ESG and Sustainable Investing

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March 10, 2020

A new push for environmental activism from tech employees

Bill Weihl, who led sustainability efforts at Facebook and Google, has founded a new organization, ClimateVoice, to help tech employees push executives to lobby on behalf of legislative efforts around climate.

As Barron’s noted, we have reached a tipping point on ESG. This is no doubt in part due to what many perceive as abdication of responsibility by world governments. But it is also due to increasing recognition that environmental risk – and potential opportunity – are quantifiable financial issues. So, for example, we see an article suggesting that climate change is an issue for the CFO:

[C]utting greenhouse gas (GHG) emissions leads to cost savings. If you cut emissions, you cut energy, which is a massive organizational cost – something CFOs pay close attention to. Third, because investors are pushing to make climate-safe investments, they want climate risks to be integrated within corporate financial disclosures. Finally, the business opportunities for climate change solutions are blooming. According to Chartered Professional Accountants of Canada, “As creators, enablers, preservers and reporters of sustainable value, accountants can make their organizations’ adaptation efforts more effective.” Taken together, these shifts are leading finance teams to include what were formerly called “nonfinancials” in their daily jobs.

Other recent highlights:

Banks and Climate Crisis: Time for Stakeholder Governance and Reinvention Dina Medland writes

Sustainable business models rely on the ability to transition. It is estimated and well documented that without deep and sustained cuts to greenhouse gas emissions, we are on course for a 2 degree C increase around 2050. “This could mean an increase in the global population facing water scarcity of nearly 400 million, and the cost of annual flood damage losses from rising sea levels of more than $11tn” says the report. The cost of doing nothing cannot be quantified, or imagined.

        Or, as Henri de Castries, the then-CEO and chairman of AXA, one of the world’s largest insurers, said in 2015 and I reported: “A 2 degree C world might be insurable. A 4 degree C world certainly would not be.”

State Street Tells Companies ESG Moves Are No Longer Optional, from Bloomberg

        State Street Corp. said three out of four companies haven’t made meaningful progress on environmental, social and governance issues, and the asset manager is putting them on notice.

        State Street Global Advisors is prepared to take voting action against board members at companies in the major stock-market indexes that have been “consistently underperforming” peers in the asset manager’s ESG performance scoring system. That’s according to a letter released Tuesday by Cyrus Taraporevala, chief executive officer of the unit that oversees $2.5 trillion in assets.

AstraZeneca commits to being carbon negative by 2030

The company also said that it is pledging to engage its suppliers to reduce their direct emissions through to 2030 and identify carbon removal options that will lead to more carbon dioxide (CO2) removed from the atmosphere than added to it, recognizing that the total emissions from its value chain partners are significantly larger than its own direct operations.

More on ESG:

Fashion Companies Reach Landmark Sustainability Accord Ahead of G7 Summit. Fashion is second only to the fossil fuel/automotive industries in impact on climate change, so this is a significant announcement.

Investors Turn Up the Heat on Companies over Climate Change. A group of 515 investors, including CalPERS and Allianz, urged policymakers to act with the “utmost urgency” to comply with the goals of the 2015 Paris climate agreement, which seeks to limit global warming.

UC to dump fossil fuels holdings in pension and endowment funds worth $83 billion. The decision followed a faculty vote across the 10-campus system to demand divestment of the endowment.

New Illinois Law Requires Corporations to Report Diversity on Corporate Boards.  Illinois follows California, whose law requiring diversity on boards is now being challenged.

Asia-Pacific investors more open to ESG investing

        ESG consideration is gaining more acceptance from investors across the Asia-Pacific (APAC) region, according to the APAC results released by Franklin Templeton of a comprehensive global study on ESG adoption, implementation and development across institutional and wholesale asset owners globally. The study was conducted by NMG Consulting.

ESG considerations gain acceptance

        Results show investor predisposition towards ESG investing in APAC is rising rapidly, but investment adoption and application methods differ across the region. Globally, ESG is now a central consideration for asset owners, with a large majority building their capabilities in this area. The study shows that two-thirds (67 percent) of APAC respondents now consider ESG an important component within the investment process. Across APAC, 71 percent of asset owners are investing to increase their ESG knowledge and expand their investment capabilities in this area.

Early ESG adopters are confident of higher returns

        As ESG considerations gain acceptance, there is a high degree of consensus on the risk benefits, but differences of opinion on the impact on returns. ESG adopters in Australia and New Zealand (ANZ) in particular, no longer accept that ESG investing must mean accepting lower rates of return. An impressive 94 percent of ANZ respondents believe that ESG investments will in fact enhance returns. While ANZ leads in this belief, other Asian countries are not far behind with 80 percent holding this view across the rest of the region.

‘Governance’ factors key, ‘Environmental’ concerns are rising

        The study found that the three components of ESG investing (Environment, Social, and Governance) have become interdependent as asset owners globally now view them as linked. Overall, European asset owners focus on a broader set of ESG issues, reflecting the region’s longer track record on responsible investing, while APAC and North American ESG adopters tend to have a narrower focus. However, in APAC, of the two prioritized criteria “environment” and “governance,” shifts in priority over time has seen “E” becoming more important. Seventy percent of respondents consider environmental factors as their first or second priority among the three factors.

Shareholders Urge JPMorgan Chase, Wells Fargo to Act on Climate

        A coalition of investors – Walden Asset Management, Presbyterian Church USA, and First Affirmative Financial Network – led by shareholder advocate As You Sow recently filed climate-focused resolutions with a large segment of the U.S. banking industry, including JPMorgan Chase, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley.

        Investor concern is growing regarding banks’ role in contributing to the climate crisis with their lending portfolios. Investors are asking these banks – some of the largest funders of fossil fuels – to immediately take tangible steps to measure, disclose, and reduce the greenhouse gas emissions associated with their fossil fuel lending.

Bankruptcy Filings Reveal Previously Concealed Climate Change Denial Expenditures

Bankruptcy filings have revealed that, as a company begged for corporate welfare, it spent outrageous amounts on CEO pay and climate change denial. Perhaps if it had spent money on sustainable strategic initiatives instead of fake science that fools no one and on overpaying insiders, it might still be a viable business.

        As his coal mining company hurtled into bankruptcy, Robert E. Murray, the former chief executive, paid himself $14 million, handed his successor a $4 million bonus and earmarked nearly $1 million for casting doubt on man-made climate change, new court filings show.

ESG is still very much a nascent and evolving discipline as we see here, and susceptible to greenwashing by corporations and investment firms that claim to be ESG-sensitive but whose policies are not in line with sustainability priorities.

        Some of the world’s biggest fossil fuel companies, including Russia’s state oil giant Rosneft, have been added to the London Stock Exchange’s “ethical” investment lists.

        The FTSE4Good indices, run by the London Stock Exchange Group’s FTSE Russell subsidiary, are marketed to investors interested in environmental, social and governance (ESG) issues.

        However, the LSE has refused to remove big polluting companies or the security company G4S despite allegations of systematic labour abuses across the world.

Edelman’s 2019 Trust Barometer shows a strong swing toward ESG and sustainability from investors.

It cannot be emphasized too strongly that sustainability by its very definition is not a trade-off for returns; it is essential for returns, both present value and long-term, as the subsequent findings show. 

And we are going to keep saying this: ESG is simply an adjustment to risk assessment necessary because traditional financial measures and reporting requirements are outdated. Underscoring our point that the inadequacy of traditional financial disclosures is the reason for the interest in ESG/sustainability is the finding that three of the big four accounting firms fell short in audit quality. Three of the big four consulting firms failed to do enough work to support their audit opinions on every important aspect of at least one client’s financial reports.

        The corporate regulator’s latest audit inspection reports revealed that EY failed on all fronts for two clients, while Deloitte and KPMG did so for one client each.

The conclusions of the Edelman Trust Barometer:

Investors agree that a multi-stakeholder commitment is essential. 84% of investor respondents agree that maximizing shareholder returns can no longer be the primary goal of the corporation, and that business leaders must commit to balancing the needs of shareholders with those of employees, local communities, customers, partners, and suppliers.

Overemphasizing shareholder returns can lead to multi-stakeholder activism. 71% said that companies will make themselves responsible for employee or consumer activism if they overemphasize shareholder returns at the expense of other stakeholders. Three-quarters say that companies with employee activism are less attractive investments.

Investors are investing more in ESG-excelling companies. 61% have increased their investment allocation to companies that excel when it comes to ESG factors, and more than half of investors believe that ESG practices positively impact trust.

Illinois Treasurer Takes the Lead on ESG

Illinois state treasurer Michael W. Frerichs is one of the most respected public pension fund fiduciaries in the country. From his thoughtful comments on ESG as an essential element in minimizing investment risk:

        Making Prudent Choices. Investing means making choices. For the investment officers at the Illinois State Treasurer’s Office, it means choosing investments that are risk-appropriate, high-performing, and meet or exceed the benchmark. It means making investments that reflect our commitment to sustainability, inclusion, and sound corporate governance, given that these factors boost our investment returns and strengthen the economic well-being of Illinois citizens and institutions.

        Sustainability Factors. We at the Treasurer’s Office know that to fulfill our fiduciary duty and maximize returns, we need to focus on more than just short-term gains and traditional indicators. Additional risk and value-added factors that may have a material and relevant financial impact on the safety and performance of our investments need to be integrated into the decision-making process. These material sustainability factors include (1) environmental; (2) social capital; (3) human capital; (4) business model and innovation; and (5) leadership and governance factors.

        Research agrees. Studies clearly demonstrate that companies with sustainable policies are lower risk investments and frequently provide collateral benefits to investors. So not only is sustainable investing good for the community, it’s good for business. To put it another way, sustainable investing aligns with our core fiduciary responsibilities.

        That’s why we at the Treasurer’s Office are raising the bar. We endeavor to take governmental investment standards to a new level, one that recognizes that sustainable environmental, social, human capital, business model, and governance practices are strongly related to safer, more innovative, better-performing companies.

        Why it matters. As a large, long-term investor to funds and corporations around the nation, we believe we can help raise the bar for the entire industry. That’s why we’re promoting an investment philosophy that fuses traditional investment objectives – optimal risk-adjusted returns, low expenses, and diversification – with a focus on sustainability, corporate responsibility, and risk management. By doing so, not only do we position ourselves to protect shareholder value and maximize returns, we can help foster a business culture that is more attentive to structural trends, societal impacts, and long-term growth. And that benefits all of us in Illinois and beyond.

Impact Investing

On August 22, a coalition of global leaders and businesses said that they are launching a new initiative aimed at aligning business interests that can also deliver social impact.

The 35 leading international companies joining the Business for Inclusive Growth initiative will work with the Organization for Economic Cooperation and Development, whose chairman – French President Emmanuel Macron – is expected to promote the initiative at the upcoming G-7 meeting in Biarritz, France.

        The companies have committed to act more assertively to address social inequalities in society and their workplaces.

        A three-year program, including a global inclusive growth accelerator and fund, will be supported by robust measurement and analysis led by the OECD. B4IG will focus primarily on G-7 countries for now.

        The organizations will work with the OECD across three key areas: securing basic human rights, building inclusive workplaces, and strengthening inclusion in company ecosystems. This includes impact investing, active ownership, and environmental, social, and governance principles. A focus will be on experimenting, replicating, or scaling-up inclusive business solutions from B4IG companies to deliver social impact and drive social progress.

        Participating global businesses with a combined market worth of more than $1 trillion and more than 3 million employees have pledged their commitment. Nigel Wilson, CEO of Legal & General, one of the participating firms, said in a statement that “delivering shareholder value and furthering social progress are not mutually exclusive. It is the opposite – for companies to prosper in the long term, it is imperative that they be socially as well as economically useful.”

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