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General ESG News
GRI has released its updated Universal Standards, now including due diligence for organizations to manage their sustainability impacts (especially regarding human rights), to be used by the more than 10,000 companies already using the GRI standards for reporting.
The latest version includes sector-specific standards for 40 identified sectors, and they include the Foundation, General Disclosures, and Material Topics.
The new standards align with the UN’s Guiding Principles on Business and Human Rights, OECD’s Guidelines for Multinational Enterprises and Due Diligence Guidance for Responsible Business Conduct, as well as the International Labor Organization’s International Labor Standards, and more.
For years, ESG professionals have focused on protecting companies and mitigating risk. Now, experts note that real change will require disruption -- sweeping, strategic changes.
Many ESG professionals are good at preserving value, but they also have the responsibility to reduce the causes and accelerators of disruption. Instead of focusing on protecting companies from the perception that they’re not doing enough, and disclosing this information, ESG professionals need to docs on the substance of a company’s actions.
As reflected in the urgency of the latest IPCC report, business resilience will increasingly be dependent on companies making big, step changes, not incremental ones -- disrupting their existing business model instead of merely “polishing” it.
Emerging approaches to this issue include:
Highlighting the consequences of a lack of action
Expanding the voices heard
Building realistic but challenging scenarios
Putting reporting into perspective, and not conflating it with performance
Creating champions on key ESG issues
The goal of ESG is not to generate a rating for public relations purposes, but rather to develop a plan to integrate it into overall organizational practices to improve the business and the world.
Ultimately, despite the popularity of raters, companies should never be run based on an outsiders’ interpretation of what a business owner should be doing.
For most companies, ESG integration means determining the E, S, and G issues most material to the business and formulating the necessary policies, benchmarks, goals, and programs to demonstrate improvement.
Paul Polman, CEO of Unilever, has published a new book titled “Net Positive: How Courageous Companies Thrive by Giving More Than They Take,” co-authored by sustainability consultant Andrew Winston.
In this book, “giving more than they take” is not referring to companies creating products for customers that ultimately contribute to the world’s problems, but deriving profits from helping to solve the world’s problems.
The financial markets are viewing companies from both a risk and opportunity perspective, and net-positive companies are companies that take responsibility for their total societal impact.
Systems and organizational transformation will rely on leadership transformation. The current lack of progress, according to Polman, is at least in part due to the fact that leaders lack the courage to set the ambitious targets needed.
Being net positive is not just about offsets -- it is about removing carbon out of the atmosphere, or engaging in things like regenerative agriculture to be both reparative and restorative.
Fortunately, there is an increasing movement of CEOs making bolder sustainability commitments and impactful partnerships.
According to FactSet, more than 30% of S&P 500 companies cited ‘ESG’ during their first-quarter earnings call this year, which is the highest number on record. It is important to ensure ESG is being treated in a meaningful way, not a superficial way, on these calls.
ESG disclosure should be tailored to the audience and the format of the earnings call. An example of a company that has consistently been doing this well is Nestle, which has been including specific updates on ESG-specific topics in its earnings calls.
It is also important to frame ESG as an opportunity in earnings calls, not a short-term trend or a burden. It is not about reimagining the earnings call, but seamlessly integrating ESG information.
The Economic Times: Why it’s time for business leaders to integrate ESG into their firm’s DNA
The global COVID-19 pandemic has shed light on how much things like greenhouse gas emissions are the result of “haphazard business activities” and the fragility of the societal thread of communities, as well as how good governance is essential to business resilience.
Investors and business leaders alike need to realize that ESG investments are not counterintuitive to maximizing shareholder returns. Additionally, ESG is being increasingly recognized as a long-term value driver.
Key difficulties for business leaders are not just determining ESG objectives, but also ensuring that ESG principles are ingrained into company culture. Approaches to this include leading by example, creating ESG awareness programs for employees, and recognizing and rewarding innovative ideas.
Beaumont Enterprise: Questions surround how to pay for energy transition
Ernst & Young recently presented a webinar in which panelists discussed financing the clean energy transition, the market’s view of ESG, and the evaluation of climate-related risks and compliance.
The financial services industry is conducting initial assessments with a focus on the production of hydrocarbons and how they’re used in electrification, power generation, and the evolving fuel mix.
Challenges include the lack of strong data to help investors and financiers understand the carbon emissions and intensity of their organizations or their supply chains.
Regulators are pushing for improved disclosures, and asset managers are prioritizing intensive portfolios that aren’t capable of demonstrating that they are shifting their processes.
Ultimately, there is still significant debate around “what will really move the meter and at what cost.” However, there is a consensus around the fact that a company’s ability to provide data to support its efforts to reduce its carbon footprint will make it more attractive to banks, investors, and financiers.
Tariq Fancy, former head of sustainable investing at BlackRock, argues that so-called ESG investing only allows fund managers to charge higher fees for investment products that have “little evidence for real-world impact that would not have otherwise occurred.”
Fancy points out that while these funds may divest from big-time polluters like oil and gas companies, other investors will simply fill the void, having no real effect on the offending companies.
Fancy uses a sports metaphor to illustrate his point -- he argues that Wall Street is focused on scoring points (e.g., maximizing profits), not good sportsmanship (e.g., being responsible investors.
Noel Quinn, Chief Group Executive of HSBC, believes that banks should be financing the “transition of dirty industries to a clean future, not cutting them off,” as this can help avoid the binary world that would result from refusing to help existing industries invest in changing their business models.
Environment + Energy Leader: Survey Finds Businesses need to be Accountable for Supply Chain Practices, Ethics
A recent OpenText survey of 3,000 U.S. consumers found that people want ethical standards placed on the entire source of a product, and companies need to be accountable and transparent for their business practices and supply chains.
The survey also found that 82% of consumers will prioritize buying from companies with strong ethical sourcing strategies in place.
Supply chain ethics are becoming an increasing focus in many industries, as is legislation for stricter supply chain oversight.
A Harvard Business Review report from 2020 also found that while many businesses have sustainability goals for their supply chains, it can be difficult to measure and find accountability in multi-layered supply chains. However, the cost of not addressing supply chain responsibility can be monumental.
David Picton, SVP of Sustainability at Alcumus discusses the wide abuses that cause concern in the area of modern slavery, including failure to pay minimum wages, depriving workers of facilities to wash, rest, and eat, demanding excessive hours, harassment, assault, domestic servitude, and unpaid wages.
There are significant legal and financial penalties for companies trading in the modern economy, signaling that the need for supply chain accountability is unavoidable.
Despite the heightened focus, there is still confusion around what modern slavery is, how to identify it, and what steps to take to remedy it.
As international supply chains become more complex, there are risks of compliance gaps for businesses without the appropriate due diligence processes. While this is a more visible issue for larger companies, smaller and medium-sized companies should adopt the same focus on eradicating modern slavery.
Accenture released its new report “Reaching Net Zero by 2050,” exploring European corporate climate commitments and goal progress. The report found that while companies are increasingly setting net-zero targets, the vast majority are not on track to meet their goals.
Climate experts note that to reach net zero by 2050, the pace of global emissions reductions would need to double by 2030 and triple by 2040, meaning sweeping changes in technology and collaboration across industries and supply chains.
While many companies are behind on their goals, the goal setting, itself, did have a positive impact, and companies that have set net-zero targets have reduced their emissions by 10% over the past decade.
ESG Disclosures, Standards, Rankings, and Reporting
Some experts believe that the increasing scrutiny and criticism around ESG strategies signals maturity and mainstreaming, which could be beneficial for certain ETFs, especially those that go beyond simple ESG metrics and use a robust screening process (including the Goldman Sachs JUST U.S. Large Cap Equity ETF).
ETFs that can distinguish themselves in the crowded ESG market segment also stand to be more successful.
ESG considerations have become a crucial part of every issuer’s equity story, and market regulators are catching up and increasing their scrutiny of ESG investment options.
For companies looking to go public, insufficient ESG disclosure and a failure to clearly articulate ESG strategy can negatively impact investor demand.
White & Case provides a webinar discussing these issues with a panel of experts debating what ESG means in practice in an IPO context.
Environment + Energy Leader: Repurposing the Environmental Impact Statements Process for ESG -- A Holistic, Alternatives Analysis
The 1969 National Environmental Policy Act (NEPA), which is best known for requiring federal agencies to prepare environmental impact statements, also includes a broad commitment to sustainability.
Recently, Intelligize released a report that concluded that public companies are “begging for direction” on ESG reporting, which the SEC can (and is being expected to) help fix.
CEQ’s “A Citizen’s Guide to the NEPA” explains that human beings are an important part of the environment. Applying the NEPA model to a corporation then leads to a series of questions related to what ESG aspects the company is wishing to address.
Then, companies need to measure and evaluate their impacts, identify alternatives where necessary, and monetize impacts where possible.
Journal of Petroleum Technology: Blockchain Companies Team Up To Track ESG Data
The Houston-based blockchain companies Data Gumbo and Topl are collaborating to help corporations with their ESG reporting while managing and protecting sensitive data.
This collaboration gathers data from business operations and transactions, uses the data to inform calculations, and enables the review and certification of ESG metrics by auditors.
This offering (provided to customers) is based on GumboNet ESG and Topl’s blockchain-as-a-service platform.
Business Wire: Axiomatic Data Creates and Releases ESG Social Metrics
Axiomatic Data released its new ESG metrics to its database that covers more than 700,000 public and private companies in the U.S., aiming to help fill the gap in data sources for the social component of ESG.
Key new social metrics include Salary Boost, Salary Deferral, and Pension Plan Participation Rate, which can help identify the strongest and weakest social performers.
Business Standard: Acuite Ratings to incorporate ESG norms into its credit ratings
Acuite Ratings is the first rater from India to sign a UN-supported initiative for the Principles for Responsible Investment (PRI). In January of this year, Acuite set up a subsidiary ESG Risk Assessments & Insights to make assessments for investors.
As Acuite systematically incorporates ESG norms into its credit ratings and analysis, it is becoming increasingly visible that assets linked to climate change or questionable accounting practices can cause operational inefficiencies, regulator scrutiny, reputational damage, and even financial losses.
Redington’s annual Sustainable Investment Survey found that over the past six months, a quarter of asset managers were unable to provide evidence of ESG considerations influencing their buy or sell decisions, despite strides being made in the areas of ESG reporting and policy development.
The survey also found that progress on policies is not always supported by tangible action. Experts insist that being “successful” in ESG means incorporating ESG fully into investment decision-making and reporting processes.
On the engagement front, the survey found that credit managers were not undertaking any engagement across 75% of their overall portfolios.
However, some experts note that having different views on ESG is a good thing and allows them to decide how important ESG is to their firm.
Lingering misconceptions about ESG investing make it difficult for both asset owners and regulators to implement common standards for ESG investment methodologies. Experts also note that the increasing discussions and variety of regulatory activity can be a distraction instead of promoting clarity -- global standards are needed to resolve confusion.
Experts also argue that ESG ratings are often “overly simplistic” and susceptible to pitfalls. Trying to mitigate risk, create positive real-world impacts, and increase returns can lead to differing results, and rating agencies are often a black box in terms of their scoring methodologies.
The younger generation of investors, in particular, is demanding more precision and accountability in ESG investing.
A group of leading private equity investors, led by the California Public Employees’ Retirement System (CalPERS) and Carlyle, has launched the ESG Data Convergence Project to streamline the industry’s approach to ESG data reporting and collecting.
Participating firms include (but are not limited to) Blackstone, CVC, Permira, TowerBrook, The Picket Group, and Wellcome Trust. The group will meet annually to assess the data and refine the metrics with a focus on materiality.
Recent research has revealed that on average, self-labeled ESG funds tend to pick companies with worse employee treatment and environmental practices than non-ESG funds, and stocks in ESG funds rely more on government subsidies and lobbying.
ESG funds’ portfolio companies are more likely to disclose their GHG emissions and other data, but are also more likely to exhibit worse performance in terms of total emissions and intensity. However, ESG ratings for these stocks remain generally high.
Screening criteria for many ESG-related funds are often vague, as are assessment procedures.
Another way to look at ESG funds’ portfolios would be to assign a charge of $100 per ton of carbon emissions (all scopes) to the companies’ annual net income from last year -- Tesla and Disney already reported losses. P&G’s profits would be wiped out, and Microsoft would lose more than 10% of its net income. Visa, on the other hand, would lose 0.3% of its net income.
Various jurisdictions are beginning to introduce mandatory ESG disclosures for asset managers, with climate-related disclosures taking priority. However, a broader regulatory landscape is evolving.
The law firm Latham & Watkins released a publication on ESG in Asset Management this month, and the full PDF is available for download.
Environment + Energy Leader: Executives Say Big Increase in ESG and Sustainability Investment Coming
More than half of senior executives responsible for ESG and sustainability issues say their firms expect double-digit increases in spending in 2022 toward these efforts; they will prioritize funding for supply chain sustainability, according to Verdantix.
Increased stakeholder pressure is causing much of this increase, and the Verdantix survey found that climate change policy development is the main driver for increasing corporate involvement in sustainability issues, though they are held back by the lack of clarity around reporting standards.
Supply chain accountability and reporting can be an obstacle to improving ESG goals, though increased regulation is expected to help solve this and increase spending.
A recent OECD report notes that the world’s biggest economies need to do more to ensure that ESG-related ratings and investments are effective in the low-carbon transition.
Challenges highlighted include the variety in approaches to ESG issues, data inconsistency, and the lack of comparability in ESG rating methodologies.
The report calls on G20 governments to ensure transparency, clarity, quality, and comparability of ESG metrics at the global level, as well as greater international cooperation.
Business models that have adapted to ESG considerations have boosted companies’ performance. However, for investors to support businesses that are serious about making positive impacts, they need reliable definitions, data, and tools to differentiate between virtue signaling and actual impact.
COP26 provides an opportunity to reset the course, and the IFRS Foundation plans to launch a body dedicated to developing a global baseline sustainability reporting standard -- the International Sustainability Standards Board (ISSB).
It is expected that the ISSB will adopt a climate-first approach and will place the TCFD framework at the core of its new standard. However, it is important to not neglect social and governance components.
The concept of “dynamic materiality” should be at the core of the new board’s approach, which recognizes that what is material to investors will change over time.
Vanguard recently purchased Just Invest with the aim of making its services more widely available to financial service providers.
This deal continues the recent trend of large financial firms acquiring ESG-related data providers and other informational/technology agencies in an attempt to create a “seamless and scalable client experience.”
Notably, Vanguard Personal Advisor Services is not slated to be an early adopter of the Just Invest technology, nor will Vanguard make direct indexing available to its mostly direct retail clients.
Experts describe the acquisitions as a round of “musical chairs,” with the biggest investment firms competing for direct-indexing service providers, as the service is increasingly recognized as a value driver.
According to a recent Schroders study, more than half of Canadian investors believe that data/evidence demonstrating that sustainable investing delivers better returns would prompt them to increase their investments. More than a third also believe that regular reporting that highlights investment impacts would motivate them to increase their sustainable investments. Still, Canada lags slightly behind other sustainable investors, globally.
Canadian investors cite financial scandals as a main obstacle, as well as human rights scandals and climate change risks.
Philipp Hildebrand, vice chairman of BlackRock, insists that global capital markets are about to witness a huge shift of capital into products promising to support ESG goals. This prediction comes even as the ESG market faces increased scrutiny from investors and regulators to address greenwashing accusations and establish clarity around ESG assets.
BlackRock, already the largest global provider of ESG ETFs, plans to expand its range of ESG products. However, some in the industry have expressed concern that this expansion will just lead to a greater risk of greenwashing.
Advisor Perspectives: Banks Are Really Cashing In on ESG Bonds
While the banking industry has been criticized for its continued funding of fossil fuel producers, the industry has actually been making more money from underwriting ESG bond sales, reflecting the ongoing inflow of capital into ESG investing.
Incentives to participate in ESG range from investor demands to regulatory pressure. Even JPMorgan, the top arranger of bond sales for the fossil fuel industry, is now earning more in total fees from underwriting ESG debt.
China Minsheng Bank (CMBC) has collaborated with Societe Generale to launch the Minsheng multi-asset ESG global allocation index (MSMEGA). It is mainland China’s first global multi-asset index with embedded ESG criteria. The index comprises fixed income and equities.
In the past year, Chinese regulators and financial institutions have been focusing on initiatives supporting the sustainability transition. Market necessity drives market behavior, and mainland China’s current economic situation is a key driver for the creation of the index.
CMBC has been highly regarded for its product offerings in China, and the new index will help Chinese investors who don’t want to tie their financial futures exclusively to mainland markets, as well as those who want to effectively manage the risk of their portfolios.
After its victory in ExxonMobil’s boardroom, Engine No. 1 has announced its investment in GM, praising its vision to go all-electric by 2035. The activist investor has also stated that it has had very “constructive and collaborative” dialogue with GM.
Along with its investment in GM, Engine No. 1 announced the publication of its new wh ite paper, “Mobility Becomes Electric,” which details the need for auto OEMs to lead the transition to electric vehicles.
MSCI recently announced the launch of its Climate Lab platform combining its climate data and financial modeling capabilities across multiple asset classes. The platform allows institutional investors to assess trends, identify leaders and laggards, and run scenario analyses.
Climate Lab also includes the ability to aggregate MSCI’s new Implied Temperature Rise solution at the portfolio level, enabling investors to evaluate alignment with global temperature targets.
I Squared had launched the renewable energy platform Cube Green Energy to accelerate the transition to a net-zero carbon economy.
The platform will initially focus on mature renewables markets in Europe, and it is led by former senior executives at General Electric’s investment arm GE Energy Financial Services.
FTSE Russell released its annual Sustainable Investment survey of 179 global asset owners across North America, EMEA, and Asia Pacific. The report revealed a high level of interest in sustainable investments and a desire to mitigate long-term investment risk. Client demand and regulatory requirements were also cited as drivers for incorporating ESG into investment strategies.
One key focus area of the survey is the asset owners’ perceptions about the role of regulation in sustainable investing, and it found that attitudes vary by region. The highest level of focus is in Europe (59% viewing regulation as a potential enabler, versus 22% in the U.S. and only 9% in Asia Pacific).
Companies and Industries
ESG initiatives should be central to non-profit healthcare systems, and main drivers should include:
Maintaining brand integrity
Responding to investor scrutiny
Attracting a more socially conscious hiring pool
Staying a step ahead of imminent regulatory mandates
Healthcare organizations must also take a strategic approach to ESG assessment and governance, as well as to data collection and usage. This will increasingly require collaboration and engagement with leaders and professionals.
Engineering and construction (E&C) account for more than 11% of the global GDP, which means these firms play a critical role in how ESG investments are prioritized.
Certain market segments have been particularly impacted by recent events; these segments include:
The demand for renewable energy services
The need for specialized E&C providers to develop supply chains
The demand for utility contractors to support deferred maintenance needs and expand their focus on power resiliency
The need for aggregate producers in certain regions to address the replacement/repair of roads and highways with an increased focus on sustainable materials
Valuations for well-run companies with exposure to more “attractive” segments are at an all-time high, reflecting the fact that investors are increasingly putting their money into investments with ESG exposure.
The main ESG focus areas for companies in construction materials, specialty chemicals, building products, architecture, and contractors are carbon footprints, recycled products and product lifecycles, hazardous waste, sustainable design, as well as energy solutions and “cleantech.”
Companies looking to capitalize on their positions in the industry should consider their unique ESG performance and consider how it offers them a competitive advantage in their sector and to further their potential customers’ ESG goals.
Yahoo! Finance: Banks Start Dropping Clients to Dodge Costs Tied to ESG Risk
European banks have begun dropping clients that pose a climate risk instead of facing the possibility of higher capital requirements. They are increasing their prices and denying loan requests, as well as deselecting industries and certain clients.
Upstream oil and gas projects are falling out of favor with banks as regulator and investor pressure increases to shift to low-carbon sectors. Companies determined to be on the “receiving end” of climate change are also being reassessed, such as some segments of the mortgage market.
Other actions banks are taking to regulate ESG investment elements include making clear distinctions in auto loans, auto leasing, and mortgages, as well as using internal models to identify risks in capital demands.
Payments Journal: Risk, Reward and How Banks Can Thrive in an ESG-Focused World
Jamie Dimon, chairman of the Business Roundtable, has been consistently urging industry-wide engagement on SEG principles as both a business imperative and a social responsibility. ESG-related areas for improvement and opportunity include:
Building robust and far-reaching capabilities for capturing, processing, analyzing, and acting on large amounts of data.
Establishing new KPIs across the business to reinforce ESG as a core risk-management priority.
Moving more of the business to the cloud.
Using analytic and modeling tools to illuminate the most efficient and impactful ESG paths forward.
Developing and integrating ESG-specific disclosure and reporting capabilities.
GreenBiz: When AI and ESG Collide
In a late-2020 survey by McKinsey, at least half of the executives surveyed said their companies were already using AI for product development, service optimization, marketing, sales, and risk assessments. For ESG, AI can particularly be used in reporting and data validation.
However, the widespread embrace of AI is expected to strain ESG strategies, especially due to its energy usage and intensity, algorithmic biases, and the ethics surrounding the amount of data collected. Major corporations like Facebook, Google, and Microsoft are already publicly struggling with ethics concerns.
Experts insist that companies need a plan for mitigating AI-related risk (instead of dealing with it on an ad hoc basis) to avoid falling into ethical pitfalls.
Regulation is beginning to permeate the global financial industry. Matt Patsky, CEO of Trillium, believes that a fund is authentically ESG if there is pressure on its corporate executives to change their behavior and extend sustainability practices, shareholder resolutions, and voting.
For example, Putnam’s Sustainable Leaders ETF (PLDR) has ESG-focused active sustainability managers and invests in companies with an ESG focus that goes beyond basic compliance.
International Banker: Why Banks Deserve More Credit for Their ESG Efforts, and How They Can Do Better
Banks have been facing unprecedented criticism surrounding ESG issues and have been good at responding to public pressure (in the absence of government regulation) and adapting, developing necessary policies, and working to establish unified SEG standards.
However, banks can do more to take advantage of opportunities instead of operating purely from a defensive standpoint. Banks can develop dedicated ESG advisory groups with experts to provide counsel to their clients. Banks can also provide sustainability linked loans and other ESG-related offerings.
Moody’s recently launched its sub-sovereign climate risk scores, which quantify population-weighted exposure to climate-related hazards like floods, excessive heat, hurricanes, water stress, wildfires, and more. The scores provide information to users like banks and asset managers to compare risks for specific asset areas.
The sub-sovereign scores extend Moody’s sovereign climate risk scores to include states, counties, urban areas, metropolitan areas, etc.
SEC Chair Gary Gensler recently announced that formal rules around ESG disclosure may be postponed until 2022, but the SEC has begun sending letters requesting that public companies review and improve their disclosures around climate-related risks.
The agency also released Staff Guidance (updated from 2010 Climate Change Guidance) and a sample letter that prompts companies to consider the direct and indirect impacts of climate change-related legislation. The sample letter also includes an example of a request for a company to provide further information on how climate-related risks are impacting the company’s financial condition.
The letter also requests revisions of certain disclosures, as well as an explanation for why a company has more expansive disclosures in its CSR report than in its formal SEC filings.
Also covered in The National Law Review: SEC Pushes for More Robust Climate Disclosures
Also covered in Lexology: SEC staff issues sample comments regarding climate change disclosure
The SEC has increased its review and investigation of climate-related financial disclosures from public companies and has begun sending letters to public companies requesting information and clarification.
The agency is drafting proposed regulations for mandatory climate-related and other ESG disclosures, but the letters currently being sent are enforcing existing laws.