Economy and Society: Yellin announces US role to address climate change through financial structures

ESG developments this week

In Washington, D.C.

Yellin announces US role to address climate change through financial structures 

Two weeks ago, Treasury Secretary and former Fed Chair Janet Yellen told a virtual meeting of G7 finance ministers and central bankers that the United States intends to play a significant role in addressing perceived climate change concerns through its financial structures. According to The Hill:

“She expressed strong support for G7 efforts to tackle climate change, highlighting that her colleagues should expect the Treasury Department’s engagement on this issue to change dramatically relative to the last four years,” the department said in a statement.

“The Secretary noted ‘we understand the crucial role that the United States must play in the global climate effort.’”

Yellen’s pledge to global allies marks a notable turning point in the U.S. government’s approach to fighting climate change, a major priority for the Biden administration.”

The Wall Street Journal also recently reported that Secretary Yellen intends to create a new hub for climate change action and regulation within the Treasury Department and that former Obama administration Treasury official, Sarah Bloom Raskin, is a candidate to lead the effort: 

“Treasury Secretary Janet Yellen plans to wield the department’s broad powers to tackle potential risks to the financial system posed by climate change while pushing tax incentives to reduce carbon emissions.

Ms. Yellen is looking to a veteran of the Obama administration, Sarah Bloom Raskin, as the leading candidate for a new senior position that would head a new Treasury climate “hub,” according to people familiar with the matter. A former deputy Treasury secretary who once worked alongside Ms. Yellen on the Federal Reserve Board, Ms. Raskin has warned in interviews and speeches that U.S. regulators must do more to strengthen the financial system’s resilience to climate risks.”

In the States

Hawaiian State House bill would require public pension systems to implement ESG investment policies

On February 14, Tina Wildberger, the state representative for Hawaii House District 11 (covering the South Maui communities of Kihei, Wailea and Makena), contributed a piece to the Honolulu Civil Beat, in which she described the perceived overlap between the local environment and investment and detailed the legislation she introduced to address potential burgeoning issues. HB1205 (and its Senate companion bill, SB801) would require the Hawaii Employees’ Retirement System and all other public pension systems in the state to, in its words, “develop, publish, and implement socially responsible investment policies” and “submit an annual report to the legislature on disclosing its investments in accord with environmental, social, and governance investing and socially responsible investment policies.”

On Wall Street and in the private sector   

Anheuser-Busch enters largest-ever ESG-related debt facility 

Late last week, Anheuser-Busch InBev SA/NV, the brewers of Budweiser, among other beers and adult beverages, announced that it has signed a deal to participate in the world’s largest-ever ESG-related debt facility. The revolving-debt loanwhich will total $10.1 billionwill be tied to the company’s performance on ESG factors. The poorer the company performs against its benchmarks, the more it will pay in interest for the loan. Conversely, the better it performs, the lower its servicing costs will be, as Bloomberg reported on Thursday, February 18:

“The new revolving credit facility replaces an earlier financing line and ties interest margins to meeting goals on water efficiency, recycled packaging, renewable energy use and emissions, the company said on Thursday.

AB InBev’s new deal nearly doubles the global tally of environmental, social and governance loans for this year, which at $12 billion was already 71% ahead of the same period in 2020. Annual sales have surpassed $100 billion since 2019.”

S&P Global adds further ESG-related scores for companies 

Late last week, S&P Global announced that it had created two new levels of ESG-related data that will govern companies’ ESG scores. In a press release, the company noted:

“An additional 400 data points have been made available for each company, based on their applicability and relevance to informing a company’s overall scoring assessment. The additional data points will help markets better understand companies’ environmental and social impact as well as its governance standards….

The additional data points will provide clients with a better understanding of companies’ environmental reporting disclosures, biodiversity commitments, its direct and indirect CO2 and greenhouse emissions, waste/hazardous disposal, energy consumption and water usage.

For the Social dimension it will now be possible to determine whether companies in their social reporting activities disclose safety policies, human rights commitments, code of ethics and whether social reporting disclosures have been independently audited.

The new data sets will also provide greater insights on the Governance & Economic dimensions and help obtain better understanding of companies’ codes of conduct and policies addressing anti-crime, corruption & bribery, governance of the board and executive compensation, ownership, diversity, materiality disclosures, risk and supply chain management, and tax strategy and reporting.” 

ESG goes private

As anticipated by comments made earlier this month by BlackRock CEO Larry Fink, ESG-focused efforts appear increasingly targeted at privately owned businesses, in addition to publicly-traded corporations. On February 16, Reuters reported on a recent survey showing that private companies are less concerned about modernizing their ESG performance than are their publicly-held counterparts:

“Family-owned businesses are falling behind on setting environmental and social standards, with just over a third having set a sustainability strategy, a survey published by PwC on Tuesday found.

While family-owned companies – particularly in Europe and the United States – looked to charitable giving and helping employees during the COVID-19 pandemic, most put sustainability on the back burner, the consulting firm’s survey of 2,801 family business owners showed.

Without the investor pressure that listed companies face to conform to and set environmental, social and governance (ESG) standards, family businesses have implemented what PwC described as an “increasingly out-of-date conception of how businesses should respond to society”….

…more than three-quarters of the U.S.-based family businesses and 60% of those in Britain placed greater emphasis on direct societal contributions, mainly through charity, over a strategic approach to ESG matters.”

In the spotlight

Mondelēz International launches impact investment platform aimed at climate change 

Late last week, Mondelēz International, the Chicago-based snack-food king spun off from Kraft Foods a decade ago—and makers of products including Chips Ahoy!, Oreo, Ritz, and  Jell-Oannounced that it will create a new platform by which the company will maintain what it describes as its “commitment to deliver a positive impact on people and planet” and “incubate, finance and build partnerships in the impact investment space.” The new venture, called Sustainable Futures, will, according to the company:

“[Seek] to co-invest in projects addressing climate change, as well as making seed investments into social ventures that aim to improve livelihoods and build healthy communities. Through the platform, Mondelēz International intends to invest in projects that protect forests, reduce carbon emissions or increase resilience in landscapes from which it sources raw materials.

The first social ventures will initially include support for an NGO in India that will set up a sustainable, women-owned social enterprise to up-cycle multi-layered plastic packaging into board for multiple uses, and a venture with INMED Aquaponics Social Enterprise (ASE) in South Africa, supporting agro-entrepreneurs in climate-smart food production.”

The announcement by Mondelēz comes six days after Mondelēzalong with Nestle, Mars, and Hersheywas named as a defendant in a lawsuit filed by International Rights Advocates alleging the widespread use of child slave labor on cocoa farms in West Africa. Mondelēz commented: “Forced labour and child labor have no place in the cocoa supply chain.”

Notable quotes

“In the U.S. last year, investors pumped $47 billion into investment strategies that take ESG features into account, as well as financial metrics, according to Goldman Sachs. That’s almost double the amount of the previous five years combined.”

Economy and Society: SEC disclosure rules meet resistance

The Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

In Washington, D.C.

SEC disclosure rules meet resistance from potential ESG allies

The Biden administration has dedicated attention and resources to administrative efforts to monitor and, where possible, increase the federal government’s involvement in ESG matters.  Its recent creation of a new, senior position at the SEC for ESG and climate policy and the immediate review and intended repeal of a Trump administration rule on fiduciary responsibilities are two of the administration’s early actions in this area.

According to a recent Politico story, however, the administration’s plans face resistance from  potential private sector ESG allies. On February 8, Politico reported the following:

“Democrats are vowing to go through the Securities and Exchange Commission to impose sweeping financial disclosure rules on climate risk that would force thousands of businesses including banks, manufacturers and energy producers to divulge information to investors. Lenders are set to get even more scrutiny from their own regulators like the Federal Reserve, including potential stress tests to measure their resiliency to rising sea levels and extreme weather.”

Politico quotes BlackRock’s Larry Fink, however, arguing the following:

…many publicly traded companies — those accustomed to sharing information widely with investors — are on track to manage their climate risk amid growing market pressure. He says the government should focus on privately held firms that are taking on more carbon-intensive businesses but don’t divulge as many details of their operations. Companies that start disclosing information should get temporary legal protections to shield them if they misreport data, Fink says.

We’re going to see a vast change in the public company arena worldwide,” he said at a Brookings Institution event Tuesday. “They are going to move forward. We’re not going to need really governmental change or regulatory change.”

On Wall Street and in the private sector   

Data from 2020 show continued ESG growth

According to CNBC and Morningstar, inflows to U.S. ESG investment funds in 2020 were more than $51 billion, “a record and more than double the prior year.” Additionally, in 2020, ESG funds captured more than a quarter of all funds invested by Americans over the year, up from just 1% in 2014.

Elsewhere, Bloomberg Green reported that global sales of ESG bonds and other ESG investments also continued to set new records. In a February 10 article, Bloomberg’s Tim Quinson reported that:

“Governments, corporations and other groups raised a record $490 billion last year selling green, social and sustainability bonds. A further $347 billion poured into ESG-focused investment funds—an all-time high—and more than 700 new funds were launched globally to capture the deluge of inflows.”

Bloomberg Green also reported that Wall Street giant Goldman Sachs has, for the first time, begun selling ESG bonds, following other big banks into the new and lucrative business line:

“Goldman Sachs Group Inc. sold bonds aimed at financing environmentally and socially conscious projects for the first time, joining other Wall Street banks tapping the fast-growing market.

The New York-based lender issued $800 million in sustainable bonds after the offering was upped by $50 million amid strong investor demand, according to a person with knowledge of the matter….

Goldman Sachs plans to use proceeds from the sale to fund or refinance a combination of loans and investments made in projects and assets that meet its green and social eligibility criteria, according to the firm’s sustainability issuance framework. That includes priorities such as clean energy, sustainable transport and financial inclusion.”

ESG becomes a new target for SPACs

Last week, Europe’s first ESG SPAC, ESG Core Investments BV, held its IPO, successfully raising its target 250 million Euros, and rising in subsequent trading. SPACsa Special Purpose Acquisition Companyare companies that exist exclusively to find and acquire existing businesses or business opportunities. SPACs have no prior operations and raise funds to pursue purchases and/or takeovers of businesses that fit its investment criteria. 

Meanwhile, in the United States, former NFL quarterback Colin Kaepernick announced that he, in partnership with Jahm Najafi, a partial owner of the Phoenix Suns, had filed to use an SPAC to raise $250 million in pursuit of an ESG-related company. 

Moving from E to S and G

In his annual letter, published last month, Cyrus Taraporevala, the President and CEO of State Street Global Advisors, one of the world’s largest asset managers, advised clients and companies that his firm would focus on social and governance issues this year, in addition to the environment. Up to this point, most of the energy behind ESG matters has focused on energy and environmental issuesthe “E” in ESGincluding the transition from fossil fuels to what are deemed by proponents sustainable energy sources. In his letter, he announced the following updates:

“The preponderance of evidence demonstrates clearly and unequivocally that racial and ethnic inequity is a systemic risk that threatens lives, companies, communities, and our economy — and is material to long-term sustainable returns. … 

To build on our previous guidance — and to ensure companies are forthcoming about the racial and ethnic composition of their boards and workforces — we are instituting the following proxy voting practices, which are outlined in our new Guidance on Enhancing Racial and Ethnic Diversity Disclosure:

* In 2021, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards;

* In 2022, we will vote against the Chair of the Compensation Committee at companies in the S&P 500 that do not disclose their EEO-1 Survey responses; and 

* In 2022, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not have at least 1 director from an underrepresented community on their boards.”

Scholarship and research

Updating the balanced scorecard for ESG

Writing in the Harvard Business Review, Robert S. Kaplana senior fellow and the Marvin Bower Professor of Leadership Development, Emeritus, at Harvard Business Schoolupdated the balanced scorecard theory (BSC) that he and his co-authors, George Serafeim and Eduardo Tugendhat, introduced in 2018. The scorecard, as they explained it three years ago, “illustrated how companies can join with other firms, non-profits, and communities in positive-sum networks that create economic value while simultaneously addressing poverty, social exclusion, and environmental degradation.” In order to accomplish these goals, the authors noted, a company had to develop a second bottom-line, which could “overcome the limitations of their accounting and control systems that prioritize only financial outcomes.”

This year, Kaplan and his new co-author, David McMillan, argued that their theory should be updated to include a third bottom line, to accommodate companies pursuing “strategies encompassing economic, environmental and societal performance.” They wrote that, “[b]y evolving the Balanced Scorecard and Strategy Map’s perspectives to reflect today’s expanded role for business in society,” Kaplan and McMillan wrote, “we believe that the BSC will help businesses focus and deliver on society’s expanded expectations for sustainable and inclusive economic growth.

In the spotlight

Tesla’s bitcoin investment 

Tesla’s recent $1.5 billion investment in Bitcoin might delay its ability to join the S&P 500 ESG Index, according to a story in Investors Chronicle. According to the report, 

“While Tesla stands out in part due to its credentials as a leader in the clean energy revolution, the bitcoin mining process is extremely energy-intensive and notoriously bad for the environment. Recent best guess estimates from the University of Cambridge suggested that bitcoin used more than 120 terawatt hours a year. For context, that would mean it consumes nearly as much energy as Norway. If Tesla’s bitcoin stash looks minuscule in the context of the company’s roughly $800bn market capitalisation, this still seems problematic.” … “It may well be issues like this, and broader governance concerns, helping to keep the carmaker out of most ESG funds.”