ESG Weekly News Update: May 28, 2021
Grand Canyon National Park, Arizona, USA
General ESG News
Personnel Today: What does purposeful business mean for HR?
Leaders at 14 major companies have pledged to prioritize the wellbeing of their personnel, forming The Purposeful Company with the aim of establishing criteria for measuring purpose statements.
Annual meetings increasingly feature demands from activist investors, and the focus is on real action, especially for younger generations.
David Logan, author of Companies for Good, notes that companies are “under pressure from their employees to cut their environmental impact, to make a contribution to society – what’s new and developing rapidly is their role in empowering employees to help them do that.”
Experts note that transparency and measurement need to be at the center of companies’ commitments as companies report on diversity and inclusion, philanthropy, environmental sustainability, etc.
The Conference Board has issued a report offering insights for business leaders about confronting inequality and injustice in society and in their businesses.
Insights include change starting with leadership, looking inside first (then outward), embracing partnerships, and choosing progress over perfection.
The report also advocates for investing in high-quality education, committing to pay equity, and taking on a holistic view of employee wellness.
Harvard Law School Forum on Corporate Governance: Incorporating ESG Measures into Executive Compensation Plans
The role of ESG in long-term value creation has been steadily increasing, and ESG investors have made their expectations known; greater attention is already being dedicated to climate topics from a policy/regulatory perspective.
Financial measures have typically been the predominant form of executive incentivization, and since ESG results are shown to drive long-term shareholder value, it’s likely that executive incentive plan designs will increasingly include “quantifiable” ESG measures.
Currently, less than 40% of Fortune 100 companies have incorporated ESG incentives into their executive compensation plans, and the companies that do this evaluate ESG measures on a qualitative basis.
When establishing such plans, companies need to consider several things: What are the company’s relevant ESG issues? Which ESG topics or issues have the greatest impact on enterprise value creation? How is ESG performance measured and is the information reliable? What is the appropriate time horizon for measuring ESG priorities?
World Economic Forum: Ensuring supply chains are deforestation-free is still a priority. This is why
Many corporations dealing in agricultural and forestry commodities have made deforestation reduction/elimination commitments, and buyers are expecting companies to halt deforestation and human rights abuses throughout their supply chains.
It may also be useful to use the existing accountability infrastructure for deforestation and human rights commitments (e.g., the Accountability Framework) to measure other sustainability commitments, since ensuring that supply chains protect ecosystems and land rights often provides a clear route for achieving other sustainability priorities.
One major driver for eliminating deforestation is the rise of net-zero emissions commitments -- to achieve these goals, companies with large land footprints will have to take immediate action to halt deforestation and conversion.
Angel Oak Capital Advisors just became the first U.S. lender to sell a “social” mortgage bond without government backing, marking a large step for private U.S. mortgage lenders looking to join the sustainable finance movement.
The bond helped finance about $232 million in home loans, mostly to self-employed borrowers, small business owners, and others excluded from traditional home loan programs.
While the lender doesn’t specifically focus on financing affordable housing, its head of ESG stated that the issue of racial inequality is “top of mind,” and the firm wants to expand its lending across different market segments.
ESG Disclosures, Standards, Rankings, and Reporting
As the increase in ESG investing continues, it is important to look at what is included in “ESG” funds -- currently, each of the world’s 20 biggest ESG funds holds, on average, investments in 17 fossil-fuel producers, as well as other “sin” stocks.
Governments are noticing, and one option is to increase regulation. Another option is for investors to make their own ESG investing decisions, but this will require improved corporate disclosure.
Robust disclosure about carbon footprints would allow investors to see the small number of firms that account for more than 80% of the world’s emissions, as well as the small number of firms that are actually investing in renewable energy and other sustainable technologies.
Instead of defining ESG/sustainability terms, CFA Institute has chosen to describe them in “plain language” in its forthcoming draft disclosure standards. The standards are now organized primarily by components of investment strategy, instead of by ESG feature.
The standards are similar to the EU’s Sustainable Finance Disclosure Regulation (SFDR), but with a slightly different scope and no additional goals.
Since the standards are voluntary, they can be implemented faster than what is typically possible through legislation/regulation.
The SEC plans to propose a rule requiring public companies to publish certain human capital disclosures, including metrics related to diversity, turnover rate, and full- and part-time employees.
The SEC has also made it clear that future rules will also include extensive climate-related disclosures, further confirming the agency’s commitment to cementing ESG principles into its regulatory regime.
The total investment from Canada’s top five pensions funds into the U.S.-listed shares of Canada's top four oil sands producers increased to $2.4 billion in the first quarter of 2021, up 147% from one year ago. The funds are currently facing pressure to be environmentally responsible while also maximizing returns.
Some fund managers say they prefer to continue investing in fossil fuel producers to help those firms transition toward producing cleaner energy.
Overall, however, annual reports show three of the five pension funds decreased their energy exposure in 2020 from 2019.
Responsible Investor: The State of ESG 2.0: from incremental to systemic change
Predistribution Initiative’s ESG 2.0 report notes, “In practice, the negative impacts of weak capital structures are typically being addressed piecemeal through company-by-company interventions that focus on their operations, like a game of whack-a-mole; but the key roots of the problems — the investment structures themselves — are left unaddressed.” It then proposes 11 preliminary solutions and more practical applications.
The report highlights the opportunity for asset allocators to take action and join in the systematic change, instead of implementing changes at the individual level.
These developments have all informed the World Benchmarking Alliance’s Financial System Transformation Benchmark, which will be published in June with the intent of highlighting financial institutions’ support of sustainable progress.
Industry groups are arguing that asset managers who lend securities should create policies using ESG principles for how they recall their shares for voting.
Shareholders can lend securities to other investors (for a fee), but this can conflict with ESG investing, since asset owners who lent their shares could be unable to vote for policies that fit with their ESG goals at company meetings.
Experts advise that securities lenders develop a recall policy to identify the resolutions to vote on by company and issue, and to establish acceptable collateral.
Financial Times: Fund managers will soon be climate advisers
Asset managers have responded to the recent explosion in ESG interest with a flurry of product launches, which have been successful so far -- “phase one.”
The next opportunity for asset managers is to offer ESG advice to investors as they work to meet their ESG investment and net-zero commitments -- “phase two.”
Investment Week: Vanguard expands ESG range with global corporate bond ETF
The Vanguard ESG Global Corporate Bond UCITS ETF will track the Bloomberg Barclays MSCI Global Corporate Float-Adjusted Liquid Bond Screened index.
The ETF will exclude companies involved in weapons, non-renewable energy, vice products, and companies involved in controversies related to the UN Global Compact Principles.
Investment Week: Greenwashing tops investors’ concerns around ESG
Research from Quilter indicates that 44% of investors worry that ESG products are not what they claim to be, and 42% have concerts about the high fees associated with such products.
However, more than half of the investors surveyed indicated that they are likely to consider responsible investing more in the future; 11% are “ESG-dedicated” and already include ESG elements as a major part of their portfolio.
The Treasury Select Committee group of MPs recently argued the Financial Conduct Authority should be given powers to tackle greenwashing.
Putnam Investments just launched its first four actively managed ETFs, two of which are based on the company’s ESG funds: the Putnam Sustainable Leaders ETF (PLDR) and the Putnam Sustainable Future ETF (PFUT).
PLDR invests in companies demonstrating leadership on sustainability issues that are financially material, and PFUT invests in companies with products and series that provide solutions to sustainability challenges.
The purpose of the fund created by Dow, LyondellBasell, and NOVA Chemicals is to invest in circular plastics solutions, including recycling technologies, equipment upgrades, and infrastructure solutions. Broadly, the fund will invest in the strategic areas of access, optimization, and manufacturing.
These investments are expected to increase the collected and recycling of targeted plastics by improving transportation, logistics, and recycling sortation systems.
The fund launched with a $25 million initial commitment, and it will be managed by the investment firm Closed Loop Partners.
Mercer launched the Responsible Investment Total Evaluation (RITE) for institutional investors, and its aim is to monitor ESG integration into investment processes, as well as to identify areas where interventions can be implemented to deliver a positive societal and/or environmental impact.
RITE incorporates 75 data points aligned with regulatory guidance across 21 categories to offer performance insights and evaluate investors’ ESG credentials. Evaluations are presented on a scale of C to A++, and they include specific actions investors can use to demonstrate improvement.
Orange launched the Orange Ventures Impact investment vehicles aimed at funding startups focused on environment, inclusion, and CareTech. Specifically, the fund will target French and European startups in the seed stage or with proven development potential.
Orange Ventures plans to dedicate special attention to monitoring the impact of the portfolio over time, including the number of people helped, the jobs created in the sustainable economy, and the tons of CO2 avoided.
Companies and Industries
Chief Executive: A Watershed Day For Exxon, Activists And ESG
Last week, owners of ExxonMobil voted to upend the company’s board and install two new directors to push the company to reduce its emissions. This marks a huge win for activist investors, including Engine No. 1 that has been arguing that ExxonMobil has been doing a poor job in preparing for a future less reliant on fossil fuels.
On the same day, 60% of Chevron’s shareholders pushed for the company to reduce emissions from the company’s consumers, and a court in the Netherlands said that Shell must cut its greenhouse gas emissions by 45% by 2030.
Wall Street Journal: Oil Giants Are Dealt Major Defeats on Climate Change as Pressures Intensify
ExxonMobil and Shell faced major defeats this week as a Dutch court ruled that Shell is partially responsible for climate change (and ordered the company to drastically reduce its emissions by 2030) and activist investors won seats on ExxonMobil’s board.
These decisions demonstrate the dramatic shift in pressure for oil and gas companies. Many have initiated programs to reduce emissions, but they are struggling to do so without sacrificing returns.
The Dutch court ruling could set a precedent for Western jurisdictions and other energy-intensive sectors.
ExxonMobil’s defeat was largely due to the aggressive campaign from Engine No. 1, a hedge fund that owns just 0.02% of the company’s stock.
Institutional Investor: Activist Wins Two Exxon Board Seats in ‘Historic’ Vote on Sustainability
Engine No. 1 proposed and won two board seats from ExxonMobil, marking one of the biggest activist upsets in recent years (though the results are preliminary and have not been certified yet).
The small hedge fund accused the company of trying to get shareholders to switch their votes last-minute, as well as trying to delay the closing of the polls.
Preliminary winners were Gregory Goff, the former executive vice chairman of Marathon Petroleum, and Kaisa Hietala, a partner of sustainable business advisory firm Gaia Consulting, and at least two spots remain undetermined.
Total Food Service: The Pillars of Business Evolution
The COVID-19 pandemic has led to an erosion in trust, and companies in the hospitality business are being forced to evolve to meet growing demands for responsible business practices. Crucial pillars that need to be addressed for future success include:
Reducing carbon footprints
Solving the food waste problem
Energy management and equipment uptime
There is some evidence that ESG firms are more profitable, but it depends on the time, country, and the measures used. It is not clear that ESG is a main profit driver.
Resiliency deals with long-term profits, and while ESG tends to increase resilience, there is some variation. There is also concern about a trade-off between prioritizing ESG and prioritizing financial performance.
One dominant measure of resilience is resource survival, as well as measuring the exposure of banks to systemic risks. When banks score high on certain ESG measures, systemic risk decreases, but there is still discrepancy across banks, regions, and ESG measures.
High ESG scores signal “something” to regulators and investors, which can also increase profitability.
Variables like human rights, product responsibility, and workforce training are long-term investments. They are costly for short-term profits but lead to long-term gains, and are therefore rated high for resiliency. If ESG measures indicate a true long-term orientation, they will drive both long-term profits and ESG investments.
S&P Global: Banks are more ESG aware but struggle with data
A recent S&P panel with banking professionals found that they are paying more attention to ESG issues due to demand from communities, but they lack streamlined data, pointing to both a lack of education and resources, as well as difficulty in quantifying progress.
Despite the data challenges, some banks have begun publishing sustainability reports focusing on their values, and many stakeholders appreciate the effort and transparency, even if there is a lack of consistency.
New data from Nomura Greentech show that U.S. IPOs by special purpose acquisition companies (SPACs) with a focus on ESG or sustainability in sectors like environmental technology, transportation, water, energy, and industrials totaled more than 49 in the first four months of 2021 (a significant increase from 2020).
So far, 32 SPAC mergers with ESG firms have been announced in 2021, compared to 31 total for 2020, and the value for the deals is more than 2.5 times that of 2020.
Major drivers in ESG growth are lower costs driven by new technology, customer demand for sustainability products and services, and policy support.
The massive growth has caught the attention of regulators, who are concerned that investors may be put at risk by the lax rules allowing SPACs to avoid the intense due diligence that accompanies normal IPOs.
The new ESG Sector Discovery Tool for Public Finance and Global Infrastructure offers a top-down view of the credit reliance and materiality of ESG issues across regions and sectors, showing the distribution of a variety of Fitch Ratings’ scores.
The tool highlights trends and lets users see where ESG issues are affecting portfolios, and is available on the Fitch Ratings website.
Banking Exchange: US banks need to prepare for regulation on ESG
Rules are expected to come into effect for ESG disclosures that will limit (and possibly punish) banks that lend money to clients that actively ignore climate change policies.
Banks may ultimately be asked to take account of the sustainability impact of their loans and investments, according to a partner at the law firm Wachtell, Lipton, Rosen, & Katz.
While the EU is leading the regulatory charge, the SEC warns against following this style as it may “impede creative thinking” by homogenizing disclosures and capital allocation decisions.
In December of 2020, the US Federal Reserve joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), and the SEC formed a climate- and ESG-dedicated task force, all signaling the move toward increased oversight and regulation.
BlackRock could end up determining the outcome of the proxy battle between ExxonMobil and Engine No. 1, the hedge fund that is fighting to alter the company’s board and future direction, arguing that it overspends on fossil fuels and lacks a strategy for transitioning to cleaner energy.
BlackRock’s votes could help Engine No. 1 win seats on the board, though it has declined to comment on its stance despite being Exxon’s second-largest shareholder.
Last year, BlackRock voted against two Exxon directors, citing a lack of progress on climate reporting -- this may be an indication of future voting practices, as the firm faces pressure to uphold its widely publicized climate priorities and goals.
While Exxon lacks targets for restricting customers’ emissions, it has been working to meet other stakeholder demands, such as expanding its board and pledging to increase spending on lower-carbon initiatives.
The Investor Watch Group just launched its Industry Tracker, which houses research focused on industrial sectors that are difficult to decarbonize. The tool is meant to provide investors with the information they need to engage with these sectors regarding their climate and energy transition plans.
Sectors included in the tracker are cement, steel, chemicals, capital goods, technology, health, and other consumer sectors, covering the most impactful global companies.
The tracker builds on previous research from CDP, as well as the Investor Watch Group’s Carbon Tracker and Planet Tracker.
A Dutch court ruled that Shell must cut its emissions by 45% by 2030 (from a 2019 baseline), and the ruling also holds the companies responsible for Scope 3 emissions from its value chain.
This ruling came just days after 88% of shareholders approved Shell’s energy transition strategy, which made Shell the first major energy company to bring climate plans to a shareholder vote. The strategy includes a commitment to become net-zero by 2050.
Despite Shell’s intention to appeal the decision, the ruling may set a precedent for similar actions across other high-emitting sectors.
S&P launched the Electric Quarterly Reports (EQR) that track power purchase agreements (PPAs) in the U.S. and allow market participants to track clean energy pricing trends.
The dataset will provide details on bulk power transactions, including the parties involved, prices, contract duration, volumes, rates, and locations. The intention is for the dataset to help with due diligence efforts for utilities and plants, as well as with forecasting power plant revenues.
Government Executive: Biden Requires Climate Considerations in Budget Process
President Biden signed an executive order aimed at addressing climate risks to the U.S. government, financial system, and citizens. The order directs the relevant councils to identify climate-related financial risks and develop strategies to address them in long-term budget projections.
The order also calls for the publishing of an annual report (in the president’s budget) about the government’s climate risk exposure, as well as to improve accounting for climate-related financial expenses.
Another provision in the order asks the Labor Department to publish rules by September 2021 that suspend or revise the previous rules banning investment firms from including ESG considerations in pension plans.
Plan Adviser: Bill Would Allow Retirement Plans to Use ESG Investments
Senators have introduced legislation in both chambers of Congress that would amend the Employee Retirement Income Security Act (ERISA) to clearly allow plans to include ESG factors in investment decisions (as long as all fiduciary obligations are met).
Under the Trump Administration, the Department of Labor proposed rules making it more difficult for retirement plans to include ESG considerations, and the current administration is in the process of rolling back these rules.
The Securities Industry and Financial Markets Association (SIFMA) supports the new bill, stating “it is important for financial institutions to be able to consider all factors, including ESG factors, as part of an investment and risk management strategy.”
President Biden’s recent executive order urges key regulators to assess climate-related financial risks, and suggests that the relevant councils make recommendations within six months about how to mitigate these risks.
The order also directs the National Economic Council to determine the financing needed to transition to a carbon-free economy in the next three decades.
The order tasks the Department of Labor with determining how to protect pensions and retirement savings against the costs of climate change.