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General ESG News
ESG disclosure originates from the sustainability reporting that began in the 1980s as a divergence from corporate social responsibility (CSR) reporting. As this reporting grew, concerns increased around potentially deceptive marketing practices, also known as greenwashing.
Increasing regulator and investor demand for transparency has prompted modern ESG disclosure frameworks like the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD).
Current momentum is growing toward common definitions and language for sustainable investing. However, issues still persist around data and rating consistency, as well as data assurance.
Financial analysts play a role in navigating the ESG landscape and using ESG data to make financial assessments. To this end, it is important to optimize ESG education for financial analysts with resources like the Consumer Finance Institute’s new ESG curriculum.
According to the co-chairs of the Alliance of CEO Climate Leaders, the global climate crisis is the “greatest global challenge we face in the coming years.” All stakeholders are increasingly realizing that building a better society will depend on private-sector engagement and working toward the UN Sustainable Development Goals:
SDG 9 : Industry, innovation, and infrastructure
SDG 12: Responsible consumption and production
Another notable challenge is the fact that we still lack the ability to measure progress across industries. The establishment of core ESG metrics and disclosures help companies communicate transparently with all stakeholders.
Experts believe that the lessons businesses have learned from the COVID-19 pandemic are helping them address other challenges like systemic racism and the climate crisis.
WEF has launched several collaborative initiatives to help its partners do better business, including the Alliance of CEO Climate Leaders, the Global Water Initiative, the Alliance for Clean Air, and the COVID Action Platform.
Individuals can help businesses to better by encouraging them to embrace environmental stewardship, helping to close gender and diversity gaps, encouraging companies to engage in public-private partnerships to achieve the SDGs, and encouraging companies to adhere to the principles of stakeholder capitalism.
Provide the tools needed to support company culture.
Translate strategy for employees.
Develop a talent management program.
Incorporate culture into every employee communication.
Implement company culture across departments and strategies.
Drive changes in organizational culture.
Act as cultural role models.
Operationalize culture throughout the employee life cycle.
Focus on proactive and transparent communication.
Model desired behaviors intentionally.
Conduct regular check-ins.
Encourage management to make positive changes.
Encourage top-down change.
Take a systemic approach.
Design and execute development programs.
GreenBiz: Gordon Gekko vs. ESG
As a number of mission-driven companies plan to launch IPOs this fall, critics and the media have been quick to dismiss the “do-gooders” as companies that say mission is more important than money. While the language has changed in the past decade, the narrative of condescension disguised as skepticism remains ultimately the same.
Many of these companies were founded on responsible environmental and social principles and have taken notable action to drive change, yet critics still argue that this is mostly a “marketing illusion,” despite the fact that the company founders were doing good long before their companies had any marked financial success.
These companies are still out to make money and serve investors, and one way to do so is by making ESG progress and receiving investment from that corner of the market. When coupled with effective change, this is a business strategy with positive impact, not just a ploy for ESG investments.
Examples of companies planning their IPOs include Chobani and the Allbirds, which is a certified B Corp and California public benefit corporation.
Supply Chain Brain: Responsible Supply Chains: ‘Tier 1’ Visibility No Longer Cuts It
Many supply chains are exploitative and unsustainable, particularly to the poor and vulnerable. Fortunately, new methods of visibility like social media whistleblowers and activists have brought these issues to the forefront.
Plausible deniability is no longer a viable excuse, but there is still a gap between knowledge and visibility, especially for sub-tier suppliers.
Common principles and best practices for screen supply chain sustainability risks include monitoring behaviors, quantifying policies and practices, mitigating risks, and tracking progress. Launching a supplier risk assessment survey program specific to CSR and ESG is another best practice.
Harvard Business Review: Your CSR Strategy Needs to Be Goal Driven, Achievable, and Authentic
Creating customized and effective CSR and sustainability strategies requires several important steps, including getting buy-in from executives by demonstrating the business value of a goal-driven strategy, conducting a materiality assessment to determine the most material issues, aligning goals to the company’s values and culture, establishing a goal framework, and creating a system for implementation and accountability.
Furthermore, businesses need to then develop and deliver transparent reporting on goal progress to both internal and external stakeholders.
The 37 Global Compact LEAD companies are the “most engaged participants of the world’s largest corporate sustainability initiative” and represent all world regions and 18 different industries.
The 2021 Global Compact LEAD companies include: Anheuser-Busch, ARM, BASF SE, Bayer AG, Braskem, SINOPEC, Colgate-Palmolive Company, Charoen Pokphand Group, Danone, Ecolab, Enel, Eni, Firmenich, Global Green Chemicals, Global Compact Initiative, H&M, Iberdrola, Jayco MMI, Knoll Printing & Packaging, Leonardo, L’Oreal, McCormick, Moody’s, Nestle, Novozymes, Orsted, Pernod Ricard, Pirelli & C., PJSC PhosArgo, RELX, Rosneft Oil Company, Safaricom Limited, Schneider Electric, Sumitomo Chemical Company, TotalEnergies, Unilever, and UPM-Kymmene Corporation.
A new UN report states that even if all countries meet their promised emissions reduction targets, the global average temperature will increase by 2.7 degrees Celsius, which will increase the frequency of deadly heat waves and cause sea levels to rise enough to threaten coastal cities.
The report also highlights the gap between what scientists are urging world leaders to do and what those leaders have been willing to do thus far. Nomajor emitters have a climate pledge that is on track to keep global warming to the current 1.5 degree target.
Some countries have strengthened their pledges, but pledges from 70 countries, including China, which is currently the largest greenhouse gas emitter in the world. India and Saudi Arabia, both high emitters, also have not made pledges. Brazil, Mexico, and Russia have weakened their emissions targets.
The U.S. emissions target of 50-52% reduction from 2005 levels is proving to be difficult, especially politically, and Congress fails to support major climate legislation.
The counterattack against ESG gained momentum in recent weeks, but many of the arguments are ill-conceived and leave room for strategic action. However, some of the arguments have basis in fact, and ESG needs to mature in some areas, especially amidst riding activist opposition, the lack of follow-through on corporate racial justice pledges, and the lack of companies responding to the new anti-abortion laws in Texas.
ESG advocates should address the real flaws in ESG instead of resorting to tribalism, as this is the best way to silence critics and promote the goals of ESG. Three essential corrections include:
Setting actionable targets to achieve and demonstrate real progress
Using real political capital to achieve policy change
Promoting alignment of ESG measurement and disclosure.
Net-zero alignment means using a portfolio’s “emissions budget” to mitigate global warming. MSCI investigated three common investment approaches, including:
Shifting capital from carbon-intensive to less-carbon-intensive investments to influence share price
Engaging with individual issuers to promote decarbonization among laggards
Directing investments toward low-carbon technology.
The MSCI report also includes temperature forecasts for different decarbonization pathways.
Mail & Guardian: ESG continues to redefine the role of companies in society
Addressing ESG concerns that are material to a company is essential as ESG factors increasingly contribute to long-term financial performance. Companies should give careful consideration to ESG business strategy, risk management, and compliance.
Liberty Two Degrees has made an ESG proposition (titled IMPACT) that is supported by effective oversight and a purposeful culture.
Sustainable ways to integrate ESG into strategic processes include:
Incorporating ESG components into policies and risk management systems
Integrating ESG into strategic planning
Using effective measurement tools and risk indicators for board oversight
Pursuing initiatives and services that consider ESG impact
Ensuring ESG requirements are met by all suppliers
Environment + Energy Leader: ESG Success Fueled by Experienced Boards
New S&P research has found that companies with strong and experienced board networks have better ESG policy outcomes than those with weaker board networks.
Boards with members who serve on multiple boards and who have multiple connections may have access to information others do not and can transfer successful ESG strategies between boards.
A 2020 PWC survey has found that 45% of board directors say ESG topics are a regular part of board discussions (up from 34% in 2019).
The S&P research also found that more experienced boards have better environmental efficiency and generate less waste than boards with weaker networks.
ESG should be an opportunity for compliance and Chief Compliance Officers, not a threat. CCOs already know how to develop company-wide controls, gain business buy-in, and leverage internal partners to maximize impacts.
CCOs should build positive relationships with the CEO, board, senior management, and committees to create a successful ethics and compliance program.
The Science Based Targets initiative (SBTi) announced recent research results indicating that while companies are increasingly setting climate targets, most of them do not align with current climate science.
The research found that only about 20% of G20 company climate targets are science-based, but the results are better for G7 companies. The UK and France were the best-performing companies.
Accenture and WEF have released their report “Shaping the Sustainable Organization,” which explores and finds a strong connection between sustainability focused business management and value creation.
Additionally, the report also found that while most companies express intentions to improve their sustainability, conversion into action is often lagging due to a variety of factors.
The report identifies a set of 21 management practices to help businesses transform sustainability intentions into effective stakeholder changes.
Accenture and WEF created the Sustainable Organization Index (SOI) that ranks nearly 4,000 companies on their ESG practices to assess “sustainability DNA”
ESG Disclosures, Standards, Rankings, and Reporting
Every major investment firm currently is or will soon be covering ESG. The landscape is changing around investments, ratings, and public disclosure. Advanced ESG reporting must incorporate the following and more:
Responding to rater questionnaires
Providing/verifying the data sought by raters
Addressing the leading public disclosure frameworks
Disclosing material SEG information
Generating CSR or sustainability reports
Additionally, ESG reporting needs to be customized to a company’s own strategy, company, and culture. Companies must also be aware of peers’ progress to avoid being labeled as a laggard, and they must apply the same rigor they do to financial reporting.
Companies should approach ESG reporting as a continuous improvement process, leveraging research organizations, rating agencies, and disclosure frameworks to enhance reporting scope, depth, and value.
Automating reporting processes can also help streamline and simplify workflows as well as improve accuracy and consistency.
National Law Review: SEC Chairman Gensler’s Senate Testimony Reaffirms focus on ESG Disclosures
Chairman Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs, noting that “today’s investors are looking for consistent, comparable, and decision-useful disclosures around climate risk.” He argued that the SEC needs to step in where there is this level of investor demand.
Gensler asked staff to develop proposals for the agency’s consideration on climate risk and human capital disclosures.
Gensler also (again) referenced the TCFD framework as useful for learning and for developing guidance.
BlackRock, which has demanded ESG disclosure from its portfolio companies, is “losing patience” with companies that have been slow to disclose their adherence to ESG principles, especially as evidence of the effects of climate change become more prevalent.
ESG disclosure requirements from the SEC are forthcoming, and they may be required in Form 10-K filings. However, many companies’ boards are still not taking SEG seriously. Increasingly, companies that dismiss ESG concerns risk financial and reputational consequences.
Financial Times: Why the ‘S” of ESG proves so troublesome for rating services
MSCI currently rates ExxonMobil as BBB, and Moderna receives a BB rating. The ‘E’ and ‘G’ aspects are not making the difference here -- the drugmaker Moderna performs far better than the oil and gas giant in both aspects. This leaves the ‘S’ as the defining factor.
Burning fossil fuels results in pollution that causes roughly 10 million premature deaths worldwide each year (which is about four times the number caused by COVID-19 in 2020). Furthermore, COVID-19 vaccinations -- developed by Moderna - have prevented 279,000 deaths and 1.25 million hospitalizations just in the U.S., to date. The relative impacts both companies are having on human health should be clear. The problem is that the investment industry focuses on a company’s intrinsic ESG processes, rather than their outputs.
Additionally, some portfolio companies aren’t rated by MSCI, despite the work they do in the ‘S’ category and other ESG areas, so owning these companies would ultimately lower a firm’ average ESG score.
National Law Review: Rating Agencies Focus on ESG Concerns
Fitch Ratings’ new rating system Sustainable Fitch aims to use a “clear methodology” for a full assessment of ESG performance for comparability. The focus on ESG ratings demonstrates the increasing salience of these issues to investors and other stakeholders, which has likely contributed to some of the increasing regulatory scrutiny.
Recent research has found that on average, ESG funds are more heavily exposed to changes in oil prices than the S&P 500, despite the fact that most ESG funds don’t hold oil and gas stocks.
The research looked at U.S. equity funds with “ESG,” “sustainable,” or “impact” in their names and found that the funds are more exposed to tech and other volatile stocks, as well as interest rates and inflation, than the S&P 500.
ESG funds were also found to have slightly more total risk than the S&P 500 as well, and several ESG funds have single-stock holdings of 10% or more.
The U.S. Labor Department has declined to enforce the Trump-era rule that made it difficult to add ESG funds into retirement accounts. Despite this, in 2019, only 2.6% of 401(k) plans had ESG options.
Overall demand for ESG investment options is growing as people realize that it also produces adequate returns. One potential benefit of adding ESG options to 401(k) plans is that it might encourage more people to participate in their employer-sponsored retirement plan.
Some critics argue that the lack of transparency and standardization around ESG funds is a reason why they should be excluded from 401(k) plans. However, others insist that including ESG funds in 401(k) plans would increase the pressure on companies and regulators to improve transparency.
As funds flow into ESG investment options, a good amount of due diligence is required to ensure that the money is going to investments that are truly impactful.
One important thing to note is that there is no “gold standard” for ESG ratings, and that evaluating ESG investments requires both a qualitative and quantitative approach.
While ESG ETFs are a popular option, but proper due diligence requires looking at the collective activities of the companies included in the funds. Robo-advisors can be a solution to this, if investors agree with the robo-advisor’s methodology.
Another potential solution is to invest in a holding company dedicated to investing directly in companies whose sole missions are to address ESG-related issues.
United Kingdom: Pension and ESG -- The legal angle
The UK Prime Minister recently announced a meeting with heads from pension and insurance industries to discuss how pension funds can be used in green projects. This highlights pensions’ role in the UK’s “build back better” policy.
Chevron has announced that it will invest 200% more in lower-carbon businesses in the next seven years, but it did not commit to a timeline for achieving net-zero emissions.
Chevron also committed to increasing its renewable natural gas output to 40,000 million British thermal units per day by 2030 and growing its hydrogen production to 150,000 tons annually.
To account for the increase in “green” spending, Chevron’s annual capital budget for 2022-2025 will increase to $15-$17 billion (from prior guidance of $14-$16 billion).
Some analysts were disappointed that Chevron did not provide an explicit strategy for becoming a net-zero emitter by 2050, especially since many of its European and Canadian peers have done so.
Institutional Investor: Private Market Allocators Are No Longer Taking a ‘Wait-and-See’ Approach to ESG
A recent Pitchbook survey of limited partners found that 46% of respondents are increasing their focus on sustainable investing, and 64% of GPs and service providers said that limited partners had increased interest in sustainability issues over the last three years.
Many respondents attributed the rise in ESG investing interest to the major events of the last two years. However, as more funds come into the market, investors have been wondering what managers are doing about emerging ESG risk factors.
For both LPs and GPs, sustainable investing is about returns, not just altruism. Those working on ESG risk factors have made compelling cases about the real, financial risks of things like climate change.
One of the main problems is the lack of a singular, widely used framework for measuring investment impact.
Desjardins Groups is considering a sale of sustainable bonds in the U.S. after success in Canada. The goal is to take advantage of “greenium” pricing to create a “virtuous circle” that allows the issuance of more and more sustainable bonds.
Current low yields in most debt markets mean that issuers must be mindful about how they use their ESG bond programs.
ESG Clarity: DWS’ Xtrackers unveils 10 ESG European equity ETFs
DWS Xtrackers has launched 10 ESG-screened ETFs that track MSCI indices and offer exposure to European equity sectors. The screens filter for conventional weapons and remove the worst ESG “laggards” according to MSCI’s ESG rating system.
Jointly developed with Intrinsic Exchange Group (IEG), the NYSE launched the Natural Asset Companies (NAC) asset class, which includes sustainable enterprises that hold rights to ecosystem services produced by natural, working, or hybrid lands.
NACs will enable naturfal asset owners to convert natural value into financial capital and was developed to enable exposure to the opportunities created by the $125 trillion annual global ecosystem services market.
IEG also developed an accounting framework to measure ecological performance to complement GAAP financial statements. The NYSE will seek SEC approval for the unique listing requirements associated with NACs.
Companies and Industries
Both public accountants and management have the opportunity to lead on sustainability reporting, especially as scrutiny increases around companies’ environmental and social impacts and as ESG reporting moves toward a mandatory basis.
Jeffrey Hales, Ph.D., professor of accounting at the University of Texas at Austin and chairman of the Sustainability Accounting Standards Board, notes that “businesses don’t have the ability to choose whether these [sustainability issues] are real issues.”
Additionally, businesses that view ESG as merely a compliance issue are missing the bigger picture. Board members will also play a major role in highlighting and focusing ESG matters by considering all the impacts a business can have on a business (other than just financial).
According to the Bank of England’s framework, there are several practical steps banks and insurers should take to address both the physical and transition risks from climate change, including:
Completing climate models and scenario analysis
Establishing baselines for risk assessment
Encouraging disclosure from companies
Establishing multidisciplinary, knowledgeable teams
Increasing standardization around analytical models
The Guardian: The computer chip industry has a dirty climate secret
In the semiconductor industry, demand for silicon chips is increasing, which have a huge carbon footprint. Unfortunately, meeting climate goals will partially rely on semiconductors, which are integral to things like wind turbines, solar arrays, electric vehicles, and more.
The semiconductor manufacturing process contributes to the climate crisis in many ways -- it uses large amounts of water, it is energy intensive, and it produces hazardous waste. The manufacturing process is relatively rigid in that there are not many alternative options.
Last week, the world’s largest chipmaker pledged to reach net zero emissions by 2050. Currently, the Taiwan-based company uses nearly 5% of the country’s electricity. In the U.S., Intel’s campus in Arizona produced nearly 15,000 tons of waste (60% hazardous) in just the first half of the year and consumed 927 million gallons of fresh water.
It is chip manufacturing (not consumption) that accounts for most of the carbon output of electronic devices. A global shortage of high-end chips is resulting in many countries initiating programs to boost the industry, which sets up a clash with international climate goals.
Fortunately, chipmakers make lots of money and have good margins, so they can afford new, greener carbon measures. Additionally, customers are increasingly willing to pay for greener devices.
Moody’s new 2040 target brings its original target forward by 10 years, aligning with the company’s Decarbonization Plan and its status as a 2021 Global Compact LEAD company. Moody’s also set interim net-zero science-based targets to reduce emissions in its operations and value chain.
Also covered in ESG Today: Moody’s Ramps Climate Goals, Committing to Net Zero by 2040
As companies increase their automated processes, as regulators expect complete reporting, and as consumers expect their personal information to be safeguarded, it becomes increasingly important to ensure the integrity of the underlying data and processes.
Data does not exist in a vacuum, and it is now more visible than ever. For data to be accurate, the processes governing data collection and manipulation, as well as the controls in place for data validation, must be of the highest quality.
Robust data integrity practices can help companies avoid legal and regulatory problems. Tech assurance helps manage the risks and controls related to technology, helping to increase confidence in the accuracy of financial data for investors and other stakeholders.
The integration of digital technologies across all areas of business has changed how businesses deliver value, but it also has resulted in new risks.
Additionally, as ESG reporting is increasingly expected, risks of reporting errors and potentially misleading information have also increased. These risks can be best managed through partner due diligence and independent audits.
Think tank Universal Owner reports that Vanguard’s U.S. equity assets are at risk of major losses due to climate change, and this is more than likely due to the group’s carbon-intensive holdings.
The think tank argues that Vanguard is too focused on individual company risk disclosure and is not representing beneficiaries’ best climate interests.
Vanguard’s equity and bond holdings have deep connections to fossil fuels, and a large proportion of its bonds are due to mature in the next decade, placing them at odds with international views on achieving net zero by 2050.
Universal Owner also reports that Vanguard falls short in the area of stewardship, and its climate engagement “lacks ambitious objectives and a coherent escalation policy.”
ADP’s new DEI benchmarks will allow companies to compare metrics against similar companies and local populations using live HR and compensation data.
The benchmarks follow ADP’s launch earlier this year of its DEI dashboard that enables companies to analyze DEI aspects of their business and to set and track their goals. The benchmark feature will be integrated into the DEI dashboard.
Workforce management and board-level diversity have increasingly come into focus as key issues for investors, but tracking and managing DEI is challenging for many companies.
Arabesque’s new AutoCIO is an AI-powered autonomous asset management platform meant to enable the development of customized and sustainable investment strategies.
AutoCIO provides access to more than four million strategies and thousands of personal investment and sustainability criteria.
A recent SEC announcement of Chair Gary Gensler’s rulemaking agenda notes that the Division of Investment Management is considering recommending that the agency “propose requirements for investment companies and investment advisers related to ESG factors.” Specifically, the announcement also states that the agency is considering rules around climate risk and human capital disclosure.
The SEC’s Investor Advocate has reported to Congress that existing problems with traditional ESG disclosure are the fact that information companies disclosure is of variable quality and is not presented in a standard format.
Antonio Guterres, head of the United Nations, is calling for “immediate, rapid and large-scale” greenhouse gas emissions reductions to slow global warming. Guterres stated that recent extreme weather events show that no country is safe from climate-related disasters, and fossil fuel emissions have already rebounded from the pandemic-induced dip.
Critics note that Guterres’ statements and a recent UN-backed report summarizing current efforts around climate change ignore existing pledges and progress currently being made.