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50 years since Friedman, the shareholder stakeholder debate

Issue #48: A weekly update on responsible investment.

In the 1980’s Milton Friedman made the famous claim that the only purpose of a business is to maximize returns for shareholders. This business rhetoric was the dominant way of thinking though the mid 2000’s in academia and the business world. Think about how much the position of one organisation, The Business Roundtable, has changed over the years:

1997 Statement:

2019 Statement:

Today the difference of these two statements has become the shareholder-stakeholder debate in the world of ESG. To celebrate 50 years since Friedman, ProMarket is writing a series of articles comparing this topic.

How are we seeing companies respond?

Uber launched ‘Driving a Green Recovery.’ Uber’s CEO explained: “Everything changed in 2020. Months of rolling shutdowns cost millions of people their livelihoods and pushed cities and businesses into survival mode. Longstanding inequities have worsened, with many of the same communities that have been plagued by air pollution now vulnerable to the impacts of COVID-19. Instead of going back to business as usual, Uber is taking this moment as an opportunity to reduce our environmental impact. It’s our responsibility as the largest mobility platform in the world to more aggressively tackle the challenge of climate change. We want to do our part to build back better and drive a green recovery in our cities.”

Meanwhile Google announced their ambition to become carbon free by 2030: “In our founding decade, Google became the first major company to be carbon neutral. In our second decade, we were the first company to achieve 100% renewable energy. By 2030, we aim to be the first major company to operate carbon free. Moving towards carbon free by 2030 won’t be easy.” Learn about Google’s plans to be part of the solution to climate change.

Lack of response can be costly:

On the other side of the narrative we are seeing how disaster can strike when ESG issues are managed poorly (Wirecard, Boohoo). In today’s age of social media and increased transparency, no company — regardless how strong its financial performance — can afford to ignore the wider societal context in which it operates.

Rio Tinto showcases this in action: Despite a 40% rise in stock value in the last 6 months, Rio Tinto’s chief exec was forced to depart the company after the scandalous destruction of two ancient Aboriginal sites in May to expand an iron ore project. What does this show us? Socially responsible investing has so much power that “Chief executives can no longer hide behind stellar financial returns. Pressure for him to go has been building in recent weeks, with everyone from major shareholders to two former Australian prime ministers joining the chorus of disapproval.”

Join MIT’s Aggregate Confusion Project:

ESG data is noisy and unreliable. Based on MIT’s research the correlation among prominent agencies’ ESG ratings was on average 0.61; by comparison, credit ratings from Moody’s and Standard & Poor’s are correlated at 0.92. This ambiguity around ESG ratings creates acute challenges for investors trying to achieve both financial and social return.

The Sustainability Initiative is working to solve this problem through a program of research to improve the quality of ESG measurement and decision making in the financial sector. The first step was to characterize the problem in the paper “Aggregate Confusion: The Divergence of ESG Ratings”.

The group is now seeking corporate member participation by asset owners and managers to chart a course toward more rigorous, coherent methods for ESG integration.

Learn more.

Subscriber Feature:

How to Guide Improving your ESG Performance

As an organisation, you need to ensure that your ESG strategy and disclosures meet this growing investor need in order to safeguard your company’s ability to raise capital. This guide is designed to help you understand the steps you can take to effectively integrate ESG into your strategy and disclosure.

Simply Sustainable.

Top stories

Private Equity Cannot Afford to Leave out ESG
In recent years, the most noticeable movement towards ESG made by large private equity firms was related to the launch of new products, such as impact funds that select small and midcap companies according to specific environmental or social themes (e.g. education, healthcare, sustainable infrastructure) and align with the Sustainable Development Goals. Today, investment firms should look at ESG policies, data, and practices as an aggregated layer of value that is embedded everywhere, from the company culture to the mathematical way money is allocated. Private Equity Wire.

New diversity ‘standard’ for VC firms launches
Non-profit organisation Diversity VC is launching a new ‘standard’ for VC firms. It’s the investment equivalent of the Fairtrade mark — a symbol for those firms which are following diversity and inclusion best practice. The hope is that the ‘standard’ will encourage VCs to up their game when it comes to sourcing and investing in diverse founders and employing diverse talent — but also help all the firms which go through the assessment and certification process to figure out what ‘good’ looks like.
Sifted.

Global regulatory body to harmonise ‘plethora’ of ESG standards
The global umbrella body for securities regulators is seeking to harmonise the patchwork of rules governing how companies disclose sustainability risks in a move that could be a game-changer for the fast-growing green finance sector. The International Organization of Securities Commissions said on Monday it would work to identify “commonalities” among the vast range of sustainability disclosure standards from across the world in order to make it easier to compare information.
Financial Times.

Europe can help take sustainability beyond ‘green’
Europe is a leader in its plans to “build back better,” with the EU, national governments, and some of the continent’s biggest companies and investors explicitly linking recovery plans to both job creation and tackling climate change. As a pioneer of sustainability, Europe has played a key role in driving non-financial disclosure, and it continues to do so with its Sustainable Finance Taxonomy, Sustainable Finance Disclosure Regulation (SFDR), and Non-Financial Reporting Directive (NFRD). Europe’s taxonomy, along with its disclosure regulations, have the potential to be catalysts for a globally accepted framework for comprehensive corporate reporting. Janine Guillot CEO of SASB on LinkedIn.

Tipping the ESG balance through secondaries
Are LPs using this unprecedented time to scrutinise their portfolios and perhaps look to sell positions that do not align with their values and ESG criteria? Secondaries market Palico facilitates a debate. “We see the secondaries market becoming a powerful tool to reposition your portfolio and we see sellers for different reasons, including ESG. There is a big opportunity because we all see ESG investment criteria differently, so I might have something that does not fit with my ESG programme, but it might fit and be positive for you with yours. And on the buy-side, there is more clarity and control since investors are not buying a blind pool, but can actually see into the portfolio and make sure that the individual assets match up.”
Palico.

UBS advises private clients to pick ‘sustainable’ investments
“The shift in preferences toward sustainable products and services is only just beginning,” said Iqbal Khan, co-president of UBS Global Wealth Management.“We believe sustainable investments will prove to be one of the most exciting and durable opportunities for private clients in the years and decades ahead.” Last week UBS said it would advise private clients investing globally to choose sustainable investments over more traditional options, the first major financial institution to do so.
Reuters.

Paper Highlight

Statement of Intent to Work Together Towards Comprehensive Corporate Reporting
Five framework- and standard-setting institutions of international significance have come together to help resolve this confusion and to show a commitment to working towards a comprehensive corporate reporting system. GRI, SASB, CDP and CDSB set the frameworks and standards for sustainability disclosure, including climate-related reporting, along with the TCFD recommendations. Through this collaboration, the intent is to provide:

  • Joint market guidance on how frameworks and standards can be applied in a complementary and additive way;
  • A joint vision of how these elements could complement financial generally accepted accounting principles (Financial GAAP) and serve as a natural starting point for progress towards a more coherent, comprehensive corporate reporting system;
  • A joint commitment to drive toward this goal, through an ongoing programme of deeper collaboration and a stated willingness to engage closely with other interested stakeholders.

Read the statement.

How to ensure the transition label has impact- A joint Climate Bonds & Credit Suisse Whitepaper

This paper presents an ambitious framework for identifying credible, Paris-aligned transitions. The aim is to support the rapid growth of a transition bond market as part of a larger and liquid climate-related market. The aim is to deliver confidence for investors, clarity for bankers and credibility for issuers.

Only a few economic activities operate at or near zero emissions today.

For some high-emitting activities, feasible low/ zero-emissions solutions are possible within a reasonable timeframe — transition should be towards those solutions.

For others, there are no such solutions. Instead, substitute low-emission activities are in development — transition should move to better alternatives.

To account for these differences, economic activities can be categorised based on two factors:

  1. Is it needed post 2050?
  2. Can it be decarbonised in line with the Paris Agreement?

Read the Whitepaper.

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