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Issue #106: A weekly update on responsible investment.
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Welcome back to another year of ESG education with Nossa Data. We hope everyone had a refreshing holiday and New Year. I have two articles I would like to feature in today’s issue. First, I found a really nice piece from Schroders going over “The flow of ESG information as it should be versus how it will be.” Next, key questions companies need to be asking themselves about ESG.

(PSA: This newsletter features a lot of lists, it seems people like to write lists in January…)

How is ESG information flow meant to be working in Europe?

  1. Companies report on the sustainability of their activities as per the Corporate Sustainability Reporting Directive (CSRD).
  2. Asset managers use this information to report on the sustainability of their products as per the Sustainable Finance Disclosures Regulation (SFDR).
  3. Financial advisers then use this information for their discussions with end-investors to establish the latter’s ‘sustainability preferences’ as per the MiFID suitability test.

The reality is all that information does not happen in this order. Company reporting will not kick in before 2023. And the technical details on how asset managers report on the sustainability of their products won’t apply before 2023 either.

Here is a nice visualisation:

The second article I wanted to share is one done by Harvard Business Review that shares 10 questions that companies need to be asking themselves in terms of ESG. It seems like great timing as many firms confirm their upcoming ESG disclosure plans for 2022.

What should you be asking?

  1. Is ESG undermining your company’s competitiveness?

Are you doing too much ESG or too little? Too much, you could risk focus on growth, market share and profits. Too little, you could lose support from employees, customers, investors and potentially not align to incoming regulation.

2. Does driving the ESG agenda mean sacrificing company returns?

ESG focus could be seen by some shareholders as harmful or compromising financial shareholder returns. However, we are also seeing that ESG index funds are out-performing their ESG peers. Investors must assess the value the ESG agenda creates for business.

3. How are you navigating ESG trade-offs?

All aspects of ESG are beset with trade-offs that business leaders must navigate. For example, energy company boards have to weigh urgently tackling climate change against meeting the needs of the over 1 billion people who do not have access to reliable and affordable energy.

4. How does ESG change due diligence?

Areas that could come into ESG due diligence include adapting products and services to climate-friendly materials and processes, evaluating diversity and wider employment practices, as well as revamping how companies engage with communities.

5. Should you become a public benefit corporation?

There is a push by campaigners for environmental and social causes for companies to switch to either a public benefit corporation (PBC) or B-corps structure. PBCs are signed up to a governance code that is recognized in 37 states, whereas B-corps are corporations that are certified by the non-profit B-lab as meeting higher standards of accountability, transparency, and social purpose than traditional listed companies.

6. How should corporations address societal concerns such as racial equity?

Business leaders must be guided by a framework that is transparent and consistent in addressing current events that highlight injustice. Recently, boards have been challenged to ensure that they are consistent in defending racial justice across all racial, ethnic, and religious groups.

7. How do you develop a global approach to ESG?

A more comprehensive ESG approach must be inclusive of different countries and cultures. Companies must consider the expectations of other markets such as China and India versus firms in the Western world.

8. How do you build an ESG framework that is future-proofed for tomorrow’s economic realities?

Often a large proportion of diverse staff within a company come from less-skilled workers who are more vulnerable to losing their jobs to automation. There is an onus on companies to take active steps to reskill their existing workforce specifically through well-developed trainee programs, apprenticeships, and on-going internships.

9. How do you vet company performance of ESG?

Business leaders must decide how their ESG results will be vetted for compliance. ESG benchmarking remains highly fragmented. Therefore, the challenge for boards is to assess which metrics to choose and use.

10. How should corporations navigate the ever-changing landscape of ESG?

Corporates need to anticipate where regulation on all aspects of ESG will land. Therefore, business leaders must maintain a dialogue with regulators and policymakers, and companies should look to cooperate and coordinate on best practices with their industry peers.

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ESG Frameworks and Standards

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Frameworks and Standards in the ESG Space

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How VCs Can Help Startups Set (and Meet) ESG Goals
ESG integration for VCs poses some key challenges.

  1. Promoting ESG objectives among portfolio firms is contingent upon the development of specific, practical tools, as well as measurement and benchmarking frameworks.
  2. Promoting ESG practices among startups requires that venture capitalists first enhance and solidify the legitimacy of their own claims.
  3. VCs need to find ways to support startups to increase the authentic incorporation of ESG factors.

Harvard Business Review. (Another great article on ESG in VC by WEF)

Top 10 ESG Trends For 2022
Another list to start your 2022 ESG plans. This time by our friends at Close Group Consulting.

  1. ESG Ratings will remain uncorrelated, and that’s Ok!
  2. Who should be driving the ESG car? Strategy
  3. Expect more hunting down of greenwashing
  4. Zero-washing or how to address a portfolio’s carbon intention
  5. ESG through the financing lifecycle of a firm (VC — IPO)
  6. Who is winning the race to advance ESG maturity? Private markets
  7. Fund metrics: Return, risk and now ESG
  8. ESG Investing, becomes just “Investing”
  9. Circular technology in the 4th industrial revolution
  10. Asset owners as a catalyst for change

Read the predictions.

How Nasdaq’s Board Diversity Rule Creates Potential for Real Change

Beginning in August 2022, Nasdaq-listed companies will have to disclose annual statistics about their board’s diversity using a matrix (shown above) prescribed by Nasdaq. This simple format has versions for US and foreign companies, and both include board members’ self-disclosed gender identity, relevant underrepresented racial/ethnic/religious identities and LGBTQ+ status. Goals for a more diverse board: The initial objective for all Nasdaq-listed companies is to have one director from a diverse background by August 2023. For the largest Nasdaq-listed companies, the final objective is two directors from diverse backgrounds (meaning, for US companies, one woman and one underrepresented minority or LGBTQ+ individual) by August 2025.

Board Responsibility for Artificial Intelligence Oversight

  1. First, to address this issue and comply with their responsibility, board directors must understand how pervasive AI bias already is. We’ve seen AI-enabled harms pop up in most sectors. In healthcare, biases in AI training data have led to class and race-based inequities in care offered to patients.
  2. Directors need a basic understanding of how bias infiltrates AI. Contrary to popular belief, AI is not neutral or infallible. Rather, an algorithm is like an opinion. Bias can embed in each of the human touch points throughout the AI lifecycle — from determining and framing the problem deemed worthy of an AI solution to product design to data collection, development, and testing.
  3. Directors need a game plan. When they fail to monitor or institute AI governance, we can expect shareholders to point to those who were in a position to act during this window when the harms are increasingly visible, especially as regulators clarify the rules of the AI road.
    Harvard Law.

Eight essential ESG topics for 2022
In 2022 the debate is no longer about “why” sustainability is needed — but “how” to pursue it in a practical, effective manner. This means tackling issues such as: how do you measure carbon emissions? Interpret ESG ratings? Track supply chains? And these debates are not just occurring inside public companies in Europe (where they have rumbled for some time), but increasingly in the US and Asia regions too — and the private capital sphere.

  1. Scope 3 emissions: focusing on transparency and reduction
  2. Private capital: ‘A paradigm shift is taking place’ amid hunt for climate deals
  3. Green bonds: growth to the moon, but is it credible?
  4. Carbon markets: more growth ahead, amid rising scrutiny of offset quality
  5. Sustainability accounting: global standards start to take shape
  6. The ‘S’ of ESG: employee activism soars
  7. US-China relations: the green cold war
  8. US climate policy: Biden confronts challenges at home as he tries to inspire global action

Financial Times.

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Expected timeline of ESG regulation in Europe Report

Top Risks in 2022 — Eurasia Group

  1. No Zero Covid
  2. Technopolar World
  3. US midterms
  4. China at home
  5. Russia
  6. Iran
  7. Two steps greener, one step back
  8. Empty lands
  9. Corporates losing the culture wars
  10. Turkey

Read about the upcoming risks.

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