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Economy and Society: Greater fund disclosure on voting behavior

ESG developments this week

In Washington, D.C.

Greater fund disclosure on voting behavior

On March 17, then-acting-chair of the Securities and Exchange Commission, Allison Herren Lee, spoke to the Investment Company Institute, a fund trade group, on Commission plans to address the transparency of fund votes taken on shareholder proposals. She said:

“There are two key trends that have brought us to our current posture and which necessitate updates to our rules and guidance to reflect a new reality regarding proxy voting and corporate governance. First, is the growth in households invested in funds. It is estimated that in 2020, nearly 47% of US households owned funds, up from 6% in 1980….

A second key trend is the soaring demand for opportunities to invest in vehicles with ESG strategies. Millennials, in particular, are increasingly attuned to the specific ways in which funds and companies utilize their money, and their influence will only grow….

Retail investors need more meaningful insight into how their money is voted, and that insight is more important than ever with the growth of interest in ESG shareholder proposals. It’s hard to see how retail investors can formulate an accurate and reliable picture of how a fund votes on ESG issues when they are forced to parse voluminous forms that often use bespoke shorthand for shareholder proposals. Importantly, funds also stand to benefit from more effective disclosure as the fund landscape becomes increasingly competitive….

there is a lot of work to do in this area. And it is important work because it gets to the heart of ensuring that our system of shareholder democracy works. As investor preferences continue to transform, proxy voting will become an increasingly important component of that transformation. We must ensure that current incentives and rules for voting and voting disclosure are really serving the needs of investors today.”

In the states   

West Virginia Attorney General threatens SEC with lawsuit over ESG disclosures

On March 25, West Virginia Attorney General Patrick Morrisey (R) sent a letter to Allison Herren Lee, then-acting-chair of the Securities and Exchange Commission, asking her to abandon her plans to make climate change a greater part of the SEC’s mandate and to compel climate disclosures on companies. The plans, according to Morrissey, violate the SEC’s legal mandate and impose undue and unnecessary burdens on corporations. He threatened to sue the Commission, if it proceeds. He wrote:

“Going beyond requiring companies that disclose information that is material to future financial performance will unavoidably politicize the commission, detracting and distracting from other work. Private competition for customers and investors already leads companies to issue statements on a wide variety of matters of public interest without government compulsion….

If the commission proceeds down this pathway, states and other interested stakeholders will not hesitate to go to court to oppose a federal regulation compelling speech in violation of the First Amendment.”

Morrissey’s letter follows one sent previously by Senator Pat Toomey (R), ranking member of the Banking Committee, also opposing what he sees as the SEC’s shift in mission away from financial regulation to a policy-oriented role.

ESG opportunity and risk in state environmental laws 

In an article posted on March 9, Bloomberg Law Legal Analyst Dylan Bruce suggested that a recent series of what are described as environmental justice laws passed by states provide both an opportunity and, perhaps, an unforeseen ESG risk to companies doing business in those states. According to Bruce:

“These laws are giving regulators and communities new tools to mitigate negative environmental impacts that have historically and disproportionately affected minority and low-income communities.

Ten states have already codified environmental justice in some form—with Connecticut the latest to do so, in October 2020—while another 13 states have pending legislation.”

While Bruce suggests that companies that abide by ESG demands are well positioned in these 23 states, these laws, in his view, “[A]lso expose companies to new ESG-related risks, including enhanced enforcement, litigation, and possible disclosure requirements. For those reasons, ESG-conscious companies should be paying close attention to this trend.”

Student activism and divestment in Nebraska

On April 4, the Lincoln Journal-Star reported on the efforts of Veronica Miller, the student representative on the Nebraska Board of Regents, to compel her school, the University of Nebraska-Lincoln, to divest its remaining funds from fossil fuels. Although the University’s endowment is already invested using ESG methodologies, it still holds a small amount of fossil fuel companies:

“[W]hen she became the University of Nebraska-Lincoln’s students’ voice on the Board of Regents, Miller said the groundwork was there to push for a change.

“The ask was already there,” said Miller, who will graduate next month with degrees in Spanish and political science. “There was a conversation about how we get this done and how we work through this.”

At its April 9 meeting, the Board of Regents will consider adding an “environmental, social and governance criteria” policy — commonly referred to as ESG — for investing the roughly $370 million in Fund N, the endowment funds controlled by the university.

Currently, only about 2% of the investments held in Fund N are in fossil fuel companies, down from 6.5% a year ago, the university said.

The rest of the university’s $1.7 billion endowment is managed by the NU Foundation, which also uses an ESG criteria when considering investments, a foundation spokeswoman said.”

On Wall Street and in the private sector

Will the ‘Flight to Value’ hurt ESG long term?

The Wall Street Journal noted on April 2 that ESG funds have taken a hit as a result of a cyclical change several years in the making. Equities markets have, over the last few weeks begun shifting from growth stocks to value stocks:

“Growth stocks propelled the outperformance of many environmental, social and governance (ESG) funds in recent years. But those same types of stocks now are turning into potential headwinds for the funds, as investors pivot more to stocks the market sees as undervalued….

High-growth companies that ESG funds have often skewed toward in recent years include Apple Inc., Google parent Alphabet Inc. and Microsoft Corp. The tech giants and other growth stocks flourished last year despite a challenging economic environment. That performance, in turn, helped ESG funds. A basket of 94 U.S. ESG exchange-traded funds ended last year up more than 20% on average, according to Dow Jones Market Data, beating the bellwether S&P 500’s gain of more than 16%.

More recent months, however, have seen a shift in investor appetites. In expectation of an economic recovery, investors have piled into companies that are seen as undervalued relative to their earnings potential. Meanwhile, there is less appetite for growth companies. For the year, the Russell 1000 Value index is up nearly 12%, versus the Russell 1000 Growth’s rise of 2.4%.

A similar trend can be seen in the performance of ESG funds.”

In a note to clients posted the previous day, however, a Bank of America Quant analyst suggested that ESG’s value-related pullback should be temporary:

“One critique of ESG investing is that it tends to favor growth stocks at the expense of value-oriented sectors,” Savita Subramanian, an equity and quant strategist at Bank of America, said in a research note dated April 1. “But our analysis of US-domiciled ESG fund holdings presents a different picture.”

BofA found that ESG funds are overweight industrials, materials and real estate relative to the S&P 500 index SPX, 1.47%, “with significantly more exposure to these pro-cyclical sectors than mutual funds broadly,” according to the note. ESG funds have meanwhile avoided growth-oriented, communication services stocks, Bank of America found.

Long-only fund investment managers generally have been moving into value-oriented sectors, boosting bets on financial and energy companies in recent months while trimming weightings to growth-oriented, technology and communication services sectors, according to BofA. Value stocks trounced their growth counterpart in the first three months of 2021 after suffering a decade of ineptitude….

ESG funds may be poised to benefit from a further rotation into value, as they remain “significantly underweight” energy and utilities even after increasing their exposure to these areas in recent months, the bank’s research note shows.”

Pershing Square declares ESG a life (and world) saver

Hedge-fund investor and CEO of Pershing Square Capital, Bill Ackman, declared recently that capitalism can save the world, and ESG, in his view, is the manifestation of its world-saving capacity. March 29, Ackman and Pershing published a 115-page letter that expressed his beliefs, summarized as follows by Yahoo Finance:

“Billionaire activist investor Bill Ackman, the CEO of the $13 billion hedge fund Pershing Square Capital, made a case that capitalism is “the most powerful potential source” for solving society’s biggest challenges — and ESG investing is ushering in that change.

“With the benefit of substantial philanthropic and investing experience, I have come to believe that capitalism is likely the most powerful potential force for good in addressing society’s long-term problems. A successful business operating ethically and sustainably can create many thousands of high-paying jobs, deliver high long-term returns for pensioners, long-term savers and other investors, and provide goods and services that materially increase its customers’ quality of life, broadly defined. That said, capitalism is far from perfect,” Ackman wrote in a shareholder letter published on Monday.

Ackman, 54, a high-profile activist investor usually known for picking up large stakes in publicly-traded companies and effectuating corporate change, pointed to the elevated importance of environmental, social, and governance (ESG) issues boardrooms and managements need to examine and tackle.

“We believe that good ESG practices are fundamentally aligned with running a successful business. As consumers and other corporate customers have become increasingly educated on matters of ESG, they have begun to avoid companies that contribute to climate change or do not treat their employees well, while rewarding companies with their business that have sustainable and responsible policies. Similarly, a growing number of investors have become increasingly concerned about the risks of companies which do not take ESG issues seriously. These investors avoid investing in companies which do not meet high ESG standards, reducing the valuations and investment returns of these businesses, negatively impacting their cost of capital,” Ackman added.”

In the spotlight

Agency theory in the United Kingdom

In the March 23 edition of Economy and Society, we reported that Canadian companies are implementing ESG-performance-based pay for corporate managers. According to S&P Global, the same process is underway in the UK, although perhaps even more rapidly:

“Nearly half of the U.K.’s 100 largest companies now use an environmental, social and governance measure when setting targets for executive pay, a sign of the growing acceptance of sustainability metrics in corporate boardrooms, according to a new report.

Growing pressure from investors and other groups has persuaded more companies to shift their ESG emphasis from more traditional areas such as employee engagement and risk to newer concerns such as climate change, the environment and diversity. The study was authored by London Business School and PricewaterhouseCoopers, based on ESG targets disclosed in the pay plans of FTSE 100 companies’ 2020 annual reports. The FTSE 100 is an index of the U.K.’s 100 largest companies by market capitalization.

According to the analysis, published March 18, 45% of FTSE 100 companies currently have an ESG measure in either their annual bonus targets or their long-term incentive plans, also known as LTIP. Of the 100 companies, 37% include an ESG measure in their bonus plan with an average weighting of 15%, while 19% include them in their LTIP with an average weighting of 16%. The weighting indicates how much of the pay measure is linked to ESG performance. FTSE 100 companies that link ESG performance to pay include Unilever PLC, Standard Chartered PLC, Royal Dutch Shell PLC and BP PLC.”

According to S&P Global, roughly half of all American S&P corporations state executive pay is tied to ESG matters, although it also quotes Willis Towers Watson, the company that conducted the survey, as noting that “few [American companies] give them the importance it deserves.” Additionally, only 2% of American S&P 500 companies tie executive pay to carbon emissions, below the 11% in Europe. 



Economy and Society: SEC broadening definition of materiality

ESG developments this week

In Washington, D.C.

SEC broadening definition of materiality

In a March 15 speech given to the Center for American Progress, Acting SEC Chair Allison Herren Lee said that she was grateful for the opportunity “to reflect on the enhanced focus the SEC has brought to climate and ESG” and “on the significant work that remains.” Lee indicated that the Commission will utilize a much broader definition of materiality (which measures the relative financial importance of a factor among a company’s ESG considerations) over the course of its next term. Lee did not indicate whether this change in definition will be formalized or will be accomplished through informal attention to ESG-inspired disclosure rules. Lee stated the following:

“The most fundamental role that the SEC must play with respect to climate and ESG is the provision of information – helping to ensure material information gets into the markets in a timely manner. Investors are demanding more and better information on climate and ESG, and that demand is not being met by the current voluntary framework. Not all companies do or will disclose without a mandatory framework, raising the cost, or resulting in the misallocation, of capital. Investors also aren’t getting the benefits of comparability that would come with standardization. And there are real questions about reliability and level of assurance for the disclosures that do exist. Meanwhile issuers are assailed from all sides by competing and potentially conflicting demands for information. That’s why we have begun to take critical steps toward a comprehensive ESG disclosure framework aimed at producing the consistent, comparable, and reliable data that investors need….

…two weeks ago, we announced the formation of the first-ever Climate and ESG Task Force within the Division of Enforcement. The Task force will work to proactively detect climate and ESG-related misconduct, including identifying any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules and analyzing disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”

Senator Pat Toomey (R, PA), the Ranking Member on the Senate Banking Committee, responded to the pre-release of Lee’s comments, tweeting, “This would be a total abuse of power and a politicization of SEC’s disclosure standard. What matters is whether an issue is financially material to a reasonable investor, not if it conforms to the woke Left’s opinion about what’s best for humanity’s general welfare.”

On Wall Street and in the private sector   

Former BlackRock official voices ESG criticism

On March 16, Tariq Fancy, former CIO of sustainable investing for BlackRock, the largest asset management firm in the world and a driver of the ESG investment trend, wrote an op-ed for USA Today that was critical of ESG and the sustainable investment movement more generally. He wrote:

“The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it’s not….

As the former chief investment officer of Sustainable Investing at BlackRock, the largest asset manager in the world with $8.7 trillion in assets, I led the charge to incorporate environmental, social and governance (ESG) into our global investments. In fact, our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that’s all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community….”

That same day, Fancy also appeared on CNBC, stating, in his opinion, “There is no evidence that any ESG ETF has any positive social impact.”   

ESG’s higher management fees

On March 16 the Wall Street Journal featured a piece on ESG investing’s higher management fees: 

“Sustainability has been good for Wall Street’s bottom line.

Exchange-traded funds that explicitly focus on socially responsible investments have 43% higher fees than widely popular standard ETFs.

The environmental, social, and governance funds’ average fee was 0.2% at the end of last year, while standard ETFs that invest in U.S. large-cap stocks had a 0.14% fee on average, according to data from FactSet.

“ESG creates a fantastic revenue possibility for large firms,” said Dr. Wayne Winegarden, a senior fellow at the Pacific Research Institute.

Even a seemingly small increase in fees can have a big impact at scale. A firm managing $1 billion in a typical ESG fund, for example, would garner $2 million in annual fees versus managing the standard ETF’s $1.4 million.

“It’s fresh, feels good and new,” said Andrew Jamieson, global head of ETF product at Citigroup Inc., of ESG. “But it’s not any different than anything else. These things aren’t any more expensive to run.””

The Journal noted that other categories of ETFs charge even higher fees than the ESG funds but none as prevalent or as massively capitalized.

Research estimates one-in-four dollars invested in ESG

Last week, the investment banking and research firm Cowen claimed that its estimates show that roughly one-in-four dollars invested in American markets is now invested directly in an ESG vehicle. The firm also expects that the growth in the ESG sector over the last few tears will continue for the next few as well:

“Investors poured record amounts of money into environmental, social and governance-based funds in 2020 as the pandemic, climate disasters and racial injustice came into sharp focus.

That momentum will grow in 2021 and beyond, according to Cowen.

The firm noted that roughly one in four dollars in the U.S. is now invested through an ESG lens. If two equities offer similar expected risks and returns, investors are increasingly likely to choose the name that screens better on sustainable investing scores.

Indeed, sustainable funds attracted a record $51.1 billion in inflows in 2020, according to data from Morningstar. That figure more than doubled 2019′s prior record.”

Putting the “S” in ESG

Last week a group of ESG advocates and investorsAs You Sow, Sustainable Investments Institute, and Proxy Impactreleased the joint annual proxy preview. Confirming earlier reported expectations that 2021 would be the year that “s” in ESG began to play a much more prominent role in the investment movement, the groups reported that “of 435 shareholder resolutions already filed, about 300 are headed for votes at spring corporate annual meetings.” While the number of such proposals focusing exclusively on climate change fell from 87 to 78, the “number of proposals on workplace diversity more than doubled from 2020.”

Vanguard increasing its ESG capacity      

Vanguard, the second-biggest asset management firm in the world (by assets under management) and the manager with the largest passive investment portfoliowhich according to some analysts has been slow in following the ESG trendrecently begun putting together the workforce and other resources it will need to remain competitive in the ESG investment world:

“Vanguard isn’t known for its broad suite of environmental, social and governance investment funds. It has just five available in the U.S., versus dozens at rival Blackrock and other firms.

But as billions of dollars have flowed into rival firms’ ESG products in the past year and a half, the fund giant may be shifting its stance as it adds expertise in the area.

Kaitlyn Caughlin, who oversees the firm’s portfolio review, wouldn’t say whether or when to expect new products, but noted the firm is doing “a lot of additional research right now.”

The firm recently created an ESG product category team in the U.S. with two dedicated ESG product managers and three support staff. In Europe there is a head of ESG strategy who leads a group of product specialists who are largely, though not solely, dedicated to ESG. Those teams will collaborate with others in Vanguard, both related to ESG products and ESG integration in conventional products.

The hiring shows Vanguard is expanding into the space….”

In the spotlight

Agency theory and Canadian corporate governance

Our March 9 edition of Economy and Society highlighted the aspect of agency theory that advocates alignment of corporate managers’ self-interest with the interests of the corporation, specifically by tying executive compensation to company performance. To date, this practice is only rarely used regarding ESG matters, although that is starting to change.

As it turns out, according to a report from Bloomberg, the concept is already an integral part of Canadian corporate governanceor at least it is at Canadian banks:

“Canada’s six largest banks have all added ESG components to their chief executive officers’ compensation frameworks, putting them in a small minority of companies that tie executive pay to such measures.

How environmental, social and governance matters affect pay varies by firm, as does the percentage of compensation involved. Still, the Canadian lenders stand out because only 9% of the 2,684 companies in the FTSE All-World Index tracked by researcher Sustainalytics in a 2020 study had tied executive pay to ESG.

The moves, disclosed in the banks’ proxy circulars earlier this month, put them at the front of a push by activists and investors to establish incentives for actions like reducing emissions and diversifying workforces. At Canadian Imperial Bank of Commerce, the impetus to make changes also came from within, said Sandy Sharman, head of the bank’s people, culture and brand team.

“We didn’t want this to be something that we just report on and it’s a check-box,” Sharman said. “We actually wanted to drive accountability, and we also wanted to put areas in there that we wanted to improve. You need that healthy tension to move up your game.””

Notable quotes

“Imagine the planet is a cancer patient, and climate change is the cancer. Wall Street is prescribing wheatgrass: A well-marketed, profitable idea that has no chance of curing or even slowing down the cancer. In this scenario, wheatgrass is the deadly distraction, misleading the public and delaying lifesaving measures like chemotherapy. But like giving false hope to unproven cures in the midst of a pandemic, the consequences of such irresponsibility are all too obvious. And motivation for why the industry continues to greenwash is all too obvious.”



Labor Department ends enforcement of Trump administration ESG rule

ESG developments this week

In Washington, D.C.

Labor Department ends enforcement of Trump administration ESG rule 

On March 10, the Biden administration announced that it will not enforce a Trump administration Department of Labor rule warning asset managers about their fiduciary responsibilities under ERISA (The Employee Retirement Income Security Act of 1974), specifically concerning ESG-related investment vehicles. 

The rule, DOL Regulation, §2550.404a-1, reminded retirement plan managers that their fiduciary responsibilities included ensuring that retirement investment fund decisions be made exclusively on pecuniary factors. 

Asset managers argued that the rule was unnecessary and would, in their view, punish those saving for retirement: 

“There was not a real rationale for that rule in the first place, says Aron Szapiro, head of policy research for Morningstar, an investment research firm. In fact, he said it was the opposite of what many investors want: Sustainable investments have been increasingly popular every year outside of workplace retirement plans. Precluding them from 401(k)s and other retirement accounts doesn’t make sense.

“This is basically a good news story for investors,” says Szapiro. It’s actually beneficial for long-term investors when companies take climate change and other issues into consideration, he adds.

Not only did investors put a record $51 billion into sustainable investments in 2020, Morningstar found in a recent analysis, but funds that take ESG factors into consideration have actually out-performed other conventional funds, on average. There is no real conflict between good investment returns and promoting ESG practices, Szapiro says.”

Trump administration Labor officials, however, argued that the rule was worded to avoid casting aspersions on ESG funds and their managers, and intended to protect future retirees and their investments. 

Patrick Pizzella, a former Deputy Secretary of Labor under President Trump, told the Wall Street Journal that the statement announcing the end of the rule’s enforcement “listed a wide variety of stakeholders they heard from—but not among their list was a single beneficiary or plan participant….And that is who these final rules are looking out for.”

On Wall Street and in the private sector   

Investors managing $33 trillion create new ESG investment standards

On March 10, a group of investment managers announced that they had created new ESG investment standards and a new framework by which to judge and adjust corporate behavior. The group, which calls itself the Institutional Investors Group on Climate Change, announced its plans, its participants, and its expectations. The broader effort in which this framework was released, which is led by the environmental advocacy group Ceres, is titled The Paris Aligned Investment Initiative. According to participants, as reported in Bloomberg, the Initiative will aim to leverage its $33 trillion-plus combined assets to advocate global corporations be better environmental stewards:

“The idea is to come up with a common approach to decarbonize investor portfolios and the wider economy, and thereby contribute to keeping global warming below 1.5 degrees Celsius, the more ambitious target of the Paris climate accord….

“It is easy to make a long-term commitment to be net-zero, but the key question is the path you take to achieve it,” Adam Matthews, chief responsible investment officer at the Church of England Pensions Board, said in the statement. A practical and credible framework for getting to net-zero “is a vital part of the investment architecture that was missing,” he said….

“Decarbonising our portfolio alone isn’t enough,” said Barry O’Dwyer, chief executive officer of Royal London Group. “As institutional investors, we must influence the companies we invest in to reduce their emissions and invest in the solutions that will help us realize the goals of the Paris Agreement.””

This pledge follows similar, recent pledges from other large banks and asset management firms, including Goldman Sachs and Citigroup.

Investment banking firm assigning ESG scores to companies

On March 8, the investment banking firm Cowen announced that its research arm had begun assigning ESG scores to all of the companies it covers. Cowen announced that it had also developed its own matrices and will be providing them henceforth to analysts and customers alike. Reuters reported the following:

“Cowen said it would use technology and data from third-party ESG specialist Truvalue Labs, which deploys artificial intelligence to assess more than 100,000 sources of information that can help give a steer on potential issues and controversies in real time.The score would be presented to clients on a scale of 1 to 100, with 50 being neutral, and above being positive.

“ESG factors have become a critical component of the investment process and there is a distinct need to have a solution set that can address the volume of information involved and standardisation needed to have a clear view of corporate progress,” Robert Fagin, Cowen’s Director of Research said in a statement.

The scores would be made available to Cowen’s team of 55 analysts from Monday, with coverage expected for all the companies it analyses, except those for which sufficient ESG data is not available.”

CFA Institute offering new ESG certification

On March 15, the CFA Institute, which provides the Chartered Financial Analyst designationconsidered a gold standard among investment professionalsbegan offering a new ESG certification:

“The CFA Institute’s ESG certificate, which was initially developed by the CFA Society of the UK, will be available globally starting on Monday. It requires candidates to complete 130 hours of self-directed study and pass an exam lasting two hours and 20 minutes….

Margaret Franklin, president and chief executive of the CFA Institute, sees an increasing focus on ESG as an important part of that plan. There is an “astronomical gap” between the soaring demand for sustainable investment products and the limited number of people with the expertise needed to create them, she told the Financial Times.

“The nature of portfolio management is changing, and so the real strategy is to make sure that we have those learnings available for the investment professional,” she said.”

In the spotlight

ESG-related debt instruments continue growth

In our February 23 edition, we reported that Anheuser-Busch, the brewers of Budweiser, announced its deal to participate in the world’s largest-ever ESG-related debt facility. The revolving-debt loan—which will total $10.1 billion—will be tied to the company’s performance on ESG factors.

In an article also published last month, the environmental-financial journalist Heather Clancy reported that similar ESG debt instruments are growing increasingly mainstream and popular. Clancy noted the following:

“In early February, the U.S. arm of Japanese tire company Bridgestone disclosed that it had signed a $1.1 billion credit facility with Tokyo-based global bank SMBC with interest rates pegged to the ESG risk scores it earns from ratings organizations Sustainalytics and FTSE Russell. The better its ESG scores, the less interest it will pay on the borrowed money. The opposite is also true: If the company blows one or more of its ESG goals or slips in a rating, that loan will be more expensive.

The arrangement, touted as one of the first of its kind for the U.S. tire industry, is known as a sustainability-linked loan (SLL). This sort of financial instrument first emerged in 2017, and volumes grew 150 percent between 2018 and 2019 — with more than $137 billion in borrowing driven by SLLs during 2019, according to research by law firm Skadden. And although the first half of 2020 slowed along with the economic shock of the COVID-19 pandemic, the borrowing volume through October of last year was still 29 percent higher than for all of 2018….

Bridgestone has certain targets in place for both Sustainalytics and FTSE Russell. For example, if Bridgestone’s ESG risk drops to “Negligible” (the lowest possible level and the best rating that Sustainalytics catalogs), it will realize a better credit rate. (As of this writing, Bridgestone is at the risk level one step above.) Its cost of borrowing will be lowest if it meets the goals for both Sustainalytics and FTSE Russell, [Jose] Anes [vice president and corporate treasurer of Bridgestone Americas] said. “On the other side, if our scores get worse, we have skin in the game.”

Bridgestone’s sustainability goals include a commitment to become carbon neutral by 2050, alongside a midterm goal to reduce its CO2 emissions by 50 percent by 2030 compared with 2011 levels. It’s also pledging to use “100 percent sustainable materials” by 2050, with an interim goal of 40 percent of its materials coming from renewable or recycled resources.”

The article also notes that the majority of these debt arrangementsincluding the one entered into by Anheuser-Busch InBev SA/NVare fashioned in Europe. Nevertheless, the practice is increasing in the United States as well.

Notable quotes

“The transformation of the energy sector or the industrial sector will require massive amounts of investment. The investors have shifted their focus from risk analysis to [thinking] ‘wow, this is potentially the largest investment opportunity of our lifetime. How do we participate in this very large shift in the global economy?’”



Economy and Society: SEC announces enforcement task force on ESG issues

ESG developments this week

In Washington, D.C.

SEC reviewing ESG disclosure practices of publicly traded companies

Late last month, the Securities and Exchange Commission, led by acting Chair Allison Herren Lee, announced that it has started reviewing ESG disclosure practices and demands among the publicly traded corporations it regulates. According to Lee, “Now more than ever, investors are considering climate-related issues when making their investment decisions…It is our responsibility to ensure that they have access to material information when planning for their financial future.”

Lee’s statement suggests a potential change in SEC policy and a concomitant issue on the Commission over the definition of materiality, the financial elements deemed fundamental to the long-term success of a company’s ESG strategy. In a statement released just over a year ago, just after the SEC’s Divisions of Corporation Finance and Economic and Risk Analysis and Office of General Counsel released new recommendations on efforts to modernize and enhance financial disclosures, Commissioner Hester Peirce wrote:

Thanks in part to an elite crowd pledging loudly to spend virtuously other people’s money, the concept of materiality is at risk of degradation. We face repeated calls to expand our disclosure framework to require ESG and sustainability disclosures regardless of materiality. The proposed amendments and companion guidance do not bow to demands for a new disclosure framework, but instead support the principles-based approach that has served us well for decades.

SEC announces ESG enforcement task force

Last week, the SEC announced that it will create a new task force targeting those who engage in fraudulent ESG behaviors. To be housed in the Commission’s enforcement division, the new, 22-person task force will be charged with ensuring that corporations are complying with existing ESG-friendly disclosure rules and will play a much more significant role if new rules are added. According to Reuters, the task force will be run by Kelly L. Gibson, currently the acting deputy director of SEC’s enforcement division. Reuters also notes that Satyam Khanna, the Commission’s newly appointed senior policy adviser for climate and ESG, declared that the task force is evidence that the SEC intends to take an integrated approach to enforcement of climate-related issues, rather than simply assigning the matter to one small group within the Commission. The announcement, Khanna said, is evidence that the new administration and its appointees are “taking an ‘all of SEC approach’ to climate and ESG risks.”

ESG in Sweden

On March 5, the Swedish Society for Nature Conservation released a report accusing the nation’s state-backed pension funds of failing to meet their obligations and to keep their promises regarding climate change and other ESG matters. Specifically, the Society accused pension fund managers of remaining invested in fossil fuel companies, which, it claimed, is a violation of promises made, both to activists and pensioners. Fossil fuel investment accounts for less than 1% of the funds’ total assets under management. According to Bloomberg:

The AP funds, which oversee about $250 billion in assets and have all committed to environmental, social and governance goals, continue to invest in fossil-fuel companies that are contributing to a dangerous rise in temperatures, the Swedish Society for Nature Conservation said Friday in a report.

“Not a single one” of the fossil-fuel companies held by the AP funds has set climate goals that live up to the Paris Agreement, the group said….

The comments mark the latest clash between a financial industry keen to tout its ESG credentials, and climate protection groups who say their strategies do little more than pay lip service to the idea. That’s as the industry stretches the definition of sustainability to include companies that pollute now, but say they have plans to cut their emissions in the future.

Despite cuts in the AP funds’ holdings of fossil-fuel companies last year, they still have about $1.8 billion invested in 66 of the world’s 200 biggest polluters, the Swedish Society for Nature Conservation found.

On Wall Street and in the private sector   

Putting the ‘S’ in ESG

Last week the investment news site Seeking Alpha suggested that the rise of Black Lives Matter and other social movements may have triggered greater concern among investors about the ‘S’ in ESG:

While the reflection on environmental and governance factors remains at the forefront of asset owners’ interests, social issues such as health and safety, human rights, labor rights and equality have recently been pushed into the spotlight.

Our 2020 ESG Manager Survey showed an uptick in social factors, when compared to the previous years’ responses….

While environmental and governance factors have been in focus for a number of years, the coronavirus pandemic, along with the Black Lives Matter movement, #MeToo movement and campaigns for equal pay, have increased the focus on social factors.

ESG in Asia

While much of the analysis and discussion around ESG investing focuses on the United States, United Kingdom, and Europe, Asia’s financial sector is moving quickly and significantly into the ESG space. In the recently published results of its global institutional investor survey, MSCI, an American finance company, noted the following about the Asian ESG market:

Around 79% of investors in Asia-Pacific increased ESG investments “significantly” or “moderately” in response to Covid-19, according to a recent MSCI 2021 Global Institutional Investor survey.

That is a slightly larger share than the 77% of investors globally who upped sustainable investments during the period. Overall, the figure rose to 90% for the largest institutions, or those with over $200 billion of assets, the survey found.

Meanwhile, 57% of Asia-Pacific investors expect to have “completely” or “to a large extent” incorporated ESG issues into their investment analysis and decision-making processes by the end of 2021.

“Once an issue for ‘green funds’ and side-pockets, ESG and climate are now firmly established as high priority issues,” Baer Pettit, MSCI president and chief operating officer, said in the report. “2020 marked a profound shift in the way institutions invest as many investors have recognized that many companies with strong environmental, social and governance practices outperformed during the pandemic.”

In the spotlight

Agency theory in ESG

Agency theory, as it evolved during the 1970s, focused on improving the performance of a corporation by aligning the interests of the corporation and its managers. In their work “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Michael Jensen and William Meckling argued that alignment between corporate and managerial interests would greatly and swiftly advance managerial performance. Later, Jensen and Kevin Murphy suggested that paying managers with company shares would cement the alignment and ensure that managers would constantly and permanently try to maximize the company’s value to its shareholders. 

Currently, there are some attempting to apply agency theory and corporate alignment practices to ESG. For example, Environment and Energy Leader reported last Friday that Chipotle Mexican Restaurants has announced that it is attempting to lead this agency movement:

Chipotle Mexican Grill has gone public with its intention to tie executive compensation to its environmental, social and governance (ESG) goals. The company has introduced a new ESG metric that will hold its executive leadership team responsible for making business decisions that prioritize corporate responsibility. Ten percent of the annual incentive bonus for officers will be tied to the company’s progress toward achieving those ESG goals.

The announcement comes following a year in which a litany of disrupters boosted the profile of corporate responsibility issues. With the pandemic, social injustice, extreme weather and wildfire events setting a magnifying glass over how ESG influences the global economy in 2020, such topics will continue to play out on a larger stage in 2021, S&P Global Ratings said earlier this year.

Meanwhile, Bloomberg Business reported that Cevian Capital, described as “an activist investor with sizable stakes in some of Europe’s biggest companies,” is advocating the same alignment tactics in Europe. Bloomberg noted:

The new campaign is intended to address growing concerns that too many firms are touting environmental, social and governance goals without always living up to their promises.

“Several of our companies are not currently where they need to be, including larger ones such as ABB, CRH and Ericsson,” Cevian Managing Partner Christer Gardell told Bloomberg.

Cevian wants the matter to be put to shareholder votes in its portfolio companies at annual general meetings next year. Those companies that have yet to take ESG seriously need to “start,” while the rest need to “accelerate” strategies already in place, it said in a statement….

The investor plans to “hold companies and their directors to account” through a combination of voting on director elections and compensation plans.

Notable quotes

“[I]f capitalists are unable to reform capitalism, it will be reformed for them. The American public is already distrustful of big business, and only half of American adults under 40 view capitalism favorably — down from two-thirds in 2010. Companies that don’t adapt will find themselves at odds with their customers, employees, investors, and regulators.

Michael O’Leary and Warren Valdmanis, “An ESG Reckoning Is Coming,” Harvard Business Review, March 4, 2021