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ESG Developments This Week

In Washington, D.C.

SEC Chairman Gensler testimony on crypto, disclosure, and more

On September 14, Securities and Exchange Commission (SEC) Chairman Gary Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs, covering several topics related to ESG investing.

First, he discussed the SEC’s interest in regulating crypto-currencies and laid out his plans:

“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws were enacted. This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.

I have asked SEC staff, working with our fellow regulators, to work along two tracks:

One, how can we work with other financial regulators under current authorities to best bring investor protection to these markets?

Two, what gaps are there that, with Congress’s assistance, we might fill?

At the SEC, we have a number of projects that cross over both tracks:

The offer and sale of crypto tokens

Crypto trading and lending platforms

Stable value coins

Investment vehicles providing exposure to crypto assets or crypto derivatives

Custody of crypto assets…

Further, I’ve suggested that platforms and projects come in and talk to us. Many platforms have dozens or hundreds of tokens on them. While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50, 100, or 1,000 tokens, any given platform has zero securities. Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they qualify for an exemption.

I am technology-neutral. I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”

Gensler also addressed proposed disclosure rules that the SEC has pondered for several months; rules that he claimed many ESG investors hope will bring greater uniformity and greater consistency to the ESG marketplace. To that end, Gensler stated the following:

“Since the 1930s, when Franklin Delano Roosevelt and Congress worked together to reform the securities markets, there’s been a basic bargain in our capital markets: investors get to decide what risks they wish to take. Companies that are raising money from the public have an obligation to share information with investors on a regular basis.

Those disclosures changes over time. Over the years, we’ve added disclosure requirements related to management discussion and analysis, risk factors, executive compensation, and much more.

Today’s investors are looking for consistent, comparable, and decision-useful disclosures around climate risk, human capital, and cybersecurity. I’ve asked staff to develop proposals for the Commission’s consideration on these potential disclosures. These proposals will be informed by economic analysis and will be put out to public comment, so that we can have robust public discussion as to what information matters most to investors in these areas.

Companies and investors alike would benefit from clear rules of the road. I believe the SEC should step in when there’s this level of demand for information relevant to investors’ investment decisions.”

The Chairman also issued another warning to fund managers that he and the Commission are watching closely and intend to ensure that promises and results match up closely:

“[W]e’ve seen a growing number of funds market themselves as “green,” “sustainable,” “low-carbon,” and so on.

I’ve asked staff to consider ways to determine what information stands behind those claims and how we can ensure that the public has the information they need to understand their investment choices among these types of funds.”

Plan advisors have big hopes for Labor Department

Last week, the National Association of Plan Advisors (NAPA) held its annual 401(k) Conference, and among the hot topics was the impending decision by the Department of Labor regarding the suitability of ESG investment funds in retirement plans, under the authority of the Employee Retirement Income Security Act of 1974 (ERISA). As has been previously noted in this newsletter, the Trump Labor Department issued a rule late last year that suggested that ESG plans did not meet fiduciary requirements of ERISA and, therefore, should be handled sparingly by retirement plan managers. The Biden Labor Department, however, declined to enforce the rule and has been working on a new rule of its own, which will presumably be more ESG-friendly. According to Roll Call, advisors at the NAPA conference were keenly interested in the timing and content of the new Labor rule:

“As the Labor Department mulls a proposed rulemaking on environmental, social and governance investment options by retirement plans, advisers say the rules are likely to temper a “chilling effect” caused by the prior administration’s guidance.

Advisers say more retirement savers are asking about ESG investing and that the forthcoming rules could place them on equal footing with many retail and institutional investors who examine factors such as environmental sustainability and corporate responsibility on social issues alongside traditional financial metrics.

“I don’t know if DOL is going to go as far as requiring plan sponsors to think about ESG investments as part of a plan menu, but I am pretty confident we’re going to get a level playing field,” National Association of Plan Advisors Executive Director Brian Graff told attendees as he led a panel discussion of experts during the NAPA 401(k) Summit this week.

Retirement plan fiduciaries haven’t had that much leeway in directing investments into ESG options….

“Retirement plan sponsors and participants deserve the freedom to choose the 401(k) investment that best suits their needs,” Graff, who is also CEO of the American Retirement Association, said in a prior statement in support of proposed legislation….

Investors worldwide are seeking more ESG options, according to another panelist, Charles Nelson, vice chairman and chief growth officer of Voya Financial.

“We meet with analysts and investors, and every time there’s a question around ESG,” Nelson said at the event. “I think this is one of the greatest opportunities for advisers in your practices as you go forward, because businesses, whether they’re publicly traded or they’re privately held by private equity or ultimately a hedge fund, they’re getting asked these questions.”

Another panelist noted it gives plan advisers more credibility with clients when they can discuss and offer ESG options.

“You’re now not just the guy or gal that comes in to do the 401(k) review — you become a strategic business partner with them, so it puts you at a much different level,” said Jania Stout, senior vice president at OneDigital Retirement. “I think that’s a huge opportunity for us as advisers.”…

One notion shared by all the panelists: ESG investing is here to stay.

“Look, you can run your practice how you want, and you all should, but there’s a reason investors and shareholders are asking about this around the world and increasingly in the U.S,” said Nelson. “And I really believe it’s going to continue to build here in the U.S., and those advisers that lean into it and can find a way to engage with their customers in a different way on this will find some new growth as well.””

In the spotlight

NYU professor Damodaran posts criticism of ESG 

Last week, Aswath Damodaran, a finance professor at the Stern School of Business at New York University, published a post on his personal blog, Musing on Markets, criticizing ESG and its claims of ethical superiority in unflinching terms, calling ESG “The Goodness Gravy Train.” Among other things, Damodaran reiterated his four key conclusions from earlier work on ESG:

“1. Goodness is difficult to measure, and the task will not get easier!

2. Being “good” will add to value some companies, hurt others, and leave the rest unaffected!

3. The ESG sales pitch to investors is internally inconsistent and fundamentally incoherent

4. Outsourcing your conscience is a salve, not a solution!”

Damodaran finished with the following repudiation of what he describes as ESG gravy train-riders:

“The ESG movement’s biggest disservice is the message that it has given those who are torn between morality and money, that they can have it all. Telling companies that being good will always make them more valuable, investors that they can add morality constraints to their investments and earn higher returns at the same time, and young job seekers that they can be paid like bankers, while doing peace corps work, is delusional. In the long term, as the truth emerges, it will breed cynicism in everyone involved, and if you care about the social good, it will do more damage than good. The truth is that, most of the time, being good will cost you and/or inconvenience you (as businesses, investors, or employees), and that you choose to be good, in spite of that concern.”

Notable quotes

“I am willing to listen to arguments for why this new model is better, but I am certainly not willing to concede, without challenge, that a corporate CEO knows my value system better than I do, as a shareholder, and is better positioned to make judgments on how much to give back to society, and to whom, than I am.”

Aswath Damodaran, “The ESG Movement: The ‘Goodness’ Gravy Train Rolls On!” September 14, 2021

ESG Developments This Week

In Washington, D.C., and around the world

Saudi sovereign wealth fund reportedly seeking ESG framework, redux

In the July 21 edition of this newsletter, we noted that the Saudi “sovereign wealth fund reportedly has begun the process of developing ESG reporting standards that will, presumably, allow it to raise greater funds in the global debt market.” We cited Reuters as follows:

“The Public Investment Fund (PIF) sent a request for proposals to banks last month, said the four sources with direct knowledge of the matter, speaking anonymously because the matter is private.

PIF – at the centre of Saudi de facto ruler and Crown Prince Mohammed bin Salman’s Vision 2030 that aims to wean the economy off oil – has been funding itself in recent years with tens of billions of dollars in loans.

One of the sources said developing an ESG framework was likely a precursor for a multibillion dollar bond sale, which would be the Saudi wealth fund’s first.”

Last Wednesday, Reuters reported that the Saudis have made some decisions and have decided to move forward with the PIF ESG initiative:

“Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), has hired five international banks as members of an environmental, governance and social (ESG) panel for its medium-term capital-raising strategy, IFR News reported on Monday….

The hydrocarbon-rich Gulf has seen a surge of interest in ESG-related initiatives and deals amid growing awareness among global investors about ESG risks.

Credit Agricole (CAGR.PA), Deutsche Bank (DBKGn.DE), Goldman Sachs (GS.N), HSBC (HSBA.L) and Standard Chartered (STAN.L) were hired to advise the investment fund’s global capital finance division on an ESG framework for public market capital raisings, IFR, a fixed income news service owned by Refinitiv, reported.

IFR also said that Saudi Arabia’s finance ministry hired HSBC and JPMorgan (JPM.N) as structuring agents for the kingdom’s sustainability financing framework.”

Reuters also reported last Monday that the government of Oman is also working on developing an ESG framework that would allow it to attract new investors/creditors:

“The government of Oman is working on an environmental, social and governance (ESG) framework which could allow the heavily indebted Gulf oil-producing country to widen its funding base, two sources familiar with the matter said.

The move comes as Oman works with the International Monetary Fund to develop a debt strategy after state coffers were hurt by low oil prices and the COVID-19 pandemic last year….

Work on developing an ESG framework is at its early stages, said one of the sources.

A second said that while it was not linked to specific debt issuance plans, it would prove useful to tap ESG-focused investors in future fundraising exercises.”

On Wall Street and in the private sector

PwC expanding its ESG services—and others join in

In the June 29 edition of this newsletter, we noted that PwC (Price Waterhouse Cooper) planned to get more heavily involved in ESG and, given this, “expects to add as many as 100,000 jobs worldwide and spend as much as $12 billion over the next five years to address the needs of clients in navigating the waters of ESG disclosures.”

On September 9, Accounting Today reported that PwC is significantly expanding its ESG services:

“PricewaterhouseCoopers is broadening its array of environmental, social and governance services to help clients deal with growing demands for sustainability and climate risk reporting and assurance on their disclosures….

Last month, PwC released its Next in Work Pulse Survey, which indicated that 42% of companies are planning to improve ESG reporting over the next few months in response to investors and other stakeholders….

“ESG is one of those topics that is high on the priority list of business leaders,” said Wes Bricker, vice chair and U.S. trust solutions co-leader at PwC. “It’s high on their priority list because it’s relevant to businesses and how they create value. Boards want to know how corporate strategies are incorporating a view about the impact on the environment, whether it’s carbon or water usage or plastics. They also want to know the human capital strategy, which is the essence of ESG. And boards want to understand management’s plans around how to govern all of this. Do they have high-quality information and reporting? We’re seeing companies increasingly are pledging very ambitious climate targets and plans.”…

PwC recently reorganized the firm into two areas — Trust Solutions and Consulting Solutions — to emphasize the concepts of trust and sustained outcomes. But Bricker sees ESG cutting across all the different service areas at the firm.

“ESG reporting is a capability that we see being relevant across the entire firm, and all of our services,” he said. “We’ve taken that approach by providing training for all of our partners, whether you’re sitting in trust or consulting, whether you’re in a specialty group or whether you’re in more of a standardized service. All of our partners, all of our teams need to understand ESG and how it connects to business, how it impacts our clients and the services that we deliver when it comes to trust solutions. We’ve trained all of our partners on the connection of ESG to our financial statement audits and financial reporting and the attestation services that we can provide on ESG metrics.”…

PwC is also expected to get involved in the International Financial Reporting Standards Foundation’s efforts to set up an International Sustainability Standards Board. “We will do our part in providing our best thinking about the structure for setting standards and the content of standards,” said Bricker. “For example, we have developed a relationship with the [Sustainability Accounting Standards Board] to deliver the first-of-a-kind XBRL taxonomy for SASB … . We’ll continue to do that with each of the standard-setters who look to us for our experience.””

Two weeks ago, on August 29, The Financial Times reported that other major accounting firms are, following PwC’s lead:

“The sustainability boom has moved trillions of dollars into environmental, social and governance funds and brought a new stakeholder-led agenda to corporate boardrooms.

Now the Big Four accounting firms are jumping on a bandwagon that offers two tempting opportunities: an expansion of what companies must account for, and a chance to rebrand a scandal-plagued profession as experts on climate change, diversity and winning consumers’ trust.

PwC put the booming demand for ESG advice at the heart of a $12bn investment plan it announced in June that will involve adding 100,000 employees and launching “trust institutes” to train clients in ethics….

Deloitte, in turn, announced a “climate learning programme” this month for its 330,000 employees. KPMG’s ESG work has included helping Ikea to analyse social and environmental risks linked to the Swedish furniture retailer’s raw materials, and advising on the first green bond issued in India.

Alongside EY, all four have been at the table as business groups try to thrash out new international standards for measuring sustainability….

The Big Four are responding in part to a rise in clients’ budgets for developing net zero emissions plans and other sustainability initiatives. Tracking nonfinancial metrics such as companies’ carbon footprints, and not simply their financial results, gives them a chance to generate more fee income and improve profit margins.

The introduction of standardised ESG reporting metrics for companies would also create more work for accountants. This will potentially be facilitated by the proposed International Sustainability Standards Board, a body that could be created by November to mirror the role the International Accounting Standards Board plays in setting financial reporting standards.

The Big Four are responding in part to a rise in clients’ budgets for developing net zero emissions plans and other sustainability initiatives. Tracking nonfinancial metrics such as companies’ carbon footprints, and not simply their financial results, gives them a chance to generate more fee income and improve profit margins.

The introduction of standardised ESG reporting metrics for companies would also create more work for accountants. This will potentially be facilitated by the proposed International Sustainability Standards Board, a body that could be created by November to mirror the role the International Accounting Standards Board plays in setting financial reporting standards.”

Deutsche Bank gets back in the ESG game, while JP Morgan seeks to boost ESG credentials

Despite the issues that its asset management arm, DWS, is having with U.S. regulators over what some have alleged are its fuzzy definitions of ESG-investments, Deutsche Bank has dived into the world of ESG-friendly repo offerings. Meanwhile, JP Morgan has decided that all financial instruments should be ESG-compliant. Bloomberg reported the following last Friday:

“Deutsche Bank AG has just completed its first green repurchase agreement, marking another foray into a world of increasingly complex ESG instruments.

It’s the latest example of product proliferation in a market that’s moving much faster than regulators. JPMorgan Chase & Co. has already said it plans to attach environmental, social and governance labels to all forms of finance, as ESG derivatives start to become a market fixture. Deutsche says it intends to continue expanding its offering of ESG instruments….

For its green repo, Deutsche transferred securities to London-based asset manager M&G Investments. In return, the German bank received cash to fund its green asset pool, which includes renewable energy projects such as wind and solar power plants, as well as the improvement of energy efficiency in commercial buildings. 

Deutsche says the transaction is the first of its kind in Europe. BNP Paribas SA has completed a similar deal with Agricultural Bank of China Limited. 

Claire Coustar, Deutsche Bank’s global head of ESG for fixed-income and currencies, said the hope is that the green repo “will encourage more activity so that a new source of green finance can be developed for the industry, as well as a new asset class for investors.””

Concerning JP Morgan’s efforts, Reuters reports that the firm has hired a well-experienced ESG hand to help boost its credibility in the arena:

“JPMorgan Chase & Co (JPM.N) named Aaron Bertinetti, the former head of environmental, social and governance (ESG) research at proxy advisor Glass, Lewis & Co, its new head of ESG for investor relations.

The bank created the position so it can communicate better on ESG with investors and research analysts, according to a note sent to analysts who cover JPMorgan. JPMorgan said in the note it is accelerating ESG efforts across the firm.

Bertinetti will report to Reggie Chambers, head of the bank’s investor relations.”

Glass-Lewis is one of the major Proxy Advisory Services, and has played a role in promoting ESG-related investor activism; although smaller than its principal competitor, ISS, Glass-Lewis is considered one of the chief forces behind ESG.

Notable quotes

“We will only be able to use the best conditions [of ESG] if we ourselves change — and I’m speaking first and foremost about our own company…This is about culture, it’s about leadership culture.”

Bloomberg, “Deutsche Bank CEO Wants to Change Culture to Ride ESG Boom,” September 8, 2021.

ESG Developments This Week

In Washington, D.C., and around the world

Regulatory scrutiny over ESG-related sustainability claims intensifies

As was noted in last week’s newsletter, the SEC is investigating DWS (the asset management arm of Deutsche Bank) for alleged ESG-related fraud—claims DWS rejects. Many ESG observers believe that the DWS probe is the beginning of a larger SEC crackdown on potentially deceptive ESG promises. On September 1, for example, Bloomberg Green noted the following:

“Pressure is increasing on managers of ESG-labeled investment funds to show they’re being truthful with customers about what they’re selling.

The heat was really turned up last week when the U.S. Securities and Exchange Commission and BaFin, Germany’s financial regulator, initiated a probe into allegations that Deutsche Bank AG’s DWS Group asset-management arm has been misstating the environmental—and possibly the social—credentials of some of its ESG-labeled investment products. Regulators have signaled the review is at an early stage, and DWS has rejected claims it overstated ESG assets.

Since then, researchers have raised questions about the credentials of money managers who claim they are marketing funds designed to address the climate crisis and social injustice.

A London-based nonprofit called InfluenceMap said more than half of climate-themed funds are failing to live up to the goals of the Paris Agreement….

InfluenceMap found that 55% of funds marketed as low carbon, fossil-fuel free and green energy exaggerated their environmental claims, and more than 70% of funds promising ESG goals fell short of their targets.

The SEC formed a task force in March aimed at investigating potential misconduct related to companies’ sustainability claims. Gary Gensler, who took over the agency in April, has said his staff is working on a rule to boost climate disclosures by stock issuers, and that the regulator remains focused on ESG issues.”

On September 3, Bloomberg’s market-news division reported that asset management firms didn’t have to wait long to learn whether DWS would be a one-off investigation or the start of a trend on the federal government’s part:

“U.S. regulators have long said they’re dubious about the green and socially conscious labels that Wall Street applies to $35 trillion in so-called sustainable assets. Now, the watchdogs are hunting for proof that they’re right.

For several months, Securities and Exchange Commission examiners have been demanding that money managers explain the standards they use for classifying funds as environmental, social and governance-focused, said people familiar with the matter. The review is the SEC’s second into possible ESG mislabeling since last year — showing the issue is a priority for the agency and a reason for the industry to worry about a rash of enforcement actions. 

The SEC is following the money: Few businesses are booming in high finance like sustainable investing, as governments, pension plans and corporations all seek to lower their carbon footprints and be better public citizens. Amid the rush for dollars, more and more ESG insiders have started sounding alarms that a lot of the marketing is hype, a term known in the industry as greenwashing.

Letters that the SEC sent out earlier this year point to some of the agency’s top concerns, said the people who asked not to be named because the correspondence isn’t public. 

Investment advisers were asked to describe in painstaking detail the screening processes they use to ensure assets are worthy of ESG designations, one of the people said. The SEC also wants to know how firms are grappling with different jurisdictions’ requirements. For instance, Europe has specific standards that money managers must adhere to in making sure assets are green or sustainable. But in the U.S., it’s much murkier. 

Another SEC query sought information about ESG compliance programs, policies and procedures, a different person said. The SEC additionally asked about statements made by managers in their marketing materials or regulatory filings. 

The SEC has shown it’s keen to bring cases, forming a taskforce of enforcement lawyers in March whose focus includes fund managers’ ESG disclosures.” 

Both of these stories followed an August 26 piece published by MarketWatch (a Dow Jones & Company financial news site), also suggesting that the DWS matter would be the start of a something longer:

“This is the first of many more to come,” Amy Lynch, a former SEC regulator and president of FrontLine Compliance, told MarketWatch. “The SEC has been letting the industry know that this is an area they’re looking into for the past year. They’ve given every warning.”…

Under the chairmanship of Gary Gensler, the SEC has made it a top priority to regulate what public companies must disclose about risks related to climate change and the environment, new information about its workforce policies and other policies that impact social issues.

At the same time, it has telegraphed its intention to hold investment managers responsible for clearly disclosing the principles they use to develop sustainable investment funds.

“When it comes to sustainability-related investing…there’s currently a huge range of what asset managers might mean by certain terms and what criteria they use,” Gensler said in a speech last month. “I think investors should be able to drill down to see what’s under the hood of these funds.”

Meanwhile, in the United Kingdom

On September 5, London’s Mail on Sunday newspaper reported that British Prime Minister Boris Johnson has decided to heed the advice of Tariq Fancy’s advice to make climate change finances issues a government matter, while, at the same time, maintaining the idea that investments can power a more sustainable economy. Fancy is a former CIO for sustainability at BlackRock, who has spoken publicly about his belief that ESG investing is, at best, in his view, what he describes as a dangerous distraction. The paper reported that:

“Boris Johnson will meet pension and insurance bosses in Downing Street next month to thrash out plans to channel billions of pounds of retirement funds into ‘green’ projects. 

A source said there will be in-depth discussions about how pension cash can be diverted into initiatives such as installing solar panels in homes and providing charging points for electric cars. 

More than £1trillion is sitting in defined contribution pensions – including workplace schemes.

The Government is hoping to unlock more of this to invest in Britain’s green economy and ‘build back better’ initiative. Another £2trillion is in annuities and defined benefit schemes. 

The agenda is expected to include more detail on funnelling pension money into various projects to reach ‘net zero carbon’ by 2050 – the commitment to reduce greenhouse gases to offset carbon emissions in order to combat climate change. 

Sources said the trade body the Association of British Insurers is separately meeting with City Minister John Glen this week to talk over the new push.

A source said: ‘This needs a scheme, and the Government is probably best placed to do it because you need a supply chain lined up including investment and the people to implement projects. There is a need to coordinate and get the right types of projects going.’ 

But the plans are expected to spark controversy as many of these investments are illiquid – meaning they are difficult to buy and sell – which could leave pension savers with some of their cash trapped in assets.”

In the Spotlight

Wages before sustainability?

For much of its history, ESG has been nearly synonymous with the idea of what is often called by its advocates sustainable investing. However, according to a recent study by Cerulli Associates, an American asset management research company based in Boston, when affluent American retail investors identify the factors that most influence their investment decisions, they prefer companies that pay what they deem are fair wages over companies that are keenly environmentally aware. It’s not that they don’t appreciate environmental friendliness, according to the study. It’s just that they appreciate what they deem the fair treatment of workers more:

“While the majority (53%) of affluent respondents indicate that investing in an environmentally responsible firm is important to them, 65% of respondents favor investments in companies that pay their workers a fair/living wage. “This result highlights one of the biggest challenges in promoting ESG or sustainable investing products,” says Smith. “When presented with these offerings, investors and advisors get hung up on the ‘E’ and rarely consider the ‘S’ or ‘G.’” Particularly notable in these results are indications of interest 16 to 25 percentage points higher among respondents in the three oldest cohorts compared with their overall ESG interest levels.”

ESG Developments This Week

In Washington, D.C.

SEC, Justice Department probe Deutsche Bank’s DSW sustainability claims

In the August 3, 2021, edition of this newsletter, we noted that Deutsche Bank and its asset management arm, DSW, were the subject of criticism by a former director of sustainability, Desiree Fixler, who had recently left the firm and had been publicly critical of the way DWS has performed on ESG, especially by comparison to the way, in her view, it markets its products. 

On August 25, the Wall Street Journal reported that the Securities and Exchange Commission (SEC) and the U.S. Attorney’s office in Brooklyn (New York) are now investigating Fixler’s charges. The Journal reported as follows:

“U.S. authorities are investigating Deutsche Bank AG’s DB 1.14% asset-management arm, DWS Group, after the firm’s former head of sustainability said it overstated how much it used sustainable investing criteria to manage its assets, according to people familiar with the matter.

The probes, by the Securities and Exchange Commission and federal prosecutors, are in early stages, the people said. Authorities’ examination of DWS comes after The Wall Street Journal reported that the $1 trillion asset manager overstated its sustainable-investing efforts. The Journal, citing documents and the firm’s former sustainability chief, said the firm struggled with its strategy on environmental, social and governance investing and at times painted a rosier-than-reality picture to investors….

The probes indicate regulators’ interest in money managers’ efforts to offer products related to climate change, social issues and corporate governance risks. The SEC earlier this year established an enforcement task force to look for misleading ESG claims by investment advisers and public companies.

The Wall Street Journal reported earlier this month that DWS told investors that ESG concerns are at the heart of everything it does and that its ESG standards are above the industry average. But it has struggled to define and implement an ESG strategy, according to its former sustainability chief and internal emails and presentations.

For instance, DWS said in its 2020 annual report released in March that more than half of its $900 billion in assets at the time were invested using a system where companies are graded based on ESG criteria. An internal assessment done a month earlier said only a fraction of the investment platform applied the process, called ESG integration. The assessment added there was no quantifiable or verifiable ESG-integration for key asset classes at DWS.

Desiree Fixler, at the time DWS’s sustainability chief, told the Journal that she believed DWS misrepresented its ESG capabilities.

A DWS spokesman said the firm stood by its annual report and that an investigation by a third-party firm found no substance to Ms. Fixler’s allegations. He said standards for defining ESG assets are constantly evolving, and that DWS has been seen by the market as being more conservative than most of its competitors in the definition.”

On Wall Street and in the private sector

Former ESG advocate turned critic continues criticism 

Tariq Fancy, the former CIO for sustainability at the world’s largest asset management firm and ESG pioneer BlackRock, was back in the news last week with further criticism of ESG. This time, he targeted green debt instruments specifically:

“A report published in July, looking at five of the world’s top markets, said that this type of investing had $35.3 trillion in assets under management during 2020, representing more than a third of all assets in those large markets. And the trend is not showing any signs of slowing down.

But Tariq Fancy, who was BlackRock’s first global chief investment officer for sustainable investing between 2018 and 2019, warned that there were some fallacies associated with this area.

“Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion. In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise,” Fancy said in an online essay posted last week.

This is because “most companies have a few qualifying green initiatives that they can raise green bonds to specifically fund while not increasing or altering their overall plans. And nothing stops them from pursuing decidedly non-green activities with their other sources of funding,” he added….

He also argued that financial institutions have an obvious motivation to push for ESG products given these have higher fees, which then improves their profits….”

Asset management firm issues warning about ESG and increasing capital costs

A senior credit analyst at a British asset management firm has issued a warning that ESG mandates and practices are making the currently predominant forms of energy more expensive in what is perceived as an already inflationary environment. By increasing the costs of raising capital, the warning argues, ESG is making fossil fuel exploration and recovery a more costly pursuit:

“ESG concerns are rapidly raising the cost of borrowing for oil companies as interest in hydro-carbon investment wanes and fund mandates become ever more restrictive, according to Aegon Asset Management’s Eleanor Price. [sic]

Eleanor Price, Senior Credit Analyst at AAM, says that while many oil companies are in better health from a credit perspective than they have been in recent years, having seen their balance sheets bolstered by strengthening oil prices in 2021, they are finding it increasingly difficult to raise financing as the pool of willing investors shrinks and banks bow to pressure to decarbonise their lending operations….

Price says that with most new client mandates requiring an increasingly stringent ESG focus, it is unsurprising that investors are shying away from such an environmentally unfriendly sector. However, she believes it is significant that this shift is happening so quickly at a time when oil companies offer solid credit fundamentals and attractive coupons. 

“In a market hungry for yield, it’s a brave investor who would completely eschew all hydro-carbon investment, but for the issuers it must feel like an ongoing game of musical chairs as their available investor bases continue to shrink,” she says. “This is not just a High Yield phenomenon – the pool of available lending banks is also shrinking as institutions come under increasing pressure to decarbonise their lending operations.””

In the Spotlight

Wal-Mart website features FY21 ESG summary 

Wal-Mart, one of the world’s largest companies, has begun an effort to highlight what it touts as its environmental record and waste-cutting initiatives. Last week, Waste360 reported the following:

“Walmart is now cataloging its progress regarding key ESG metrics in a new, “living” digital format on the company’s website.

The interactive document includes the Arkansas-based retailer’s FY21 ESG summary and data tables in its journey to become more circular.

Kathleen McLaughlin, executive vice president and chief sustainability officer, Walmart Inc., announced the accessibility of the data, saying: “The briefs will be refreshed online periodically, providing our stakeholders with timely information. We have updated our list of priority issues based on recent stakeholder engagement, reflecting stakeholder expectations, relevance to our business, and Walmart’s ability to make a difference in four broad themes of opportunity, sustainability, community and ethics and integrity.””

ESG Developments This Week

In Washington, D.C., and around the world

SEC weighing human capital disclosures 

On August 18, SEC Chairman Gary Gensler tweeted to explain to investors, asset managers, and corporations what is next on the SEC’s ESG agenda. He wrote:

“Investors want to better understand one of the most critical assets of a company: its people.

I’ve asked staff to propose recommendations for the Commission’s consideration on human capital disclosure….

This could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.”

For the last few months, ESG advocates have focused on expanding the nature of disclosures on which corporations should concentrate, arguing that the “E” (environmental) aspect of ESG should not be allowed to overwhelm the “S” (social) aspect. 

Chinese companies resisting ESG debt

According to Bloomberg, Chinese companies are resisting the global trend toward sustainability-target-linked debt. Most of the rest of the world—and most of the rest of Asia—have embraced debt instruments that adjust interest rates in accordance with measured compliance with ESG metrics and promises (i.e. the closer you are to the metric, the lower your rate; the further you are, the higher the rate). Bloomberg speculates on the reasons for the resistance from Chinese-based companies:

“Chinese firms are lagging their regional peers in a key funding method to meet sustainability goals, even as the world’s second-biggest economy pushes to become carbon neutral by 2060.

So-called sustainability-linked loans usually offer creditors extra margins if borrowers fail to meet their environmental goals, giving firms an incentive to make an extra effort. While the volume of such debt has climbed at a record pace in the rest of Asia Pacific, few deals are being done in China….

The volume of sustainability-linked loans is floundering in China partly because, in a market that’s keenly focused on official pronouncements, policy makers have said little about them even while encouraging other forms of sustainable financing. Guidelines for environmental lending by the People’s Bank of China released in late May emphasized green borrowings, for example, while not mentioning sustainability-linked debt.

Chinese borrowers may also be reluctant to risk harming their green reputation by missing targets specified by the loans.”

Report suggests ESG risks higher for Asian companies

Over the weekend, the Federation of Korean Industries (FKI) released its analysis of a recent Sustainalytics report tracking the ESG risks of thousands of companies around the world. According to FKI, the report demonstrates that Asian companies are considered to have higher ESG risks, trailing European countries significantly:

“Asian companies have higher environmental, social and governance (ESG) risks than companies in Europe, the Federation of Korean Industries (FKI) said Sunday.

The FKI released an analysis of the ESG Risk Ratings of 3,456 companies around the world released earlier this month by research company Sustainalytics. The FKI used raw data from Sustainalytics for its “Global Companies ESG Risk Map.”

ESG risks refer to issues that could affect a company’s performance and value. A company’s ESG Risk Rating score can vary by different rating agencies because each weighs factors differently….

Companies listed on stock markets in Greater China had the highest ESG risk level in the world, with an average of 36.1 points for companies listed on the Shanghai Stock Exchange, 32.9 points for companies on the Shenzhen Stock Exchange and 30.5 points for companies on the Hong Kong Stock Exchange.

Companies listed on the Korea Exchange had the fourth highest ESG risk, with an average of 30.1 points. Companies listed on the National Stock Exchange of India were the fifth highest, with 28.6 points.

The lowest scores came from European countries, with 20.6 points for companies listed on Euronext and 21.6 points for companies on the London Stock Exchange. They were followed by the Nasdaq with 22.1 and 22.4 for the Taiwan Stock Exchange.”

On Wall Street and in the private sector

The UN’s climate report and ESG

Earlier this month, the United Nation’s Intergovernmental Panel on Climate Change released a summary of the first part of its latest report on climate change. It is already having an effect on ESG investment professionals:

“The assessment by the Intergovernmental Panel on Climate Change, released on Monday, should prompt investors to “review their commitments to tackling climate change and to take action,” said Fiona Reynolds, chief executive of the UN-backed Principles for Responsible Investment….

Praxis Mutual Funds, one of the oldest socially responsible investment firms, which manages about $2 billion, said the IPCC report shows the need to move faster in the short-term and invest in green debt that can have greater real-world impacts. “It changes the calculus,” said Chris Meyer, manager of stewardship investing research and advocacy. “We will need to have a sharper focus. This report shows that investors aren’t moving quickly enough.”…

Schroders is among the fund managers that have committed to establishing a pathway to net zero. The adoption of these goals hasn’t yet led to lowered emissions, as the IPCC report makes clear. “Finance alone cannot solve the climate threat. This is ultimately a question of every group making significant and sustained steps to cut emissions,” said Andy Howard, the head of sustainable investment at Schroders. “Anyone looking at the same picture and data must surely reach a similar conclusion.”

With the scientific consensus now making clear that the average global temperature is very likely to rise at least 1.5° Celsius above pre-industrial levels by 2040, investors may need to pay even more attention to their contribution to limiting warming. That’s where temperature-alignment metrics come in. These grade portfolios based on their holdings’ projected greenhouse gas output.

It can be helpful “in evidencing what is a fair share that a given company needs to be doing to meet the carbon budget and how exposed companies may be to value impact from the transition,” said Christopher Kaminker, head of sustainable investment research and strategy at Lombard Odier Group.”

The perceived conflict between those who now feel that ESG investors must be more committed than ever to addressing what they describe as a climate crisis and those who (as documented above) believe that ESG can and should focus more on social impact and social justice will present investors with both uncertainties and opportunities, according to Pensions & Investments:

“It is possible for investors to meet the challenge raised in the IPCC report, said Gordon L. Clark, professorial fellow at Oxford University’s Smith School of Enterprise and the Environment. “The climate crisis presents an enormous opportunity for investors with a 15-, 20-, or 30-year horizon. It is an opportunity that long-term investors will embrace and are embracing. You see that already in U.K. and European pension funds” investing in alternative energy solutions, Mr. Clark said. “It is incumbent on pension trustees to invest in the future.””

In the Spotlight

More pressure—and rewards—for ESG performance

One ESG tactic highlighted recurrently in this newsletter is the application of alignment theory to ESG performance. For decades, companies have rewarded—or punished—managers and directors for business performance by linking their compensation to their companies’ success (or lack thereof). Most commonly, executives and others have been compensated with shares in their company, meaning that they will be rewarded if the company does well and attracts investment and will do poorly if the inverse occurs. Over the past year or so, many companies have begun moving alignment theory in a different direction, tying executive compensation to performance on ESG measures instead of (or in addition to) stock-market performance.

In Europe, this trend has taken a new dimension, focusing on the financial industry’s role in advancing ESG, as Bloomberg reports:

“European bankers will soon have to show they’re contributing to a cleaner environment, a better society and good governance — or face a smaller pay package.

In the latest sign that ESG is reshaping finance, most of the 20 major European banks surveyed by Bloomberg said they were either working on, or already had, a model that links staff remuneration to a firm’s performance on sustainability metrics. That’s as European regulators explicitly add ESG risks to pay guidelines, with the change due to take effect by the end of 2021.

Nicole Fischer, who advises German financial institutions on pay at Willis Towers Watson, said the industry is now “in a transformation phase where ESG is being anchored firmly in remuneration.”

The development opens another avenue through which policy makers in Europe are trying to redefine capitalism. The ultimate goal, ideally, is to make it financially attractive to be good.”

ESG Developments This Week

In Washington, D.C.

The SEC and diversity

On Friday, August 6, the Securities and Exchange Commission approved a plan set forth by the Nasdaq stock exchange to promote diversity among the companies it lists. Late last year, Nasdaq suggested that all listed companies would either have to have underrepresented minority groups on their boards of directors—or would have to explain why they are unable, at this time, to have such minority representation—or they would be delisted. The Wall Street Journal explained the decision and its impact as follows:

“In an order released Friday afternoon, the Securities and Exchange Commission agreed to Nasdaq’s proposed rule changes. But in a sign of the political divisions over the proposal, the SEC’s two Republican commissioners registered their opposition, with one voting against the decision and the other giving only partial support.

Under the proposal, Nasdaq-listed companies would need to meet certain minimum targets for the gender and ethnic diversity of their boards or explain in writing why they aren’t doing so.

For most U.S. companies, the target would be to have at least one woman director, as well as a director who self-identifies as a racial minority or as lesbian, gay, bisexual, transgender or queer. Companies would also be required to disclose diversity statistics about their boards. Nasdaq found in a review conducted before submitting its plan late last year that more than three-quarters of its listed companies wouldn’t have met its proposed requirements.

“These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders,” SEC Chairman Gary Gensler said in a statement….

Critics of Nasdaq’s plan have warned that it could be challenged in court. Some conservative groups have argued that the exchange’s diversity rule, if implemented, would violate the U.S. Constitution and civil-rights laws.

“The proposed rule is racist and sexist in that it mandates that firms establish quotas and discriminate based on sex, skin color, ethnicity or sexual orientation,” David Burton, a senior fellow at the Heritage Foundation, told the SEC in a January letter….

Nasdaq argued that its proposed rule change would benefit investors. The exchange operator cited studies that found companies with more diverse boards tended to have stronger corporate governance and financial performance.”

Skeptics of ESG have argued that the movement’s interpretation of diversity is superficial and potentially violates the law as well as, in their view, best business practices. Proposals like Nasdaq’s, in their opinion, are damaging to business and capital markets over the long-term. For example, in his book The Dictatorship of Woke Capital, market commentator Stephen Soukup wrote the following:

“Many companies lack diversity in various aspects of their operating structure, from employees to man­agers to executives to directors. And many of these companies could benefit from a more diverse workforce or board. There is no question that employing people from diverse backgrounds, diverse experiences, diverse educational environments, etc. can be beneficial to a company. Varying histories and personal narratives contribute to varying thought patterns and problem-solving strategies. That much is largely inargu­able. Nevertheless, one of the most important aspects of such beneficial diversity is viewpoint diversity, which is to say diversity in approaches to life, to government, to politics, to business, and so on. Diversity in itself is a noble social goal, but diversity without viewpoint diversity tends to take many of the strictly business-related benefits of the diversity strategy off the table.”

Soukup continues, arguing that, in his view, superficial diversity programs imposed from the top-down as quasi-regulatory measures are, technically, in contravention of the law:

“The law in question—the Securities Exchange Act of 1934, as amended in 2009—requires listed companies to disclose and describe their diversity policies for the nomination of direc­tors in their annual proxy statements. In its final rule on the implementa­tion of the diversity question, the SEC specifically and intentionally did not define what diversity should mean, believing that such decisions were best left up to the listed companies. The SEC wrote that it had voted to:

require disclosure of whether, and if so how, a nominating committee considers diversity in identifying nominees for director. . . .We recognize that companies may define diversity in various ways, reflecting different perspectives. For instance, some companies may conceptualize diversity expansively to include differences of viewpoint, professional experi­ence, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin. We believe that for purposes of this disclosure requirement, companies should be allowed to define diversity in ways that they consider appropriate.”

Additionally, Soukup notes that up until just a few months ago, viewpoint diversity and the rejection of superficial diversity measures were considered standard good business practices by many in the capital markets:

“[Superficial diversity programs] are also contradicted by the recommendations for “Common Sense Governance Principles” that were authored and supported by some of the biggest names in American business in 2016. Among the “authors” of these principles were some of the biggest and most powerful players in the capital markets, including four who have already been mentioned in this book: Jamie Dimon of JP MorganChase, Larry Fink of BlackRock, Bill McNabb of Vanguard, and Ronald O’Hanley of State Street.60 Toss in the Oracle of Omaha himself, Warren Buffett, and the list of the authors of these common-sense principles reads like a Who’s Who of finance. And they defined “diversity” as follows: “Directors should have complementary and diverse skill sets, backgrounds and experiences. Diversity along multiple dimensions, including diversity of thought, is critical to a high-functioning board. Director candidates should be drawn from a rigorously diverse pool. . . .While no one size fits all—boards need to be large enough to allow for a variety of perspectives.””

When the SEC approved Nasdaq’s request, Republican-appointed Commissioners Hester Peirce and Elad Roisman voted against it, and Roisman specifically questioned the wisdom of involving a state actor:

“A serious concern is that the SEC—without any doubt, a state actor—may need to take future action in which the agency must consider disclosure of the racial, ethnic, gender, or LGTBQ+ status of individual directors. After all, the Commission is the adjudicating body for exchange delisting decisions. I think that the Approval Order should have included more analysis of whether the Proposal could implicate state action through the Commission’s downstream enforcement responsibilities, or why the Commission believes this is unlikely.”

On Wall Street and in the private sector

Details emerge about Buffet and BlackRock battle over ESG

Last week, CNBC disclosed the details of a battle between one of the world’s best-known investors and the world’s biggest asset management company, Warren Buffett and BlackRock, respectively. Buffett is known in the investment world for being an opponent of ESG; as a firm believer in the inviolability of shareholder rights. He is, as a result, also known as one of the few celebrated investors who stands in the way of ESG advocates. During this past shareholder meeting season, Buffet’s shareholder traditionalism brought him into direct conflict with BlackRock, among others:

“Berkshire Hathaway is one of the best-run public companies of the 20th century, with the financial performance to prove it. But as the 21st century brings a new generation of investors shifting from pure shareholder capitalism to the stakeholder capitalism aligned with environmental, social and governance mandates, is Warren Buffett’s company positioned to be an ESG leader or laggard? The answer isn’t so simple….

[B]y some operating business measures, Berkshire Hathaway — just by doing what it does — is delivering on ESG. Berkshire Hathaway Energy, its utility company, is the biggest producer of wind energy in the U.S. Buffett’s largest stock holding, Apple, is consistently ranked among the best ESG companies in the market. On diversity, Berkshire just elevated the first-ever female CEO to run a U.S. railroad company, at Burlington Northern. Its board includes a Black director (Ken Chenault), an Indian director (Ajit Jain) and four women….”

Nevertheless:

“None of the Berkshire attributes that can be judged as ESG favorable was a factor for BlackRock, the world’s largest asset manger [sic] and the biggest force in ESG investing, when it came time to vote in the just-passed proxy season. BlackRock voted against two Berkshire directors — the directors of its audit and governance committees. And it voted with shareholders on requirements that the company produce a climate report and its holding companies produce diversity reports. BlackRock singled out Berkshire Hathaway — a step it takes with only a select group of companies in its annual investment stewardship report — as a company that left it with no choice but to vote against management.

“Berkshire Hathaway has a long history of strong financial performance; however, we had concerns related to our observation that the company was not adapting to a world where sustainability considerations are becoming material to performance.”

Meanwhile, Tariq Fancy, the former head of sustainability for BlackRock continued his press tour, criticizing his former employer and arguing that the company and its CEO, Larry Fink, are engaged in what he describes as a deadly distraction:

“They misrepresent what they are doing. It is the idea that ESG factors can be included in all these processes to achieve better returns and better social outcomes at the same time. I felt that the value of ESG data for most investment processes is very limited.

It’s a potentially dangerous placebo, a lot of marketing that answers the inconvenient truth with useful fantasy. .. ..There is no proof of that [ESG investing] Beyond the burning time, I insist, I did anything.

If you believe in ESG treatises that responsible companies are better, you argue that the best we can do is not just say it and then invest money. It’s really about making sure the regulations are smarter. In particular, by punishing irresponsible behavior at a systematic level to far support ESG products….

There is no compelling reason to believe that it surpasses non-ESG strategies, so I don’t think it should be done. In addition, there is no impact on the actual environment or society….

To make matters worse, overall, you will help contribute to a huge social placebo and delay government action.”

ESG Developments This Week

In Washington, D.C.

House Democrats urge repeal of Trump administration ESG rule

On July 29, 13 Democratic Members of the House of Representatives sent an open letter to Labor Secretary Marty Walsh asking him to take the Labor Department’s actions on ESG investments one step further.

The Trump Labor Department enacted a rule late last year that directed retirement-fund managers to assess investments governed by the Employee Retirement Income Security Act (ERISA) using pecuniary factors only. Although the rule did not preclude ESG investments altogether, its aim was to make their inclusion in retirement investment funds far more complicated than it would otherwise have been and thus far less likely.

Upon taking office, President Biden called for that rule to be reexamined by Labor, and, on March 10, the Labor Department’s Employment Benefits Security Administration announced that, until further notice, the Trump administration rule would not be enforced.

In their July 29 letter, the House Members—including Andy Levin (MI) and Suzan DelBene (WA), who have introduced legislation touching on this subject​​—asked Secretary Walsh to take the next step:

“While ending that rule’s enforcement is a necessary first step, we feel it is just that – a first step. A new rule is essential to eliminate the aforementioned chilling effect and allow plan fiduciaries to incorporate ESG factors into their investment strategies without fear of legal consequences.

ESG investing is growing at a tremendous rate. In 2020 alone, $51.1 billion in net investments went into sustainable funds, nearly double the previous annual record. We believe this is evidence of workers’ desire to make sure that their retirement investments reflect their values. This desire is backed up by evidence that shows that investments that consider ESG principles generally performed as well or better than comparable conventional investments. Workers do not have to make a trade-off between getting a return on their investments and their principles, and the rules and regulations governing pension investments should not force them to. Instead, those rules should provide clarity so that sustainable investing is not burdensome.”

The Members did not ask Walsh for a specific response or a date by which they would like to hear back from him, only that they look forward to working with him on the issue.

Who wants greater disclosure?

In a July 28 post at the website of the Cato Institute, Jennifer Schulp, Director of Financial Regulation Studies, advanced an argument made previously by SEC Commissioner Hester Peirce about the alleged investor demand for new, mandatory ESG disclosures from publicly traded companies. Whereas Peirce recently drew a distinction between investors and activists, Schulp articulates the potential differences between professional investors and individual investors, between Wall Street and Main Street:

“[T]here’s no denying the current interest in ESG.

Those who want public companies to be required to disclose ESG information point to this investment behavior as a sign that the “crowd” agrees. During his confirmation hearing, SEC Chairman Gary Gensler cited the “tens of trillions of dollars in assets” as proof that investors “really want to see” climate risk disclosure, which is part of the “E” in “ESG.” SEC Commissioners Lee and Crenshaw also have both pointed to investor demand as supporting SEC efforts to mandate ESG-related disclosure. But do we understand this “investor demand?”

[T]he common refrain that “investors are demanding ESG disclosures” fails to address who those investors are. Investors, of course, are not a monolith, but the conclusions drawn from empirical research in the space often treat them as such. That research tends to ignore individual investors and focuses on professional investors, including many who themselves offer ESG-related products. That research also has largely been conducted by organizations, such as Blackrock, Ernst & Young, and Natixis, that themselves have an interest in the promotion of ESG.

The emphasis on investment professionals is certainly warranted as they are an important constituency to understand. Many of these professionals are making decisions that affect individual investors through mutual funds, ETFs, or the direct management of retirement assets. But even where fiduciary duties are supposed to ensure that these professionals are acting in their clients’ interests, Wall Street and Main Street may not necessarily see eye to eye. While surveys generally show professional investor interest in ESG, few have asked about individual investors. Those that have found that individual investors show only some interest in ESG investing, which largely disappears during economic stress, and individual investors broadly view ESG disclosures as irrelevant when making investment decisions. It’s a stretch, then, to say that investor interest in ESG issues applies uniformly to different investor types.”

On Wall Street and in the private sector

Investors get creative

According to MBH Corporation, a UK-based financial services company, investors are so consumed by the desire to find good smaller companies with solid ESG qualifications that they are willing to look almost anywhere and to accept almost any positive data as evidence of a company’s qualifications:

“A lack of publicly available information on companies’ ESG credentials is prompting investors to turn to overlooked sources to acquire data, new research shared exclusively with City A.M. reveals.

Figures from MBH Corporation shows 89 per cent of UK based professional investors think employee satisfaction platforms will provide crucial information on the validity of firms’ adherence to good environmental and governance initiatives.

MBH Corporation said investors are combing through employee reviews published on sites such as Glassdoor and Vault for ESG information to evaluate whether to invest in a company….

Vikki Sylvester, chief executive of Acacia Training and executive director of MBH Corporation, said…

“Investors are so hungry for information and will reference relevant websites for clear insights into companies.””

In the spotlight 

Ben and Jerry’s governance 

According to Effi Benmelech, a finance professor at Northwestern University’s Kellogg School of Management, the recent decision by the Ben and Jerry’s ice cream company to end its license with its current Israeli affiliate has left its parent company, Unilever, in a very tough spot, one that might end up costing it:

“In the U.S., 33 states have passed laws that restrict government investment or contracting in companies that boycott Israel; if Unilever does not act to reverse the board’s decision, it could face divestment and losses.

When founders Bennet Cohen and Jerry Greenfield (a.k.a., “Ben and Jerry”) turned the company over to Unilever in 2000, the acquisition agreement laid out a unique governance structure that retained the company’s independent board of directors, responsible for protecting the company’s brand and pursuing ESG efforts. And in their view, the board is acting exactly as intended. As they wrote in a recent Op-Ed, “[W]e unequivocally support the decision of the company to end business in the occupied territories… While we no longer have any operational control of the company we founded in 1978, we’re proud of its action and believe it is on the right side of history.””

As Professor Benmelech notes, Ben and Jerry’s is, in his words, a practitioner of “ESG with no G.” Benmelech concludes that, in his opinion, the only solution for Unilever is to terminate Ben and Jerry’s special conditions and impose some “G” on its subsidiary, whether it likes it or not.

ESG Developments This Week

In Washington, D.C., and around the world

ESG pioneer fires back at SEC Commissioner

As noted last week in Economy and Society, on July 20, SEC Commissioner Hester Peirce “delivered an address at the Brookings Institution in which she again made the case that the SEC’s current leadership is overstepping both its regulatory mandate and the bounds of what is objectively knowable about corporations and their impact on aggregate measures of environmental, social, and corporate governance (ESG) well-being.”

In response to Commissioner Peirce’s address, Robert Eccles, a former professor at Harvard Business School and an ESG investing pioneer, offered a rebuttal, of sorts at Forbes.com. Eccles, who was the Founding Chairman of the Sustainability Accounting Standards Board (SASB) and one of the founders of the International Integrated Reporting Council (IIRC), and who has thus been pressuring the SEC on this issue over three presidencies, is frustrated with the Commission’s pace on reform:

“One week ago today on July 20, 2021 Trump appointee SEC Commissioner Hester M. Peirce (R) gave a 4,725 word speech to the Brookings Institution titillatingly titled “Chocolate-Covered Cicadas.” The purpose of this cute title eludes me because I never figured out where the chocolate-covered comes from. The only time it’s mentioned again is the snide closing line of her speech in which she says that in 2038 “perhaps even the chocolate-covered cicadas will be net-zero carbon.”

In her speech Peirce notes a request from her fellow Commissioner Allison Herren Lee for comments on climate change. Yes, Commissioner Peirce, climate change is real. Peirce thought it helpful to point out that Lee’s request came on the Ides of March. In her typical soft dig sleight of hand, Peirce points out that “it was not a Commission request.” Nor did the SEC request Peirce to give her speech and here she gives the standard disclaimer “that the views I represent are my own views and not necessarily those of the SEC or my fellow Commissioners.” For this we can count our blessings.

Once again, the Commissioner camouflages her hard-right ideological views by couching her remarks in the pretext of sparking “a textured conversation about the complexities and consequences of a potential ESG rulemaking.” Perhaps in hope of brandishing some green credentials, Peirce plays the naturalist by beginning with an endearing tutorial on the 17-year Cicadian cycle which she somewhat incoherently links to ESG rulemaking.

The construction of her speech nicely maintains the charade of wanting to have a conversation. She organizes it in terms of 10 “theses” (her own rendition of a slimmed down Diet of Worms) supported by 63 (!) footnotes. In this piece I will respond to each of her theses.”

Meanwhile in London…

The International Organization of Securities Commissions, a global organization of securities and futures regulators—including, for example, the Securities and Exchange Commission— released a paper asking member organizations and states to begin the process of consolidating ESG ratings services and regulating the uniformity of those ratings.

“ESG raters and data providers are largely unregulated, lack transparency in their methods, offer uneven coverage and harbour potential conflicts of interest, said the International Organization of Securities Commissions (IOSCO)….

Asset managers running ESG focused funds increasingly rely on about 160 raters globally to help pick stocks and bonds, raising investor protection questions, IOSCO said. Users, however, generally do not conduct any formal verification of the ratings, calling the process a “black box”.

“Users have signalled that having multiple ESG ratings and data products can cause confusion, raising serious questions about relevance, reliability and greenwashing,” said Ashley Alder, who chairs IOSCO and heads Hong Kong’s securities watchdog.

IOSCO’s consultation paper recommends that regulators consider formally regulating the sector, echoing similar moves with credit rating agencies (CRAs) in the aftermath of the global financial crisis over a decade ago when similar concerns were aired.

Regulators could encourage industry to develop and follow codes of conduct, the watchdog said.”

…And in Brussels

In January, the European Commission introduced new climate-investing benchmarks, which are beginning to draw interest from asset managers who are interested in standardized green investments and are leery of greenwashing. Bloomberg reports that only a small fraction of ESG funds are benchmark-aligned at present, but the amount is growing and expected to continue to grow:

“ESG asset managers are accelerating their use of new climate-investing benchmarks created by European authorities, in a development that’s set to make it harder to get away with greenwashing.

While only about $1.2 billion is now tied to gauges that meet European Commission requirements — a tiny fraction of the $35 trillion of ESG assets worldwide — inflows have more than doubled since January, according to the European Securities and Markets Authority.

That suggests investors are looking for some guardrails as they navigate a market rife with anxiety about greenwashing, which is the term that’s been given to exaggerated, false or deceptive claims about a product’s fidelity to climate goals, such as those set in the landmark 2015 Paris agreement. EVestment, a unit of Nasdaq, estimates that there are more than 890 ESG dedicated strategies and another 7,400-plus that integrate ESG into the investment process.

Before the creation of the new benchmarks “you could have smacked that label on a product and gone, ‘Paris Aligned,’ and there could be anything going on in that index,” said Jas Duhra, the EMEA head of environmental, social and governance indexes at S&P Global, which makes and markets such gauges. Now, asset managers making ESG claims “can’t just have an index that’s formed of IT companies and media companies.””

Additionally, Alicia Carspeck, the head of research at Fabric RQ, made the case that the European Commission’s new ESG regulations will, in her view, “transform the global standard for risk management.”

“The EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March, is designed to drive capital toward sustainably-oriented investments. It is widely considered the broadest regulatory action in sustainable finance to date. And for U.S. firms trying to keep up with the blistering pace of ESG-related transformations within the financial sector, the SFDR could offer some clarity.

The SFDR was initiated by the European Commission as part of a broad EU action plan, announced in 2018, to encourage sustainable investing throughout the EU financial system and to put ESG issues on-par with traditional financial risk indicators. It is broad in its scope covering nearly all asset managers, investment product providers, and financial advisors that operate within the EU. The first phase of reporting standards is already in effect and increasingly detailed reporting obligations will phase in over the coming months and years….

Under the SFDR, all EU asset managers (whether or not they are focused on sustainability) are now asked to publicly disclose: their approach to incorporating sustainability considerations their investment decisions; any “adverse impacts” investments may have on environmental or social factors; and, any sustainability risks that may impact investment performance….

Financial advisors will now be required to counsel clients on the sustainability implications of their investments — including the potential impact (whether negative or positive) on the financial performance of their investments.

The SFDR will act as a mandate for participants in financial markets to “do no harm” to society and the environment while also safeguarding investors from exposure to undue risk stemming from poor ESG positioning of their investments. The regulations are written to make sustainability considerations a routine addition to existing financial disclosure and risk-management requirements.”

While the SEC continues its internal—and external—discussions about materiality, the European Commission is moving ahead with reforms that preemptively alter those standards by imposing the SFDR’s requirements even on “Non-EU managers and advisors that market financial products into the EU or provide advice to EU firms.” These include large American asset management firms like BlackRock, for example.

On Wall Street and in the private sector

Former ESG investment professional critical of industry

Joining former BlackRock head of Sustainable Investing Tariq Fancy and a handful of other former ESG insiders, Desiree Fixler, the now-former head of sustainability for DWS (Deutsche Bank’s asset management arm) has called out her firm for alleged ESG duplicity. While Fixler has not carried out a public campaign similar to Fancy’s, according to the Wall Street Journal, she has nevertheless been critical of the way DWS has performed on ESG, especially by comparison to the way it markets its products. DWS implied, in return, that the problem was Fixler’s, not the firm’s:

“Deutsche Bank AG’s DB -3.02% asset management arm, DWS Group, DWS -0.30% tells investors that environmental, social and governance concerns are at the heart of everything it does, and that its ESG standards are above the industry average.

But behind closed doors, it has struggled to define and implement an ESG strategy, at times painting a rosier-than-reality picture to investors, according to its former sustainability chief and internal emails and presentations seen by The Wall Street Journal….

Frankfurt-based DWS said in its 2020 annual report released in March that more than half of its assets under management—€459 billion, equivalent to $540 billion—have run through a process it calls ESG integration. In such a process, companies are graded on ESG criteria, which helps inform fund managers if the investment faces any risks related to these standards.

According to an internal assessment of the company’s ESG capabilities a month earlier, “only a small fraction of the investment platform applies ESG integration,” adding there is no quantifiable or verifiable ESG-integration for key asset classes at DWS….

The same month, Desiree Fixler, DWS’s sustainability chief, made a presentation to the executive board saying the firm had no clear ambition or strategy, lacked policies on coal and other controversial topics and that ESG teams were seen as specialists rather than being an integral part of the decision-making, according to the presentation, which was reviewed by the Journal.

That contrasted with what DWS told investors in its annual report: “As a firm, we have placed ESG at the heart of everything that we do,” it said….

Ms. Fixler was fired on March 11, one day before the annual report was released. Ms. Fixler said she believes DWS misrepresented its ESG capabilities. She said revisions and verbal objections she had made to the annual report before publication, including how many assets were under ESG integration, were never included. She said she was fired because she was too vocal about problems and has filed an unfair dismissal case against DWS in a labor court in Germany.

“As chief sustainability officer, as a proponent of ESG, how could I not speak up on wrongdoing,” she said in a statement sent to the Journal. “Posturing with big statements on climate action and inclusion without the goods to back it up is really quite harmful as it prevents money and action from flowing to the right place.”

 DWS, which is majority owned by Deutsche Bank but maintains its own stock listing, said in a statement that it has always been transparent to investors and clients, and it stands by its annual report, which was audited by KPMG.

It said that standards for defining ESG assets are constantly evolving, and that DWS has been seen by the market as being more conservative than most of its competitors in the definition. It said the sustainability office led by Ms. Fixler didn’t gain the expected traction on creating or showing an action plan.”

Research

Does ESG differentiate companies?

A recent analysis conducted jointly by the Wall Street Journal and the Drucker Institute indicates that corporations are generally unable to differentiate themselves from other companies through their ESG efforts. This, in turn, according to analysis, suggests that whatever their interest in or dedication to ESG practices, corporations seeking greater investor interest are likely to be disappointed by the results their ESG efforts yield:

“Companies have a lot of good reasons to pay close attention to environmental, social and governance factors: attracting talented employees who want to work at a place that is making a positive impact on the world; responding to regulators who are demanding more ESG-related transparency; and pleasing major investors who are pushing them to be sustainable for the long haul.

But there’s at least one thing that being ESG-minded may not do: help a corporation stand out from the crowd as much as other actions might.

That’s the big takeaway from our latest analysis of the Management Top 250….

In all, we evaluated 886 large, publicly traded companies last year through the lens of 33 indicators that fall into five categories: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength.

In our most recent research, we wanted to see where companies were setting themselves apart, thereby shedding light on the richest opportunities for firms to build a distinct reputation or brand identity.

The runaway winner was innovation, where the spread between the highest-scoring company in our universe ( Amazon.com Inc. AMZN -7.56% at 135.9) and the lowest ( Apartment Investment & Management Co. AIV 0.87% at 36.5) is a whopping 99.4 points….

[T]the configuration within social responsibility is striking. It has by far the narrowest span—50 points—between the highest-scoring company ( Microsoft Corp. MSFT -0.55% at 78.9) and the lowest-scoring firm ( Seaboard Corp. SEB -0.73% at 28.9). The differential is 67.3 points in customer satisfaction, 73.4 points in employee engagement and development and 76.3 points in financial strength.”

ESG Developments This Week

In Washington, D.C.

SEC continues internal debate about its role in ESG investing

On July 20, SEC Commissioner Hester Peirce delivered an address at the Brookings Institution in which she again made the case that the SEC’s current leadership is overstepping both its regulatory mandate and the bounds of what is objectively knowable about corporations and their impact on aggregate measures of environmental, social, and corporate governance (ESG) well-being. Peirce’s address, which is the latest public airing of grievances on the part of SEC Commissioners, conceded that SEC Chairman Gary Gensler and his supporters on the Commission have their hearts in the right place, seeking predictability for investors, but warned that, in her view, outcomes and intentions are often at odds. As a framework for her critique of proposed new disclosure mandates, Peirce presented ten theses that she argues all interested parties must consider before the Commission votes to make new disclosures compulsory:

“I. ESG as a category of topics is ill-suited, and perhaps inherently antithetical, to the establishment of clear boundaries and internal cohesion.

II. Many ESG issues lack a clear tie to financial materiality and therefore do not warrant inclusion in SEC-mandated disclosure.

III. The biggest ESG advocates are not investors, but stakeholders.

IV. ESG rulemaking is high-stakes because so many people stand to gain from it. 

V. “Good” in ESG is subjective, so writing a rule to highlight the good, the bad, and the ugly will be hard.

VI. An ESG rulemaking cannot resolve the many debates around ESG models, methodologies, and metrics. 

VII. Emotions around ESG issues may push us to write rules outside our area of authority. 

VIII. ESG issues are inherently political, which means that an ESG rulemaking could drag the SEC and issuers into territory that is best left to political and civil society institutions.

IX. ESG disclosure requirements may direct capital flows to favored industries in a way that runs counter to our historically agnostic approach.

X. An ESG rulemaking could play a role in undermining financial and economic stability.”

Peirce concluded, arguing that the SEC’s probable contravention of its statutory bounds could be remedied, if the Commissioners decided to take a more cautious, less over-optimistic approach to its regulatory limitations:

“You have made it with me through ten theses, so I will quickly draw to a close. I do not want to do so without first offering a potential better path forward. Rather than embarking on a prescriptive ESG rule that departs from and undermines our agency’s limited, but important, role, we could work within our existing regulatory framework. We could put out updated guidance to help issuers think through how the existing disclosure regime already reaches many ESG topics and to address frequently asked questions that arise in connection with the application of the existing disclosure regime. We also might consider whether we can give any Commission-level comfort about forward-looking statements along the lines of what former Chairman Clayton, Corporation Finance Director Bill Hinman, and Office of Municipal Disclosure Director Rebecca Olsen did in connection with COVID-19. Finally, we can work with investment advisers using ESG strategies and products to ensure that investors understand what that adviser’s brand of ESG means in theory and practice. I am looking forward to hearing other suggestions in the discussion that follows.”

On Wall Street and in the private sector

European ESG assets take a tumble—by design

According to the Global Sustainable Investments Alliance, the amount of money held by Europeans in sustainable investments fell from $14 trillion to $12 trillion. Given the relative stability of the bull market and the flood of funds into ESG, that seems counterintuitive at best. But it’s not, according to a Bloomberg Green story. The drop was not caused by decreasing value or a change in priorities but by an intentional reclassification of assets. Bloomberg Green reports:

“The decline isn’t the result of dampened investor enthusiasm for ESG investments, it’s because policy makers have tightened the parameters for what can be considered a responsible investment, said Simon O’Connor, chair of the GSIA….

Europe has led the global charge into ESG investments and its banks and fund managers are most advanced in calculating the impacts of their operations on climate change and biodiversity. The bloc’s politicians also have embraced sustainability by developing the world’s most ambitious climate strategy and a suite of new rules to bring the world of finance in line with its carbon neutrality target.

The EU’s anti-greenwashing rules known as the Sustainable Finance Disclosure Regulation, or SFDR, were introduced in March and require fund managers to evaluate and disclose the environmental, social and corporate governance features of their financial products. They require fund managers to classify funds, with Article 8 funds defined as those that actively promote environmental or social characteristics, while Article 9 funds have sustainable investment as their objective, with both categories subject to higher standards of disclosure under the SFDR.”

Meanwhile, in the rest of the world, sustainable assets continued to grow unremittingly:

“[S]ustainable investment assets in the U.S. increased to $17 trillion last year from $12 trillion two years earlier. Canada recorded the largest proportional gain in ESG assets between 2018 and 2020, with a 42% jump to $2.4 trillion.

The sustainable investment industry grew 15% in the two-year period to $35.3 trillion, and now accounts for 36% of all professionally managed assets across the U.S., Canada, Japan, Australasia and Europe, GSIA said.”

The Financial Times reports two stories of dissent

First, on July 18, FT reported that the private equity business appears, on paper at least, to have become a hub of counter-cultural investing, in which ESG issues are treated with rather less deference than they are in the world of publicly traded companies:

“Done well, private equity has a crucial role to play in modernising economies, helping companies to restructure efficiently away from the short-termist glare of public markets. Buyout firms rightly pounce on listed companies that they deem undervalued or bloated. In so doing, they keep capitalism efficient and act as a positive reactionary force.

But is private equity also reactionary in the conservative backlash sense of the word — facilitating a rebellion against some of the progressive constraints of public company existence, particularly the growing demands of complying with standards on environmental, social and governance issues? The evidence is mounting.

More freedom on governance has long been seen as a plus for private companies. As listed company governance has become stricter, so the advantage of private company status has increased. Heads at private equity owned companies relish diminished bureaucracy and the ability to earn more money without critical scrutiny from public company shareholders. Fortress’s agreed £9.5bn buyout of Morrisons this month came with a strong hint that management “incentives structures” would be boosted, only weeks after the listed UK supermarket suffered a shareholder revolt over pay….

Social issues, S of ESG, are also antithetical to much traditional private equity. Many listed companies increasingly trumpet “stakeholder value”, expressing concern for staff, customers and a company’s local area. Private equity remains a safe space for the hard-nosed. Quite rightly in some instances: public-company management may have been loath to take tough decisions on closing shops, factories or offices, and making job cuts.

But it is in the environmental field that a good chunk of the private equity industry is playing its most obviously reactionary role. When oil majors are looking to sell off stranded production assets, private equity are among the readiest bidders.”

On July 22, FT returned to the issue of ESG vs. shareholder value, with a profile of Eiji Hirano, the former chairman of the board of the Japanese Government Pension Investment Fund, the largest pension fund in the world. According to the paper: 

“Though carefully framed, Hirano’s comments highlight increasingly urgent questions over the future direction of the GPIF since the departure in March 2020 of its charismatic chief investment officer Hiromichi Mizuno.”

“The GPIF [Government Pension Investment Fund] must always go back to its investment purpose,” says Eiji Hirano, who stood down from the job three months ago. His comments reflect concerns that too great a focus on environmental, social and governance (ESG) standards can add risk, including a possible collision between the law and the investment philosophy under the GPIF’s previous regime.

According to the law under which the GPIF operates, it must invest with the sole purpose of benefiting Japanese citizens through the returns generated….”

“[A]rguably Mizuno’s boldest achievement, which he proselytised about at Davos and other global financial forums, was yoking the GPIF name to the then fledgling theme of ESG investing. The campaign included what Mizuno himself described as the “epochal” decision to mandate index-compilers FTSE and MSCI to create ESG indices for the GPIF. It sent the message that the GPIF under his stewardship would regard ESG factors as financially relevant.”

“That, says Hirano, is one key area where debate is now focused. While there is increasing evidence that some aspects of ESG-themed strategies boost returns in the long term, he thinks many ESG proponents, including Mizuno, rely on the argument that it is “common sense” that this will be the case across the board.”

EU efforts to compel greater disclosure receive pushback—months ahead of implementation

On July 6, the European Commission finalized its new banking regulation known as the green assets ratio. The regulation will go into effect in 2022, and banks will be compelled to make their first report by 2024. The GAR is designed to measure the green loans and securities a bank possesses (against its total assets). And according to Bloomberg, banks are already crying foul:

“It’s meant to be the ultimate metric for gauging how clean European banks are. But some in the industry say it will be flawed from the get-go.

The European Union’s planned Green Asset Ratio, intended to reveal how much a bank lends to climate-friendly companies and projects, will offer a distorted picture of reality, according to a Bloomberg survey of some 20 major European banks. The firms, which rely on clients for the data they need to calculate the ratio, point out that many small or international companies simply won’t provide it….

Europe is taking a more aggressive approach than the U.S. and other jurisdictions on climate change and will ultimately penalize financial firms that turn a blind eye to global warming. Banks that have long touted their green credentials are now being told to back up those claims with hard data. Lenders perceived to be laggards risk losing investors and depositors.

The European Banking Authority, which mapped out the Green Asset Ratio, says the metric will help compare banks both in terms of their exposures as well as their sustainability strategy and how they plan to mitigate climate-change related risks. The EBA “strongly believes” that the availability, quality and exchange of data can be improved with the right regulatory framework and incentives, a spokeswoman for the Paris-based authority said by email. Banks will also be allowed to use estimates for the environmental impact of their clients, she said.”

In the Spotlight

Moody’s launches new ESG ratings service

Moody’s just launched an ESG ratings service for small and medium-sized companies. But because ESG data is unavailable or limited for smaller companies, Moody’s had to develop a new methodology for estimating or predicting a company’s ESG ratings, which it has done:

“Based on a model derived from Moody’s proprietary ESG scoring methodology for large-cap corporates, the ESG Score Predictor provides financial institutions with essential quantitative data for portfolio and risk management, and helps companies monitor ESG risk across their global supply chains….

Assessing companies’ exposure to ESG risks requires comparable and standardized metrics. Limitations in company disclosures continue to affect data quality and company coverage, especially in the SME space. The ESG Score Predictor leverages state-of-the-art advanced analytics to provide 56 ESG scores and sub-scores for any given company using location, sector, and size. Customers can access approximately 140 million company ESG scores on Moody’s Orbis database, Procurement Catalyst and Credit Catalyst platforms, via an application programming interface (API), or leverage the ESG Score Predictor model with their in-house data to score their portfolios.”

What this means, according to a Moody’s white paper on the subject, is that the number of companies on which it can provide estimated ESG scoring is now infinite. According to the paper, “As long as we have data on a firm’s size, location, and industry, we can use these three factors as inputs to generate predicted metrics using the SP models.”