ESG developments this week

In Washington, D.C.

Congressional hearing puts focus on ESG opposition

On February 25, the House Subcommittee on Investor Protection, Entrepreneurship and Capital Markets held a hearing titled “Climate Change and Social Responsibility: Helping Corporate Boards and Investors Make Decisions for a Sustainable World”. According to S&P Global Market Intelligence, the virtual hearing showed a potential political fault-line related to ESG:

“While much of the U.S. investment community and many large corporations are moving to adopt sustainability-focused approaches and provide related disclosures, the deep political divide on that topic was on display at a U.S. House of Representatives subcommittee hearing Feb. 25.

The House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets held a pre-mark-up hearing regarding a handful of bills that would mandate publicly traded companies disclose their climate and other environmental, social and governance risks.

The Democrat-controlled committee heard testimony from several panelists representing groups and pension fund managers pressing for such mandates. The Republican party’s witness on the panel — a former CEO of a biotech company who is writing a book on the topic — claimed that disclosure mandates and the ESG movement more broadly threaten democracy by allowing rich investors and corporations to dictate what should be done on issues of morality and public policy.”

In the States

Fitch Ratings makes cyber security a key assessment factor in municipalities’ ESG ratings

Two weeks ago, Fitch Ratings—one of the three main credit rating services, alongside Moody’s and Standard & Poors—announced that cyber security is one of the key assessment factors it uses in its evaluation of municipalities’ ESG ratings. The service reported on a Florida town’s struggles with cyber-attacks, noting that preparedness for such attacks is an important part of its credit evaluations:

“The recent cyberbreach of the Florida city of Oldsmar (not rated by Fitch Ratings) is an important moment in the evolving nature of municipal cyber risk, Fitch Ratings says. The breach was one of the first cases of the use of a municipality’s cyber infrastructure for a kinetic attack with the potential for human casualties. Though unsuccessful, the attack was evidence of the increasing frequency of cyber-attacks and the significant risks they pose to public finance entities, their constituencies and management. It also highlights the critical need for robust cyber hygiene and cyber vigilance in the municipal sphere. Recognizing this risk, Fitch includes cybersecurity in its credit analysis of the municipal sector and as part of its corporate-wide environmental, social and governance (ESG) framework. In addition, we believe cyber events pose financial risk which could impact municipal credit quality. This risk is not limited to the upfront cost of responding to a cyber-attack, but the costs of recovery and realignment of systems as well, which are many times more than the initial cost.

The Oldsmar attack consisted of a yet unknown assailant breaching the control systems of the city’s water treatment plant and adjusting the levels of sodium hydroxide to poisonous levels. This attack could have harmed thousands of residents without the city’s manual redundancies and safeguards that limit chemical levels.

Cyber breaches pose significant social and governance risks, which are reflected in our ESG framework and which we analyze when evaluating all credits, including states and local governments.”

On Wall Street and in the private sector   

Largest wealth fund manager sees parallels between ESG and dot-com bubble 

Last week, Nicolai Tangen, the CEO of the largest sovereign investment fund in the world—Norway’s $1.3 trillion fund—indicated that he believes that ESG might, at present, be a bubble investment-theme. Specifically, he compared the present-day interest in sustainable investments with the dot-com bubble of the late 1990s. Bloomberg reported his comments as follows:

“What is interesting is, if you compare the situation now with, for example, the situation before the year 2000, then the stock market was right that technology companies were going to do well in the future,” Tangen said in an interview on Thursday. “But the valuation went a little high, so it came down again, but the technological development continued.”

The analogy suggests that stocks and bonds touting environmental, social and governance credentials might be in for a correction in the short term, but have significant potential in the longer term.

“We may see something of the same sort now, that what is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”…

Asked specifically about the risk of an ESG bubble, Tangen said it’s his instinct to be “worried about everything between heaven and Earth. Overpricing in parts of the market is one thing I am worried about.”

Asset managers face increased scrutiny around ESG efforts

According to a Pension & Investments story published on February 26, the 50 largest asset management firms in the world should expect to have their efforts on ESG made public in the very near future. P&R reported the following:

“How the 50 largest asset managers approach ESG and corporate governance and the pressure on them to do more is the subject of a forthcoming report by SquareWell Partners in London.

The annual study covers 50 of the largest asset managers with a combined $60 trillion, and found that 20 of them use at least four ESG research and ratings providers, and 30 have developed their own internal ESG ratings.

More than half, 27, support the Sustainability Accounting Standards Board reporting framework.”

Scholarship and research

New book: “The Dictatorship of Woke Capital: How Political Correctness Captured Big Business”

On February 23, Encounter Books released “The Dictatorship of Woke Capital: How Political Correctness Captured Big Business” by Stephen R. Soukup. Soukup, an analyst in capital markets for 25 years, describes what he calls woke capital as “the top-down, antidemocratic means by which some of the most powerful and best-known men and women in American business are endeavoring to change capitalism, the securities markets, and the fundamental relationship between the state and its citizens—and to ‘save’ the world.”

In the spotlight

Index sees ESG become the core of its business

MSCI, one of the world’s leading providers of investment indices announced that it now makes more money from its ESG index business than from its more traditional index products. Last week, the company’s COO, Baer Pettit was interviewed by Barron’s, which noted the following:

“Approximately $200 million of the firm’s revenues are now “tied to ESG and climate,” and are growing “in the 30 percentages in this area,” Pettit said. “It’s growing dramatically, faster than even the second major closest category, the index business.” The latter is growing “in the low teens.” MSCI had $1 billion in revenue in 2020, up 10.4% from a year earlier….

Money has flooded into the category, with U.S.-domiciled sustainable investments totaled $17.1 trillion at the beginning of 2020, up 42% from two years earlier, according to trade group US SIF. That number represents about a third of U.S. assets under management….

According to a recent MSCI survey of 200 institutional investors across the globe, 73% plan to increase ESG investment by the end of 2021. Among the largest firms, or those managing more than $200 billion in assets, the pandemic was a critical driver of plans to boost ESG integration. For the same firms, climate change is a critical risk, with more than 50% saying they actively use climate data to manage risk”.