General ESG News
The Wall Street Journal: COP26 Summit: Climate Change’s Real Risks
Key takeaways from the COP26 summit include:
Even with climate change, the world isn’t doomed
Climate change calls for adaptation, not panic
Climate change barely affects poverty (growth-oriented policy does much more to precent malnutrition deaths)
Hitting environmentalists’ time tables for emissions would take far more than what the pandemic forced
The New York Times: 5 Takeaways From the First Days of the Climate Summit
Holding a global conference in a pandemic is hard.
The United States ‘showed up’
Some pivotal leaders did not show up (including China, Russia, and Brazil)
Money was pledged, but will it flow?
The next target is ending coal.
The New York Times: Corporate Climate Pledges Often Ignore a Key Component: Supply Chains
Many major companies are making commitments regarding carbon neutrality, but they are failing to account for significant emissions from their supply chains and waste from their products, which can amount to more than 95% of the companies’ overall GHG emissions in some cases.
Also, despite ambitious pledges, many companies are taking very small steps to reduce their carbon footprint, like installing solar panels at headquarters and tracking employee business travel.
This creates a challenge for consumers looking to spend money on sustainable goods and services and investors trying to finance companies that are not harming the environment.
For example, Amazon’s emissions from indirect sources increased 15% in 2020, but when measured relative to sales, the carbon intensity has decreased. However, this obscures the fact that the company is still generating an increasing amount of carbon.
Many companies cite difficulty in accurately measuring carbon contributions from suppliers, but companies are increasingly voluntarily submitting their emissions reports and setting science-based reduction targets.
National Geographic: Why methane cuts pledged at COP26 may be key to meeting climate goals
At the COP26 summit, more than 100 countries signed a pledge to reduce their methane emissions 30% by 2030. If this goal is achieved, temperatures in the coming decades would increase 0.2 degrees Celsius less than they would otherwise, which could potentially keep global warming levels manageable.
However, major emitters like China, Russia, and India – which account for about 35% of all human-sourced methane emissions – have not yet joined the Global Methane Pledge.
Methane is a highly potent greenhouse gas that lasts only a short time in the atmosphere, so taking any action to quickly reduce its concentration could have major climate benefits in the next few decades.
California News Times: Boards face growing pressure from ESG petitions
In 2021, twelve record-breaking environmental issue proposals were passed in U.S. companies with majority shareholder support, and the average level of shareholder support for all ESG-related petitions increased to a record 34% in the summer of 2021.
The largest asset managers (e.g., BlackRock, Vanguard, and State Street) are increasingly endorsing shareholder proposals, and companies are concerned about negative votes and reputational damage. However, it is expected that companies will continue to try to negotiate the withdrawal of climate-related shareholder proposals rather than risk being considered anti-climate.
A recent survey from Diligent and Corporate Board Member reflects director backlash against ESG. Very few directors chose ESG-related issues as the main issues they believed would have the most influence on the success of their company’s strategy in the coming years.
The responses – particularly the open-ended comments – highlighted ESG burnout. One respondent stated that they were, “too busy trying to survive to focus on ESG,” which is still not universally regarded as essential to business strategy.
Directors can combat this burnout and reactivity by getting educated on ESG topics, implementing the right tools, creating an embedded ESG infrastructure, and aligning ESG with their long-term strategies.
The Glasgow Financial Alliance for Net Zero (GFANZ) was established to help direct funds in the global energy transition.
More than 100 countries signed the Global Methane Pledge to reduce methane emissions by 30% by 2030.
Leaders representing more than 85% of the world’s forest (even including Brazil) pledged to stop and reverse deforestation and land degradation by 2030.
As countries increasingly commit to net zero emissions and scale up green energy while meeting the growing energy demands of society, there are a few strategies that can help them navigate the transition:
Deploy carbon pricing and markets more widely
Focus attention on the hard-to-decarbonize sectors
Get China and other emerging economies on board
Focus on innovation
Prioritize green financing
Reduce short-lived greenhouse gases.
According to the British Industry’s “Seize the Moment” report, 63% of years lost to poor health are in the working-age population, which results in significant losses to annual economic output (excluding direct healthcare costs). McKinsey also reports that better health can contribute to a significantly higher GDP.
These statistics highlight the missed opportunity when it comes to improving worker health and wellbeing, instead of focusing solely on innovation and R&D. The goal of “leveling up communities” can be met by targeting investments to reduce health inequalities (which also helps to close productivity gaps).
It is also increasingly being realized that employers can play a role in reducing as much as 20% of the disease burden on the healthcare system, especially in the areas of mental health and chronic conditions. However, current performance metrics in the healthcare system are not incentivizing prevention, and are therefore unsustainable.
Health is where the climate change agenda was a decade ago, and it is time to direct more innovation and investment (guided by ESG mandates) into improving societal health and healthy life expectancies.
While 96% of large firms currently report on their sustainability efforts, the Harvard Business Review reports that these efforts are rarely substantive. As the world struggles with the “Great Resignation,” this gap is becoming increasingly salient.
Individuals want to see their employers’ values align with their own, and efforts in sustainability will do more than just attract talent – they will have benefits in productivity health and wellbeing, driving down costs, etc.
Customers and suppliers are also demanding sustainability improvements, and as the demand grows, so does the number of strategies, frameworks, and tools available to help companies achieve it.
The prevalence of social media, video technology and cell phones, and activist organizations has shed light upon some of the unethical and unsustainable practices that occur in supply chains. This is where ESG due diligence and supplier screenings come in, as a single violation/compliance issue can cause major disruptions.
More ESG-related regulations for supply chains are expected, and companies are going to be required to monitor all of their locations, not just Tier 1 suppliers. Some common best practices that should be applied include:
o Monitoring suppliers across key risk areas
o Surveying and scoring suppliers
o Highlighting suppliers that have strong sustainability and ESG policies/practices
o Working with at-risk suppliers to develop joint plans
o Maintaining active tracking and reporting on mitigation plans.
Bloomberg Law: Get Ready for ESG to Make an Impact on M&A
In a recent survey, 30% of G20 corporations indicated that they expect to conduct M&A in the next year to boost their ESG credentials. This is leading to increased scrutiny, and two potential impacts to mergers and acquisitions have been emerging recently: additional complexity in merger clearance and new risk considerations in deal-making decisions.
As organizations extend the factors by which they measure success to include ESG performance, it makes sense that regulators may follow and consider ESG-related cooperation when assessing the likely effects of proposed transactions.
Corporations must also increasingly consider how ESG factors may influence deal risk, valuation, and completion.
A new facility named “Orca” has been constructed in Iceland to capture 4,000 tons of greenhouse gas per year and store it in boxes the size of shipping containers. The captured gasses will then be funneled underground to be transformed into harmless rock.
Some believe this new technology is a key solution to the climate crisis, while others warn of its high prices and energy intensity. Still, direct air capture is the essential for achieving net zero, and environmental experts are arguing for a mass rollout of similar facilities.
The U.S. released its long-term strategy to meet its 2050 goal: President Biden announced the launch of “Pathways to Net-Zero Greenhouse Gas Emissions by 2050.”
Climate finance: European leaders have been urging other developed nations to help meet the pledge to mobilize $100 billion in annual climate finance for developing countries. The U.S., Germany, Canada, and Japan all made commitments to grow their climate finance contributions.
Country commitments: Several new countries have made climate commitments, including Brazil, which pledged to cut its GHG emissions in half by 2030 and aim for carbon neutrality by 2050; India, which pledged to reach net zero by 2070 and reduce carbon intensity by 45% by 2030; and Israel, which pledged to hit net zero by 2050.
Company commitments: Many companies announced new climate commitments, including new net-zero goals from Prudential Financial, Moderna, Mondelez, and Xcel Energy.
ESG Disclosures, Standards, Rankings, and Reporting
Financial Times: US holds back on support for global sustainability standards
The IFRS Foundation has decided to establish an International Sustainability Standards Board (ISSB) to start the process of formulating a set of generally accepted global standards for sustainable investing that meet the needs of stakeholders and capital markets.
The U.S. SEC has some objections to the broad approach of appealing to all stakeholders (instead of just shareholders), and there are concerns around who has the right to set such standards for U.S. investors. Some think the ISSB may have too broad of a mandate, so the new ISSB will focus more on the needs of investors.
The ISSB will start with climate-related standards, but it can only provide guidance – the board has no legal authority.
The current sustainability reporting landscape is complex, but eventually sustainability reporting standards will follow the path set by financial reporting standards, with standardization across most major countries.
Even with momentum to set up a globally recognized ESG disclosure standard, the idea of a single set of reporting rules does not address the capability gap involved in actual application and implementation of sustainability reporting
As long as the processes and methods for collecting and reporting sustainability data require extensive manual efforts and human intervention, achieving reliable, auditable reporting standards will not be possible
Getting every country to agree on a single unified ESG standard is an uphill battle, but companies can prepare for this reality by investing in technologies that can be applied to global businesses to automate ESG reporting regardless.
Yahoo! Finance: Invesco Launches ESG-Tilted Nasdaq ETFs
Invesco has just launched ESG versions of its two main Nasdaq-100-based ETFs. They have the same base index as the non-ESG versions but screen to remove companies that derive at least 5% of their revenues from carbon fuel production, nuclear energy, firearms, pornography, and the production of alcohol, tobacco, and/or cannabis.
The new funds also use rankings from Sustainalytics to estimate companies’ ESG risks and exclude any company that ranks 40 or higher on the scale of zero to 100.
The funds come with slightly higher expense ratios but aim to be an attractive choice for investors looking for a product that was already aligned with some ESG principles due to the nature of its existing constituent companies.
Regulators are currently working to catch up to contain the risks of money managers overstating the ESG credentials of their products, and thus far, penalties for ‘greenwashing’ have been minimal.
Recently, IOSCO published recommendations its members are obliged to follow when analyzing how asset managers sell ESG-labeled funds. The recommendations note what regulators should check for in asset managers’ internal policies and procedures, as well as how they market ESG funds.
The new rules are part of a holistic approach that includes a new International Sustainability Standards Board to write ‘baseline’ disclosures from public companies on the financial impacts of climate change.
Financial Times: ESG metrics trip up factor investors
Asset manages and index providers are increasingly using ESG scores from major raters and rankers to select and weight stocks, but this approach may be flawed.
One flaw is confusion over the purpose of ESG rankings – are they meant to give an ethical ‘tilt’ to investments, or are they meant for outperformance, or both?
Additionally, recent research finds that while ESG-labeled funds may minimize some negative impacts, they have no significant positive impacts.
There are also concerns about the quality of the ESG data being used in ratings, and the ESG landscape is evolving more rapidly than many models can follow. Additionally, there is no evidence supporting ESG as a factor that can be used with other factor considerations in investment decisions.
The USD-denominated ESG bond supply in Asia (excluding Japan) has reached a record year-to-date high of $58.6 billion USD, and it could continue to rise.
Investor demand, increased adoption of ESG strategies by issuers, government policies, and regulatory requirements are all expected to boost ESG bonds.
Sean Kidney, chief executive of the Climate Bonds Initiative, notes that “capital allocation toward clean energy, resilient infrastructure, green transport, buildings, and sustainable agriculture need to accelerate into the multiple trillions, every year, rippling through both developed and emerging economies.”
Almost half of asset managers and other top investors worldwide are willing to divest of companies that fail to sufficiently follow ESG best practices, according to a survey by PwC of 325 asset managers and analysts at investment firms or brokerages.
59% of the survey respondents said they would likely vote against a pay agreement for an executive who failed to address ESG issues, and 79% said that the way a company handles ESG risks and opportunities is an important factor in their decision-making.
National News: How sustainability is driving a change in investor behaviour
There are three main drivers behind responsible investing: better financial performance of ESG-focused companies, investors’ objectives, and regulation. Fundamentally, integrating ESG perspectives into investment decisions improves investors’ abilities to identify and understand risks and opportunities.
Accessing reliable ESG data has been a challenge, but new tools and comprehensive processes are being developed to help in decision-making processes.
Ultimately, sustainable value creation requires responsible practices. Companies that take a long-term approach often receive a higher valuation in financial markets.
BlackRock announced that it has raised $673 million for the Climate Finance Partnership (CFP), which will target investments in climate infrastructure in developing markets to facilitate the global transition to a net-zero economy.
The CFP is a public-private partnership between BlackRock and the governments of France, Germany, Japan, and several leading impact organizations seeking to accelerate the flow of capital into climate-related investments in emerging markets, such as grid connected and distributed renewable power generation, energy storage solutions, ultra-low emission or electrified transportation, and more.
The UK’s Financial Conduct Authority (FCA) launched its new ESG Strategy to support the financial sector in driving positive change and contributing to the net zero transition. The strategy is based on the key themes of promoting transparency on climate change, building trust in ESG-labeled investment products, developing tools to improve firms’ management of sustainability-related risks, supporting the role of finance in delivering a market-led transition to a more sustainable economy, and more.
Key actions included in the strategy are enhancing climate-related financial disclosures, promoting global standards for sustainability reporting, promoting better investor stewardship, and integrating ESG and net-zero considerations into FCA functions.
The FCA also announced the publication of a new discussion paper that seeks input on new sustainability disclosure requirements for asset owners and managers
Companies and Industries
The Wall Street Journal: Financial System Makes Big Promises on Climate Change at COP26 Summit
Most of the world’s banks, major investors, insurers, and financial regulators have all signed a coordinated pledge that will incorporate carbon emissions into fundamental decision-making processes – the United Nations’ Glasgow Financial Alliance for Net Zero (GFANZ).
The Alliance’s groups with assets of $130 trillion have committed to its emissions reductions program. The funding can take the form of bank loans, investments, endowments, stock and bond purchases, and more.
Leaders noted that the private sector needs to play a larger role in financing the global energy transition, and one main challenge will be finding the projects where the significant amount of capital should be deployed.
With increasing attention on ESG issues over the past few years, many companies feel we have reached the “crest” of the ESG wave, but the focus on ESG issues is reaching across a much broader spectrum than just the technology sector.
Targeting companies in the energy sector was a logical “first choice” for ESG and environmental activists, and the question is now, “who’s next?”
The technology sector is likely next on the agenda – it is by far the largest economic sector now, and it faces challenges related to diversity and inclusion, customer privacy, data security, product lifecycle management, energy management, supply chain management, competitive practices, and more.
Tech companies can prepare by proactively addressing investor priorities, integrating ESG concepts into business strategies, and understanding the behavior and disclosure of their peers.
The massive inflow of funds to ESG funds (and the predicted continuance of this trend) is fueling a debate around SEG’s ability to live up to its label, as GHG emissions continue to increase.
A growing number of asset managers are committing to net zero emission goals, and are hoping to use their leverage to influence companies to step up their ESG and climate-related performance.
The Economist: How cement may yet help slow global warming
Cement is responsible for a significant amount of GHG emissions in its production process, and so far, cement has few practical alternatives.
Fortunately, new technologies are being developed to make the cement production process greener, especially in the calcination portion of the process. Efforts are being deployed to capture and store the carbon released during calcination.
Ideally, the carbon captured can then be used by other industries, such as in the production of synthetic fuel. Additionally, it can be injected back into concrete to cure it and make the concrete stronger. This helps reduce the amount of cement needed for a job, further reducing emissions. The Canadian company CarbonCure is exploring this method.
Another potential approach is to substitute the coal burnt in kilns with municipal and industrial waste. Cemex is already exploring this technique.
Materials substitutions can also go further to make cement with a higher silica to calcium oxide ratio, which requires less heat in production.
The Wall Street Journal: Shell Is the Greenest Big Oil Company. Look What That Got It.
Shell has gone further than any other oil supermajor to shift away from fossil fuels, it is the closes to meeting the Paris carbon target, and it has a better ESG score than both Tesla and Plug Power.
However, Shell has a low market valuation, is screened out of ESG-labeled investment products, is faced with consistent divestment, and it lost a lawsuit that ordered it to slash its emissions.
Many major oil companies are simply splitting into two – one business for its “green” transition (which will attract investors), and one for its legacy business. The argument here is that this approach is ultimately better for the environment because the new “dirty” business will have a lower valuation, higher cost of capital, and should therefore invest less in production. However, management may not care, and there is no guarantee that the separate “dirty” company will have a low enough valuation to make a difference.
There are also concerns around investors that refuse to invest in oil and gas altogether, and many environmental campaigners dismiss all oil and gas ESG activity as greenwashing, since the companies still produce and sell oil and gas.
ET Auto: The Why & How of ESG for auto cos
ESG reporting is becoming the “hottest trend” for automotive, mobility, and vehicle technology suppliers. The auto industry has high exposure to environmental risks, in particular.
Integrating ESG into credit & equity analysis in the auto manufacturing industry helps identify companies that will be able to successfully adapt their business strategies to impending emissions standards.
ET Auto presents a podcast with Mr. N. V. Balachander, CSO and President of CSR, Communications, and Corporate Affairs to discuss.
Insurance Journal: Where U.S. Insurers are in Integrating ESG Issues
U.S. insurers are increasingly listening to demands from stakeholders that they use social, environmental and governance factors in their decision-making, according to a study by AM Best.
ESG interests varied by insurance segment. Property/casualty insurers are focused more on environmental risks in their ESG engagement, whereas life/annuity insurers concentrate mainly on investment risk. Health insurers have put greater attention in the social impacts of health equity.
All insurance segments are focused on corporate governance, with a particular focus on diversity and inclusion and corporate reputation.
Elon Musk has said that the fundamental “good” Tesla does is measurable in accelerating the world toward sustainable energy. Musk and his company have pushed the auto industry toward taking electric vehicles seriously.
Tesla’s stock price is now nearing $900, and early investors have been rewarded with high returns after the company battled through financial struggles over the past few years.
Now, Tesla’s shareholders are pressing the company on ESG issues. In a recent shareholder meeting, shareholders approved a measure for diversity, equity, and inclusion over management objections.
Major ESG rating agencies don’t yet agree on how to assess Tesla on any of the ESG pillars. For example, the company produces only non-emitting electric vehicles and its revenue sources are green, but it does not disclose its own operational emissions. However, the company has been improving its transparency to meet investor pressure.
Major issues the company is ow facing include allegations of poor working environments and investigations into the functionality of the Autopilot driving technology. On the governance front, Elon Musk has had visible confrontations with the SEC on social media, and there are questions around Tesla’s acquisition of SolarCity, which was controlled by Musk’s cousins.
ISS ESG is launching Net Zero Solutions, which is a new suite of tools to help investors assess how well aligned their investments are with a 2050 net-zero scenario.
The Solutions are in response to investors increasingly setting emissions reductions targets for their portfolios, but many of the goals are not science-based, or the companies’ actions are not sufficient to reach the goals.
The Solutions are expected to launch in Q1 2022 and will provide coverage of 29,000 issuers for climate data, 23,000 issuers for energy and extractives data, and 8,000 issuers for EU Taxonomy eligibility data.
The U.S. Supreme Court is considering limiting the EPA’s authority to cut GHG emissions from power plants and is agreeing to hear appeals from coal-mining companies in Republican-led states. These companies and states are arguing that the ruling would have dramatic consequences for electricity production.
The court’s decision could be a setback to President Biden’s pledge to reduce U.S. GHG emissions by 50% by the end of the decade and achieving a carbon-free electricity grid by 2035.
The Biden Administration encouraged the court not to get involved until after the EPA has completed its updated rule making.
The New York Times: At G20, Climate Change and Vaccine Access Confront Leaders
The main issues noted at the G20 summit were access to vaccines, extending an economic lifeline to the developing world, and improving public finance for climate action.
The U.S. pledged to donate more than one billion COVID vaccine doses -- the most in the world. President Biden is also seeking commitments from other foreign leaders.
Unfortunately, promises from wealthy nations regarding vaccines and climate action have fallen short, and the world is seeing the consequences.
President Joe Biden and European Commission head Ursula von der Leyen have reached an agreement to curb carbon emissions from the steel industry by restricting “dirty steel” made in China from U.S. and EU markets. The officials also encouraged like-minded economies to participate.
Additionally, the deal allows some European steel and aluminum to enter the U.S. tariff-free, and the U.S. will ensure that all steel entering the U.S. from Europe was produced entirely in Europe.
President Biden urged world leaders to rise to make an ambitious transformational shift to a lower carbon economy, while asserting that the US would lead by example on climate.
Biden asserted that wealthy, major polluters like the US have an overwhelming responsibility to aid smaller countries that bear the impact of climate change, while calling out major polluters like Russia and China for not doing enough on climate.
Indigenous leaders from the US whose communities are on the frontline of fossil fuel extraction impacts criticized the Biden administration for promoting a message of climate leadership, while maintaining and, in some cases, expanding US oil and gas production.
President Biden announced that the US will reduce carbon emissions by 50-52% below 2005 levels by 2030 and achieve net-zero emissions by no later than 2050.
Biden also announced plans to launch a new program to help developing countries adapt to climate change, which he hopes will provide $3 billion annual financing by 2024.