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Issue #109: A weekly update on responsible investment.
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\\ Weekly Insights \\
First, I would like to apologise for the delay in sending these newsletters but I would like to make up for it by packing this week’s newsletter with all of the great ESG articles I saw on ESG over the month of February. Since I last wrote, the world has changed yet again as we watched a war begin between Russia and Ukraine. I wanted to focus this mega issue by touching on some of the ESG related content I have seen in relation to this conflict.
Let’s get started by considering the potential impact on emission targets. Morningstar predicts it will hurt our emission reduction ambitions sharing“ The Ukraine invasion has sent the price of oil climbing. That could make fossil fuels more attractive to investors and delay the momentum toward net-zero.” It goes on to share that “From an investor perspective, energy and energy security will be a big deal for the next six to 24 months. The focus [on net zero] will wane and commitments will wane, and let’s say if we lose 12 to 24 months of resolve and action, it puts those short-term targets at risk.”
Europe leading on sustainable finance:
Morningstar continued to add, “Europe, which has promoted sustainable finance and been at the forefront of regulations around sustainable investing, will be distracted as it refocuses on energy security.”
Divestment from Russian holdings:
Bloomberg noted some were able to exit their holdings in Russia by quick action. This was the case of the Church of England which was able to completely unwind their $11 million stake by March 1st, when there were still buyers.
For others, their governments are forcing their investors to sell:
United Kingdom: BP Plc has owned a stake in Rosneft PJSC for about a decade, unmoved by investors’ concerns about the Russian energy explorer’s environmental track record. However, the U.K. government pressured BP to sell the holding because of the unacceptable social ramifications tied to Russia’s invasion of Ukraine.
Norway: The country’s $1.3 trillion sovereign wealth fund said they had no intention of selling Russian assets worth roughly $3 billion — but the government said the “brutal war of aggression against Ukraine from Russia” demanded the holding be frozen and divested.
What about defense stocks?
Some, as reported by the Wall Street Journal, are now allowed to buy them. “Swedish financial group SEB said it would start permitting some of its funds to buy shares of weapons makers and defense companies, reversing a position it adopted just a year ago as part of its commitment to investing based on environmental, sustainability and governance principles.”
Financial Times also comments on the ESG worthiness of defense stocks:
“War is nasty, the weapons that facilitate war are nasty and buyers of those weapons aren’t always particularly steady clients. But if you supply weapons to the invaded underdog in an unprovoked fight, or to the countries backing said underdog to pass along, could we not file your activity under S as a social good? Surely. As the Latvian deputy prime minister said this year: “Is national defence not ethical?””
To this point, Bloomberg shared that Weapons Group Points to Ukraine in Bid to Shape ESG Rulebook:
Previously, the defense industry says it has struggled to get loans as ESG concerns steer funding in the finance sector. However, the invasion of Ukraine shows how important it is to have a strong national defense. To that point, Germany’s Chancellor Olaf Scholz announced a massive boost in defense spending unveiling plans for 100 billion euros ($113 billion) in expenditure this year that will go toward modernizing Germany’s military. This announcement subsequently sent defense stocks soaring. As the EU looks to develop its ESG Taxonomy, the conflict in Ukraine puts new questions on how it will develop.
What are the banks doing?
First, I wanted to share this great graphic that compares MSCI, S&P Global, and Sustainalytics scores of the top banks shared in Forbes.
However, Goldman Sachs and J.P. Morgan have been pouncing on distressed Russian corporate debt in recent days. According to Bloomberg’s Laura Benitez, Sridhar Natarajan and Katia Porzecanski “Goldman Sachs Group Inc. and JPMorgan Chase & Co. have been purchasing beaten-down company bonds tied to Russia, as hedge funds that specialize in buying cheap credit look to load up on the assets, according to people with knowledge of the private transactions.”
Considering a key aspect of S is “Addressing human rights-related risks” — can these banks maintain their high credentials?
How will the Russia-Ukraine conflict impact ESG going forward?
Bloomberg comments on the topic:
First of all, how much Russia exposure did ESG asserts have? “Industry researchers at Morningstar Inc. estimate that 14% of sustainable funds globally held Russian assets right before the war.”
Should that have been allowed? ESG is a screening mechanism, not always about exclusion. Now, ESG portfolio managers, like any other managers holding Russian assets or not, will be evaluating the situation and trying to understand the broader implications of the conflict and impact on their portfolios.
Blanket exclusion could prevent investment in good companies: For example, “rejecting Russian assets entirely also can mean cutting off good companies. These often include technology firms that are actively trying to provide transparency in defiance of Putin’s restrictions.”
Time will tell how this conflict impacts the ESG industry in the weeks and months to come.
\\ Nossa News \\
What Magnified the ‘S’ Issues in ESG and what made companies resilient during Covid-19?
We interviewed Jeremy Richardson, Global Equities Senior Portfolio Manager at RBC Global Asset Management (UK).
“When the pandemic happened, there was a big focus of attention from companies on the ‘S’ of ESG; I think this remains incredibly topical. Back in the middle of 2020 it was all about PPE, social distancing and supporting remote workers. Employers were trusting their workforce to do their jobs when they were no longer clocking in and out every day. For many businesses this proved to be manageable. But for many it was also incredibly stressful. For example, we would not have been able to get through the pandemic nearly as well as we did were it not for the continuation of food delivery, etc.”
Read our feature.
ESG for early-stage businesses: Helping your portfolio companies.
ESG_VC is an initiative in the venture capital industry, responding to the pressing ESG issues that affect early-stage businesses. The initiative has established a whole VC community spanning across the UK, USA and Europe. The aim is to progress and support the efforts of early-stage businesses in managing and integrating ESG into their operation. The initiative equips entrepreneurs with the knowledge and tools necessary to embrace ESG from the very beginning. Nossa Data interviewed Henry Philipson, ESG_VC Co-Founder and Director of Marketing & Communications at Beringea. As well as Serena Taylor, active member of the ESG_VC initiative and ESG & Impact Officer at Talis Capital.
Read our feature.
Biodiversity is consistently becoming a more and more important ESG issue for companies.
\\ Top Stories \\
Boards face more challenging 2022 proxy season on ESG
CFOs and their boards at publicly traded companies face rising pressure to improve performance on environmental, social and governance issues as institutional and retail investors plow record levels of capital into businesses deemed sustainable. During the 2021 proxy season, shareholders filed 348 E&S proposals and voted on 158 of them, compared with 314 and 151, respectively, in 2020. Furthermore, investors are expected to file climate-related proposals across all industries, not just carbon-intensive sectors.
Overcoming the hurdles to board leadership on climate change
Climate change has emerged as a central and existential risk for organizations — and fertile and critical ground for innovation. Yet new Deloitte research shows that many audit committees, an essential bulwark in helping companies manage and respond to risks and opportunities, haven’t yet sufficiently placed climate change initiatives at the core of their agendas. Nearly 60% of board audit committees say they don’t regularly discuss climate change during meetings. And nearly half say they lack the basic literacy in climate issues they need to make informed decisions. While results vary by region (see sidebar, “EMEA moving ahead”), more than two-thirds (70%) say they have yet to complete an assessment of how climate change will affect their company’s operations, supply chain, and customers.
ESG Investing Needs to Expand Its Definition of Materiality
The way the ESG market has developed limits the potential benefits these trillions of dollars of capital could have on society and the planet. Why? 1. Only factors that affect financial returns are considered “material” for ESG investors. 2. The S in ESG remains woefully underdeveloped. Whenever we see the word “materiality,” we must remember to ask: what risk, and for whom? ESG frameworks were developed by standards bodies for investors, so it’s hardly surprising that their focus has been on identifying and addressing key operational and reputational risks to the financial bottom line. And while it is true these bodies deserve credit for widening the scope of what the investment community should consider in their investment decisions, the fundamental flaw with this approach remains: there are loads of things companies do that contribute to the problems of the world without it affecting company profitability.
Auditing / Regulation
Who Regulates the ESG Ratings Industry?
ESG ratings providers — and the ratings themselves — face increasing scrutiny.
There are calls for the Securities and Exchange Commission and other agencies to regulate the raters. Observers worry that ESG ratings lack clarity, rely on inconsistent criteria, and suffer from conflicts of interest that plague other ratings industries. ESG ratings providers mine public information to grade companies and sort them into ESG indexes (like sustainable impact, tobacco involvement, or women’s leadership). Investors and financial advisers, in turn, look to the ratings and indexes to develop investment strategies or create ESG-focused mutual funds, index funds and ETFs. Last year, a Harvard study found that “the more information a company discloses about its ESG practices, the more rating agencies disagree on how well that company is performing along these dimensions.”
MSCI ESG indices’ outperformance needs scrutiny, experts caution
A suite of MSCI environmental, social and governance indices outperformed their non-ESG parent despite surging energy stock prices last year, but analysts say the findings deserve careful scrutiny. All but one of the ESG indices, the MSCI ACWI ESG Focus index — designed to maximise exposure to positive ESG factors — outperformed in 2021. All five beat the parent benchmark over both three and five years. The researchers noted that the ESG indices had higher weights than the parent index in semiconductors, which outperformed, and lower weights in airlines, aerospace and defence, which underperformed, compensating for losses from the lower exposure to oil and gas.
Corporate sustainability push a $35 trillion dollar conundrum for auditors
Reliable checks on companies’ sustainability credentials will take years to develop, auditors say, meaning investors pouring trillions of dollars into green funds remain at greater risk of being hoodwinked. ESG auditing is in its infancy with no single global, mandatory standard. And efforts to create a more rigorous regime for this type of auditing will take several years to bed down as investors, companies and auditors try to get a handle on new and complex data. Investors agree that the current patchwork of auditing practices offers only basic assurance, falling a long way short of the higher standard applied to a company’s financial statements.
IPOs that don’t meet ESG standards can expect a discount
Companies planning to list need to implement a robust ESG strategy or they will receive a discount on their valuation. The inclusion of ESG data in the IPO roadshow has grown since the beginning of last year and is now a ‘must have.’ Whether private or public, companies are coming under pressure from a range of stakeholders to disclose ESG information around areas like climate change, human capital management and biodiversity. Increasingly, that pressure is coming from regulators. In Europe, the European Commission has proposed a new sustainability reporting directive, which will see the number of companies required to disclose on ESG issues rise from around 11,000 to 50,000.
Eyeing a merger or acquisition? Keep ESG at the top of your mind
There is a growing recognition that ESG considerations play a decisive role at every step of the M&A process, from target selection through to post-merger integration. A survey conducted in December 2020 revealed that 83% of business leaders believe that ESG factors will be increasingly critical to M&A decision-making over the next 12 to 24 months. The movement towards a stakeholder-centric model is a key factor driving the integration of ESG considerations in M&A decision-making. While institutional investors continue to play a pivotal role in bringing ESG issues to the forefront through investment and proxy voting decisions, a growing focus on sustainability and long-term value creation from a broader range of stakeholders, including employees, consumers, and governments, is having a significant impact on how corporations view ESG issues.
Your ESG Story
Does Your Company Need a Chief ESG Officer?
Harvard Business Review analyzed senior executives from more than 1,400 U.S. public companies in 2020 and 2021. Using insights from this analysis and from studying other top executives, they developed three questions that CEOs and boards should ask before creating a chief ESG officer position.
- Do your stakeholders care about ESG?
- What role does ESG play in your strategy?
- Would a chief ESG officer be complementary?
Corporate ESG Storytelling Largely Focused on the ‘E’ During 2021
Looking at more than 8,000 reports and stories on ESG (environmental, social and governance) last year, environmental topics generated the most volume and interest. In the wake of the climate-related disasters that made headlines last year, the news surrounding the most recent IPCC report and the run-up to the COP26 talks in Glasgow, it is clear that stakeholders — especially investors — are demanding ESG performance and transparency. The second most viewed category in 2021, philanthropy and cause initiatives, in audience engagement from its 2020 spike when both B2B and B2C brands were pledging their support in the ongoing battle against the COVID-19 pandemic.
Where U.S. Investors Stand on ESG Investing
How interested are US investors in sustainable funds?
How does interest in sustainable investment compare to interest in financial performance?
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\\ Report & Paper Highlight \\
ESG Priorities of UK Companies — IoD
IoD — A checklist of issues which the IoD believes are worthy of boardroom discussion in 2022
- Stakeholders and business purpose: The IoD believes that companies should adopt a balanced stakeholder orientation to guide their business activities — rather than a narrow focus on short-term shareholder returns.
- Sustainability: UK business has a crucial role to play in the transition of the UK economy away from fossil fuels and carbon-intensive business activities.
- Inclusion and Diversity: Business leadership, and directorship in particular, should be open to anyone with the necessary abilities — regardless of their socioeconomic background or personal characteristics.
- Governance: A robust governance framework is essential in order to promote accountability, effective decision-making and sustain the trust of stakeholders.
- Executive remuneration: Senior managers should be rewarded on the basis of performance that they deliver for the organisation and its stakeholders.
\\ Leading Across ESG \\
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