ESG Weekly News Update: September 10, 2021
Fusine Lake
General ESG News
Financial Director: Mid-sized market at risk of missing out on funding due to lack of ESG strategy setting
Banks and private equity firms are looking to invest in the mid-market, but they are becoming more elective in their ESG-focused investing. Nearly half of mid-sized businesses have not reported their carbon emissions externally or set net-zero strategies.
Mid-sized companies note a lack of understanding, resources, and management support as barriers to ESG progress. Experts note that one solution to this is to incentivize ESG agendas through executive compensation, which is a practice that is already in place at many larger organizations.
JD Supra: ESG in 2021 So Far: An Update
ESG Funds: Inflows to “sustainable” funds in 2021 have far outpaced the previous year, and regulators are struggling to catch up.
Sustainable Finance Market: The green bond market has exploded this year and has expanded to non-investment-grade, sustainability-linked notes, reflecting investors’ increased focus on ESG (despite greenwashing concerns).
ESG Activism: Activists have been battling aggressively in 2021 and have gained support from firms, winning several challenges against “Big Oil.”
Executive Remuneration: Executive pay is becoming increasingly linked to ESG KPI, and executive pay has decreased significantly in the past year.
Government Regulation: 2021 has seen the introduction of the EU Sustainable Finance Disclosure Regulation (SFDR), UK ESG disclosure rules for alignment with TCFD, and impending ESG disclosure rules from the U.S. SEC.
Data, tech, and cryptocurrency are new areas of interest where there is expected to be both increased scrutiny and ESG opportunities.
For the rest of 2021, there will be the COP26 in Glasgow, and key issues that are expected to come to the forefront are greenwashing concerns, board compensation, and flexible working.
World Economic Forum: Human capital is the key to a successful ESG strategy
Stakeholders are demanding change and are increasingly expecting CEOs to lead on societal issues. They are also demanding accountability and transparency in financial exposure to risks, opportunities, governance, and fiduciary duty related to human capital.
Experts insist that human capital should be treated as an asset with associated metrics like workforce profile, pay/pay gaps, benefits, hiring, retention, productivity, wellbeing, culture, and more.
Companies should align these metrics with their business strategy and implement them into performance expectations and executive incentive plans to make substantive change.
401(k) Specialist: COVID Pandemic Has Been Very Good for Global ESG Adoption
The global pandemic has acted as a catalyst for ESG considerations in investing, which has also created the need for different skill sets and products, as well as new regulation.
Asset owners are expecting managers to have clearly articulated missions and cultures that promote diversity, and allocators are digging into firms’ policies and practices.
In Q3 2020, nearly 90% of asset manager product executives in the U.S. said that incorporating ESG criteria into investment products was at least a moderate priority, due in large part to increasing demands from investors. Managers in Europe are facing similar pressures and expect to repurpose existing fund options into “greener” versions over the next year.
American Thinker: ‘Social Responsibility,’ ESG Scores, and China’s Social Credit System
CSR, ESG Scores, and China’s Social Credit System share several similarities, including the “erosion of individual liberty via the propagation of a singular ‘morality’ unilaterally determined by an authoritarian overseer.”
Echoing Milton Friedman’s views on corporate executive responsibility, the article authors argue that it is economically inefficient and socially unproductive for companies to act on social reform. Friedman believed the result of mass implementation of CSR would lead to a society in which the individual must serve the more general social interest.
In recent years there has also been a shift in power from the shareholder to the stakeholder, as well as a focus on defining stakeholder metrics like “wellbeing” and other social impacts that are difficult to quantify. Some count these as arbitrary and liken it to China’s new Social Credit system that combines an individual’s financial credit with a level of morality/integrity to determine an overall social score and impose sanctions or rewards.
Yahoo! Finance: Is It Possible To Eliminate Greenwashing?
ESG commitments have become imperative for business survival, but the lack of a universal ESG reporting system has led to accusations of greenwashing, or misrepresenting sustainability performance, which can lead investors into poor ESG investing decisions.
Practices like relying on carbon offsets and failing to account for Scope 3 emissions have given rise to efforts to encourage companies to provide a more accurate picture of their environmental footprint.
There is a push for standardized ESG reporting, but for emerging economies (which are especially vulnerable to climate risks), adapting to a “one-size-fits-all” approach may be more difficult. For example, many of these economies are in an energy-intensive stage of development, making it difficult to compare their performance to developed economies.
The Economic Times: ‘Cos can incorporate rewards, incentives to achieve environmental, social, and governance goals'
Recent research from Willis Towers Watson notes that rewards and incentives can be incorporated into a company’s ESG agenda through compensation committees. It also argues that incentivising ESG progress must be done from a top-down approach; boards must set the right expectations for management and reward them for delivering.
However, designing the right long-term incentive (LTI) plan for ESG considerations is both difficult and crucial for success.
Specifically in India, companies are showing gradual progress in ESG reporting, but India has a way to go before it catches up with its global counterparts. For reference, only 52 companies in India have made SBTi commitments, compared to 200 in the U.S. and 128 in the UK.
ProMarket: Two Years Later, Has the Business Roundtable Statement Transformed Capitalism?
In August of 2019, the Business Roundtable (BRT) redefined its statement of the Purpose of a Corporation to include a “fundamental commitment to all of our stakeholders” (not just shareholders). Two years later, some argue that shareholder capitalism is dead, and others insist that little has changed. While it’s impossible to isolate the effects of the BRT’s statement, there have been several trends emerging in recent years, including:
Legislation of ESG actions
Increased measurement and reporting
Pay-for-ESG in incentive plans
ESG activism
ESG stock selection
Changes in directors’ duties
Underpinning these trends are the assumptions that ESG performance can be measured, that better ESG performance improves financial performance, and that stakeholder and shareholder capitalism cannot coexist. While not untrue, each of these assumptions has its flaws, such as data limitations and a narrow view of company value.
Institutional Asset Manager: Companies with stand-alone ESG committees have higher sustainability scores, research shows
A joint study by NN Investment Partners (NN IP) and Glass Lewis found that companies with dedicated ESG supervisory structure account for the highest proportion of companies in the top quartile of NN IP’s ESG Lens. Companies with “below board” ESG oversight also account for a significant proportion of top scorers.
The research also found that companies in the U.S. and Europe are the most likely to have stand-alone, board-level ESG committees, but European ESG disclosure is much stronger than in the U.S.
The study notes that the level of oversight boards actually provide on ESG/sustainability often varies and can be very limited. European companies are more affected by regulatory pressure to report extra-financial information, which makes them more likely to have dedicated committees.
Financial Times: Human rights climb the business school curriculum
The Center for Business and Human Rights at the New York University Stern School of Business was the first such entity at a business school. Proponents note that despite the rise of ESG, the ‘S’ has often been left out. Recently, there has been a new focus on areas like outsourcing, land rights, privacy, workers’ conditions, and safety.
Other schools have followed suit and are establishing their own human rights programs. Critics note that business curriculum is already congested, but human rights curriculum needs to be a new way of teaching to “create value for business and society.”
For investors, human rights has gone from a “fringe activity” to something they push for and allocate significant capital toward.
Bloomberg: Regulators Intensify ESG Scrutiny as Greenwashing Explodes
A London-based nonprofit called InfluenceMap said more than half of climate-themed funds are failing to live up to the goals of the Paris Agreement.
InfluenceMap found that 55% of funds marketed as low carbon, fossil-fuel free and green energy exaggerated their environmental claims, and more than 70% of funds promising ESG goals fell short of their targets.
The SEC formed a task force in March aimed at investigating potential misconduct related to companies’ sustainability claims.
CNBC: Britain’s economy is already seeing a rapid shift due to climate change
At the end of July, the U.K.’s Royal Meteorological Society published its State of the U.K. Climate 2020 report, with the authors noting that last year was England’s third warmest year since records began in 1884. Unless drastic measures were taken in the U.K. and internationally, temperature rises would have “more and more catastrophic effects.”
In 2008, British lawmakers overwhelmingly passed the Climate Change Act, which aims to cut emissions by 100% by 2050 relative to 1990 levels. The U.K. is currently in its third carbon budget period, which ends in 2022. According to the Climate Change Committee — an independent advisory body established under the 2008 legislation — the U.K. is currently “off track” for its fourth, fifth and sixth budgets.
Speaking to CNBC via email, a spokesperson for the CCC said there was a lack of evidence businesses were taking action to prepare for climate risks such as flooding, coastal change, extreme weather events and supply chain disruption.
Business Inquirer: SEC – Early ESG adopters more resilient amid pandemic
Companies that initiated environmental, social and governance (ESG) reforms ahead of any prodding from corporate regulators are proving to be more resilient to the shockwaves caused by the prolonged COVID-19 pandemic, a top Securities and Exchange Commission (SEC) official said
Companies that have been reporting way before the regulators, or the SEC required this, are more resilient, and more quick to adapt during this pandemic. They were able to immediately identify the problem areas, engage their stakeholders, provide solutions and adapt to the new normal
Amidst the pandemic more companies gave more focus on the social aspect of the business, giving more importance to health concerns, providing safe and healthy work environment, taking care of their well-being and mental health.
ESG Disclosures, Standards, Rankings, and Reporting
Bloomberg: How Wall Street Is Gaming ESG Scores
A study by the Paris-based business school EDHEC finds that while asset managers talk about using climate data to construct ESG portfolios, many funds aren’t run in “a manner consistent with promoting such an impact.”
Such concerns have led regulators in both the U.S. and Germany to start investigations into potentially misleading ESG-focused investment products. Funds claiming adherence to net-zero investment strategies are subject to significant greenwashing risks.
One major risk is when money managers “game the system” to improve their scores instead of truly making a difference. To solve this, experts note that fund managers need to put pressure on industries to invest in greenhouse gas reduction technologies, which requires “highly selective, intra-sector capital allocation that favors climate change leaders.”
The EDHEC study also found that fund manager climate strategies almost always fail to account for whether or not a company has improved its climate performance, and drastic changes in portfolio construction need to happen if asset managers want to make a positive contribution.
Financial Times: Letter: More bosses must get aboard the bandwagon on ESG reporting
ESG and stakeholder capitalism, though now defined in new terms, are not new concepts. They echo sentiments from Peter Drucker and John HUmble in the 1970s and the Prince of Wales in the 1980s.
The author argues that all boards of directors and their audit and risk committees must be considering how future generations will judge today’s ESG reporting, measurement, assessment, and independent assurance.
Businesswire: International Country Risk Guide 2021 with Environmental, Social, and Governance (ESG) Data - ResearchAndMarkets.com
Labelled as 'the most authoritative' geopolitical risk series available, the ICRG risk data series has been highly useful in the construction and guidance of ESG portfolios given the range of risk metrics used that touch upon such concerns as poverty and wealth distribution, joblessness, social turmoil, and overall democratic accountability.'
For the complete ICRG series of 140 countries, you will receive monthly data from 1984 through the current month affecting all economic and financial risk ratings, and the following political risk ratings: corruption, democratic accountability, religious tensions, ethnic tensions, military in politics, and bureaucratic quality. In addition to the metrics available above, you will also receive monthly political risk data from 2001 through the current month on the risks related to unemployment, poverty, civil disorder, popular support, government stability, contract viability, and payment delays.
Investment Trends
Institutional Investor: Emerging Markets Face Mounting Pressure to Target ESG Goals
Recent research finds that companies in Asia-Pacific are increasingly incorporating ESG into their strategic planning due to pressure from international investors, with many companies choosing to embed the UN Sustainable Development Goals into their planning.
The global pandemic has accelerated the focus on sustainability in this region, especially in Australia and Singapore (and less in China, Malaysia, and Thailand). However, China’s government is now releasing green investment principles in view of its Belt and Road Initiative to connect countries across Asia, Europe, and Africa.
Human rights violations are another pressing issue in mainland China, and while there is little regulatory pressure for reform, investors are increasing their demands for ethical practices and due diligence. In contrast, ESG pressure in Japan is coming directly from the government.
In the wake of the pandemic, tech, media, health, telecom, and life sciences are the sectors expected to focus the most on sustainability going forward. For energy, mining, and infrastructure, which were heavily regulated before the pandemic, sustainability focus is not expected to increase as drastically.
The first US SIF Foundation Trends Report on Sustainable and Responsible Investment, published in 1995, tracked just $639 billion in total assets under management. Fast forward to 2020 when, in its most recent report, the US SIF Foundation tracked assets of more than $17 trillion. The Global Sustainable Investment Alliance recently reported global sustainable assets under management have reached $35.3 trillion.
In just the first half of 2021 alone, policymakers took several actions to lower the barriers to ESG in ERISA-governed retirement plans: The Biden administration overturned limitations enacted by the previous administration related to the consideration of ESG factors; the DOL committed to revisit and release new guidance on these rules, and a bill was introduced in both the Senate and the House to allow consideration of ESG factors. The SEC issued a request for information on climate risk and relevant ESG disclosures, and the White House issued an executive order on climate-related financial risk. The Federal Thrift Savings Plan announced the roll-out of a mutual funds window in 2022 that will allow Federal employees to select ESG-related investments in their retirement plans.
As sustainable investing continues to deepen its reach in the mainstream, industry growth will depend on expanded impact measurement, from firms like Sustainalytics and MSCI, as well as greater and more meaningful disclosure from portfolio companies.
JPMorgan: The importance of due diligence for sustainably minded investors
As concerns about greenwashing continue to grow with investor demands for ESG disclosure, it becomes increasingly important for investors to conduct due diligence to make informed decisions when reviewing the sustainability claims made by a company and its products.
ESG investing is still a relatively new space and there are no unified definitions for ESG considerations, so it is important to “meet funds on their journey” toward sustainability integration.
Since greenwashing leads to investment risks, robust due diligence is essential to creating an investment portfolio that aligns with investor values. Investors can turn to an advisor for help, use research tools, and be aware of false or misleading advertising.
Bloomberg: World’s Biggest Wealth Fund Steps Up ESG Focus in Real Estate
Norges Bank Investment Management says it is working on an improved sustainability strategy to align with the Paris Agreement. A recent review of the wealth fund’s investment mandate points to real estate as an area that poses climate risks, as well as banking and insurance.
Though Norway doesn’t have any formal net-zero goals, the firm’s real estate overseer insists that the fund has well-defined ESG policies and screens potential acquisition targets for risks before taking any action.
Fidelity has launched Fidelity Funds -- Sustainable Climate Solutions Fund, which aims at achieving long-term growth by investing in companies that enable decarbonization. The new fund will target opportunities to reach net zero over the next 30 years.
The launch also follows Fidelity’s recent announcement that it has accelerated its own emissions reduction goals to reach net zero by 2030.
The new fund is classified under Article 8 of the EU Sustainable Finance Disclosure Regulation.
Bloomberg: Deutsche Bank’s ESG Probe Triggers Review at Asset Managers
Anxiety around greenwashing -- mis-stating how climate friendly assets are -- is palpable across the industry as fund managers react to German and U.S. investigations of DWS Group.
The Deutsche Bank unit says it did nothing wrong, the development has led to a moment of reckoning as fund managers wake up to a new regulatory era in which once fluffy environmental, social and governance definitions are no longer tolerated.
Stricter European regulations have already forced the finance industry to abandon some of its ESG claims. Between 2018 and 2020, the label was stripped off about $2 trillion of assets, suggesting that other regions might be facing a similar correction once regulations catch up. In the U.S., the Securities and Exchange Commission has made clear it intends to crack down on inflated ESG statements.
Nasdaq: Why Advisors Need to Become ESG-Aware
“Despite this dramatic increase in interest in sustainable funds, some advisors have been slow to embrace the trend: Although the majority of investors working with a financial professional say they have positive perceptions of sustainable investing and ESG, only 36% of advisors offered sustainable investment options to their clients in 2018,” according to Fidelity research.
The time is now for advisors to have more ESG and sustainable investing conversations with clients and bring more options into the fold to meet surging client demand.
Fidelity found that 1 in 5 investors—and over a third of Gen XYZ investors—are willing to pay more for an advisor who offers more socially responsible or ESG-based investing strategies.
Companies and Industries
Regulation Asia: EU Banks Urged to Accelerate Adoption of ESG Risk Strategies
A report from the European Commission found that most European banks are failing to measure and report their ESG risks. It notes that banks had made progress on climate-related risks but tended to view other ESG risks through the “lens of reputational or strategic risk.”
The report also found that banks have not integrated ESG risks into their reporting frameworks, with most disclosing only qualitative information and failing to collect data on the risk/return profile of their ESG lending and investment activities.
The European Commission notes that more cross-bank collaboration is needed to improve ESG integration. Also, it notes the need for harmony in ESG product classification and widespread compliance with certain standards and regulatory frameworks like the EU Green Bond Standard and the EU Taxonomy.
Bloomberg: Deutsche Bank’s ESG Probe Triggers Review at Asset Managers
Following news of the investigation into Deutsche Bank’s investing arm, anxiety around greenwashing is growing and European asset managers are reviewing their ESG labeling and marketing claims.
One major European fund manager has created an internal task force to review ESG products and procedures, and others are reviewing old marketing materials to make sure they don’t contain misleading language.
Stricter European regulations have already forced the finance industry to abandon some of its ESG claims -- from 2018 to 2020, the “ESG” label was removed from nearly $2 trillion in assets. The U.S. SEC has stated its intentions to increase scrutiny around ESG investing as well.
Despite growing concerns, cash continues to flood the market for climate-friendly investments.
GreenBiz: Why the Paris Agreement poses major stranded asset risk to Indonesian palm oil
Indonesia currently accounts for nearly 72% of global palm oil production. Orbitas warns that as the world responds to deforestation’s role in accelerating climate change, Indonesian palm oil producers engaging in unsustainable practices could face severe consequences.
Orbitas estimates that more than 76% of unplanted Indonesian palm oil concessions and 15% of the country’s plantations could become stranded assets due to regulatory and investment shifts. Land and palm oil prices are also expected to increase drastically if banks, investors, governments, and society all respond ambitiously to climate change.
For stakeholders who address climate change risks, however, there are opportunities to diversify revenue and continue to see growth.
In response to Orbitas’s findings, the Roundtable on Sustainable Palm Oil (RSPO) said the findings provide an “urgent wake up call to end tropical deforestation.”
NPR: Climate Change Risks And Insurance Policies
Last week, in the wake of Hurricane Ida, President Biden scolded insurance providers that would not cover the claims of people who chose to evacuate but were not mandated to do so. In California, there are reports of insurers dropping property owners in areas considered too vulnerable to wildfires.
Economist Howard Kunreuther explains that the increasing frequency and severity of weather-related disasters will inevitably lead to higher insurance premiums, just from a mathematical standpoint. On the affordability front, there are discussions about something like a voucher for people with lower income that comes with the condition of “mitigating their house” to protect against future disasters.
However, mitigating houses and structures against damage also comes at a cost. Kunreuther points to low-interest, long-term loans as a solution, since making homes safer is vital and helps everyone in the community.
Corporate Secretary: Opinion: Fulfilling the promise of The Business Roundtable’s statement on corporate purpose
Given the long-standing axiom that, with respect to investors, companies should under-promise and over-deliver, it is fairly stunning to consider how many companies are now over-promising in the ESG arena and ignoring the reputational risks associated with under-delivering.
The number of shareholder derivative litigations referring to reputational damage is skyrocketing, accusing boards of having failed to protect this mission-critical asset.
Clearly, companies cannot continue addressing their ESG activities with ‘marketing hype’ and ‘disingenuous promises.’ They need to create new processes for understanding and managing the reputation risk associated with ESG and recognize it as an essential, enterprise-wide issue.
Phys Org: Companies owned by families are better at looking after their staff but not the environment
Researchers from the University of Salamanca in Spain analyzed data on 423 companies in 21 European countries, including the UK, to see how family-run and family-owned businesses compared with other firms.
"The results confirm the better corporate social responsibility performance of family firms at an aggregate level, which is driven by the greater care that they take for their staff," María del Pilar Rivera-Franco told the conference.
The more responsible behavior of family firms can be partly attributed to the higher exposure of the family identity. The visibility of the family name becomes a strong incentive to avoid CSR-related problems.
Forbes: The Rise Of Climate-Conscious Consumers: The Climate Change Opportunity In Banking
Anew study from Cornerstone Advisors and Meniga demonstrates that there is a significant opportunity for banks to gain a competitive advantage by serving climate-conscious consumers.
Consumers want more than just a climate tracker from their bank, however. At least a third of all consumers are very interested in checking accounts with: rewards for purchases made from environmental-friends; debit cards made from renewable or upcycled materials; policies that prevent deposits from funding fossil fuel exploration or production; and, an option to plant a tree with every roundup
Climate-conscious and climate-aware consumers are mainstream consumers and there are opportunities for banks and credit unions to focus their corporate strategies around products and services to serve these consumer segments.
Philadelphia Business Journal: Multifamily operators and investors can tackle ESG goals through utility ownership
There exists a legitimate and protracted set of challenges for companies attempting to successfully execute on the ESG model. This is certainly true in the multifamily space, where owners and developers are weighted with creating an enviable return at a property while juggling the substantive complexities socially responsible investing brings.
Consider the challenge thrown at a multifamily property owner/developer who wants to manage the energy efficiency to meet ESG goals at her property. Because they deliver energy to such large, diverse sets of consumers and businesses, utilities rarely produce offerings specific to multifamily communities or their residents.
The answer can be discovered in utility infrastructure ownership. Privatizing means implementing a minigrid (i.e., an electric distribution system) on the property and places the owner in control of her community’s energy efficiency. This provides access to environmentally driven strategies, and a proven methodology to improve the community’s ESG score.
While not a panacea to every ESG-related challenge, utility ownership offers a legitimate option to many multifamily developers, but one that is only beginning to be appreciated. The fact is more and more communities are discovering the benefits associated with private minigrids are numerous, extending beyond ESG targets
Liskow & Lewis: ESG for the Modern Private Company
While much of the interest around sustainability and social responsibility has centered on larger public companies, private companies are set to make significant contributions to these efforts by integrating Environmental, Social and Governance (ESG) principles. Modern businesses understand that sustainability and social responsibility are no longer niche interests and prioritizing a strong ESG proposition creates opportunity and value.
As considerations of market value and social value continue to merge, unrealized ESG capabilities of private companies may drive future value creation. Businesses that proactively adopt ESG principles could benefit from differentiation, enhanced profiles and new opportunities, particularly if those efforts are highlighted to stakeholders and the general public.
Adoption of sustainable and socially responsible strategies reflects a modern understanding of the forces that many believe will shape opportunities and value in the near term. It is this level of understanding that underpins the momentum around ESG integration by private companies. Being uniquely positioned to adopt and implement such strategies, private companies stand to play a key role in positively impacting local communities from an ESG perspective.
Government Policy
New York Times: Biden Opens New Federal Office for Climate Change, Health and Equity
The Biden administration is creating a new federal office to address the health consequences of climate change and their disproportionate effects on poor communities.
The Office of Climate Change and Health Equity will be the first federal program aimed specifically at understanding how planet-warming greenhouse gas emissions from burning fossil fuels also affect human health. It will fall under the Department of Health and Human Services.
President Biden has requested $3 million to fund the climate office next year, a sum that still requires congressional approval. Those setting up the office have been brought in from other agencies drawing on existing funds. John Balbus, the senior adviser to the director of the National Institutes of Health on climate change, will serve as interim director.
New and prospective environmental, social and governance (ESG) reporting and supply chain due diligence requirements in the European Union (EU), together with enhanced global regulatory scrutiny of ESG issues, mean that corporates who operate in the EU or have supply chains within the EU will need to ensure that their ESG performance can withstand public scrutiny in the evolving legal, regulatory and stakeholder environment.
Boards and management should take action now to get ahead and ensure compliance and best practices at an early stage, by implementing ESG reporting and human rights due diligence into the company’s holistic compliance framework.
These new and prospective ESG legal obligations, combined with activist stakeholders increasingly holding companies with EU and global operations to account and intensifying public scrutiny of ESG issues, could lead to increased litigation and enforcement risks for businesses.