General ESG News
The Paris Agreement will inform much of the conversation at COP26. The agreement sets countries on a course to reach a peak in their greenhouse gas emissions as soon as possible and shoot for net zero emissions by the second half of the 21st century.
The Paris Agreement laid the foundations for climate action, but recent research has identified other threats like biodiversity loss, extreme weather events, rising sea levels, and more, making the current targets insufficient for limiting global warming impacts. Achieving the necessary reductions means halving global emissions by 2030 and hitting net zero by 2050.
COP26 will be the first opportunity for Paris Agreement signatories to discuss updated targets and will help ensure accountability (since there is no legal means of enforcement).
Business World: Paving the path toward decarbonization
The recent IPCC report and upcoming COP26, as well as increased regulatory and investor pressure, have provided organizations with a much-needed wake up call regarding climate change. Many companies are responding by expanding their climate-related disclosures and aligning with the TCFD framework.
However, improving climate reporting should go beyond compliance to accurately identify and address risks and establish robust risk management strategies.
A recent EY study indicated that currently, ESG disclosure coverage outpaces disclosure quality. However, sectors with the highest exposure to transition risks (e.g., banks and financial institutions) scored higher for their disclosures, indicating that they are taking the initiative to stress test their assets, products, and services.
Enhancing scenario analysis is a key component in building risk management strategies and transforming these strategies into measurable actions.
The EY report also notes that areas like the ASEAN region and the Philippines, which are playing catch-up with global initiatives and are particularly vulnerable to climate change impacts, require special attention.
A wide range of topics will be addressed at COP26, including updated ambitious emissions reduction targets, international collaboration, goal setting, and aligning on a voluntary scheme centered around principles of human rights, labor, anti-corruption, and the environment.
The question of materiality will have the most impact on individual industries -- addressing the challenges that have a particular impact on companies. However, some issues (especially those addressed in the key principles) are fairly universal.
It is one thing for businesses to take action, but real, long-term change will require a variety of stakeholders working together.
While environmental and social topics tend to “grab the headlines,” it is the governance pillar that will ultimately determine how organizations address the new ESG-related global challenges.
Governance is the facilitator at the core of any business and its operations. However, the challenge of good governance is compounded by the need to engage with a broader and growing stakeholder landscape.
As regulators agitate for change, there is increased scrutiny on the governing bodies responsible for overseeing the ESG issues at the forefront of public consciousness. Governance must be constantly reviewed in the lens of evolving E and S requirements, as well as evolving stakeholder views.
Barron’s: ESG 2.0 Is in the Making
While ESG has entered the mainstream, there are still persistent doubts about the validity of ESG as an indicator of financial performance. These doubts have led to some backlash against the promises of ESG investing.
Some critics argue that any financially material ESG information is already captured in traditional market fundamentals, and others argue that ESG aspects, by nature, are external to the business and accepting responsibility for these externalities is a cost.
However, markets are not perfectly efficient and externalities do not simply disappear -- they often become integrated into the market. Additionally, major transitions like those being spurred by ESG momentum, are not smooth or linear.
Also, ESG ratings have become part of the problem by contributing to the variety of voices in the space and offering little transparency into ratings methodologies.
The current backlash against ESG, while an obstacle, will not stop the inevitable integration of ESG into corporate management and asset valuation.
Eco-Business: The next big ESG issue? Employee well-being
A growing number of companies have taken steps to improve the economic, physical, and mental well-being of their employees in recent years (especially during and in the aftermath of the COVID-19 pandemic).
A recent global study by AXA found that 95% of respondents believe a high intensity work environment for employees is a business risk, and conditions like burnout and poor mental health are material issues to business performance. The market for corporate wellness is continuing to grow, and bonds sold to fund social causes increased nine-fold in 2020.
Social sustainability is complicated by regional differences, and measuring the ‘S’ in ESG is highly nuanced across cultures, as evidenced by evolving working conditions in China.
The complexity of sourcing and managing ESG data is another obstacle to progress, and as the ESG market grows, so will the need for internationally consistent standards and data.
Fitch Ratings published its 3Q21 ESG Relevance Heatmap for Public Finance (available for download) with Relevance Scores indicating whether an ESG risk is minimal, emerging, or contributing to credit decisions.
The Free Press Journal: Double materiality, risks and integrated thinking -- Through the lens of ‘sustainable business’
Sustainability and business are persistently placed into different compartments, and sustainability and financial issues are often separated through strategy, risk and materiality assessment, and reporting.
Double materiality means stakeholders focusing on the impacts of externalities on the business as well as focusing on the impacts of the business on the externalities. SASB is largely focused on the former, while GRI standards emphasize double materiality.
The IASB is finalizing its proposed International Sustainability Standards Board (ISSB) to recommend investor-focused materiality leading to enterprise value.
Dynamic materiality recognizes the evolving nature of what may be financially material now and in the future, and given the number of stakeholders involved and the complexity of jurisdictions, global consensus will be a time-consuming process.
Enterprise risk management is increasingly expanding to include sustainability, and a detailed sustainability risk assessment can accompany a materiality assessment at an enterprise level to address and mitigate risks.
Historically, innovation has influenced culture. However, we may have reached a time when culture has begun influencing innovation. Business leaders are not only considering their environmental and social impacts, they are also seeking out innovation to help measure their impacts.
Companies and stakeholders are being held accountable for their roles in sustainability, social responsibility, and corporate governance. More organizations are recognizing how good ESG performance can lead to superior financial performance, as well as fostering trust and transparency.
Companies can start by gathering their data across multiple facets of the organization, aligning internal and external data, creating standardized reporting, and engaging in effective supplier management and assessment to drive responsible growth.
ESG Disclosures, Standards, Rankings, and Reporting
The newly-established Task Force on Nature-Related Financial Disclosures (TNFD) met for the first time on October 6th with the mandate to develop a disclosure framework for supporting a financial shift toward nature-positive outcomes.
Abyd Karmali, TNFD member and managing director of ESg client advisory at Bank of America, notes that there is much work to be done before there are standardized reporting approaches.
Karmali also notes that it is important to include nature-based considerations (including biodiversity) in reporting, other than climate change. The TNFD is willing to pilot draft framework approaches, learning from TCFD approaches and engaging with a broad set of stakeholders.
Obstacles to allocating funds appropriately include skepticism from the investment community and a lack of clarity on where there are opportunities.
JD Supra: Gearing Up for Climate Disclosure
Institutions are increasingly recognizing the physical and transition risks associated with climate change, and many are beginning to align disclosures around TCFD recommendations.
SEC Chairman Gary Gensler has been vocal in supporting the mandatory climate risk disclosure agenda, and the agency is working to develop proposed rules to be published either late this year or early 2022. For financial institutions subject to SEC regulation, the disclosure requirements may be more complicated than for other industries.
The U.S. Federal Reserve is preparing to use scenario analysis to address climate change risks. Last month, the agency published a staff report with a stress testing procedure to determine financial institutions’ resilience to climate-related risks.
The Office of the Comptroller of the Currency (OCC) appointed a Climate Change Risk Officer and joined the Network of Central Banks and Supervisors for Greening the Financial System, aiming to develop best practices and develop climate risk management.
As the U.S. seeks long-term energy independence, there is a need for eliminating emissions sources and being transparent about this effort. Stakeholders need data to make investment decisions and drive industry performance. Data can also help prospective buyers decide if they want to buy assets based on their ESG performance.
For example, flaring rates skyrocketed in 2018 and 2019 for a variety of reasons, but the top-10 producers in the Permian Basin are now achieving lower flaring.
Interestingly, activity is resuming while flaring is decreasing, indicating an increasing electrification of oilfield operations.
ESG Channel: Company Executives Calling for Rules Regarding ESG
Charter Communications has asked that FASB regulate accounting for energy transactions like carbon offsets and renewable energy certificates. Charter is seeking to become carbon neutral and participate in more energy-related agreements, but there are currently no rules for accounting for these types of transactions.
Fortunately, SEC Chairman Gary Gensler has requested that his staff submit a proposal by the end of year in regard to mandatory ESG disclosure.
The Wall Street Journal: Foundations, Private-Equity Firms Create ESG Reporting Platform
The new Novata system, created by philanthropic foundations and PE firms, aims to be a central database for gathering, reporting, and comparing companies’ ESG performance.
Novata’s lead investors are the Ford Foundation, the Omidyar Network, Hamilton Lane, and S&P Global. PE firms that advised on the project include Bridgepoint, Clearlake, Kohlberg, Vistria Group, and KPS Capital.
Also covered in ESG Today: S&P Global, Hamilton Lane Launch ESG Reporting Platform for Private Markets
A group of major UK companies, including BT, Tesco, Aviva, and Legal & General Investment Management has called on the government to set a requirement for large companies to disclose net-zero transition plans.
The signatories argue that in addition to setting climate goals, companies need to be transparent in their strategies for achieving their targets. They are calling for a policy requiring mandatory disclosures to be rolled out by 2025.
TCFD-aligned disclosure has increased in the past year, but governance disclosure remains the least popular reporting topic. The report also found that disclosure increased more between 2019 and 2020 than any previous year, with more than half of companies disclosing climate-related risks and opportunities.
In terms of sectors, the report found that materials and building companies lead on disclosure, followed by the insurance industry.
The report also found that while reporting on weighted average carbon intensity has increased (and become the most popular topic for asset owners this year), reporting on climate-related targets remains low.
Over the next several months, TCFD will continue to promote and monitor the adoption of its recommendations, and it will prepare a status report for the Financial Stability Board in September 2022.
Washington Post: Ethical Investment Needs to Keep Its Promises
The ESG movement has been facing backlash for virtue-signaling and weak or contradictory assurances, and many ESG-labeled funds are run in a way that will do little to advance the movement’s stated goals.
ESG is no longer a fringe segment of global markets, and as ESG becomes more mainstream, companies’ and funds’ claims will come under increasing external scrutiny.
Experts note that ethical investors will be better suited to rely less on simple negative screens (e.g., excluding companies in high-risk sectors), and more on finding new investments that serve ESG goals.
Investment Week: ESG strategies to ‘reboot’ European private markets, says PWC
A recent PWC study forecasts ESG assets in European private markets to skyrocket and account for between 27.2% and 42.4% by 2025. The report also predicts this influence spilling across borders and extending globally.
Shifting societal values, changing investor behaviors, policy shifts, increased recognition of ESG’s value creation, and more will drive ESG growth in private markets.
ESG is increasingly dominating boardroom agendas, and the issues are now being viewed holistically rather than in isolation. However, there is no harmonized approach for assessing ESG investments.
Private equity funds and other financial investors are leading the way in addressing ESG risk within their portfolio companies. For M&A transactions, PE investors are boosting their scientific modeling to assess the climate impacts on assets they are considering buying, and they are increasingly focusing on supply chain due diligence.
In non-financial sectors, regulatory pressure is lighter and there is a lower level of activity, but it is expected that more buyers will enter the market and try to create value by assessing assets and deploying capital in a more sustainable and holistic way.
The two key ESG focus areas in both the U.S. and Europe are the carbon footprint of a firm and its investments and the diversity of a firm’s staff and management team. However, one main challenge is that very few people share the same values on all fronts.
Institutional investors, businesses, families, and individuals all focus on different priorities, and hedge fund operations are evolving to meet investor demands, especially as working conditions shift as a result of the COVID-19 pandemic.
Traditional equity and credit returns are set to be lower than they have been over the past decade, which creates the challenge for hedge funds to try and help solve this portfolio conundrum. This also presents the opportunity for hedge funds to play a meaningful role in helping allocators achieve their goals for both returns and sustainability impacts.
Investment Week: Empowering advisers through data will make ESG a success
The market has become saturated with products with ESG labels and claims. The FCA has not rejected a fund application in the past five years, despite complaints over fund quality.
Using data to accurately position a client and their ESG preferences can help guide advisers’ discussions and the investment decision-making process. Currently, advisers do not have the best tools for identifying sustainable funds.
Advisers will increasingly be held accountable for their client portfolio selections, as greenwashing has become the biggest concern for sustainable investors. This is where technology and data can make a real difference.
JD Supra: ESG Toolkit Expands for European PE
The ESG investing market is seeing increased demand for enhanced diligence around the themes of climate change, supply chain issues, diversity, data privacy, and governance.
The trend of greater data availability and disclosure in the market is increasing the level of scrutiny of ESG fund credentials.
BlackRock has announced its new initiative to allow its clients to participate in proxy voting, giving them a voice on issues like executive pay, climate action, and governance. The new voting capabilities will first be rolled out to the firm’s largest institutional clients, starting next year.
This initiative reflects a trend among investors to take a more active role in investment stewardship, especially as sustainability and governance issues rise to the forefront.
BNP Paribas launched the BNP Paribas Easy Low Carbon 100 Eurozone PAB UCITS ETF aimed at reducing the carbon footprint of product portfolios and offering exposure to energy transition opportunities. It is classified as SFDR Article 9.
BNP now offers three low-carbon ETFs (with the first launched in 2008), and the newest one tracks the Euronext Low Carbon 100 Eurozone PAB NTR Index. This index meets the European standards for a Paris Aligned Benchmark, with criteria like fossil fuel exclusions and annual portfolio decarbonization targets of at least 7% per year.
EY released its Renewable Energy Country Attractiveness Index (RECAI) ranking of the top markets in terms of attractiveness for renewable energy investment and deployment opportunities.
The RECAI bases its assessments on a series of criteria and factors like policy stability, long-term contracts, natural resources, grid infrastructure, finance ability, and more.
The EY report highlights some of the major renewable energy developments in the U.S., as well as some of the barriers to continued growth and deployment of renewable energy.
Notably, the report points to the need for rapid growth in grid investments to accommodate the expected increase in renewable energy capacity.
The newly-commissioned green bond offering sets a record of 12 billion euros over a 15-year bond period, and it is the first green bond offering under the EU’s new NextGenerationEU (NGEU) green bond recovery program.
The offering indicates that the demand for green bonds remains strong, and the deal drew a book of 135 billion euros. Proceeds from the issuance will be directed according to the European Commissions’ Green Bond Framework, with particular focus on financing climate-relevant expenditures.
A new report from the BlackRock Investment Institute (BII) found that the need to significantly increase the mobilization of capital to emerging markets is a current barrier to limiting the effects of climate change.
The report notes that while private capital to fund the net-zero transition is technically plentiful, high levels of country risk act as a major barrier to large-scale capital flows.
To overcome these obstacles, the BII recommends public sector participation and to scale up budgetary allocations to $100 billion annually. The report also acknowledges the risk/reward benefits from this significant investment.
Companies and Industries
The Wall Street Journal: Chevron Sets Goal of Cutting Carbon Emissions in Operations but Not for Products
Chevron has set a goal to reduce or offset emissions in its operations to zero by 2050, and it also set a target to reduce the intensity of emissions from its products, though it set no target for outright emissions reductions for its products.
Other large oil companies have established similar targets, but Chevron’s announcement was immediately criticized by environmental groups as being a “disappointing tokenism,” and the slow and non-ambitious targets from U.S. oil companies were called a “beauty competition.”
Three months ahead of its 2021 goal, Apache has stopped its routine flaring in U.S. onshore operations.
Previously Apache’s majority-owned midstream company Altus Midstream invested $850 million in new natural gas pipelines, and Apache committed to underwrite and ensure construction. Apache believes this investment is necessary to move gas to market and therefore reduce the practice of flaring for operators in the region.
Apache’s CEO notes that the industry faces the challenge of reducing emissions while continuing to deliver reliable energy to the world.
Apache also announced new ESG goals that are linked to incentive compensation for all employees and are aligned with the company’s ESG focus areas of air, water, communities, and people.
Thousands of U.S. farmers’ businesses have been both damaged and transformed by recent effects of climate change, especially drought and heat. Producers must devise new strategies for their land, and consumers will have to adjust to price increases, and perhaps a less consistent supply of some foods.
More frequent storms and flooding are severely affecting infrastructure in the South and Midwest, and wildfires are taking a toll nationwide.
Some farmers are adapting by using their land to host solar and wind installations, which can lead to revenue streams and new ways to power farming facilities. Others are reducing their crop diversity to focus on saving their market share of certain crops. Smaller farmers will need government assistance to survive.
Dow is targeting carbon neutrality by 2050 and plans to allocate approximately $1 billion per year in capex on decarbonizing investments. The company also plans to build a net-zero carbon emissions ethylene plant, and it has made several other sustainability commitments in the past year.
One of Dow’s most significant emissions-cutting actions is its plan for a net-zero carbon emissions integrated ethylene cracker and derivatives site in Alberta. Dow has also signed several new renewable power purchase agreements across Europe and the Americas.
Building materials companies are increasingly coming into focus in the fight against climate change due to the carbon intensity of their products.
The Global Cement and Concrete Association (GCCA), which represents 40 of the largest cement and concrete companies in the world, launched its Global Net Zero Roadmap with steps the industry will follow to decarbonize, including a goal to reach net zero concrete by 2050 (and cut emissions by 25% by 2030).
The Roadmap is built around a seven-point plan with key steps for reducing the CO2-intensive clinker in cement, cutting fossil fuel use in manufacturing, and accelerating product innovation and efficiency.
The GCCA is also calling on governments, contractors, and designers to support the industry’s transition.
On October 7th, in response to President Biden’s Executive Order 14008 “Tackling the Climate Crisis at Home and Abroad,” the U.S. Department of Agriculture (USDA) released its climate adaptation and resilience plan for how the agency will prepare for current and future climate change impacts.
The agency notes that integrating climate change into USDA’s planning and decision-making processes is critical to ensuring that America’s producers are positioned for long-term success. The Adaptation Plan notes key climate threats to the industry and outlines actions the USDA can take, including:
Building resilience across landscapes with investments in soil and forest health
Increasing outreach and education to promote the application of climate-smart adaptation strategies
Broadening access to climate data at regional and local scales
Increasing support for research and development of climate-smart practices
Leveraging the USA Climate Hubs to support USDA Mission Areas and deliver adaptation science, technology, and tools.
Twenty-three federal agencies released reports identifying major climate change threats to their departments and how they plan to respond. The reports outline solutions (including investment in resilient infrastructure) and underscore the policy changes the U.S. is facing in response to global climate change.
President Biden took office with the promise to make climate change a top priority, but some Democrats and activists criticize that he has not responded with enough urgency.
The reports highlight how climate change is already affecting (and will continue to affect) aspects of everyday life, including degrading roads, school closures, temperature-induced aircraft limitations, population movements due to drought, and more. All agencies emphasized the need to prioritize vulnerable populations.
The Glasgow Financial Alliance for Net Zero (GFANZ) announced the publication of The Call to Action, which is a series of policy proposals aimed at G20 leaders to help the industry mobilize capital to address climate change and support the transition to a net-zero economy.
According to the coalition, large amounts of capital will be needed to support the climate fight, including nearly $5 trillion in clean energy investments. The alliance urges the need for widespread government action and policies to enable this capital mobilization.
Key policy proposals include setting economy-wide 1.5 degree Celsius aligned net zero targets, aligning regulatory frameworks to net zero, and encouraging coordination between regulators.