clients fare better if they are challenged.”
JD Supra: Q&A: Why the Chemical Industry Is Leading the Way in ESG
Long: “In recent years, ESG has emerged as a more common go-to strategy. The push from consumers propelled it forward... they want to know that their end products were produced with as low of a carbon footprint as possible.”
Whitaker: “We knew in other parts of the world that sustainability and renewable chemical manufacturing were a little ahead of what it is here in the US, but if we could bring something to the market that was timed right, we would be in a position to be able to give ourselves a great chance for success.”
Long: “One of the first motivators that define the scope of ESG is policy. Some countries and regions are a bit more progressive than others, and it will be remarkably interesting to get that perspective considering HELM is EU-based.”
Whitaker: “Our existence is a motivator that defines our ESG scope, our competitive advantage in the marketplace is that we solve a problem for users of chemicals that are interested in having more sustainably oriented supply chains. We are a producer of renewable chemicals...”
Digital Nation: CEOs Prioritize Sustainability and Inflation Risks for 2022
Gartner's annual CEO and senior business executive survey is a global assessment of business leader priorities and technology-related thinking.
Social responsibility and ESG was the second largest contributor to CEO focus on corporate issues. According to Gartner, “to increase the stainable impact, executive leaders should refocus vision, put digital to work, and deliver price sensitive, sustainable products.”
Gartner named three actions CEOs involved in sustainability should apply to their organization:
Provide data on stakeholder pressure and direct and indirect sustainability impact
Uncover ways digital technology can create positive impact on material issues
Prove sustainable product impact through traceability and transparency.
ESG Today: More Than Half of Public Companies Still Housing ESG Data in Spreadsheets: EY Survey
A new survey released by professional services firm Ernst and Young (EY) LLP and nonprofit research group The Financial Education and Research Foundation indicated that 55% of companies are housing ESG data and spreadsheets, and the collection and reporting of ESG information remains a highly manual process.
While ESG data collection and reporting processes appeared to be relatively early stage, respondents reported that working on advancing the systems and working towards more mature models was taking place. Roughly two-thirds of respondents reported having dedicated substantial time over the past year to address ESG data collection, aggregation, and disclosure, with over half saying that they have increased effort significantly compared to prior years.
Sustainable Brands: We All Have An Important Role to Play in Putting People at the Heart of Sustainability
Shaw created the “sustain[HUMAN]ability Leadership Recognition Program” to recognize the wide range of organizations that are putting people at the heart of sustainability. Each year they look to highlight the work of a wide range of organizations, here are the organizations Shaw is recognizing this year.
The American Institute of Architects (AIA)
Appalachian Botanical Co.
ChemSec, the International Chemical Secretariat
The Cradle to Cradle Products Innovation Institute
Cushman and Wakefield
HOK
Metropolis
re:loom
ToxNot
Walmart
Fitch Ratings: Fitch Ratings Publishes Where ESG Matters in Credit for Corporates
Governance is the most significant environmental, social, and governance factors affecting corporate credit ratings according to a new report by Fitch Ratings.
Governance risks need to be managed by all corporate issuers to maintain credit quality. Several recent corporate failures have identified governance failings as a driver of the failures, heightening awareness of the issue. 11.6% of rated corporate issuers had at least one elevated governance score, indicating that governance concerns are credit relevant and have an impact on their credit ratings. There has been a progressive increase in the number of issuers with elevated scores for social and environmental factors, and they expect this trend to accelerate.
Diversity, Equity, and Inclusion
SHRM: Expect Equal Pay, DE&I Policies from Employers
ADP’s 2022 People at Work report showed that 76% of employees would consider new employment if they discovered that their current employer has an unfair gender gap or lacks a diversity, equity, and inclusion (DE&I) policy. These sentiments are slightly more likely from women than men. ADP’s chief economist mentions that “employers risk putting themselves at a competitive disadvantage if they fail to take company culture seriously.”
The ADP survey also found that salary is the most important job factor. However, at least half of the employees show a willingness to take a pay cut for a better work/life balance or workplace flexibility, such as a four-day workweek or an option to work remotely. Companies have been acting to improve flexibility, and data scientists project that 25% of all professional jobs in North America will be remote by the end of 2022 and increase through 2023.
Organizations should prioritize DE&I to create a well-rounded team that strengthens culture, decision-making, and equitable outcomes.
The Global and Mail: How Workplace Equity, Diversity And Inclusion Practices Foster Mental Health
Salwa Salek, chief equity, diversity, and inclusion (EDI) officer at Desjardins Group believes that having EDI embedded within an organization provides the opportunity to rebalance and address barriers and ideologies to ensure everyone is treated fairly. More than a moral imperative, it also allows companies to tap into the best talent and perspectives.
Employees feel safe and heard when they feel their employers have taken the time to educate their leaders and people about EDI. Embedding EDI practices are about creating a new ecosystem within the organization and listening to employees helps leaders understand what direction to go.
Leaders can also look outside their organization to trusted EDI partners to help them enhance their initiatives.
Forbes: How New Leaders Can Take Action Toward Diversity and Inclusion
Diversity and inclusion can help businesses become more productive, innovative, and profitable. When companies create diversity within their organization and inclusive teams, they deliver a higher chance of success.
A study by McKinsey & Company found that companies with diverse teams were 35% more likely to have above-average financial returns. Innovation is key to success in any business and establishing an inclusive team that attracts diverse employees regarding education, age, background, gender, and more can accelerate the company’s ability to innovate.
In today’s workplace, it is more important than ever to give visible recognition to employees of all backgrounds. Recognition is a key driver of diversity and inclusion, and it helps to create a more positive and cohesive work environment.
Forbes: Five Reasons To Develop Women To Lead And Influence Your Corporate ESG Operating Models
According to a Deloitte survey of executives, major ESG disclosure topics include diversity, equity, and inclusion (53%), greenhouse gas emissions (49%), health and safety (44%), governance practices (40%), water (38%) and energy (36%).
Chaitra Vedullapalli has identified 5 reasons for developing women to lead corporate ESG operations:
Women boost your bottom line.
Women bring greater depth to ESG.
Women drive stronger ESG integration.
Women establish credibility with NGOs and stakeholders.
Women boost your corporate citizenship reputation.
OpenGlobalRights: What It Takes To Bridge The Divide Between The Business Sector and Human Rights
The enactment of legislation at the regional and national levels requiring companies to carry out human rights due diligence, such as the newly proposed EU Directive on Corporate Sustainability Due Diligence, as well as negotiations on a binding international treaty on business and human rights, creates a window of opportunity for NGOs to be ambitious and innovative in testing new advocacy strategies to change corporate conduct and advance human rights.
As companies need to increasingly comply with human rights and sustainability regulations, NGOs and defenders can become key in risk assessment and do diligent processes, directly influencing the behavior of companies.
ESG Disclosures, Standards, Rankings, and Reporting
Bloomberg: Lack of Uniformity in ESG Ratings System Poses Risks, Opportunities
Major institutional investors predict that capital will increasingly be deployed to the most sustainable, ESG-committed companies, and corporate boards and executives are asking how to disclose their performance on these issues in the current disjointed ESG ratings landscape. The unregulated ratings environment is confusing for both investors and consumers.
Companies hoping to remain competitive must balance this uncertainty with compliance to avoid litigation, regulatory enforcement, reputational damage, and other costly consequences.
Aligning ESG disclosure with a reputable framework helps focus the information and enhance investor confidence, as does improving the accuracy, reliability, and comparability of the data disclosed.
Greenbiz: Are ESG Ratings Really Necessary?
ESG ratings evaluate the risks facing a company and its shareholders, and there are questions about the necessity of this system if credit ratings can essentially do the same thing. There are also questions about the possibility of rolling both rating systems into a single, unified system.
Beyond this, there is a bigger question about whether ESG ratings are actually helping companies and investors to move the needle on pressing issues.
Rating firms state that the risk information they provide and evaluate is complementary to traditional financial risk analysis, and experts in the industry believe in an eventual convergence. Others believe that ESG ratings should look beyond risk to assess companies’ impacts on people and the planet, because this will ultimately be financially relevant from a forward-looking perspective.
A survey by the European Commission in 2020 found that companies spend an average of 316 days a year completing sustainability reports and other disclosures, "and an average of 155 days per year responding to and managing sustainability-related ratings and ranking providers." The light at the end of this tunnel is that mitigating ESG risk now should ultimately serve to mitigate financial risk in the future.
Currently, evidence is mixed as to whether companies that receive high ESG ratings also see higher financial returns (or alpha), largely because there is still no consistent definition about what constitutes “good” ESG. As cash flows into ESG increase, so does the amount of backlash against the movement.
It is expected that ESG will cease to be a standalone topic in the coming years, and it will become integrated into regulation, risk assessment, etc.
Business Live: Goldman Finds ESG Ratings Can Be Misleading
Today, the quality regarding the usefulness of ESG rating is being questioned by market players.
Investors should be aware of multiple ESG ratings inconsistencies. From the perspective of fund managers, those seeking passive tracking indices, there are advantages of using ESG ratings.
According to Bloomberg Intelligence, there are more than 600 ratings, rankings, and data providers as well as standards and frameworks trying to measure ESG-related risks, according to the European Banking Federation.
When it comes to potential stricter regulation from government bodies, some rating agencies are not hoping for changes. MSCI, for instance, believes that transparency and potential conflicts of interest whing the wider ESG rating industry should foster the development of a voluntary principle of conduct.
The Star: Risk Management Encompasses ESG
Risk management and internal controls became key aspects of companies’ annual reports.
Companies are evaluating potential risks to be assessed and factored when designing an enterprise risk management (ERM) framework. There are unique differences between compliance risk and operational risk. The first is associated with government regulations and legal framework, as well as internal policies and guidelines. The second relates to the business operation of the company and is mainly internal.
When companies face financial risks, however, they face market, credit, and liquidity risk. Fraud, misconduct, litigation, property, or fire risks are all associated with hazard risk,
Introduced in 2014, FTSE4Good Bursa Malaysia Index (FAGBM) is an index developed by FTSE Russell and highlights companies that are able to address ESG Risks. To be an index member, a company would need to score at least 2.9 or higher for index inclusion, in addition to passing certain screenings, which are negative screens.
For ERM, the objective is not related to “what is the score” but rather to identify the risk factors, measure them as to how the risk factors may impact the company and the likelihood of occurring, implement control measures, and monitor the risk parameters.
ESG Today: Regulators, Standard Setters Urged to Align ESG Reporting Initiatives
Global standards setters and regulators are being urged to coordinate and align their sustainability reporting initiatives, in order to create globally consistent disclosure systems, in a new letter issued by the We Mean Business Coalition. The We Mean Business Coalition is A group of sustainable business and investment focus organizations including BSR, CDP, Ceres, CLG Europe, Climate Group, The B Team, and WBCSD.
The letter highlights the unique opportunities and warns of the potential downsides from misalignment created by the concurrent initiatives of multiple organizations to create rules and standards for companies to communicate their sustainability status, progress, and plans to investors and other stakeholders.
“By working together, we will unleash the potential of corporate climate leadership and pursuit of our shared goals of halving emissions by 2030 and securing a just, sustainable future for all,” the letter states.
According to the Complaint filed by the SEC, Vale deceived investors about the safety and stability of the dams it built to hold waste from its mining operations. The SEC alleges that Vale was aware of and concealed the risk that its Brumadinho dam could collapse.
The SEC looked beyond the formal SEC filings and concluded that Vale’s President and CEO falsely touted the condition of the dams in a public article, Vale produced a sustainability report that included false statements, and Vale conducted webinars that contained false proclamations about compliant measures and the general condition of the dam.
Takeaways:
Accountability and Transparency: The Complaint also highlights how the alignment of commitment and action will be scrutinized.
Stakeholder Capitalism: ESG is an enterprise-wide financial value proposition that signals balancing all stakeholders to drive that value.
Director Oversight and Management Execution: The SEC Complaint highlights the actions and statements made by Vale’s CEO, corporate geotechnical risk management group, and other executives.
JD Supra: SEC Enforcement Division's ESG Task Force "Lifts the Vale" on Its Scrutiny of ESG Disclosures
With the SEC's approach to the Vale litigation, public companies can anticipate how ESG disclosures and statements will be examined when the company experiences adverse events that are linked to ESG.
As alleged in the SEC's complaint, Vale failed to make appropriate disclosures before a disastrous environmental event that had a direct impact on its investors' bottom lines.
The SEC alleged that “Vale and its executives knowingly or recklessly engaged in deceptive conduct and made materially false and misleading statements to investors about the safety and stability of its dams.”
Gurbir Grewal said, “Many investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions,” and he stated that the company’s misstatements “undermined investors’ ability to evaluate the risks posed by Vale’s securities.”
Furthermore, the case demonstrates that the SEC will investigate a potential defendant's interactions with regulators when evaluating fraud charges.
Investment Trends
Fund Selector Asia: MSCI tackles ESG reporting for long-short portfolios
An MSCI report said that transparency is the most important principle for long-short portfolio ESG reporting as “[t]ransparency allows both regulators and clients to more accurately assess the ESG risks and opportunities to which the fund is exposed on both the long and the short sides of the portfolio.”
The report provides examples of what shorting is and is not in the ESG context. The researchers also emphasize considering whether the ESG reporting is from the approach of financial material impact or double materiality, which is the impact on the company and its outside environment and stakeholders.
In terms of net exposures, long and short legs would offset ESG metrics to get net portfolio level attributes. For gross exposures, ESG metrics would be summed across long and short legs.
Insider Intelligence: The Rise of ESG Investing
The recent report from Insider Intelligence, which is available for purchase, answers questions about why investment managers need a strong ESG offering, what is at stake for investment managers that fail to overcome the ESG data challenges, and how managers can use technology to roll out customized ESG products and meet increasing regulatory standards.
The report also finds that global investment managers will be competing for about $9 trillion in new ESG AUM between 2022 and 2025 (with total AUM exceeding $50 trillion).
Wall Street Journal: ‘ESG’ Is About Information, Not Imposition
Utah State Treasurer Marlo Oaks argues that ESG investment practice is apolitical, meant to give transparency to investors, and it depends on the beliefs of who constructs it. The factors that inform ESG ratings are not ‘law,’ and it is up to investors to use them as they see fit.
The article author states that while there are no laws that require investors to make decisions based solely on ESG information, but it is in their best interest to take ESG seriously.
National Review: ESG, Energy, and War: BlackRock’s Nod to Reality
There is increasing pressure against the SEC, originally created to protect investors, for hunting companies and hurting shareholders of corporations. In special, for the way the institution is treating companies that are not adapted in a proactive manner concerning climate change mitigation strategies.
Strategies to reduce emissions among countries are being thrown into the market without proper structure and due diligence. Germany’s energy transition is a clear example of how reckless the West decided to create economic mayhem and political opportunities for common enemies.
Biden Administration recently canceled one of the most high-profile oil and gas lease opportunities due to lack of interest in the leasing area. Many companies may have realized the regulatory and legal impact on their operations and how progressive environmental agenda and political atmosphere would be discouraging.
BlackRock has decided not to incorporate or support any further resolution on climate change as it is considered too extreme or too prescriptive.
Environmental Leader: Moody’s: More Net Zero Targets Could Increase Transition Risks in Emerging Markets
Emerging markets are more prone to transitional risks while targeting net zero carbon emissions. In certain industries, such as oil, gas, and steel, this impact could be even larger.
$1 Trillion in clean energy investments in emerging markets will be necessary to reach the International Energy Agency’s goals by 2050. That is substantially bigger than what was provided until 2020, $150Bi.
On the other hand, certain industries are less affected by transitional risks due to scalable technologies, such as electric utilities and automakers. Both Latin American utilities and Asia-Pacific refineries are the most well prepared for their transitional risks. Greater access to affordable clean energy by 2030 in emerging markets will enhance productivity.
More investment in low carbon and energy-efficient transitions will continue to increase in emerging markets. There is growing attention to sustainable debt issuance. They correspond to 14% of the global green, social and sustainability bonds in 2021.
ESG Today: Study Reveals Cost of Climate Disclosure for Issuers and Investors
According to a new survey released by the SustainAbility Institute at ERM, corporate issuers are currently spending an average of more than $675,000 per year on climate-related disclosures, and institutional investors are spending nearly $1.4 million a year on average to collect, analyze, and report climate data.
This survey comes as companies are facing increasing pressure to provide climate-related disclosures from multiple stakeholders who are increasingly introducing mandatory climate reporting rules.
The SEC has released its own estimates for complying with its proposed rules, predicting first-year costs at $640,000 and annual ongoing costs for issuers at $530,000.
The survey also asked the issuers and investors to rank the benefits provided by climate-related disclosures and impact assessments. For issuers, the top-ranked benefits included better performance in meeting sustainability, climate, ESG, and SDG goals, followed by better access to data capable of enhancing corporate strategy. For investors, the top break benefit was meeting client demand for climate disclosure and related products, followed by better performance in meeting sustainability, climate, ESG, and SDG goals.
Market Watch: Opinion: ‘Climate’ is the new buzzword in a crop of new ESG funds that were just launched
According to Morningstar data, asset managers opened 24 funds in the first quarter, including 15 exchange-traded funds, with sustainable mandates, with a fifth of those focusing on climate action.
Using the term “climate” may help a fund stand out in a crowded field. Including the first-quarter launches, Morningstar says there are now 555 sustainable open-end mutual funds and ETFs.
Morningstar’s Stankiewicz says. “However, I will say that funds that put it (climate) in the title should expect greater scrutiny from investors and higher expectations…especially as regulatory bodies turn greater attention to the space.”
Stankiewicz says “active funds can more easily engage directly with portfolio companies about sustainable business practices. Those portfolios are often more concentrated than passive index funds.”
Companies and Industries
Allianz: Building on Change: ESG Considerations for The Construction Industry
Buildings contribute to approximately 40% of global energy consumption, 25% of global water usage, and a third of greenhouse gas emissions. As ESG issues, legislation, and reporting requirements are quickly evolving around the world, the construction sector is pressured to act towards ESG goals for investment and minimize exposure to litigation.
The design and construction industry must evaluate what and how it builds with a particular focus on sustainability, durability, resilience, energy efficiency, waste reduction, and water conservation.
There are many organizations that provide measurable achievement and independent ratings for the design and construction of buildings, such as BREAM, WELL, LEED, and Green Globes.
DLAPiper: 10 Considerations For Companies On The Path To Sustainability
DLA Piper has outlined 10 different considerations for boards and management teams as they embark on the journey to sustainability:
Establish purpose and a corresponding tone at the top.
Engage as a board in the oversight of ESG.
Ensure sustainability competency.
Seek to understand better the carbon footprint of the company’s products and services and investigate new production and service delivery processes.
Engage experts or develop partnerships to identify, track, and disclose Scope 1, Scope 2, and if necessary, Scope 3 GHG emissions.
Map and address physical and economic risks from climate change, like sea-level rise and extreme weather events, that may have a material impact on the company’s business.
Create processes and controls to collect, manage, and analyze climate-related data.
Enhance record keeping, auditing, risk control, and compliance to support transition solutions.
Explore opportunities to collaborate with governments, financial institutions, technology companies, and environmental engineering firms.
Adopt a global perspective when addressing climate change-related disclosures, risks, opportunities, and transition plans.
Tracking, reporting, and calculating carbon emissions are a key part of progressing countries, industries, and companies towards net zero goals.
As a newly established discipline, carbon accounting, similar to ESG reporting, still lacks standardization and frameworks in how emissions are tracked, reduced, and mitigated.
The main carbon accounting standard used by businesses is the Greenhouse Gas (GHG) Protocol, which lays out the 3 scopes businesses should report and act upon.
Carbon accounting evolves from reporting in the use of goals and timeframes in which targets are met.
Timeframes are crucial in the deployment of technologies like carbon capture, removals, and achieving net zero.
Reuters: From Philanthropy To Radical New Business Models In Latin America
Felipe Chajin is the new Executive Director of Sistema B, the Latin America arm of the B Corp movement, which is based on the premise that companies should be “inclusive, equitable, and regenerative.”
Latin America boasts the second largest number of companies after Europe that are members of the world's largest corporate sustainability initiative, the United Nations Global Compact. The continent is a well-established network of business-led organizations promoting corporate responsibility. Sistema B works with businesses of all sizes not just large corporations, with smaller medium-sized firms generating 60% of productive employment in Latin America.
Chajin Hopes the economic turmoil of recent years will awaken companies to the relevance of business resilience and sustainability. “The pandemic has left many companies in a terrible situation because they hadn't prepared properly,” he observes. “In five to ten years’ time, the same will happen to companies that don't embrace purpose-led strategies.”
Financial Advisor: The New ESG Standards for Financial Companies
When financial companies disclose ESG reporting in their annual reports, proxy advisory firms take that information and put it on a rating system, where all the financial company ESG efforts are graded on an ABCD+- level. Proxy advisors rarely dive deep into the reasoning for companies’ ratings which poses a challenge for investors attempting to ascertain which companies are the most environmentally or socially conscious.
Proxy advisors issuing ratings need to consider reforming their organizations to focus on either ESG ratings or ESG consulting. As both operations create the challenges, companies are trying to leverage the system for their own beneficial evaluations, instead of identifying true change throughout the financial industry.
JD Supra: ESG Taking Center Stage at The SEC – What Can Publicly Traded Employers Expect?
With the SEC posing an increased structure for climate-related disclosure, publicly traded companies are wondering if more detailed disclosures on their social and governance metrics are next.
Publicly traded companies are already required to provide information regarding human capital on their form 10K reports, without a standardized disclosure requirement. A survey from Financial Executives International surveyed the 10K reports of 150 companies from the S&P 500 and determined that human capital disclosures range from a single paragraph to three full pages, and there was little uniformity in what information was included.
SEC leadership has suggested that the agency could eventually require information on employee compensation, benefits, safety, and even workforce demographics as a part of human capital disclosures.
Government Policy
Mondaq: What’s Next: European Union Regulators Continue To Drive Change In ESG
The EU has been meeting in recent months to discuss strengthening defense capabilities, reducing energy dependency, and building a growth and investment model for 2030. Resulting regulations include the Corporate Sustainability Reporting Directive (CSRD), the Non-Financial Reporting Directive (NFRD), and the Corporate Sustainability Due Diligence Proposal (DD Directive).
To get ahead of regulation and to make impactful changes through ESG integration, companies can:
Assess and update risk management processes and tools
(Re)evaluate corporate strategy relative to ESG issues
Strengthen governance structure
Set ESG goals and develop related targets/KPIs
Evaluate marketing messaging.
GlobalData: It could take a climate catastrophe to put ESG back on top of political agenda
The government has been recently sidelining ESG in favor of focusing on short-term issues and backsliding on its sustainability commitments.
The war in Ukraine has highlighted our dependence on imported energy and sparked investment in fossil fuel production for short-term energy security.
According to Rachel Foster Jones: “Instead of seizing an opportunity to double down on renewables and improve our long-term energy security, the government has gone missing on its commitments at the first opportunity, for political expediency.”
1 News: $2.9B Climate Change Boost for EVs, Waste, Emission Reduction
New Zealand has made a $2.9 billion investment to tackle climate change by introducing a new scrap-and-replace scheme to help low- and middle-income New Zealanders buy EVs and provide national curbside waste collection services.
The new clean car upgrade scheme will help low- and middle-income people buy low emission alternatives in exchange for scrapping their old car. Overall, $1.2 billion would go from the climate emergency response fund to “support people to move to public transport, increase walking and cycling, accelerate the uptake of clean vehicles, and decarbonize our freight system.” Said Transport Minister Michael Wood.
The government will invest in waste infrastructure, such as composting, and all municipal landfills need to have gas capture systems by 2026.