General ESG News
The COVID-19 pandemic has brought the social pillar of ESG from being the “middle child” to being front-of-mind for all stakeholders. In particular, financial inclusion is a topic that has received increasing attention over the past year. The pandemic has:
Reversed social and economic development gains that have taken decades to achieve.
Widened the digital gap by increasing the digitalization of those already engaged in technological financial services but also increasing the number of underserved.
Highlighted the role of inclusive financial systems in times of crisis.
To make progress, financial services firms need to broaden their understanding of financial inclusion beyond “charitable ventures.”
New entrants are serving to enable financial inclusion through innovations like mobile technologies, the Internet of Things, 5G, AI, smart data, automation, open finance, digital identities, central bank digital currencies, and more.
ESG investments have reached $35 trillion and are expected to reach $53 trillion by 2025, largely driven by investors’ desires to have a positive societal impact. However, experts argue that there are flaws in how companies’ performance is being rated in that their supply chains are overlooked.
As supply chains increasingly globalize, most ESG rating agencies do not measure ESG performance through the lens of the global supply chain.
Some categorize supply chain as an item within the “S” pillar, effectively overlooking issues like carbon emissions, climate change impacts, human rights, and data security. Additionally, even when companies collect more information on their suppliers’ performance, there is no unified reporting standard, so selective reporting can become an issue. For example, Amazon is a bigger company than Walmart in terms of annual sales but only has reported emissions from shipments amounting to less than 15% of Walmart’s.
One recent study found that companies tend to report on their more responsible suppliers and “conceal” those that are lagging behind. To improve transparency and consistency, ESG rating agencies should redesign their methodologies to take into account operations from across the entire supply chain and create incentives for companies to report their supply chain partners’ activities.
Biodiversity is emerging as the next focus area for capital markets, and it will increase the amount of data points asset managers will need to collect and analyze within their investment decisions. The industry is shifting its attention toward the Task Force on Nature-Related Financial Disclosures.
There are 21 global biodiversity targets to reach by 2050, with milestones like achieving 30% of global land and sea areas conserved and halving the rate of species extinction by 2030.
Regulatory initiatives and international standards will play a large role in increasing accessibility and transparency and helping asset managers evaluate the ESG credibility of their investments.
As more sectors become caught up in the “race to greater sustainability,” liquidity becomes an issue as portfolio managers may be unable to enter or exit a strategy in a timely manner.
The international Sustainability Standards Board (ISSB) responded to the sustainability reporting community and plans to have an international reporting framework for enhanced comparability, consistency and reliable disclosure reporting by April 2022.
Sustainable Aviation Buyers Alliance, opened to new members for the first time and the World Economic Forum’s Target True Zero initiative committed to use new technologies such as electric and hydrogen and hybrid aircraft to curb carbon footprint while, 28 Industrial companies pledged to grow supply and demand of green hydrogen reducing CO2 emissions by 14 million tons a year; These are among a few of the commitments/pledges made at COP 26 this year.
The Conversation: Big business and climate change: finally, sustainability pays
Prioritizing profit at the expense of society or the environment is becoming increasingly difficult in terms of access to capital, shareholder demands, and reputational risks.
“Purpose and impact-driven" enterprises, which actively try to solve social and environmental problems, have been increasing. Now, large corporations are also participating in the “trend” of purpose and impact.
The strong performance of ESG investments is catching the attention of both investors and corporations, and the ability to ignore ESG risks in portfolios is decreasing.
For the finance sector, banks and lenders, in order to meet their targets, will be increasingly expecting recipients of their funding to have environmental commitments of their own.
US Treasury Department warned that rising temperatures were an “emerging threat” to financial stability and said that regulators should use scenario analyses to build robust predictive risk-management tools.
The Netherlands and France have put their banks through climate change exams, and the Bank of England and the European Central Bank plan to do the same in the coming months. The Nank of England's upcoming analysis includes two scenarios, one is 1.8 degrees Celsius increase in global temperature and the other is 3.3 degrees Celsius increase.
Many organizations are stuck in the planning and promising phases of ESG initiatives and falling short of making impactful and measurable results while, “73% of more than 4,000 C-suite executives identified ‘becoming a truly sustainable and responsible business’ as a top priority for their organization over the next 3 years”, according to Accenture’s Shaping the Sustainable Organization study.
Collective intelligence is central to making responsible choices and unlocking a company’s full potential on sustainability issues.
Owens Corning is an American company that is the largest manufacturer of fiberglass composites. They also develop and produce insulation and roofing materials. This year, Brian Chambers, CEO at Owens Corning was awarded the 2021 Responsible CEO of the Year Award.
Owens Corning was the first U.S. based industrial company to issue a green bond, in August of 2019. In this bond the company has committed to spend $445 million on eligible sustainability projects.
Delegations left the conference with goals not adequate enough to satisfy the Paris Climate Agreement. Representatives from hard-hit nations fear they are facing existential threat. Commitments were made here, however promising, will depend on words becoming concrete action.
Wealthy countries were condemned for producing a large percentage of greenhouse gas emissions but resisting mandates to provide cash for developing nations to limit their massive pollution.
The Conference of Parties, or COP26, agreement says that in order to achieve the 2015 Paris accord’s ambitious goal of capping global warming at 1.5 degrees Celsius (2.7 Fahrenheit) by the end of the century compared with pre-industrial times, countries will need to make “rapid, deep and sustained reductions in global greenhouse gas emissions, including reducing global carbon dioxide emissions by 45% by 2030 relative to the 2010 level and to net zero around mid-century, as well as deep reductions in other greenhouse gases.”
BofA researchers note:
Electric Vehicles and solar storage is down. (89%)
The cost of solar is down. (85%)
Wind is cheaper. (45%)
Coal is responsible for about 20% of all greenhouse gas emissions but it is also a fuel that historically has been relatively easy to replace. China and India pushed back against stricter coal rules.
ESG Disclosures, Standards, Rankings, and Reporting
Yahoo! Finance: The ISSB: A Game-Changer for ESG Reporting
The new International Sustainability Standards Board (ISSB) aims to develop globally accepted sustainability reporting standards. The board will not be starting from scratch – it will use existing major frameworks like TCFD and SASB standards to develop its set of global standards.
The ISSB will help clear up confusion and take the burden off of companies when it comes to knowing what information to collect and report. It promises simplicity in working to create reports that meet investor expectations, and Forbes has called it the “biggest change in corporate reporting since the 1930s.”
The IFRS announcement that it will consolidate the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB) is one of the most important developments from the COP26 conference.
As ESG gains momentum and urgency, the fragmentation of reporting standards and frameworks serves no one, and the new ISSB will work to achieve global, consistent, comparable ESG-related disclosure standards.
A unified system will align incentives, promote more widespread usage, allow businesses to focus on long-term value creation, and enable all stakeholders to understand which companies are truly delivering on their commitments.
Forbes: Hit A Home Run with ESG Metrics
Many businesses are still struggling to keep up with the velocity and complexity of risk within ESG. Governance Risk Compliance is shifting into ESG. An ESG score can help you understand how a company behaves, reacts, and adapts and that can key pillar for investor decision making.
Environmental or the E, in ESG: How your company interacts with the natural world, using resources, waste production, water/energy use.
Social or S, in ESG: How your company handles employee relations, health and safety, human rights, community relations/social media.
Governance or G, in ESG: How your company governs itself, policy making, board governance, diversity equity and inclusion (DEI), ethics, executive compensation.
Webinar on Dec 7th 1pm ET, A collection of marketing agency folks put together a lunch and learn where they will talk about the importance of adding a storytelling element to your corporate sustainability reporting frameworks.
Moody’s has expanded its ESG Issuer Profile Scores and Credit Impact Scores to target large U.S. cities and counties with between $500 million and $1 billion in outstanding debt.
The reports reveal that exposure to environmental considerations is negative (or highly negative) for more than 40% of the U.S. cities and moderately negative for 40% of the counties.
Social considerations tend to have a lower impact on both scores, and governance considerations were generally positive for cities and strongly positive for counties.
A new NAVEX survey of financial and HR compliance managers and executives across the U.S. and Europe found that more than 90% of respondents say ESG reporting is included as part of their companies’ compliance programs. For those who responded that ESG reporting is not currently part of their compliance programs, they believe it should be.
The findings also indicate that there is a need for standardized sustainability measurement and reporting, as respondents commonly used a variety of frameworks including SASB, TCFD, GRI, and CDP.
SBTi has published its Net-Zero Foundations for Financial Institutions Draft for public consultation and its Net Zero Standard to help assess and certify corporate net-zero commitments. The draft for financial institutions specifically aims to help develop net-zero standards for the financial sector.
In the new paper, SBTi identified three broad approaches to net zero definitions for financial institutions, including claims that are based on financed emissions, aligning portfolios so each asset achieves net zero, and a broader approach that considers the role of financial institutions in financing decarbonization activities.
The new iShares ESG Advanced Investment Grade Corporate Bond ETF (ELQD) and iShares ESG MSCI Min Vol Factor ETF (ESMV) are sustainable version of BlackRock’s flagship equity factor and fixed income funds.
These platforms aim to democratize sustainable investing and allow investors to meet their customized sustainability goals. As part of iShares’ ESG Advanced Suite, the new funds provide exposure to issuers with average or above average ESG ratings relative to their sector peers and remove exposure to activities like fossil fuels, firearms, and gambling.
Russell Investment’s recent ESG Manager Survey reflects the views of 369 global asset managers representing $79.6 trillion AUM. It published the following key findings:
90% of respondents say they include ESG in discussions with underlying investments
60% of managers globally identify climate change/environmental issues as their clients’ top ESG concern
80% of managers highlight governance as the most important ESG factor (but Continental European and Canadian managers put greater focus on environmental issues).
ESG investing is an investment approach that incorporates environmental, social, and governance factors into decisions throughout the investment life cycle. There is increasing evidence that an opportunity-seeking approach to ESG, in particular, leads to investments in businesses that are more successful over the long term.
Alternatively, impact investments are “made with the intention to generate positive, measurable social and environmental impact alongside a financial return,” according to the Global Impact Investing Network.
The world needs both ESG and impact investing to address its major challenges. ESG opportunity seekers can help build better businesses that account for stakeholder considerations, and impact investing growth can help close the investment gap needed to meet the UN Sustainable Development Goals.
[Summary provided] Interest in environmental, social and corporate governance investing has been growing for years, but it skyrocketed during the Covid-19 pandemic, driven by women investors.
As more women become the “breadwinners” in the family, more dollars go to ESG investments.
Studies show that interest in ESG investing isn’t isolated to younger female investors; the majority of women under 60 favor this type of investing.
A recent survey found that ESG data comparability and reliability challenges remain the primary roadblock to integration in investment practices. Some respondents also cited confusion around best practices and calculating ESG-specific performance as the main hurdles.
Additionally, allocators and managers are split on how important they consider ESG to be as an investment factor, as well as how to apply ESG factors into risk assessments.
When asked about the main drivers for ESG integration, 80% of fund managers said the question did not apply to them, while the rest cited alpha generation, meeting client demands, and helping the firm remain competitive as drivers of ESG integration. For investors, integration is mainly driven by stakeholder demands, creating alpha, and managing risk.
The S&P 500 Equal Weight ESG Leaders Select Index has a wider range of measurable ESG impacts. Higher exposure to companies who:
Report quantifiable environmental indicators (23%)
Have targets and initiatives to reduce emissions. (13%)
Monitor and disclose female representation across their organization. (21%)
Have publicly available anti-corruption policies. (20%)
Blackrock Global Insurance Survey Notes:
Insurers believe Climate Risk is Investment Risk (95%).
Anticipate that liquidity management could be a key factor to increasing allocation to ETF over the next 1-2 years. (87%)
Plan to focus on Asset and Liability Management integration, over the next two years. (56%)
Are looking to increase investment in technology that integrates climate risk metrics. (41%)
Institutional Investor: The surprising Reason That Allocators Are Embracing ESG
New survey from Vidrio Financial/Close Group Consulting where 85% of respondents were based in North America, reported:
Stakeholder demand is the top reason for ESG integration. (73%)
Challenges surrounding ESG data is the biggest roadblock to investing. (42%)
Are already incorporating ESG into risk and opportunity assessments. (39%)
Have not yet incorporated ESG into risk and opportunity assessments. (23%)
Mergers and Acquisitions Outlook Survey from National Law Firm Dykema:
55 % Reported they had worked on a deal involving a target company or buyer screened for ESG risk while 38% had not.
75% Reported it was “somewhat to very” likely they will directly or indirectly work on a deal that involves screening for ESG risk of the next 12 months.
Currently, Europe leads the world in ESG investing according to a report last month by RBCGAM, a capital market company.
In the 2021 EY Global Institutional Investor Survey, which canvasses 320 institutional investors across 19 countries and features 15 respondents from India reports:
Institutional investors are more likely to divest based on poor ESG performance now than before the COVID-19 pandemic. (77%)
Will be doing more to evaluate “transition” risks. (80%)
Do not believe that companies are reporting adequately on financial material issues. (50%)
Believe they have a “highly mature” approach to climate risk. (44%)
Prescient Investment Management has created a proprietary ESG risk assessment tool called the Prescient ESG Scorecard. This tool was created to provide multi-tiered granularity of ESG risks and opportunities.
The scoring system uses multiple factors and tracks over 60 metrics, across various themes, this tool also strips out company size biases that could lead to unfair penalization.
With this tool you can track industry-wide trends and conduct peer analysis within each sector to identify sector leaders and laggards.
Institutional Investor: ESG Pulse Check: Where Are We Now?
ESG is not new and it is not niche, it is mainstream. Rebecca Chesworth, Senior Equity ETF Strategist at SPDR ETFs, and Zubin Ramdarshan, Head of Equity & Index Product Design for Eurex, to share their thoughts on the dynamic ESG universe.
In 2021, Bank of America released a statistic stating of all ESG indices they looked at globally, 61% of had outperformed the parent index, and 70% had done so over three years.
The Sustainable Finance Disclosure Regulation (SDFR) is creating waves in Europe and we will see those same waves, here in the U.S. soon.
The launch of the International Sustainability Standards Board (ISSB) at the COP26 climate conference in Glasgow brings much needed standardization, consistency and comparability hopes for ESG framework disclosures.
According to a survey by PWC 49% of asset managers are willing to divest from companies that fail to sufficiently follow ESG best practices.
“More and more people are seeing opportunities with respect to ESG — creating new products, developing new materials, finding new ways to get a product to market,” - Robert Hirth, co-vice chair of the Sustainability Accounting Standards Board (SASB).
Global News: How to spot ‘greenwashing’ in your ESG investments
“Sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community,” -Tariq Fancy, the former chief investment officer of sustainable investing at BlackRock.
“Making sure your financial portfolio is in line with your values usually requires some legwork”- Jan Mahrt-Smith, associate professor of finance at University of Toronto.
Tim Nash, founder of Good Investing says “It is a bit of a Wild West,” he says. “It is a bit of a ‘buyer beware’ (environment): you kind of have to do your homework.” From mutual funds to exchange-traded funds (EFTs), goes on to say that there is often a gap between claims and what you find in the prospectus and you really need to look at the full list of holdings, not just the top 10.
The Credit Suisse JPMorgan Sustainable Nutrition Fund aims to invest in companies addressing the links between nutrition, health, biodiversity, and climate.
The new fund (which launched with more than $250 million AUM), will target UN Sustainable Development Goals #2 (Zero Hunger) and #13 (Climate Action), focusing on companies that are working to make food systems less carbon intensive.
State Street’s new Opportunity Class of money market funds aims to enable clients to support diversity and inclusion initiatives through investments.
For the new market share class, State Street will donate at least 20% of its annual net management fee to charitable organizations that align with the firm’s racial equity and social justice values.
Opportunity Class shares will be available for money market funds including the State Street Institutional U.S. Government Money Market Fund, State Street Institutional Treasury and Treasury Plus Money Market Funds, State Street Institutional Liquid Reserves Fund, and State Street ESG Liquid Reserves Fund.
The Invesco ESG Nasdaq 100 Index ETF and Invesco ESG Nasdaq Next Gen 100 ETF are ESG versions of the existing indices in Canada, and they filter constituent companies using ESG criteria from Sustainalytics.
According to Nasdaq, in the most recent quarterly analysis, six companies in the Nasdaq-100 Index did not qualify for inclusion in the ESG version and 10 companies in the Nasdaq Next Gen 100 Index did not qualify.
BNY Mellon has announced a new capability for RULE, its electronic collateral schedule manager, thereby enabling ESG factors to be incorporated into client’s collateral negotiations and decisions.
With the new capabilities, collateral providers and receivers can be sure that only securities with specific ESG ratings are acceptable as collateral.
The new capability draws from MSCI’s ESG Ratings through BNY Mellon’s ESG Data Analytics platform, assigning securities with E, S, and G scores and aggregating them into a final letter grade.
The 2021 Edelman Trust Barometer Special Report for Institutional Investors finds that there is a lack of investor trust in company ESG reporting and commitments.
The survey found that investors now subject ESG to the same scrutiny as operational and financial considerations; 86% believe that companies frequently exaggerate/overstate their ESG progress and 72% said they don’t believe companies will meet their ESG commitments.
The survey also points to an increase in investor interest in activism and engagement, specifically around the areas of environmental issues, supply chain impacts, operational efficiency, greenhouse gas emissions, and board structure.
Companies and Industries
In a recent survey of lawyers that advise clients on ESG-related matters, company reputation was the most often selected primary driver of client decisions to prepare ESG disclosures.
Companies with good governance can differentiate themselves by integrating ESG risk management processes and third-party validation, especially as reputational risks and scrutiny increase.
Steel City Re has launched a new ESG insurance product to cover “strategic managerial and governance actions signaling corporate values” that may come up in an ESG crisis, and it is available to qualified boards. The policy offers payments for a wide range of costs on behalf of boards or individual directors in an effort to improve reputation restoration/resilience in the context of ESG issues.
According to new recent research from Forrester, 68% of empowered consumers plan to increase their efforts to identify and buy from brands that reduce environmental impact. Three ways food processors and manufacturers can reduce their footprints include:
Using environmentally friendly packaging
Increasing energy and water efficiency
Reducing food waste
Improving sustainability is a value-add for companies in multiple ways. Manufacturers feel better about their work knowing they are supporting a better world, these companies attract top talent, and as the sustainable supply increases from consumer demand, companies will be able to source more sustainable products at lower costs.
For companies just starting their sustainability journey, trainings are a good place to start to understand auditing and certification standards to then help understand the time and resources needed to start implementing more sustainable products and practices.
Vogue Business: Fashion has a new product label to mark sustainability metrics
Vogue has partnered with the Responsible Business Coalition and Accenture to create the Impact Index logo to help customers understand their clothing’s sustainability credentials. The logo will appear on product websites for garments and my eventually expand to physical product labels. It will display the environmental and ethical criteria the garment meets.
Initial impact categories are raw materials, animal welfare, chemical usage, and education and empowerment, and these will likely expand.
More than a dozen major retail companies were involved in developing the index, and it aims to be a communication and education tool that provides consumers with more information when making purchasing decisions. The products consumers choose to buy will inform and impact the industry.
The behind-the-scenes work being done to ensure the accuracy and integrity of the label will be critical to the success of the initiative.
Customers translate their values to purchasing action, and a recent survey by Forrester Analytics Consumer Technographics Retail Recontact Survey found that customers in these nations are more likely to prefer to buy environmentally sustainable products.
Metro China (82%)
United Kingdom (49%)
United States (40%)
Approximately 75% of US online consumers wish that companies were more transparent about their business practices and they believe that companies are responsible for protecting the environment.
The Washington Post: U.S. and Chine issue joint pledge to slow climate change
Near the end of the COP26 summit, the U.S. and China announced that they would work together to take “enhanced climate actions” to meet the goals of the 2015 Paris agreement.
The announcement lacked specific commitments and firm deadlines, but as the world’s two biggest greenhouse gas emitters, both nations recognize the need for collaboration to drive progress.
The announcement also marks a significant achievement for those who announced it – John Kerry has been pursuing diplomacy and engagement with China this year, and envoy Xie Zhenhua came out of retirement to manage China’s climate diplomacy.
Recently, relations between the U.S. and China have been tense as the Biden administration has maintained Trump-era trade sanctions, and the Chinese president refused to travel to the summit in Glasgow.
One clause in the draft agreement states that countries would agree to stop funding for coal, and it is unclear whether China will accept this clause.
Fast Company: Inside the brewing fight over the SEC’s ESG enforcement
Since the SEC released and approved a proposal last year to boost the presence of women, LGBTQ+, and other minorities in public company boards, it has faced intense criticism about such an initiative being outside of its realm of authority.
The conservative Alliance for Fair Board Recruitment (AFFBR) hit the SEC with a lawsuit asking a federal appeals court to overturn the decision, and a few other organizations have done the same. As backlash continues, the question remains: How far can financial regulators go in pushing policies linked to social agendas and economic justice issues?
On one hand, some studies suggest a strong link between diversity and company performance. Additionally, detailed disclosures about workforce pay and promotion by gender can impact customer loyalty, which will attract investor attention.
It is also important to note that the SEC is not telling companies who to hire or what to pay their workers, but it is asking for this information to allow market participants to make informed decisions.
Failure to disclose performance – even poor performance – regarding pay, diversity, discrimination, etc. can have detrimental impacts on company stock prices and reputations when the information is ultimately revealed.
As the SEC reverses Trump-era policies that had blocked some shareholder proposals, activist investors are feeling more empowered to bring forward climate change and human capital management proposals.
Staff Legal Bulletin 14L from the Division of Corporate Finance states, “Staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal."
It is also expected that filing deadlines will be extended to allow shareholder to have more time to take advantage of the new policies.
However, the latest legal bulletins from the SEC were not previewed or discussed in advance at stakeholder meetings, and there are concerns about this creating more uncertainty for companies evaluating shareholder proposals.
The president's infrastructure funding signals how the federal government is taking into account climate change as a threat to the entire economy.
The infrastructure bill designates 50 billion for climate resilience and weatherization: Increasing funding for Federal Emergency Management Agency, Army Corps of Engineers to help reduce flood risk and damage and The National Oceanic and Atmospheric Administration for wildfire & climate modelling and forecasting.
Former president Mr. Trump had reversed more than 100 environmental rules and pulled the US out of the Paris Climate accord.
This week, President Biden signed the $1 trillion Infrastructure Investment and Jobs Act after gaining significant bipartisan support. Some of the key allocations for ESG and sustainable infrastructure focused investors include:
The National Law Review: DOL Sets New Tone on ESG Investing and Proxy Voting with Recently Proposed Rule
The proposed rule removes special rules for Qualified Default Investment Alternatives (QDIAs). Article discusses the practical implications of this proposed rule and what it would mean for a variety of parties including: Product Manufacturers, Investment Advisers, Consultants, & Plan sponsors.