What is a system positive company?
Issue #47: A weekly update on responsible investment.
Generation Investment Management has been at the forefront of ESG analysis for a long time. On top of fully integrating sustainability into their investment philosophy, they were one of the 50 original signatories to the UN PRI in April 2006 and they were there for TCFD’s launch in June 2017. Last week they released a report where they outline the 5 questions they use to assess companies to understand whether they are ‘System Positive.’ Will more investors follow Generation’s System Positive methodology in the years to come?
What is Generation IM’s definition for System Positive? System positive’ is a shorthand for companies that they believe will thrive in the transition to sustainability. Such companies are also helping to enable and drive the changes the world needs to see in economic and social systems.
5 questions to determine if a company is system positive.
1. What are the systemic shifts required to make the sector truly sustainable?
Most sectors are in some kind of transition, but the nature and speed of this transition varies. We think it is important to map out this broader context before seeking to assess the company’s specific situation. This also helps avoid being trapped in the narratives that often surround individual companies. To do so, we use a broad range of published literature, particularly major scientific assessments such as those by the Intergovernmental Panel on Climate Change.
2. Does the company stand to benefit from a sustainable transition?
This question gets at the basic opportunity (or cost) that the company would face under a systemic shift to sustainability. It also helps identify whether the company sees its interests in promoting an accelerated shift or seeking to hold it back. We want to see that it gains more from an accelerated transition than from a business as usual pathway. Disclosure in line with the Task Force on Climate-related Financial Disclosure provides useful information on some of these risks, but is less clear on the opportunities.
3. Does the business and management team have a long-term orientation?
We want to know if the company has the capability to lead and drive change at the system level. This includes innovation in the broad sense: technical capacity and know how, as well as the wider ability to develop and deploy new products and services, or move with agility to new business models. We consider whether remuneration and progression in the firm are connected to progress on sustainability. We also consider whether companies are testing their corporate strategy against a wide range of possible futures.
4. Does the company have levers available to catalyse a system-level change?
All companies can have some impact on their stakeholders. But, some have more powerful levers than others, or to put it another way, are more systemically important. Asking this question helps put the companies’ ability to drive change in perspective. If the levers are weak, we also have to ask if this is the most effective place to allocate capital. This question also helps reveal whether management are approaching this passively or looking for opportunities to act.
5. Is the company mobilising effective coalitions for systems change?
Partnerships are often needed to catalyse the change to a new system, and ensure that there is a fair transition. We consider whether companies are playing an active role within existing coalitions of the willing; for instance, they may have joined initiatives on regenerative agriculture, committed to ensuring a ‘net-gain’ for biodiversity and set a net-zero emissions goal. We want to see companies using their influence and capacity to create new partnerships in communities, sectors and supply chains. Clearly, their lobbying needs to be aligned with policies designed to support the transition.
A useful tool:
Generation IM recommends the Transition Pathway Initiative tool. The Transition Pathway Initiative (TPI) is a global, asset-owner led initiative which assesses companies’ preparedness for the transition to a low carbon economy. Rapidly becoming the go-to corporate climate action benchmark. Try the tool.
Top stories
Take ESG sceptics’ claims with a lorry load of salt
Many accuse ESG investment and stakeholder capitalism of delivering inadequate returns and no meaningful change for society as a whole. Chuka Umunna writes a rebuttle to the Financial Times explaining: This is nonsense. ESG investors seek to avoid companies that exacerbate the world’s problems and increase risk, and instead look to direct capital to those that provide solutions, reduce risk and drive up long-term value. Taking against this common sense approach is, at best, a challenge. A company’s ability to manage ESG factors is widely viewed as a proxy for prudent risk management.
Financial Times Opinion.
The Pandemic and Pay: A hot investor topic
Coutt’s focus on executive pay: “CEO and other high-level reward packages are being watched closely as companies accept government support and lay off staff due to coronavirus. We’ve been helping to ensure their pay reflects current conditions where appropriate at the companies we invest in on our clients’ behalf. Over April, May and June, half the times we voted against management at shareholder meetings on environmental, social and governance (ESG) issues involved remuneration. In the UK alone, we voted against management of the companies we invest in on pay 82% of the time.”
Coutts.
Volkswagen CFO Plans to Target New Investors With Green Bond
German car maker Volkswagen AG plans to target new investors with a green bond in excess of €1 billion ($1.18 billion) in September, the company’s first under a sustainable finance framework launched in March. “There is a growing proportion of investors searching for green bonds who are focused on environmental, social and governance [standards],” Chief Financial Officer Frank Witter said Thursday. “This is something that we have been taking very seriously.” Green bonds are similar to traditional corporate bonds, except that the proceeds are typically earmarked for renewable energy or other environmental projects.
Wall Street Journal.
Our commitment to building a more diverse and inclusive European technology ecosystem
The democratisation of opportunity should not be limited to geography. Technology now affects pretty much all aspects of our lives. Every industry across every sector is being reimagined with new processes, and that always starts with people willing to build companies and those willing to back them. Too often, these people are from a select and homogeneous pool of people who look (and often think) the same. The ecosystem needs more diversity of race, gender and perspective. At Atomico, we are committed to building the world’s most prosperous, sustainable, diverse, inclusive and mission-driven technology ecosystem in Europe.
Atomico.
Meeting new investor expectations with ESG reporting
When COVID-19 hit, progress on environmental, social and governance (ESG) factors was overshadowed by the necessary short-term focus on health and safety issues and the financial implications of the crisis. But as companies and economies start to recover, investors will be looking for companies with strong ESG performance as a proxy for a more resilient organization. Those that have strong governance, robust crisis management, enhanced and innovative talent management (not to mention strong health and safety practices) will be attractive prospects, both in terms of near-term opportunities and their long-term ability to withstand systemic shocks.
EY Canada.
Small-Cap Companies Vulnerable to ESG Risks, Says Bank of America Report
Investors are increasingly asking about the ESG scores of companies with small market capitalizations and are stymied by a lack of data. The Russell 1000 index tracks some of the U.S. companies with the largest market capitalization. Only 34% of companies with the smallest market capitalization on the index released a sustainability report in 2018, compared with a majority of the larger companies, according to the Governance & Accountability Institute. “One of the challenges in evaluating small caps from an ESG lens is the lack of disclosure. Many smaller companies just don’t have many internal resources dedicated to this, or they may not be publishing sustainability reports like a big large corporate might do.”
Karma Impact.
Maritime shippers focus on ‘clean’ vessels amid pandemic
A new International Maritime Organization (IMO) regulation took effect on January 1 2020, setting the maximum limit of sulphur content of marine fuels at 0.5%. The objective of the regulation is to reduce the air pollution created in the shipping industry by reducing the sulphur content of the fuels used by its ships and vessels plying the waters of the world. To comply with the more demanding fuel emission standards set by IMO 2020, vessels can either switch to low sulfur fuels or they can install exhaust gas cleaning systems, also known as scrubbers, to reduce their emissions of sulfur oxide and nitrous oxide.
The Asset.
Calling For ESG Strategies Based on Solutions, Not Safety
In a world currently defined by the coronavirus pandemic, ESG strategies have shown themselves to be very good at avoiding risk. Bets on health care, technology and companies that prioritized employee safety panned out. Investors have been putting so much capital to work in this space that some are wondering if ESG is becoming a gold-like asset class, one to which investors flee for safety. But while avoiding risk can protect portfolios, it doesn’t solve climate change or social inequities. A paper this month from Harvard University professor George Serafeim argued that companies are “treating ESG efforts like a cell phone case — something added for protection” rather than used to create lasting value for themselves and the world.
How to Make Corporate Climate Action Happen: Building the winning team
“As we know, the overwhelming and multi-faceted nature of the climate emergency has paralysed many people (myself included, at times), causing us all to wonder what on earth, quite literally, we can do. As Extinction Rebellion members often remind us, the scientific facts we face have triggered widespread grief, rage and depression. The younger generations, especially, cannot understand the failure of governments to halt the future displacement of millions of people, the global spread of infectious disease, generations of premature deaths caused by air pollution, drastic food and water shortages and the increased risk of war and conflict. That future, in many ways, is already here.”
Sophie Lambin on LinkedIn.
Reports Highlight
State Street Global Advisors pushes portfolio companies for race disclosures
UK Government Consultation:
Consultation: Taking Action on Climate Risk: Improving governance and Reporting by Occupational Pension Schemes.
UK Department for Work & Pensions
This consultation from the UK government seeks views on policy proposals to require trustees of larger occupational pension schemes, authorised master trusts and authorised schemes providing collective money purchase benefits to have effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities. It invites responses on proposals to disclose these in line with the recommendations of the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).
Read the consultation.
