General ESG News
Despite countless warnings from scientists and experts, businesses are still not making the decisive action needed to combat the climate crisis.
Despite the initial environmental benefits of the COVID-19 pandemic, a recent Deloitte survey found that the pandemic caused nearly two-thirds of executives to cut back their organizations’ sustainability efforts.
Tackling climate change requires boards to adopt long-term thinking, place greater trust in institutions leading large-scale change, and collaborate with other organizations globally. Boards also have the responsibility to hold management accountable for delivering on the climate roadmaps they develop.
It’s about more than the company image. While some view CSR and ESG as something businesses perform to appeal to customers and boost their brand, the real value of these initiatives lies within the company and its mission.
It’s reassuring to partners and investors who are interested in the long run.
It makes financial sense. CSR and ESG have the potential for savings in a variety of areas -- increased productivity, decreased employee turnover, decreased workplace accidents, decreased waste, decreased fines and penalties, and more.
Embedding sustainability into a business agenda is the right thing to do morally, and also provides a critical competitive advantage. As more companies pursue net-zero commitments, there will be a struggle to obtain the resources, infrastructure, and talent necessary to reach their goals. Six actions essential to the value creation agenda include:
Anchoring sustainability in purpose
Capturing business value
Building new, sustainable businesses
Making the “core” sustainable
Owning the narrative.
Business Leader: What is a B corp and should you look to become one?
Certified B Corporations have undergone the B Corp Certification process, which measures a company’s environmental and social performance through the “B Impact Assessment” questionnaire.
B Corp certification can have positive impacts on brand equity and building a global network community of companies looking to be more purposeful. Purpose is also becoming a bigger driver of business growth.
Experts note that the B Corp certification can help companies ensure that all stakeholder interests are addressed. Major challenges to earning the certification include investors who are only focused on profits, as well as potentially sweeping business changes that may be needed as a result of the certification process.
First, ESG must be integrated at the strategic level -- businesses cannot start with reporting. Additionally, ESG integration requires buy-in from top-level leaders.
There are different approaches for where to anchor ESG governance; some businesses establish a board sustainability committee, while others build ESG concerns into existing committees like the audit or nomination and governance committees. Some companies are also ensuring that more time is allocated on the main board to address ESG issues. The right strategy for each company depends on its unique circumstances.
To jump-start an ESG strategy, businesses should conduct a materiality assessment to determine their material ESG issues.
The climate crisis is urgent for all businesses, including high-growth, and businesses need to determine their environmental baseline to develop a climate strategy that fits the high-growth business model.
Social issues are coming to the forefront of public consciousness, and high-growth companies can promote social justice by “leading with equity” and partnering with specialized organizations.
High-growth businesses must address governance issues related to the speed and scale of their growth and must be intentional in building an effective governance structure that incorporates ESG ownership and oversight.
University of Pennsylvania Wharton: How the Pandemic Accelerated the Social Impact Movement
B Lab (the organization behind the B Corp certification) expected that the global pandemic would cause the B Corp application pool to shrink and prepared for this outcome. However, 2020 was by far the biggest year for the certification.
B Lab representatives believe this surge in applications is due to the pandemic accelerating action around social impacts and the increasing realization that businesses can be a “force for good.”
Making the transformation to becoming a responsible corporate citizen, even if not going as far as earning the B Corp certification, helps attract like-minded customers, investors, and top talent.
Financial Express: Employers’ ESG goals and outcomes matter to new gen talent
A recent report from Pensions & Investments and The Thinking Ahead Institute found that eight out of 10 global consumers expect CEOs to lead on social issues, and 58% of employees consider a company’s ESG commitments when deciding where to work.
By 2025, it is expected that more than 60% of the working population would be constituted by Gen Y (Millennial) and Gen Z employees, who are interested in large societal issues like human rights, poverty, climate and the environment, mental health, and more.
Measuring these goals from a human capital lens can mean including metrics like pay-equity ratios, diversity and representation targets, talent retention, whistle-blower policies, monetary losses from unethical behavior, carbon neutrality goals, and executive compensation linked to ESG targets.
When developing and implementing ESG metrics, companies must align them with their overarching business strategy, company culture, and purpose.
Investment Week: Deep Dive: Do not neglect the G in ESG
By definition, bond-buying is connected to ESG considerations, as buyers need to invest in companies with sustainable business models.
Governance is occasionally overlooked in ESG discourse, or it is considered implicit. However, bond managers tend to rank governance as the highest priority pillar of ESG.
Studies show that bonds with higher governance scores tend to have better outperformance. In part, this can be due to the fact that companies with strong governance also tend to have strong environmental and social policies and performance.
Environment + Energy Leader: Carbon Pricing Can Drive ‘Least-Cost’ Emissions Reductions, Innovation Among Businesses, New Report Finds
Carbon pricing allows companies to decide whether to pay the tax associated with carbon emissions, purchase more carbon credits, or reduce emissions. Over time, the tax increases and carbon credits become more limited, incentivizing decarbonization as it becomes more expensive to emit.
This pricing system also spurs investment in renewable energy and increased demand for technological innovation and emissions reduction strategies.
Carbon pricing also increases government revenue, which can then be used to fund further decarbonization. However, the system must be implemented correctly and avoid weak emissions caps or carbon taxes that are too low.
To optimize effectiveness, carbon pricing should also be paired with decarbonization policies like removing fossil fuel subsidies and increasing accessibility to renewable energy.
The Star: ESG boost for small businesses
Large corporations have been leading the ESG movement through actions like net-zero pledges at the same time that small- and medium-sized businesses have been dealing with the damaging effects of the global pandemic.
Digitalization trends are also affecting smaller businesses, and experts are urging these businesses to adopt ESG principles quickly to improve their access to finance. Adhering to ESG standards can also improve reputation and risk management.
However, sustainability education can be costly and small businesses can face a shortage of both resources and understanding of ESG concepts.
The possibility of government grants for small businesses to subsidize ESG assessments and certification is one possible (partial) solution to this obstacle.
General counsels are worrying about what ESG investment and company leaders’ political stances can mean for liability, especially in light of recent SEC rulings and announcements.
Criticisms around greenwashing, data integrity, scoring inconsistency, and messaging vs. tangible impacts can lead to important conversations about improvements that need to be made.
Despite its problems, ESG has had clear positive effects and, at the very least, has brought such issues to the forefront of public consciousness.
Corporate leaders are increasingly realizing the potential financial, regulatory, and legal risks of not addressing critical ESG issues. While many of these issues include a moral imperative, ESG investors are also now reportedly weighing more heavily in investors’ decisions.
Increased investor interest in ESG factors has also resulted in changing shareholder activism and success in waging ESG-focused campaigns.
ESG regulatory scrutiny is also increasing, and the SEC announced the creation of its Climate and ESG Task Force. In addition to federal actions, state attorneys general are pressuring the SEC to direct overarching ESG disclosure guidance for climate-related risks.
ESG-related lawsuits are on the rise, especially for environmental and social topics, most of which are a result of poor governance standards. With all of these actions intensifying, it is expected that business leaders will thoroughly review their risks and insurance coverages.
A recent report from the Financial Times shows that through the end of June 2021, private equity firms had concluded the most active first six months of a calendar year in the preceding four decades. With this increased investor and startup activity comes increased concerns about climate risk and social justice issues.
While ESG processes are still relatively new, growing companies with an early focus on ESG can simultaneously lower their risk and produce better financial returns.
Beyond climate risk, companies should incorporate the following ESG approaches:
Using multiple lenses to view board and workforce diversity
Hiring an internal or external chief sustainability officer or other role dedicated to overseeing ESG initiatives
Embedding resiliency planning into business practices through good corporate governance.
Private equity firms can bolster their ESG strategies by undergoing a portfolio-wide ESG risk assessment, by promoting a positive culture of ESG reporting, by adopting ESG due diligence practices for new investments, and by turning the ESG spotlight back on themselves.
Employee health and wellness has been somewhat overlooked as a key ESG concern, despite the fact that workforce health is directly linked to productivity.
Companies can address the social determinants of health (SDoH) through policies, procedures, and programs around:
Health and health care
Neighborhood and built environments
Social and community contexts.
Unfortunately, it took the global pandemic for many companies to be forced to recognize the deep and varied impacts of health and wellbeing on their workforce. Additionally, the employer costs of employee health (or lack thereof) are also being increasingly seen -- especially costs associated with conditions that could be prevented with activities like healthier eating and regular physical activity.
The pandemic has accelerated the momentum employers were also gathering toward hybrid work schedules and technology investments to facilitate better collaboration.
Several criticisms of ESG have arisen in recent weeks, coming from investors, regulators, and the general public, and this increased scrutiny is a sign that ESG is having a significant impact.
Fear of retaliation from management is a major reason why employees and other stakeholders don’t bring their concerns forward, but with the current climate surrounding ESG, individuals can feel free to bring their concerns to leaders.
It is important to clarify that ESG does not purport to solve the climate crisis or other major issues, but it does provide a foundation for transforming capitalism into a system that promotes environmental and social wellbeing while delivering reliable returns to investors.
Experts are confident that regulators and markets will flush out both the intentional and unintentional greenwashing in due time, and they predict increased involvement from multi-disciplinary teams around ESG investing.
National Law Review: ESG, Global Trade, and Forced Labor: Aligning Compliance with Company Values
As global corporate citizens become more vocal about asserting their values, it becomes important to think about how their global trade and compliance policies and supply chains reflect such values. Companies should dig into their trade and regulatory compliance infrastructure to ensure they are implementing best practices and asserting their ESG commitments. Such practices and approaches include:
Implementing ESG policies prohibiting forced labor
Vetting and developing positive relationships with suppliers
Conducting regular supply chain assessments
Training relevant internal and external stakeholders
Mapping supply chains
Keeping records organized and well-documented
Monitoring progress toward continuous improvement.
Pensions & Investments: Environmental still leads in ESG among European investors, Mercer finds
Mercer found that environmental issues still dominate European institutional investing, though social and governance factors are catching up. The research also found that among defined benefit investors, 20% are increasingly seeking diversification through alternative asset classes like fixed income and private equity.
The report found that 27% of respondents plan to increase their attention to social factors and 24% will deepen their focus on biodiversity and natural capital. 53% plan to use lessons from the pandemic to review their investment strategies and plan governance.
ESG Disclosures, Standards, Rankings, and Reporting
A new report from Thompson Hine LLP found that about half of companies have an ESG reporting strategy (both public and private). However, more than 25% of private companies had no plans to adopt an ESG strategy.
Key priorities for both public and private companies include DEI and board oversight of environmental and sustainability issues. This comes at a time when threats of legal and regulatory consequences for non-compliance increase.
Early ESG adopters include the financial services, real estate, and health care sectors.
The U.S. is pursuing a “laissez-faire” approach to ESG investing and disclosure regulation, guided by voluntary, private-sector-led processes. Compliance is driven by peer pressure and competition. However, the EU is pursuing a systematic and centralized sustainability disclosure regulation approach.
Only recently has the U.S. SEC decided to take an active regulatory role in ESG investing and disclosure and adopt mandatory disclosure rules in 2021. However, it is expected that these rules will differ significantly from EU regulations, leading to a missed opportunity for coordination toward transparency, comparability, and accountability.
Yahoo! Finance: The Fast and the Furiously Changing Future of ESG Frameworks
The Director of Corporate Outreach at the Value Reporting Foundation notes that ESG reporting is developing at a rate faster than anyone could have predicted, and the various audiences and metrics for sustainability reporting make a single corporate standard likely unattainable.
Evolving frameworks promote a layered approach to reporting, addressing investor-focused demands first, then concerns from other stakeholders and society as a whole.
It is common for companies to use multiple frameworks when developing their ESG reports, including GRI, SASB, and TCFD.
Sustainalytics: Predicted ESG Risk Ratings
Sustainalytics’ new Predicted ESG Risk Ratings (brochure available for download) provide an instant indicator of a company’s sustainability risk through the firm’s own research and a machine learning algorithm.
Investors are increasingly including ESG information in their investment decisions, and the current administration is taking notice, as has the SEC and individual state attorneys general.
The Climate Risk Disclosure Act of 2021 directs the SEC to develop climate-related risk disclosure rules for specific industries, and the ESG Disclosure Simplification Act of 2021 requires the SEC to engage in rulemaking to define exact ESG disclosure standards.
However, it is unlikely that Democrats in the Senate will be able to pass the Act without using reconciliation, and Republicans have already voiced their opposition to mandatory ESG disclosure. Additionally, four House Democrats also voted against the Act, suggesting that it may not receive full party support in the Senate.
Even if the act does not pass, it signals the momentum toward ESG disclosure, and there is still evidence that the SEC will try to mandate ESG disclosure through its own authority.
A recent Barclays survey found that 22% of investors prioritize ESG in hedge fund investment decisions.
On the surface, it looks like ESG hedge funds underperform their non-ESG counterparts (just barely). However, looking back 10+ years, non-ESG hedge funds have stayed ahead of ESG hedge funds (though these funds outperformed the benchmark).
It is worth noting that the gap is closing, and ESG hedge fund performance is accelerating. These funds also have lower annualized volatilities, which means they outperform in risk-adjusted returns.
ESG investing is on the rise in developing economies, and companies with strong ESG credentials are performing well financially. Companies with lower risk profiles are also more attractive to investors since the onset of the COVID-19 pandemic.
Persistent challenges to ESG investing include definitional discrepancies, difficulty in ESG asset pricing, and difficulty in quantifying some ESG indicators.
ESG investing in India has been steadily gaining momentum over the last few years, but it is still considered to be in the “nascent” stage.
Institutional Investor: There’s a Big Opportunity for ESG in China
Chinese companies have lagged in ESG performance but are catching up with the global ESG investing trend as they try to attract foreign capital.
With the world’s second largest economy, China ranks 47th out of 50 companies in ESG performance according to the MSCI All Country World Index.
However, Chinese companies are beginning to adopt ESG disclosure, partly due to the country opening its markets. Since most Chinese companies have yet to catch up with international ESG ratings standards, experts suggest that ESG investors should avoid a purely ratings-based approach when evaluating Chinese companies.
A recent InfluenceMap report found that of the 593 equity funds in Europe that fall into the broad “ESG” category, 421 scored negatively for Paris Agreement alignment and more than 40% invest in companies with fossil fuel reserves. These recent insights are prompting investors to seek different ways of “greening” their portfolios, such as through carbon offsets.
However, there is concern that having the option to offset emissions reduces firms’ incentive to cut their own emissions.
Europe’s first ETFs featuring a carbon-offsetting mechanism rely on Verra-accredited systems to offset and retire emissions. These processes still rely on some estimation but are being viewed as “guilt-free” passive investment options.
Criticisms lie in the fear that such mechanisms might cause investors to put less pressure on ETF issuers to engage with the boards of high-emitting companies to reduce emissions.
In a recent Campden Research report, 70% of the families, foundations, and individuals surveyed said that the net-zero transition has become the “greatest commercial opportunity of our age.” And, currently, nearly 30% of global wealth holders are targeting investments that directly support the transition to a low-carbon economy.
Many family investors believe it is up to private organizations like family offices and businesses to achieve sustainability goals through impact investing. Asset managers and financial institutions are generally more flexible and better equipped to handle shifting priorities.
“Family values” have been given greater relevance in the current social, environmental, and economic challenges, but success will require collaboration with governments, institutional investors, industry, employees, and more.
The next decade of innovation is expected to focus on remote and digitized services, and startup companies are being increasingly reviewed both by their potential return on investment and their potential global impact.
Startup companies with the intention of improving health care access and management, as well as the Internet of Things and machine learning and monitoring.
Steven Fox, founder and CEO of Veracity Worldwide, noted that the last 18-24 months have seen a sudden increase in corporate interest in ESG issues.
Fox also suggested that investors dig deeper into the nuances of their ESG surroundings to better understand the context of their ESG policies -- developing ESG intelligence -- rather than relying solely on inconsistent and self-policed rankings.
It’s important to watch for hidden subsidiaries that may implicate companies in ESG risks -- aspects that are not always captured in ESG ratings and rankings.
The Institutional Investors Group on Climate Change (IIGCC), a group of 50 global investors, produced a publication with expectations for companies to demonstrate that they are addressing the physical risks of climate change, as well as the governance and management of these risks and opportunities.
The publication also includes a guide for investor engagement , including questions for investors to ask when engaging companies on climate risk. Some of the key expectations outlined in the guide include:
Establishing climate governance frameworks
Committing to greater disclosure
Undertaking scenario-based physical climate risk and opportunity assessments
Developing and implementing a strategy for building climate resilience
Identifying and reporting against climate risk, opportunity, metrics, and progress.
The investors have also sent an open letter to 50 public companies across high-risk sectors requesting that they adopt the expectations outlined in the guide.
The UK has completed its first “Green Gilt” offering, raising 10 billion pounds for projects to help the country meet its net-zero goals. It has become the largest ever inaugural sovereign green bond issuance.
Investor orders exceeded 100 billion pounds, and the government plans to announce another offering later this year. It also outlined how the proceeds from the Green Gilt and retail Green Savings Bonds will finance climate change-related expenditures like clean transportation, renewable energy, pollution prevention, and natural resources.
Other countries like Spain, Canada, Italy, and Germany are also joining the rapidly growing sustainable sovereign debt market.
Yahoo! Finance: ‘Wild West’ of ESG Ripe for a Crackdown, Veteran Investor Says
Matt Patsky, who heads Trillium Asset Management, has been handling ESG investments since the 1990s. Currently, he estimates that only a fraction of ESG assets on the market are legitimate.
Patsky supports regulator efforts to hold money managers accountable for their ESG claims. He argues that money managers who tell clients they’re doing “ESG investing” without pressing portfolio companies to do less harm to people and the planet are not the “real deal.”
Warnings like Patsky’s are becoming more frequent as the mood around ESG shifts to become more critical. Patsky takes particular issue with the strategy called “ESG consideration,” or taking ESG risks into account in investing models but not necessarily changing investments as a result.
Europe has taken the strongest approach to ESG investment regulation thus far, but U.S. and Asian regulators are catching up.
Companies and Industries
Financial Advisor: Vanguard’s Weak ESG Chops Putting Client Money at Risk: Report
Vanguard, the world’s second-largest asset manager, only has 0.1% of its total assets under management in ESG-focused funds, a recent report found. The report also found that Vanguard’s equity portfolio will lose $3 trillion if there is a two-degree-Celsius temperature rise by 2050, noting that the firm is “contributing to the destruction of the future value of its own portfolio.”
Vanguard has no clear climate strategy and its stewardship group is under-resourced, with just one ESG employee for every 300 companies it invests in.
For banks with high exposure to the energy sector, price swings in the oil and gas markets have led to increases in impaired loans, elevated provisioning, and depressed earnings, and it could be viewed as credit negative for banks.
Increased regulatory scrutiny that results in higher capital or liquidity requirements for non-green investments could lead banks to further reduce their oil and gas lending exposure.
Some banks have even been willing to accept sizable losses to reduce their lending in the volatile oil and gas sectors.
Morningstar: Companies with Strong ESG Credentials
According to the latest data, the following companies demonstrate strong and embedded ESG policies and credentials, as well as low ESG risk ratings:
Fitch Group and RepRisk have partnered to enhance their ESG offerings to combine machine learning and human intelligence to identify ESG risks.
ESG Clarity: MSCI launches portfolio temperature tool
MSCI’s new Implied Temperature Rise Solution covers 10,000 public companies and aims to help investors determine the pace at which their portfolio holdings are transitioning their businesses to meet climate goals, capturing benchmarks like the two-degrees-Celsius target and the 1.5-degree Paris Agreement limit.
The tool converts current and projected greenhouse gas emissions and considers their reduction targets. It creates projections based on the global carbon budget, and it was created by MSCI’s dedicated TCFD alignment team.
U.S. Bank launched a full service ESG practice within its Fixed Income and Capital Markets (FICM) business and hired a Director for ESG FICM. The new director will be responsible for helping coordinate ESG financing efforts across all the bank’s business lines.
Hannon Armstrong has established a $100 million CarbonCount Green Commercial Paper Note Program (the first of its kind in the U.S.), with proceeds going toward green infrastructure projects. The program also aims to provide transparency into the emissions avoided through the projects.
Projects eligible for investment include distributed building or facility projects that reduce energy costs through renewable energy or other energy efficiency systems, grid-connected projects that use clean energy sources, and sustainable infrastructure projects.
The CarbonCount tool scores and evaluates investments in U.S.-based renewable energy and other climate resilience projects to determine their efficiency in reducing CO2 emissions.
The new Taskforce on Nature-related Finance Disclosures (TCFD) announced the first 30 executives that have been selected as members, as well as more than 100 institutions that have signed up to join the TCFD Forum.
Executive members were selected for their sector and geographical coverage, as well as their individual subject-matter expertise.
The TNFD is working toward its goal of launching its framework in 2023, with a beta framework expected in early 2022.
The Capital IQ Pro platform now offers climate analytical tools, workflow tools, and ESG and climate data and analytics from S&P’s Global Sustainable1.
S&P Global Platts has launched new products to provide transparency into the carbon footprint of oil and gas production, including monthly carbon intensity calculations for 14 major crude oil fields.
Platts considers production, flaring and venting, maintenance, production processing, and transportation to measure the impact of greenhouse gas emissions.
Platts will also provide Carbon Intensity Premiums that a buyer would pay to offset the emissions generated through crude production.
JD Supra: SEC Signals Heightened ESG Focus
On September 22, the SEC released its Sample Letter to Companies Regarding Climate Change Disclosure, previewing the impending focus on ESG matters and enforcement of disclosure rules. The letter’s three main points include:
The SEC will closely review corporate ESG/sustainability reports, regardless of whether they are incorporated in SEC filings.
Companies should make a materiality determination regarding climate change risk and business impact.
The same disclosure principles will apply to the Management’s Discussion and Analysis section, possibly requiring revisions to disclosures to identify and quantify material climate-related capital projects.