General ESG News
Climate change-fueled storms increasing in both frequency and severity are pushing electrical grids past their limits across the U.S., and the outages can have disastrous impacts on human health and wellbeing.
Environmental groups are pushing states to incorporate more batteries, renewable energy sources, and localized “microgrids” to help improve resilience and reduce the frequency and duration of outages. Utility companies are also proposing their own storm-proofing measures.
Unfortunately, state regulators have been rejecting many of these improvements on the grounds of keeping energy rates low; it is a tough sell in times of relatively calm/normal weather, and when disasters happen, it is too late.
North Carolina is an extreme example of a state with an urgent need for energy system transformation, as it has declared a federal disaster from a hurricane or tropical storm five times in the last four years.
States like North Carolina, Florida, Texas have been rejecting proposals to reinforce and/or reinvent electrical grids for climate readiness, though regulators in New York have begun pushing utilities to invest in solutions.
According to an urgent UN science report, nations can boost their climate policies by linking post-pandemic fiscal recovery to emissions reductions, slashing methane pollution, and building a global carbon market. These actions would help close the gap between the world’s current trajectory and the necessary path to limiting global climate change.
By the end of September 2021, 120 countries (which produce 51% of global emissions) had published updated NDCs, predicted to reduce emissions levels by 7.5% by 2030. However, emissions need to fall 55% overall for a chance of limiting global warming to manageable levels.
UN Secretary General Antonio Guterres has called on wealthy nations to phase out coal by 2030 (2040 for developing nations), and for all nations to introduce carbon pricing and end fossil fuel subsidies.
Yahoo! Finance: ESG awareness is growing among corporate directors: PwC survey
PwC’s recent survey of 851 corporate directors found that 64% say ESG is incorporated into company strategy, 62% say that ESG is a part of their companies’ risk management discussions, but only 25% say they have a good understanding of ESG risks.
The directors cited several macro ESG issues of concern, such as political polarization, technology disruption, income equality, and climate change, as drivers of ESG integration.
Directors especially highlighted diversity and inclusion, particularly board diversity. While more than 70% of survey respondents last year said they felt board diversity was an issue that would “work itself out,” the number dropped to just over 30% this year.
Oversight of ESG issues remains a challenge for ESG and sustainability accountability and messaging, and more than half of the director surveyed support linking executive compensation to diversity and inclusion goals.
World Economic Forum: 57 organizations release open letter for EU to act on ESG
57 organizations (representing more than 8.5 trillion EUR in assets and employing more than five million people) signed and released an open letter calling on the EU to act on ESG disclosure standards.
The letter encourages the European Commission to promote a set of global baseline standards by supporting the IFRS Foundation on the launch of the International Sustainability Standards Board.
WEF provides the full text of the letter online.
World Economic Forum: The No. 1 ESG challenge organizations face: data
A recent OCEG survey from Diligent found that less than half of respondents had a formal ESG program in place, and less than 10% were confident that their organization had mature and well-documented ESG capabilities.
The survey also found that more than half of the organizations surveyed do not publish any ESG metrics and only 9% use software to support ESG data collection, analysis, and reporting.
Organizations need to work to identify the proper data sources, shift operations and culture where necessary, anticipate future standards and requirements, stay on top of stakeholder sentiments, and evaluate third-party ESG risk.
World Economic Forum: As the world gathers for COP26, here’s how leaders can dispel ESG confusion
Industry and government leaders will need to agree on priorities at and beyond COP26 to decrease confusion around ESG investing and reporting.
Governmental leaders should focus on standardizing how to track and compare ESG performance, increase transparency, and move from agenda to action.
Partnerships between the financial sector, business, and governments will be critical to deliver change on the timeframe necessary to prevent the worst climate change impacts.
In 2020, the amounts of carbon dioxide, methane and nitrous oxide in the atmosphere rose by more than the annual average in the past 10 years, even while COVID-19 restrictions around the world saw an overall decline in carbon dioxide emissions of 5.6%.
This increase in atmospheric greenhouse gas emissions could be due to the reduced absorption capability of greenhouse gas sinks, such as trees, lands and oceans, due to rising global temperatures.
The rise in global temperatures may also cause a rise in warming gases from natural sources, as increased precipitation in areas of wetlands increases the amount of methane producing bacteria.
A new survey from White & Case notes several key themes expected to dominate the U.S. infrastructure market, especially technological innovation and ESG considerations.
74% of respondents in the U.S. said that an increased focus on digital infrastructure is a key consideration for future-proofing investments, and smart technologies could drive up to $20 trillion in economic benefits in the next decade.
More than half of the public authorities surveyed expect to sub-contract to a technology provider, and it is anticipated that partnerships between technology providers and traditional infrastructure partners will increase.
The pandemic highlighted the interconnectedness between society, the planet, and overall wellbeing, and investors and developers are becoming increasingly aware of the need to factor ESG considerations into decision-making processes.
49% of investors, financiers, and developers chose GHG emissions as a key ESG consideration, and the focus will be increasingly on how to manage emissions in infrastructure projects. Governance considerations related to good business practice will also come to the forefront.
ESG Disclosures, Standards, Rankings, and Reporting
The IFRS is working to establish a new International Sustainability Standards Board (ISSB) to guide companies on sustainability disclosure for investors, who are seeking clarity in the current landscape of competing and inconsistent disclosure frameworks.
The ISSB aims to create standardized ESG reporting rules to complement the IASB’s financial accounting regimen, in a format resembling an IFRS standard. Calls for mandatory disclosure in different jurisdictions are increasing.
It is important to note that while more and more companies are “supporting” the TCFD, this is not the same as actually producing climate-related disclosures.
MIT Sloan’s Aggregate Confusion Project (ACP) has brought on new investment firms, in addition to its five founding firms, to develop methodologies for establishing better ESG integration into decision-making processes. ACP has developed four main goals, including:
Reducing the level of noise in ESG measurement
Disentangling the effect of ESG-driven investment flows on stock price and firm behavior
Developing smarter ways to aggregate ESG factors into composite indices
Reliably assessing investor preferences to enable ESG indices to be more customized and tuned to investor values.
An investor statement, signed by 733 institutional investors representing more than half of all assets under management globally, calls on governments to mobilize investments to address the climate crisis and outlines roadmaps for decarbonizing emissions-intensive sectors and implementing mandatory disclosures.
The main actions recommended in the statement include strengthening NDCs, committing to mid-century net-zero emissions targets, ensuring that COVID-19 economic recovery plans support the net-zero transition, implementing policies to deliver on climate targets, and committing to mandatory, TCFD-aligned climate risk disclosure requirements.
SBTi has launched its Net Zero Standard to evaluate companies’ commitments to achieving net zero emissions as they respond to increasing investor, customer, and regulatory pressures to reduce their climate impacts.
However, recent research indicates that many of the new emissions reduction targets set by companies are not science-based and/or the accompanying actions are insufficient to meet the targets.
The new SBTi standard sets strict criteria for approving companies’ net zero goals, requiring decarbonization of 90-95% by 2050.
SBTi is also aiming to launch Net Zero Foundations for Financial Institutions: Draft for Public Consultation next month to help scale up the capital flows necessary to meet global climate goals.
The New York Times: As Risks of Climate Change Rise, Investors Seek Green Building
Many structures now include the typical “hallmarks” of sustainable development, but some are also building sustainability into financing plans. Some project investors are tracking environmental performance metrics with the help of new technologies and stricter standards.
While green building standards (e.g., LEED) are not new, perceptions of climate risk have changed in recent years, and experts predict an increased focus on carbon counting and resilience against natural disasters.
Additionally, companies are increasingly realizing that sustainable development means attracting better tenants and getting ahead of new regulations to create assets with more long-term value.
Stephen Tross, chief investment officer of international investments at Bouwinvest, notes that “Today, you don’t sacrifice returns for sustainability, you create returns with sustainability.”
The lack of common standards/guidelines (e.g., LEED and GRESB) prove challenging for transparency in investment and disclosure, and more accurate tools and data are making it easier for asset managers to compare properties and portfolios.
Financial Times: Invesco launches ESG version of $200 billion exchange traded fund
The QQQ ETF (which tracks the Nasdaq-100 stock index) now has an ESG version in the US and Europe based on a new Nasdaq index, and it features lower weights for tech giants like Tesla, Facebook, and Amazon and higher weights for groups like Microsoft and Apple.
The new company weights, based on data from Sustainalytics, are meant to assess how companies are managing their ESG risks.
The ESG version of the Nasdaq-100 index also excludes companies deriving revenue from sources like military weapons, oil and gas, thermal coal, and nuclear power. Excluding these companies significantly improves the ESG risk rating of the index.
The volatility and ESG risks associated with the cryptocurrency market have been barriers to institutional investment. However, a recent MSCI study found that crypto may be included in institutional investment portfolios without the investors’ knowledge.
Of the companies in the MSCI ACWI Index, 26 were found to have crypto exposure, and the MSCI ESG Research-covered securities had 52 companies with crypto exposure.
Bitcoin’s potential for returns has more companies seeking exposure despite the fact that it is one of the higher emissions-producing cryptocurrencies. Electronic waste, energy consumption, transaction disputes, and cyber security are also major concerns.
Corporate Secretary: New report shows rise in success of ESG shareholder activism
A new Diligent report found that there has been an increase in successful ESG shareholder activism campaigns, largely fueled by a lack of modern governance practices. Notably, the increase in successes has continued to rise despite an overall decline in investor activist campaigns in 2021.
This year has demonstrated that there is going to be continued pressure on issuers and boards to improve their ESG disclosure and performance, and investor activism is likely going to move from small hedge funds to institutional investors aiming to reduce their portfolio risks.
Institutional Asset Manager: Companies failing to act on ESG issues risk losing investors, says new PwC survey
A recent PwC survey found that 49% of investors surveyed said that would be willing to divest from companies that are not taking sufficient action on ESG issues. 59% also say that a lack of action on ESG issues would make it likely for them to vote against an executive pay agreement (and one-third have already done this). Nearly 80% of the investors surveyed said ESG risk management is an important factor in their investment decision making.
83% of investors surveyed said it is important that ESG reporting provide detailed information about progress toward ESG goals, and three-quarters think it is important for reported ESG metrics to be independently assured.
A high percentage of investors also say that ESG needs to be embedded into corporate strategy, and they are more confident that ESG issues are being addressed when someone in the C-suite is held accountable for them.
Thirty-six institutional investors, including five of Canada’s largest banks, have signed a new Canadian investor Statement on Climate Change.
This statement calls on companies to act on material climate risks, including through their industry association and lobbying activities.
Specific actions for investees include disclosing their financed emissions, setting emissions targets, and reporting on that progress regularly.
In the wake of #MeToo and Black Lives Matter movements, employers have been called upon by their shareholders and investors to emphasized the “S” in ESG and to take action to address sexual harassment, racial injustice, and other inequalities in the workplace.
BlackRock and other major investment firms have called upon their companies to increase board diversity, provide compensation in line with serving and retaining quality talent, and focus on human capital management.
Pressure for internal social reform is being felt at the governmental levels as well, as several states have instituted pay transparency laws and President Biden released “The Biden Agenda for Women.”
Companies need to show commitment to following through on implementing changes through actions such as increasing “top down” diversity, conducting pay equity audits, and increasing training on and policies for workplace harassment.
BlackRock has announced upgrades to its ESG Enhanced Focused Indices and ESG Enhanced UCITS ETF range, including updates to meet the EU’s Climate Transition Benchmark requirement and more strict screens for other ESG issues like weapons, environmental harm, and oil and gas.
The changes will result in the ETFs changing their EU SFDR regulation to Article 9, which indicates that they support sustainable investment.
PwC’s 2021 Global Investor ESG Survey includes responses from 325 investors around the world, and it found that a large majority of investors (79%) indicate that a company’s ESG risk management is an important factor in their investment decision making, but they lack the clear and consistent reporting needed to properly assess ESG performance.
Climate topped the list of key ESG focus areas, followed by worker health and safety and workforce and executive diversity, equity, and inclusion.
83% of respondents also noted that they want ESG reporting to provide detailed information about progress toward ESG goals, and only a third currently rate the quality of existing reporting as good.
Moody’s has issued its quarterly Sustainable Finance update, raising its forecast for sustainable bond issuance for the year to over $1 trillion. Sustainable bond issuance has grown at unprecedented rates over the past year.
The fastest growing sector of the market is the emerging sustainability-linked bond market with year-to-date issuance of $62 billion (compared to $9 billion in all of 2020).
The report also includes Moody’s ESG Solutions’ expectations for key policy areas that are likely to be the focus at the upcoming COP26 and their likely impacts on the sustainable finance market. Key anticipated focus areas include increasing country climate commitments, international cooperation on carbon pricing, scaling up climate finance, mobilizing capital, and more.
Companies and Industries
A 2021 Oxford Economics survey of 1,000 supply chain decision makers found that 88% have either created a clear mission statement around sustainability, or they’re currently in the process of creating one. However, only 52% have taken action to reduce their shipping miles and only 21% have full visibility into their supplier sourcing.
As the demand for electric cars increases, manufacturers are taking steps to prove that they can find the right parts and vendors to build high-performing electric cars.
In a new video, “Forward -- The Next Normal with Baratunde Thurston: Accelerating Sustainability,” Thurston notes that consumers, governments, and businesses can work together across supply chains to design and manufacture with sustainability in mind.
Dan Loeb’s Third Point LLC has taken a $750 million stake in Shell (about 0.4% of the company) and is now pushing to break up the company as it ventures into renewable energy while still pumping oil and gas. Loeb wants Shell’s renewables, natural gas, and marketing to split into a separate company from its legacy business of upstream, refining, and chemicals.
Loeb argues that this split would benefit shareholders after a few difficult years, and he is confident that the company will form a plan to meet its decarbonization goals while improving shareholder returns.
Loeb also notes that with so many competing stakeholders, activists, and interests, Shell is being pushed in too many directions to make any real progress.
The Wall Street Journal: ESG Gains Could Buy Better Terms in Insurance Program
Marsh McLennan’s brokerage unit has teamed with international law firms and insurance carriers to recognize corporate clients for strong efforts in improving ESG performance.
Under this initiative, U.S. companies deemed to have superior ESG practices would be eligible for improved terms on directors-and-officers (D&O) liability insurance policies.
The enhanced terms would apply to the ESG exposures, not overall D&O packages, and are expected to launch in the U.K. and other countries soon.
Philips has announced a new goal to reduce the carbon footprint of its supply chain and have at least half of its suppliers commit to science-based emissions targets by 2025.
Philips achieved carbon neutrality in its own operations last year, and its new decarbonization initiatives for its supply chain are expected to have an impact seven times greater than the reductions in its own operations.
Philips plans to take an active role in incentivizing its suppliers to set targets, focusing on structural improvements to maximize the impact of CO2 reduction. Philips will also explore Virtual Power Purchase Agreements (VPPAs) with suppliers to support the development of renewable energy projects.
MSCI is now providing access on its website to its Implied Temperature Rise solution for more than 2,900 companies. The tool converts companies’ current and projected GHG emissions to an estimated rise in global temperatures, and it accounts for each company’s emissions reduction targets.
ESG Today: Taking Stock Ahead of COP26
The investment industry has a key role to play in assessing the risks and opportunities resulting from climate change, as well as enabling the flow of investment where it is needed most.
State Street is already taking note of progress on several fronts in the past few years, including decarbonization, disclosure, and engagement. Institutional investors as a group have started to reduce their exposure to transition risks, and they are substantially increasing their demand for disclosure and their engagement with public companies on climate change-related issues.
More work is needed to improve the data, analytics, and risk management tools and processes, and State Street encourages more engagement with public companies.
As part of its 2021 State of Energy Union Report, The European Commission reported that for the first time ever, in 2020, renewables generated more electricity than fossil fuels in Europe.
The report also analyzes the five pillars of the EU, including accelerating decarbonization, scaling up energy efficiency, enhancing energy security and safety, strengthening the internal market, research, innovation, and competition.
The report also highlights the fact that fossil fuel subsidies in Europe fell in 2020, and there is notable greenhouse gas reduction progress, and EU27 emissions fell by 10% in 2020 (compared to 2019).
While the details are still being discussed, a new framework proposed by Democrats has more than $500 billion directed to fighting climate change.
The framework is expected to include expanded tax credits for renewable power, advanced energy manufacturing and electric vehicles, and incentives to support investments in energy storage, electric transmission, and sustainable aviation fuel.
The UK has officially announced its formal plans to introduce mandatory climate-related disclosure legislation for companies and financial institutions. The legislation is expected in April of 2022 and will affect more than 1,300 of the country’s largest public companies.
The new requirements are meant to help investors and businesses better understand the financial impacts of their climate change exposure and to more accurately price climate risk.
Lobbyists are increasing advocacy on ESG issues, citing ‘ESG’ as a specific issue for 63 unique clients in third-quarter federal lobbying reports (which is double the number cited in Q1).
This increase is being driven by the Biden administrations regulatory push for ESG disclosure, and specifically the anticipated SEC rules for climate-related risk reporting.
Dan Crowley, a partner at K&L Gates’ global financial services policy practice, notes that ESG lobbying is focusing less on legislative matters because the issues are mainly regulatory and are likely to move forward regardless of what bills pass through Congress.
Earlier this month, the U.S. Department of Labor (DOL) proposed a regulation that would amend existing regulations for ESG considerations in proxy voting decisions for ERISA fiduciaries.
If adopted, the regulation would require all ERISA fiduciaries to make investment decisions and vote proxies solely based on financial considerations, but they must also evaluate the economic impact of ESG factors when considering investments. Fiduciaries may also face increased risk of fiduciary breach claims for failing to properly evaluate ESG factors of justifying ESG investment decisions /proxy voting as pecuniary when they are not.
The proposed regulation aligns with the Biden administration’s view that climate change and other ESG factors should be part of an ERISA fiduciary’s decision-making process, and it would also eliminate the prohibition on investment funds serving as qualified default investment alternatives for 401(k) plans if they consider ESG matters.
The Financial Stability Oversight Council (FSOC) released a Report on Climate-Related Financial Risk in response to President Biden’s Executive Order 14030, which recognized that the “intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies—such as increased extreme weather risk leading to supply chain disruptions.”
The FSOC report declares climate change as an emerging threat to U.S. Financial Stability and provides 30 recommendations to U.S. financial regulators to help mitigate that risk, focusing on four key initiatives: assessing climate-related financial risks, promoting enhanced climate-related disclosures, enhancing climate-related data, and building capacity to analyze all this information.
The FSOC report also announced the creation of a Climate-related Financial Risk Committee to facilitate coordination among FSOC members and the development of common approaches and standards.