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This is our weekly newsletter we deliver to educate our readers on ESG. We aim to curate content on responsible investment to educate and surface relevant news articles, academic papers, best practice reporting guides and latest industry developments. We have a strong ESG community and if you have feedback to share reply to this email to let us know what’s on your mind!

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Issue #104: A weekly update on responsible investment.
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\\ Weekly Insights \\

I read two pieces recently that made me want to touch on industry-wide exclusion as this week’s core topic.

  1. Perspectives from European defense executives on the damage of exclusion to their industry
  2. An interview with BP’s new CEO on the company's goals to go green.

The first is a Financial Times piece discussing the growing pressure of defense companies. First of all, the article points out that for a long time the defense companies had been targeted by anti-war demonstrators at shareholder meetings and trade fairs. However, with the rise of ESG, they are now being targeted by socially conscious investors more than ever before. Already investors are moving away from defense stock’s as can be seen in the chart below:

One specific quote from the article is by the Head of Investor Relations at Thales, Bertrand Delcaire:

“As the designer of many innovative solutions for a greener, safer and more inclusive world, we do not understand how cyber security, in which we are a tier-one player, can be seen as a positive ESG activity while other elements of our product portfolio such as radars, sonars and military communication systems that contribute to physical security are seen as a negative ESG activity.”

Could it be a problem of definitions? This is the concern of the chief executive at BAE: [Defense] is “suffering from a lack of consensus in defining ESG compliance, which is causing some investment funds to exclude all defence stocks, rather than taking a more considered approach to assess individual company strategies and portfolios”.

How much are companies impacted by “Negative screening?” A huge % in Europe!

The next article on this is one by Time Magazine where BP’s new CEO, Bernard Looney, discusses his determination to remake BP entirely. Similar to defense, oil giants are deeply targeted by activists and when you think of “What is not an ESG” company, for many, BP would be top of the list. However, the company wants to change its image with Looney announcing the company would cut its oil and gas production by 40% by the end of this decade, plow billions into solar, wind and other renewables, and roll out electric vehicle charging points at its convenience stations worldwide. By 2050, he says, BP will zero out its polluting carbon emissions — a whopping 415 million metric tons a year in 2019.

What is he saying about the matter:

“We must change. We have to lean into the transition. We must give society what it wants and needs, and that is clean, reliable, affordable energy, and to do that, we have to change.”

What about the skeptics?

“[Many] see us as part of the problem, not part of the solution. I believe that we are and will be and need to be part of the solution. I would go further and say that if BP doesn’t transition, the world won’t transition.

Energy is where the emissions are. Tesla sells close to a million cars a year today. The world needs 70 million cars a year. Toyota, Volkswagen, Renault-Nissan: They make 30 million cars a year. When they go electric, the world goes electric. When companies and sectors like BP start to transition, the world will transition.”

I generally fall somewhere in the middle where I don’t think full exclusion is a way we can make change because that isn’t making the world’s “worst” ESG companies improve. However, letting companies get away without showing true improvement over time I also don’t believe can move things in the right direction. I think as ESG industry professionals, we need to educate the wider market on differences between exclusionary investment versus investing in improvers. I also prefer an “improvers” rhetoric because it promotes progress on key E, S and G topics and conversation while exclusion removes ourselves as advocates on ESG from the conversation.

\\ Nossa News \\

Company ESG Ecosystem Graph — 2021

Companies are faced with a growing list of external stakeholder pressure when it comes to their ESG disclosure. We understand that alongside building technology to ease the ESG disclosure burden, we need to continue to educate the market on how the entire ecosystem looks and is developing. This is our 2021 draft of external disclosure expectations placed on companies. If you are responsible for ESG at a company and want help understanding external stakeholder expectations, reply to this message and we can arrange a call. Notice something missing: comment on LinkedIn.

Reach Out!

\\ Top Stories \\

The ESG Market Is Controlled by a Few Big Investors
The iShares ESG Aware MSCI USA ETF (Ticker: ESGU@US) is the biggest ESG-focused ETF, with $25.3 billion of assets. One investor, Chicago-based Envestnet Asset Management Inc., held almost 22% of the fund’s stock at the end of September. Finland’s largest investor controlled 61% of the $4.2 billion iShares ESG MSCI USA Leaders ETF (Ticker: SUSL@US) at the end of September, and 64% of the $4.2 billion Xtrackers MSCI USA ESG Leaders Equity ETF (Ticker: USSG@US). Bank of Italy owned 12% of SUSL and 18% of USSG as of Sept. 30. The dominance of such a few key institutions points to the big challenge facing the sector: To reach the next level, ESG ETFs need a broader investor base.
Bloomberg.

How Venture Capital Can Approach ESG
How does the venture capital industry reconcile the conflict between returns, i.e., the needs of individual VC firms to make financially successful investments, with the collective interest of embracing the issues of modern society at large? The pull factor is coming from both public and private institutional investors, who are by far the largest investors in VC. They have become much more socially conscious in the past few decades, and they require their VC managers to promote their ethos of driving positive public change. The push factor is fear of the tech industry being regulated. It’s essentially a defense mechanism — become socially responsible and self-regulate before the government decides to do it for you.
Forbes.

Fidelity International: Three key themes for ESG in 2022

  1. Deforestation: “At COP26 in Glasgow, Fidelity joined over 30 financial institutions representing more than US$8.7 trillion in assets under management in signing a pledge to eliminate agricultural commodity-driven deforestation risks across our investment portfolios by 2025. This pledge puts a focus on key ‘forest-risk’ agricultural commodities like palm oil, soy, beef and leather, pulp and paper, and starts with an exposure assessment to be completed by the end of 2022.”
  2. The just transition: “Fidelity’s new climate investing policy supports this and prioritises active engagement over passive exclusion across our investment portfolios. Throughout 2022, we will be targeting the biggest emitters through transition engagement, starting with thermal coal producers. We will expand this engagement to utilities and power generators, leading to a phase-out of thermal coal exposure across our portfolios by 2030 for OECD markets and by 2040 globally.”
  3. Double materiality: “Fidelity’s ESG ratings span our equity and fixed income coverage universe and now include around 5,000 companies. We are constantly adding more. In addition, we are introducing a specific and proprietary climate rating to assess the genuine ambition and alignment of our investees to a net zero future. This is just one way we are putting our beliefs into action, because in the long run, profitability can’t exist without sustainability.”

IFA Magazine.

Gender Equity an Increasing Focus Within ESG
Inflows into funds that utilize a gender lens have grown in the last five years, with attention boosted in the space by things such as the #MeToo movement and high-profile sexual harassment cases. Funds that invest in gender equity typically have a gender diversity and/or minority representation percentage requirement within the board of directors and executive level positions. Currently, within the S&P 500, women only hold a third of board seats and 6% of companies are run by women. This trend will most likely be changing across industries with the SEC’s approval of a rule from Nasdaq that all newly listing companies must have at least two diverse board directors or have to explain why they don’t. State Street Global Investors recognizes the importance of investing in a future that is more female by supporting companies that are practicing gender equity today. The SPDR SSGA Gender Diversity Index ETF (SHE) offers data-driven exposure to companies with the highest diversity amongst leadership positions within their industries.
Nasdaq.

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\\ Law Highlight \\

ESG Continues to Find its way into Incentive Compensation Plans

Harvard Law

Traditional incentive compensation metrics, namely quantitative shareholder return and financial and operational metrics, still dominate but, increasingly, qualitative “social” factors, such as diversity and pay equity, are playing a meaningful role in executives’ take-home incentive pay. In the Top 100 Companies, 15 have announced in their 2020 CD&As that incentive compensation for 2021 will include new ESG metrics. The move toward ESG metrics is both a response to stakeholder pressures and a growing recognition that these factors are important to long-term shareholder value.

What forces are leading companies to adopt ESG metrics?

  1. Institutional Investor Focus on Sustainability
  2. Shifting Views of Role of a Corporation
  3. Regulation
  4. How are companies incorporating ESG metrics into their incentive compensation programs?

How can a company establish meaningful metrics?

  • Engage with shareholders
  • Identify the appropriate metrics
  • Ensure line of sight between executive actions and performance
  • Set goals
  • Review your executive offer scorecards

Harvard Law.

\\ Leading Across ESG \\

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Julianne Flesher
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