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Economy and Society: SEC review finds potentially misleading ESG fund practices

ESG developments this week

In Washington, D.C.

SEC investment fund review reveals potentially misleading ESG practices

On April 9, the Securities and Exchange Commission announced that its recently enhanced examinations of the investment community’s use of and adherence to ESG investment principles has yielded results. The Commission set out to find whether investment companies were keeping the promises they were making to investors. And it learned that, in some cases, according to an article in the Wall Street Journal, they aren’t:

“The Securities and Exchange Commission said Friday it has found some investment firms that tout socially responsible investing were potentially misleading investors, part of the agency’s enhanced review of funds that claim to support environmentally friendly policies but don’t adhere to them.

These funds broadly market themselves as trying to invest in companies that pursue strategies addressing environmental, social or governance issues from climate change to corporate diversity.

The SEC didn’t disclose the names of firms or how many were involved in the review.

The regulator found instances in which investment firms were making potentially misleading statements about their ESG investment processes as well as their adherence to global ESG frameworks. It has also seen cases where portfolio managers weren’t consistently disclosing their ESG strategies and where their proxy voting on shareholder proposals didn’t align with advisers’ stated stance on socially responsible issues.

Several firms didn’t have proper policies and procedures in place to address ESG or reasonably prevent violations on such matters, the SEC said, finding controls inadequate to ensure clients’ ESG-related investing preferences were reflected. Some firms also lacked compliance programs that could reasonably guard against inaccurate ESG-related disclosures and marketing materials, the agency said.”

On Wall Street and in the private sector

BlackRock ESG ETF launch biggest ever

On April 8, BlackRock launched a new ESG ETF (exchange-traded fund) that became the biggest fund launch in the 30-year history of the ETF business, securing more than $1 billion in its first day of trading: 

“Investors poured about $1.25 billion into the BlackRock U.S. Carbon Transition Readiness ETF (ticker LCTU) on Thursday, making it the biggest launch in the ETF industry’s three-decade history, according to data compiled by Bloomberg….

LCTU’s eye-catching debut comes amid a broad boom for ETFs focused on investments that meet environmental, social and governance standards. They attracted a record $31 billion in 2020, almost four times the prior year. About $6.3 billion was added in January, also the most ever, as investors bet the Democrats clean sweep of the U.S. government would usher in a swath of green policies.

That’s all taken ESG ETF assets to a record $74.8 billion, up from less than $10 billion two years ago. The largest ETF in the space is also from BlackRock. The iShares ESG Aware MSCI USA ETF, with $16.3 billion of assets, is trading at an all-time high after returning more than 50% in the past 12 months.”

BlackRock joins ESG credit-line trend

Last week, BlackRock also became the latest large, high-profile corporation to sign on to an ESG-directed credit facility. According to the Wall Street Journal, the new credit deal was disclosed in a regulatory filing made public last week and was signed on March 31:

“The firm struck a financing deal with a group of banks that links its lending costs for a $4.4 billion credit facility to its ability to achieve certain goals, like meeting targets for women in senior leadership and Black and Latino employees in its workforce.

The firm plans to boost the share of Black and Latino people in its U.S. workforce 30% by 2024, a spokesman said. It aims to increase the share of women in its senior leadership ranks by 3% each year.

BlackRock’s progress on growing assets in funds focused on companies with high environmental, social and governance ratings will also impact its lending costs. The firm aims to grow the roughly $200 billion it manages in so-called sustainable strategies to $1 trillion by 2030….

BlackRock is best known for its sprawling lineup of funds that trade rapidly and track indexes. The firm and its CEO, Larry Fink, have pushed companies its funds invest in to be more attentive to environmental and social risks—and to increase workforce diversity….

Going forward, the new lending facility will impose a cost on the asset manager for missing its workplace-improvement and other goals.”

Europe’s biggest oil producer goes green

In an interview conducted by Bloomberg on April 9, Norwegian Finance Minister Jan Tore Sanner described his country’sand, by extension, its massive sovereign wealth fund’s intention to invest heavily in sustainability-related investment vehicles. “We must have the highest possible return on our money,” Sanner told the financial news organization, “but we also want to know that it is invested in a responsible way.” Bloomberg continued:

“The goal is “to increase the competence related to climate risk, investment opportunities, the consequences associated with the transition to the low-emission society,” Sanner said. “This is because this will be perhaps the most important framework condition for large investors in the next 10-20 years.”

Western Europe’s biggest oil nation is now trying to use its giant wealth fund to steer the planet toward a greener future. Its chief executive, Nicolai Tangen, has said he will use his clout to try to force companies to act more responsibly.

Under Sanner’s proposal, which still needs parliamentary approval, about 25-30% of portfolio companies will be cut. Though that sounds like a lot, it only represents about 2% of the fund’s total market value. Sanner says he wants to avoid investments in new emerging markets because they tend to have “weaker institutions, weaker protection of minority shareholders, less openness.”

The changes will make it easier to manage the vast portfolio, and reduce complexity and risk, Sanner said.

The fund, which returned 10.9%, or $123 billion, on its total investments last year, has followed strict ethical guidelines, including bans on certain weapons, tobacco and most exposure to coal, since 2004.”

Oil and gas stocks continue to heat up

In a April 9 piece, Oilprice.com noted the perceived incongruence of the ESG push in the markets and the concomitant fossil fuel-stock rebound:

“In the year to date, the energy sector on the S&P 500 has gained 29.4 percent, Palash Ghosh reported for Forbes. This makes energy the best-performing sector on the S&P 500, followed by finance as a distant second, with a gain of 17.6 percent.

The rally in oil stocks came on the back of improving oil prices, and oil prices improved on the back of, mostly, hopes that economies will soon begin returning to normal. Mass vaccinations in key oil markets did a lot to fuel this post-pandemic optimism about oil, pushing benchmarks above $60 a barrel and drawing investors to oil stocks.

Vaccines were, of course, not the only factor. OPEC+ also kept its production limited for longer than it had initially planned. The cartel decided at its last meeting to raise production gradually and the fact that this decision did not send prices plunging shows that expectations of a demand rebound are really strong right now….

All this is happening as pressure continues to mount on oil and gas companies to basically stop being oil and gas companies. What the surge in oil stocks is demonstrating, however, is that a lot of investors still prefer returns to clean energy promises. One early proof of this was BP’s share price drop after CEO Bernard Looney last year announced perhaps the most ambitious energy transition plan among Big Oil majors….

ESG investing may be all the rage these days, and solar stocks may be favorites among the ESG crowd, but oil hasn’t fallen out of grace yet.”

In the spotlight

Is ESG necessary? Research examines how climate risks are priced into markets 

In an article published April 9, Institutional Investor magazine reported on a new study conducted by Dimensional Fund Advisors that purports to show that the “E” portion of ESG is unnecessary and that marketsbeing in their view efficienthave already priced climate and transition risks into asset prices, across various investment-vehicle types:

“Although evidence is accumulating about the effect of climate change on everything from weather patterns to human health, scientists can still only paint a partial picture of the future. Nonetheless, stock, corporate and municipal bond, futures, and options markets are doing a good job of incorporating climate risks into asset prices, despite the complexity and uncertainty.

In recent research, which includes a review of outside academic studies, Dimensional Fund Advisors sought to address the question of whether and how well climate risks are priced into different markets. Dimensional looked at how the markets priced both physical risks and transitional risk, which arises as economies move away from fossil fuels and to a low carbon economy….

“Many of the effects are hard to predict, hard to quantify, hard to bring to the present in terms of value or cost,” Savina Rizova, the firm’s global head of research, told Institutional Investor. “First, financial markets do pay attention to these risks, despite the complexity and even the longer run effects of climate change. Second, companies have incentives provided by competitive financial markets to better manage their exposure to climate risks if they want to have a lower cost of capital.”…

Investors interested in owning securities that don’t contribute to climate risk may not need to own funds with an ESG label.”

Notable quotes

“Based on the Fama and French analysis this implies that if investors have a preference for highly rated ESG stocks then those stocks will offer lower average excess returns. Note that this conclusion is contrary to the views of many ESG advocates in the investment profession. For instance, Blackrock CEO Larry Fink (2020) states that, “Our investment conviction is that sustainability and climate integrated portfolios can provide better risk-adjusted returns to investors.” We find little support for this conviction in either the theory or empirical evidence. On the other hand, there is some good news for high ESG companies in that those lower expected returns mean lower discount rates and lower discount rate produce greater valuations.”

Bradford Cornell and Aswath Damodaran, “Valuing ESG: Doing Good or Sounding Good?” March 20, 2020.


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. 



SEC announces all-agency approach to ESG

Environment, Social, and Corporate Governance by Ballotpedia

ESG developments this week

In Washington, D.C.

SEC announces all-agency approach to ESG

Last week, the Securities and Exchange Commission launched a new page on its website, a page dedicated to ESG and to tracking the Commission’s action on the subject. According to the site: “As investor demand for climate and other environmental, social and governance (ESG) information soars, the SEC is responding with an all-agency approach.”

The announcementand the page launchcame roughly a week after the SEC announced that it was requesting public input on ESG matters from “investors, registrants, and other market participants on climate change disclosure,” and three weeks after the announcement of the launch of a new task force on ESG matters, to be located in the Commission’s Enforcement Division. 

Republican Senator presses SEC on ESG goals

On March 25, the office of Senator Pat Toomey (R-Pa.), the Ranking Member on the Senate Banking Committee, and opponent of what he sees as the SEC’s shift in mission away from financial regulation to a policy-oriented role, released the contents of a letter sent to acting-Chair Allison Herren Lee, asking her to brief him on her and the Commission’s climate-change-related plans. The Hill reported the story as follows:

“The top Republican on the Senate Banking Committee is pressing the Securities and Exchange Commission (SEC) for more information about the agency’s climate change agenda.

In a letter to the SEC released Thursday, Sen. Pat Toomey (R-Pa.) asked the agency’s acting chief for a briefing on its plans for a new task force and enforcement priorities regarding climate-related financial risks.

“These announcements appear to presage major changes in longstanding practices on disclosure and enforcement matters at the SEC. Such changes would be premature,” Toomey wrote in a letter dated March 24 to acting SEC Chairwoman Allison Herren Lee, a Democrat.

“In order to better understand the scope and intention of this new task force and the SEC’s ‘enhanced focus’ on climate and ESG-related priorities, I am requesting a staff briefing on this subject by no later than the week of April 5, 2021,” he continued.”

In the states   

ESG pushback in energy-producing states

Pew Trusts reported on an effort among legislators in several states to highlight what they see as ESG’s role in the increasing cost of business insurance in their states. The legislators mostly Republicanspropose legislation that would cut ties with businesses that shift to ESG-heavy energy plans, asset managers that demand sustainability planning from the companies they hold, and banks that, in their view, punish energy companies with punitive rates or that are declining their business altogether. Pew Trusts reported as follows:

“In Alaska, North Dakota, Texas and other energy-producing states where fossil fuel taxes support state budgets, some lawmakers are introducing legislation that would force states to stop investing in companies that use sustainable strategies to make financial decisions and to cut ties with asset managers, banks and insurers that are doing the same.

The mostly GOP lawmakers argue that investment decisions should be made solely based on the likely financial returns, not so-called ESG—the environmental, social and governance criteria that socially conscious investors use. Instead of embracing ESG, several states want to double down on investments in oil, gas and coal. Otherwise, they say, the very industries they depend on face collapse.

It’s already difficult for fossil fuel projects to find insurance, financing and other backing if they don’t meet some of the sustainability standards, said state Sen. Jessica Bell, a Republican in North Dakota who has sponsored one of the bills that would keep her state from making ESG-driven investments.

“They’re denied access to capital. They are denied access to loans. They are refusing to do business with them. Our insurance rates have gone up,” Bell said. “I mean, you name it, ESG has already negatively affected us.”…

James Leiman, the new commissioner of the North Dakota Department of Commerce, said his department is neutral on the legislation. But he did tell North Dakota’s Senate Energy and Natural Resources Committee that the ESG movement represents “the greatest challenge to the North Dakota economy since the Great Depression.”

North Dakota’s energy and agricultural sectors can’t grow if they can’t borrow money or access insurance because they don’t meet ESG standards, Leiman said. Coal plants in North Dakota are closing because of market shifts as well as regulatory changes driven by other states that have established goals to reduce greenhouse gas emissions. North Dakota also faces a new federal regulatory environment, as the Biden administration is much less friendly to the fossil fuel industry than the Trump administration was.”

On Wall Street and in the private sector

Vanguard further ramps up ESG efforts

Vanguard, the largest passive asset manager in the world and the second-largest asset manager overall, has been slower than its passive-investment competitorsnamely BlackRock and State Street—to embrace ESG and to make it a focus of its investment operations. But that appears to be changing.

Earlier this month, Barron’s reported that Vanguard has been increasing up its ESG-related hiring, in an attempt to catch up to its competitors:

“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 product and ESG integration in conventional products.”

Last week, ETF Strategies reported that Vanguard has now also launched its first ESG ETF in Europe:

“The Vanguard ESG Global All Cap UCITS ETF is designed to serve as a core building block for ESG-aware portfolios, providing broad diversification while screening out undesirable issuers based on FTSE Russell’s ‘Choice’ framework.

An ESG guide for Annual Meeting Season

Over the weekend, The Financial Times identified the ESG shareholder-proposals to watch during the upcoming Annual General Meeting season. The paper identified one activist shareholder group that is focusing its energy this year on a strategy targeting large asset management firms for past voting records and encouraging them to be more ESG-friendly:

“PepsiCo, Amazon and Citigroup have been named alongside a small group of global companies to watch during this year’s annual meeting season, as investors demand businesses step up on issues from climate change to employing diverse workforces.

ShareAction, the responsible-investment charity, said the “13 most important ESG resolutions” of 2021 included a proposal calling on General Motors to disclose its lobbying around climate change, a resolution calling on the board of Walt Disney to strengthen oversight of workforce equality issues including racial and gender pay equity, and a vote on biodiversity at Amazon.

The list comes at a time of intense scrutiny over how asset managers vote at annual meetings, with widespread concern that big investors often proclaim their ESG credentials but fail to back resolutions on issues such as climate change.

“Shareholder voting works. Resolutions can deliver everything from decarbonisation targets to healthy eating strategies,” said Guy Opperman, minister for pensions and financial inclusion in the UK.

[T]the group argued the resolutions on its list for 2021 were “high quality, high-impact proposals” and called on asset owners and asset managers to back the proposals. The list also includes resolutions on climate change at Barclays, the UK bank, healthy eating at supermarket group Tesco and on human rights at Wendy’s International, the fast-food chain.

Citi said it was “acutely focused on addressing racial inequity, especially in terms of the wealth gap it creates”….

General Motors said it “believes climate change is real and we are advocates for climate action”.”

In the spotlight

ESG and Bitcoin on a collision course?

Over the weekend, HedgeWeek reported on comments made recently by Robert Furdak, the chief investment officer for ESG at Man Group about what he sees as the inevitable conflict between Bitcoin and ESG. The two, Furdak argues, are not merely the two hottest investment trends but also, in his view, all but guaranteed to crash into one another at some point in the not-too-distant future:

“The two major investment trends looming large over the hedge fund and asset management world – bitcoin’s stratospheric surge and investors’ rush towards responsible investing across all mandates – are now set for a “head-on clash”, Furdak said.

Hedge funds are continuing to profit from the ongoing surge in the cryptocurrency sector, as more managers pour money into digital assets’ record rise this year. At the same time, though, an increasingly large number of investors are calling for hedge funds to take a sustainability-based stance and implement ESG-compliant factors in their portfolios.

In an in-depth market commentary this week, Furdak – ESG CIO at London-listed global hedge fund and alternative investments giant Man – explored how bitcoin is already bumping against the range of environmental, social and governance factors that investors increasingly look for in their allocations.

On the environmental theme, Furdak noted how bitcoin mining will continue to require substantial energy consumption for as long as the digital currency’s price remains high, both in absolute and relative terms. He added that the majority of bitcoin mining takes place in south-east Asia, where coal-fired power stations remain dominant.

“Currently, one bitcoin transaction requires the same energy as processing 500,000 Visa transactions,” Furdak observed, highlighting a study by the University of Cambridge’s Centre for Alternative Finance which estimated that bitcoin mining energy now exceeds the annual consumption of countries such as the Netherlands and the United Arab Emirates, and is approaching that of Norway and Pakistan.”



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.”



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