Ethical markets welcomes this terrific article by Jean Haggerty in GREENFIN, the weekly from GREENBIZ. Very comprehensive roundup. Thanks to Joel Makower for his leadership and his longtime service on our global Judges Panel for our EthicMark® Awards for communications Uplifting the Human Spirit & society www.ethicmark.org. Don’t miss out, sign up for GREENFIN!
~Hazel Henderson, Editor“
The coming ESG explosion
As we begin another year of what’s being referred to in climate circles as the “decade to deliver,” it is being defined by ESG, driven by shareholders and aided by new disclosure requirements on climate risk and human capital management.
“The bottom line is that businesses now actively compete for capital based on ESG performance, and that competition needs to be open, fair and transparent,” Allison Herren Lee, acting chair of the Securities and Exchange Commissioner said.
A lot of the information that investors want is not included in company financial filings or sustainability reports, which in the U.S. currently rely on voluntary ESG reporting standards and frameworks, said Anne Simpson, managing investment director for board governance and sustainability at the California Public Employees’ Retirement System (CalPERS), the largest U.S. pension fund.
As a general matter, U.S. companies would be wise to take note of ESG developments in Europe. European Union legislation on sustainability reporting and disclosures far exceeds what the U.S. has in place, and European Central Bank regulations on ESG are in the process of being implemented.
With a little help from my … shareholders?
Companies need to take stock of what investors are telling them and devoting their time and energy to enhancing their ESG reporting, Hannah Orowitz, senior managing director at Georgeson, which provides strategic shareholder services to corporations and shareholder groups. This needs to be done before completing a sustainability report and keeping in mind that ESG factors are now directly influencing investors’ proxy voting decisions. Every company needs a climate transition plan based on Climate Action 100+ benchmarks, added Andrew Behar, CEO of the shareholder advocacy nonprofit As You Sow.
Several officials expect a pivotal 2021 shareholder season. According to Tomas Otterström, KPMG’s partner and head of responsible investment and sustainability services in Finland and Sweden, climate change, biodiversity and diversity/inclusion issues appear to be this year’s top proxy issues globally. In the U.S., racial equity, political spending and policy influence activity influence will also factor highly.
As U.S. companies become more willing to make substantial changes to their policies and practices, the expectation is that fewer engagements will need to be escalated to shareholder resolutions. “The companies that listen and follow shareholders’ advice are reducing risk and will outperform over time — that’s why companies are becoming more receptive” to addressing ESG issues, Behar said.
He added: “Companies need to realize that shareholders that engage them and escalate to file resolutions are their best friends. We are showing them ways to reduce risk, improve brand recognition, attract the best and the brightest and generally be more competitive … Shareholder advocacy is like a McKinsey for free.”
Already, some companies, such as Union Pacific Railroad and the online travel provider Bookings Holdings, are being asked to put their carbon transition plans to a vote at their 2021 annual general meetings, according to Rob Berridge, director of shareholder engagement at Ceres.
The regs are coming
Often, ESG investment strategies end up more closely aligning the objectives of a company with those of its long-term institutional investors. Essentially, there are three forms of capital that are long-term drivers of value and that are sources of risk — financial, physical and human capital.
To properly access risks requires complete, accurate and reliable information. “That starts with public company disclosure and financial firm reporting and extends into our oversight of various fiduciaries and others. Investors also need this information so they can protect their investments and drive capital toward meeting their goals of a sustainable economy,” SEC commissioner Lee told the Institute on Securities Regulation Conference in November.
All indications are that mandatory climate risk disclosure requirements for public companies are on the way. The Biden administration’s decision to rejoin the Paris Agreement cements this view. For countries to meet their Paris targets, they’ll need companies to transition toward net-zero goals and to measure progress using standardized, auditable and reliable corporate data.
But measure how? The proposal by the International Financial Reporting Standards (IFRS) Foundation to create a new sustainable standards board is the leading pathway to making climate disclosure mandatory, Mark Carney, the former governor of the Bank of England and the current United Nations Special Envoy for Climate Action and Finance, said in a comment letter.
Others that commented on the IFRS Foundation’s consultation overwhelmingly supported the formation of a sustainability standards board. In their comments, many also highlighted the extent of the IFRS’s reach; the organization’s financial reporting standards are mandatory in 144 countries. Carbon Tracker Initiative pointed out that putting a sustainability standards board under the same umbrella as the International Accounting Standards Board, which is housed within IFRS, would help integrate sustainability and financial reporting.
There’s no shortage of prep work on how a sustainability standards board might operate. For example, there’s the paper by five leading NGOs on how their voluntary frameworks, standards and platforms could be used together, and another seminal white paper on converging the various ESG reporting standards.
U.S. companies’ reporting on sustainability has been coalescing around the Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standard Board’s (SASB) reporting frameworks.
According to Steven Nichols, head of ESG capital markets for the Americas at BofA Securities, the investment banking arm of Bank of America, many companies are setting annual goals and measuring their progress on ESG metrics such as those related to climate risk. A new Conference Board report on corporate disclosure and performance data across North America, Europe and Asia-Pacific found that major corporations last year increased their sustainability disclosures in key areas, including climate-risk reporting, human rights and water stress exposure.
Under European Central Bank guidelines, which at this stage are non-binding, European banks must get their climate risk disclosures together this year. The ECB will be reviewing banks’ practices next year, with a view to conducting stress tests on climate risk next year.
At the French investment bank Natixis, credit decision-makers already use two sets of indicators — one that looks at the environmental impact of a transaction and another that estimates the profitability of that transaction after taking into account material environmental impacts.
Natixis’ internal capital allocation tool, called the Green Weighting Factor, already is changing origination. “A few years ago, environmental issues were not discussed in the credit process. Today, it’s a systematic part of the decision,” Karen Degouve, head of sustainable business development at Natixis, said.
Perhaps its greatest impact so far, however, has been the effect on the level of strategic dialogue the bank is having with clients, she added. Because the tool has only been used internally since September 2019, it is too early to say if it is changing client behavior, too.
On the docket
The big ESG news this week came from BlackRock CEO Larry Fink. More on that in the next edition. Meanwhile, here’s some of what else is interesting this week:
- Lazard’s annual review of shareholder activism for 2020 showed that ESG activism has gained momentum: “The pressure for public companies to adhere to best ESG practices will continue to intensify.”
- The world’s major loan trade associations are working to bring sustainability-linked loans in line with the ICMA’s sustainability-linked bond principles.
- Ethical behavior emerges as the biggest reputational risk for the UK’s large businesses, according to a new ESG report.
- The Bank for International Settlements this week launched a second green bond fund for central banks. The bonds are part of the BIS’s green bond fund initiative, which helps central banks to incorporate environmental sustainability objectives in the management of their reserves and capital, in line with a growing demand for climate-friendly investments among official institutions.
- The European Central Bank this week announced it is setting up a new climate unit to strengthen and bring together the ECB’s work on climate.
- BlackRock received a mixed sustainability report card from the FT a year after its pledge to act on ESG.
- The Global Climate Risk Index 2021 has reconfirmed earlier results that show that less developed countries suffer most from extreme weather events and that these countries are generally more affected than industrialized countries.
- Global green bond issuance hit a new record in 2020 — $269.5 billion — and could grow to $450 billion this year, according to the Climate Bonds Initiative.
- For the 2021 shareholder season, As You Sow has filed proposals pressing for cuts in use of plastic packaging with Amazon, Keurig Dr Pepper, KraftHeinz, Kroger, McDonald’s, Mondelez, PepsiCo, Restaurant Brands International, Target and Walmart.
- The Global Impact Investing Network’s new report finds that impact investors are generally getting financial and impact performance in line with their goals.
Jean Haggerty is an award-winning financial journalist based in New York.