Economy and Society: Buffett rallies opposition to ESG proposals on company proxy statement

ESG developments this week

On Wall Street and in the private sector

An Oracle’s opposition

The big story in the ESG world last week was the news that the so-called Oracle of Omaha, Berkshire Hathaway CEO Warren Buffett, opposed ESG proposals on his company’s proxy statement and was able to rally support among members of the board of directors and other shareholders to defeat proposals that would have forced the investment company to disclose various ESG data for all of the companies it owns. Buffett argued, and a majority of shareholders agreed, that the costs associated with such an effort would be damaging to shareholder value and, in his view, provide little by way of useful information. Reuters put it this way:

“Buffett and his board opposed two shareholder resolutions at Berkshire Hathaway’s annual shareholder meeting last week that called for annual reports on how its companies are responding to the challenge of climate change, as well as reports on diversity and inclusion in the workplace.

He prevailed, supported by directors who along with him control a combined 35% of Berkshire Hathaway’s voting power. But some of his top investors, including BlackRock Inc (BLK.N), the world’s biggest asset manager, were part of the roughly 25% of Berkshire Hathaway shareholders who defied him and voted for each resolution. The California Public Employees’ Retirement System, the largest U.S. public pension fund, and Federated Hermes Inc (FHI.N), the $625 billion asset manager based in Pittsburgh, were among sponsors of the climate-change resolution.”

While, according to the report, many shareholders appear to be drawing the line on ESG, even without Buffett and the board’s 35%, the resolution did not muster the support of a majority of outstanding shares, losing 40%-25%. 

ESG pioneer reexamining fiduciary duty

In her BloombergOpinion column last week, Shuli Ren disclosed that the world’s largest pension fundJapan’s $1.6 trillion Government Pension Investment Fundhas begun questioning its involvement in ESG, with some employees reexamining their fiduciary responsibilities as they relate to socially responsible investing. This reexamination, in turn, has led the fund to cool its support for ESG:

“In July 2017, Japan’s $1.6 trillion Government Pension Investment Fund — the world’s largest — blazed a trail by putting 1 trillion yen ($9.1 billion) into three indices that track Japanese stocks that put emphasis on environmental, social and corporate governance issues. GPIF then plowed 1.2 trillion yen into two carbon-efficient indices in 2018, and another 1.3 trillion yen into two ESG foreign equity indices last December.

But top officials of the pension fund have been talking up fiduciary duty lately. GPIF “can’t sacrifice returns for the sake of buying environmental names or ESG names,” a senior director at the fund’s investment strategy department told Bloomberg News in April. 

At issue is poor performance. For instance, one of GPIF’s earliest ESG picks was a thematic social index, which invests in domestic companies that hire and promote women. The MSCI Japan Empowering Women Index, the so-called Win index, has fared poorly against the benchmark Topix Index. Performance is all-important to GPIF: the fund is required to pursue a real investment return of 1.7% to support an aging Japan.

Over the last year, the Japan ESG indices that GPIF tracked could not outperform the benchmark Topix Index. 

Ren concludes, starkly:

No doubt, with the European Union and Biden administration pushing fiscal stimulus money into clean energy and climate technology, ESG investing will remain a hot topic. But if the world’s largest pension fund seems to have become more circumspect, shouldn’t you? From the perspective of pure returns, passive ESG investing can still be fruitful, but one has to be nimble and practical, able to switch quickly from one thematic fund to another — or out of ESG funds altogether. Dogma won’t work.”

BlackRock identifies ESG as the future of global investing

This past weekend, CNBC recapped an interview with Armando Sebra, the head of BlackRock’s iShares Americas, who insisted that ESG is the wave of the future for global investing. “We are just at the beginning” of the ESG era, Sebra said in a brief interview with the network’s Bob Pisani. CNBC continued:

“Environmental, social and governance (ESG) investments could become a $1 trillion category by 2030, BlackRock’s head of iShares Americas, Armando Senra, told CNBC’s “ETF Edge” this week.

With U.S. investment in iShares’ suite of ESG funds starting to pick up in earnest this year, “we’re just at the very beginning” of what could be a decade-long growth story, Senra said.

ESG funds are on track for a record year of inflows, raking in over $21 billion in the first quarter of 2021. That’s an acceleration from 2020, when they earned over $51 billion for the year; 2019, when they accrued $21.4 billion; and 2018, when they saw about $5.4 billion in inflows.

Senra attributed the interest to larger asset managers and model portfolio managers incorporating sustainable investments into their strategies in more impactful ways.”

Study on ESG alpha goes public

In the last issue of this newsletter, we noted a study, conducted by the company Scientific Beta, that purported to show that the alphai.e. the excess return over the market averagegenerated by ESG funds is a myth created by mistaken categorization of risk. The article we cited, published by Institutional Investor magazine, claimed to have seen the study, even though it had not yet been published. This week, the study and its results became public and have circulated among the niche and mainstream financial press. Among others, The Financial Times noted the following:

““There is no ESG alpha,” said Felix Goltz, research director at Scientific Beta and co-author of the as yet unpublished paper, “Honey, I Shrunk the ESG Alpha”.

“The claims of positive alpha in popular industry publications are not valid because the analysis underlying these claims is flawed,” with analytical errors “enabling the documenting of outperformance where in reality there is none”, he added.

Scientific Beta analysed 24 ESG strategies that have been shown to outperform in other academic papers. It did find evidence that ESG funds have tended to outperform, with ESG leaders typically beating ESG laggards by almost 3 percentage points a year.

However, in both the US and other developed markets, it found that three-quarters of the outperformance is due to “quality” metrics, such as high profitability and conservative investment.

Quality has long been recognised as one of the investment “factors” that have traditionally tended to drive above-market returns.

“Despite relying on analysis of non-financial information by hundreds of ESG analysts, ESG strategies perform like simple quality strategies mechanically constructed from accounting ratios,” the paper said.

“Of the 24 strategies, not one has significantly outperformed when you adjust for this factor and that to me is quite striking,” said Goltz. “It’s just the case that over the last decade quality has outperformed and if you use ESG scores that inherently tilts [a portfolio] to quality.

“You can ask the question; what is the value of the ESG analysis?” Goltz added, if ESG portfolios can be constructed simply by analysing high-level balance sheet data.”   

Former Managing Director at AQR Capital argues ESG funds cost more

In his May 7 BloombergOpinion column, Aaron Brown argued that there is very little difference between most ESG ETFs and an S&P 500 fundwith one exception, the ESG fund costs more for investors:

“Want to align the core of your investment strategy with climate-change values? Or build a sustainable equity portfolio for the long-term by focusing on environmental, social and governance goals? A variety of ESG exchange-traded funds have made these and other promises. But as the table below shows, they mostly hold the same large capitalization technology stocks as the S&P 500 Index, represented in the top row by a popular ETF with a miniscule 0.03% expense ratio, in similar weights.

Not only are the portfolios similar, but performance is nearly identical. The Vanguard ESG fund has a 0.9974 correlation to the S&P 500 fund since inception in September 2018, which is higher than most index funds have to their benchmarks. A correlation of 1 would mean the two funds run perfectly in sync.

Instead of putting $10,000 in the Vanguard fund, you could put $9,948 in the S&P 500 fund, and $52 in a long/short fund that bought a bit more of some stocks and shorted small amounts of others so the combination of the two funds had precisely the same holdings as the Vanguard ESG fund. The ESG fund charges $12 per year in expenses, while the index fund charges $3. The extra $9 in fees is really paying for the $52 “active share” fund, an annual expense ratio of over 17%!

The other ESG funds charge similar outrageous fees for tiny adjustments to the S&P 500. FlexShares charges 0.32%, which works out to 16% on the active portion of its portfolio. Conscious Companies charges 0.43%, but has a lower S&P 500 correlation, so is a relative bargain at only 11% for its active portion. SPDR charges 0.20%, or 18% on the active portion. ESG Aware is the second cheapest on raw fees at 0.15%, but its sky-high correlation of performance with the S&P 500 means you’re paying more than 20% on the active share.”

In the spotlight

Business schools jump on the bandwagon

According to The Financial Times, large businesses and some business schools have begun working hand-in-hand to educate corporate employees about sustainability efforts and their importance and to turn ESG into a much more mainstream business practice and investment strategy. Focusing on Nespresso and NYU’s Stern School of Business, the paper reports the following:

“By taking a commodity and turning it into a luxury product, Nespresso has generated billions in sales from its coffee pods. Boosted by the endorsement in its adverts of actor George Clooney, the company, owned by Swiss multinational Nestlé, has an annual turnover of SFr5.9bn ($6.3bn).

However, Nespresso has come under heavy criticism over the environmental impact of the aluminium pods that end up in landfill, because the metal is not biodegradable. It can be recycled, though.

Nespresso turned to NYU Stern School of Business in New York to create a custom executive course, run most years since 2016, to help employees understand coffee sustainability. There have been 118 participants, from different levels of the company, and what they have learnt has already helped it improve recycling rates.

Attendees visit a coffee farm in Costa Rica to understand the company’s sustainable sourcing programme, set up in 2003 with the Rainforest Alliance, an environmental organisation. They also take business classes, learning about brand storytelling to court consumers, and are encouraged to develop proposals for projects on the course — for example, ways to reduce waste in Nespresso’s offices….

In the wake of the 2008 financial crisis, some critics labelled business schools “academies of the apocalypse”, arguing that they were partly culpable. Many institutions, however, are moving beyond the shareholder-primacy model and emphasising the longer-term interests of employees and broader society in their executive education programmes, encouraging organisations to become better corporate citizens.

This month, the University of California Berkeley’s Haas School of Business launches a new course on how to integrate sustainability into a business strategy. Robert Strand, executive director of Haas’s Center for Responsible Business, says the pandemic has put “stakeholder capitalism on steroids”. It has “exposed and worsened inequalities, but it’s also an opportunity to change the narrative of capitalism, and redefine the purpose of a corporation”, he adds.

Academics disagree over whether coronavirus will really reset capitalism, but the appetite is strong for executive courses that go beyond the bottom line. Nicholas Pearce, professor of management and organisations at Northwestern University’s Kellogg School of Management in Illinois, says many executives are interested in using business as a platform for social change. “The pandemic forced people to reflect on their responsibility to use positions of privilege and power to do good,” he says.

Pearce says Kellogg’s corporate clients are increasingly requesting bespoke programmes on social purpose, employee wellbeing, and diversity and inclusion. Likewise, Ioannis Ioannou, associate professor of strategy and entrepreneurship at London Business School, agrees that demand for such training outstrips supply. “Coronavirus has awakened the ‘S’ in ‘ESG’,” he says, reflecting a rethink by companies particularly on social issues alongside environmental and governance factors.”

Notable quotes

On the perceived potential for an ESG/Bitcoin collision

“To the extent that financial firms need to improve on the sustainability of cryptocurrency products, this can be achieved for example by purchasing carbon credits at the custodial level to offset the current carbon impact of mining per coin held in custody per unit time.

So far, we have seen limited specific demand for such offsets and to my knowledge no large custodians currently offer them but it may well become a common product component.” 

Chris Bendiksen, head of research at CoinShares, “Bitcoin Under ESG Scrutiny,” etf.com, May 5, 2021.

Economy and Society: ESG references in federal lobbying reports on the rise

ESG developments this week

In Washington, D.C.

ESG references in federal lobbying reports on the rise

On April 29, Roll Call reported that references to ESG in federal quarterly lobbying reports have grown over the last few monthscoinciding with the start of the Biden administration. According to the paper, lobbying mentions of ESG had risen slowly during the Trump presidency:

“More lobbyists reported raising environmental, social and governance issues with U.S. officials and lawmakers this year, with Democrats now controlling Washington, than ever before….

Lobbyists mentioned the acronym ESG in first-quarter 2021 lobbying reports for 37 unique clients. The reports, which were due April 20, cover activity from Jan. 1 through March 31, including the beginning of the Biden administration and Democrats’ control of both chambers of Congress.

The figure is up from 21 distinct reports that mentioned ESG for the final quarter of 2020, 24 from last year’s third quarter, 18 from the second quarter and 14 from the first quarter. The final quarter of 2019 saw 15 reports mentioning ESG, which was the first time the term appeared widely in lobbying reports. It was mentioned once before in a report from the U.S. Chamber of Commerce covering 2018’s second quarter….

Groups that disclosed such lobbying included large trade associations, asset managers, financial services firms, insurers, pension-focused groups and at least two left-leaning organizations advocating ESG disclosure rules, the United Nations-supported Principles for Responsible Investment and Public Citizen.

Among all filings mentioning ESG, about 29 percent specifically reported lobbying on the ESG Disclosure Simplification Act, a bill from Rep. Juan C. Vargas that would require public company disclosure of ESG information. The California Democrat initially proposed the measure in September 2019. More than a dozen listed a Labor Department rule related to ESG, which was finalized under the Trump administration and changed requirements for employer-sponsored retirement plans when selecting investments.

Of the 37 reports that mentioned lobbying on ESG during the first three months of 2021, most mentioned ESG issues, disclosure, investing or ratings generally. Five groups reported lobbying on Vargas’ legislation, and three on the Labor Department rule that Democrats may soon roll back. One group detailed involvement in an ESG workgroup meeting at the Securities and Exchange Commission.

The world’s largest asset management firm, BlackRock Inc., mentioned ESG specifically in a lobbying report for the first time in 2021, reporting that it addressed the “ESG Rule/DOL.” The manager of $9 trillion also disclosed lobbying on “climate risk” for the first time.”

On Wall Street and in the private sector

BlackRock signaling increased support of ESG

On April 30, The Wall Street Journal reported that BlackRock, a leader in Wall Street’s ESG and sustainability efforts, with $9 trillion in assets under management, has used the current annual meeting season to put its proverbial money where its mouth is. According to the paper, BlackRock has increased its support for shareholder proposals focusing on environmental, social, and corporate governance matters:

“BlackRock Inc. BLK -0.97% has so far increased its support for shareholder-led environmental, social and governance proposals, and published a slew of criticisms of public companies that haven’t bent to its overall requests.

The firm votes on behalf of the investors in its many funds. For the roughly 170 ESG shareholder proposals it voted on during the first half of the proxy year, BlackRock backed 91% of environmental proposals, 23% of social proposals and 26% of corporate-governance proposals.

That included voting for a proposal to make it easier for shareholders to push for changes at Tesla Inc. and another to make Spanish airport operator Aena SME SA publish carbon-emission reduction plans. Most of the votes for the proxy year come in the six months ending in June.

For the 1,000-plus proposals for the year ended in June 2020, BlackRock backed 6% of environmental proposals, 7% of social proposals and 17% of governance proposals….

The firm is one of the top three shareholders of more than 80% of the companies in the S&P 500, according to S&P Global Market Intelligence, through its many funds. The money manager casts a long shadow on shareholder meetings where it can vote on behalf of its investors on board directors, executives’ pay packages and other company matters.”

ESG assets under management approaching $2 trillion 

On April 30, CNBC (citing Morningstar) reported that ESG assets under management are now nearly $2 trillion, after massive ongoing inflows throughout the 1st quarter of 2021:

“Sustainability-focused funds attracted record inflows during the first quarter, pushing global assets under management in ESG funds to nearly $2 trillion, according to a report from Morningstar released Friday.

The rise underscores the momentum behind ESG investing, or when environmental, social and governance factors are considered. Assets in these types of funds first topped $1 trillion in the second quarter of 2020.

Global sustainable funds attracted a record $185.3 billion during the first quarter of 2021, up 17% quarter over quarter. Overall, assets in ESG funds jumped 17.8% compared to the fourth quarter of 2020.

“2021 began where 2020 left off with record demand for sustainable investment options across the globe,” noted Hortense Bioy, global director of sustainability research at Morningstar.”

Meanwhile, on April 29, ETFStream.com, citing data from Ultumus, reported that more than half of all inflows into European investment markets in the 1st quarter went to ESG-aligned funds.”

In the spotlight

Are ESG returns a mirage?

On April 26, Institutional Investor magazine reported on the results of a new but yet unpublished study on the returns generated by ESG investments. The results of the study suggested that ESG fund outperformance that supporters claim is generated by ESG factors is, in fact, generated by other, more generic factors:

“Scientific Beta, set up by EDHEC-Risk Institute in 2012 and now majority-owned by Singapore Exchange, has found that 75 percent of the outperformance of ESG strategies cited in popular academic studies on the subject was due to their exposure to the quality factor, which can be cheaply accessed through systematic funds. Quality is a well-known premium, or source of return, that academic research has shown outperforms the market over long-term economic cycles.

In a report not yet published but seen by Institutional Investor, Scientific Beta deconstructed the reported ESG performance gains to account for the potential contribution of sector tilts, factor exposures, and attention shifts, meaning the steadily growing popularity of strategies over the time period that was studied. The research group also evaluated whether incorporating ESG factors protected investors from losses, another popular claim of ESG asset managers.

“We find that over the past decade these strategies did deliver positive returns,” Felix Goltz, Scientific Beta’s research director and one of the authors of the study, said in an interview. “One example is the outperformance of a fund that holds long positions in ESG leaders and short positions in ESG laggards.”

Goltz said he wanted to quantify the specific performance that could be attributed to ESG, once everything was adjusted for generic factors, such as equity styles and industry sectors, a common practice in attribution analysis. “Well, it disappears,” he said….

“We conclude that claims of positive alpha in popular industry publications are not valid because the analysis underlying these claims is flawed,” the authors wrote. “Omitting necessary risk adjustments and selecting a recent period with upward attention shifts enables the documenting of outperformance where in reality there is none.”…

Goltz said he thinks sustainable funds have plenty of value in terms of their potential impact on society, but outperformance isn’t one of them.”

Notable quotes

“Peter McKillop, founder, Climate and Capital Media: When did you first become skeptical about BlackRock’s ESG push?

Tariq Fancy, former chief investment officer for sustainable investing, BlackRock: I had to figure out an investment mechanism for how to create social change because Larry was writing that in letters and I kept getting asked by clients, “How does this actually lower emissions?” So I started writing a long paper to explain how ESG and sustainable investing will, over the long term, actually start to transform capitalism into better outcomes. By the time I had finished, I realized I had just written a somewhat tortured argument that the free market will slowly correct itself. And I said, “Oh my God, we’ve known for decades that climate change is the greatest market failure in history.”

I could clearly see that the markets would not “correct” themselves without government action. At some point we have to accept that burning fossil fuels is dangerous to us unless we do something.”

Peter McKillop, “BlackRock’s former head of sustainable investing says ESG and sustainability investing are distractions,” Greenbiz.com, April 28, 2021.

American ESG Now a Trillion Dollar Business

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

On Wall Street and in the private sector

S&P launches new sustainability project

On April 22, S&P Global announced the formation of a new organization intended to be its one-stop-shop for information, intelligence, and data on corporate sustainability practices. The new operationnamed Sustainable1was described as follows in a company press release:

“This new centralized group represents S&P Global’s integrated sustainability offerings and is comprised of a dedicated team that provides comprehensive views on sustainability, including key ESG and climate topics. Sustainable1 brings together S&P Global’s resources and full product suite of benchmarking, analytics, evaluations, and indices that provide customers with a 360-degree view to help achieve their sustainability goals….

With the launch of S&P Global’s new ESG and sustainability organization, the Company is also debuting the S&P Global Sustainable1 Knowledge Hub. This new site is a comprehensive public resource for the markets that brings together insights and thought leadership from all four S&P Global divisions, including the centralized Sustainable1 group, to provide data and well-informed points of view on critical topics like energy transition, climate resilience, positive impact and sustainable finance.”

According to the press release, among the divisions to be integrated into Sustainable1 are “S&P Dow Jones Indices,” “S&P Global Market Intelligence” and “S&P Global Ratings.”

American ESG is now a trillion dollar business 

According to Seeking Alpha’s research director Tom Roseen, the American ESG mutual fund and ETF business now has, for the first time ever, more than $1 trillion in assets under management. In an April 24 note, Roseen wrote:

“U.S. investors pushed equity funds to their fourth consecutive quarter of plus-side performance in Q1 2021. Investors embraced the $1.9 trillion stimulus package signed into law by President Joe Biden in late March, the Federal Reserve Board’s commitment to keeping interest rates low through at least 2023, and the rollout and improving distribution of COVID-19 vaccines.

All of these factors contributed to relatively strong returns for equity funds and ETFs during the quarter, with the average equity fund posting a 6.31% return, with Lipper’s Sector Equity Funds macro-classification (+8.94%) leading other macro-classifications….

Investors injected some $33.6 billion into SRI and ESG focused mutual funds and ETFs (collectively, responsible investing [RI] funds) during Q1 2021, bringing the one-year net inflows total to $121.7 billion. Assets under management for U.S. RI funds rose 7.05% from $940.5 billion on December 31, 2020, to $1.007 trillion on March 31, 2021.”

American companies join European companies in aligning management values with ESG values

As has been noted previously in Economy and Society, European (and, to a lesser extent, Canadian) corporations have taken a page out of the late 1970s shareholder primacy model of corporate behavior and have begun aligning corporate executives’ values with ESG values by linking their compensation to their ESG performance. Over the last few months, various signs appear to indicate that such an alignment transformation may be underway in American corporations as well. First, for example, is the following note, posted last Wednesday by Yahoo Finance:

“Environmental, social, and governance (ESG) investing is starting to make its way into executive compensation.

“Compensation is the ultimate governance mechanism that we have to make sure (that) companies are doing things right,” said Peter Reali, New York-based managing director and head of engagement for Nuveen, in a Pensions & Investments article.

“ESG issues are making their way into compensation conversations because shareholder proponents want it integrated into executive compensation design, to create accountability for executing on ESG commitments,” said Reali….

“Many European companies already incorporate ESG metrics into executive pay. In a study of 365 issuers from major indexes in continental Europe and the UK, 68 percent have at least one ESG metric in their incentive plans, according to Willis Towers Watson,” an IR Magazine article said. “But companies are under pressure to go further. Investors want to see stronger links between ESG, strategy and pay. In particular, they are pushing for significant metrics on key sustainability topics, like climate change and diversity.””

On Friday, Bloomberg followed that up with an article about changes underway at Alphabet, the parent company of Google:  

“Alphabet Inc. said it will create a bonus program for senior executives that’s partly based on their performance in supporting environmental, social and governance goals.

The program will begin in 2022, the company’s Chairman John Hennessey wrote in an annual proxy filing. ESG goals “have long been a key part of Alphabet and Google’s work,” he added in a letter to shareholders. The Google parent company will hold its annual meeting on June 2.

Hennessey also addressed diversity and workplace harassment in the letter, saying the Alphabet board agreed on a series of “principles and improvements” that incorporated input from employees and stockholders. That included the creation of a new Diversity, Equity, and Inclusion Advisory Council, which comprises senior company executives and external experts in the field.”

In the spotlight

Women in ESG

A recent survey of clients conducted by RBC (Royal Bank of Canada) Wealth Management showed that interest in ESG is quickly rising among RBC’s clients, and that that interest is being driven primarily by women. According to a summary of the survey published by Environment and Energy Leader, RBC’s results were as follows:

“Respondents who identified as women are more than twice as likely as men to say it is extremely important that the companies they invest in integrate ESG factors into their policies and decisions. The survey also found that 74% of women were interested in increasing their share of ESG investments in their current portfolios and were significantly more likely than men to have an interest in learning more about ESG investing.

While the survey revealed that women are leading the charge in ESG investing, more than half of male respondents (53%) also expressed interest in increasing the share of ESG in their current portfolio, and 61% of clients overall shared this position….

The results of RBC’s survey support the growing industry wide enthusiasm for ESG investing. A new report from non-profit foundation US SIF: The Forum for Sustainable and Responsible Investment found that at the start of 2020, $17.1 trillion was invested in responsibly invested assets in the US, up a staggering 42% from $12 trillion just two years prior. ESG investing was among most popular responsible investing strategies, accounting for a third of all managed assets in the US.”

Notable quotes

“The idea of having a return is important for the planet….Because if you really want businesses to engage, if you want business to really turn around and do this at scale … it has to be because there’s a return on that investment. Otherwise, it’s just philanthropy. And so much of what we’re doing at Apple is showing that the business of doing right by the planet is good business.”

SEC Commissioner argues against integrating ESG concerns into its mission

ESG developments this week

In Washington, D.C.

New SEC Chair sworn in

On April 14, Gary Gensler was confirmed by the U.S. Senate (in a mostly party-line 53-45 vote) as the new chair of the Securities and Exchange Commission (SEC). He was sworn in April 17 by Maryland Senator Ben Cardin (D) in a small ceremony in Baltimore.

According to a press release issued by the SEC, Gensler said:

“I feel incredibly privileged to join the SEC’s team of remarkable public servants. As Chair, every day I will be animated by our mission: protecting investors, facilitating capital formation, and promoting fair, orderly, and efficient markets. It is that mission that has helped make American capital markets the most robust in the world…

I’m honored that President Biden nominated me, and I’m grateful to Vice President Harris and the Senate for their support. I’d like to thank Acting Chair Allison Herren Lee for her leadership the last few months and all of my fellow Commissioners for being so generous with their time and advice.”

Among the key issues that Gensler will deal with as the new chair are reporting standards for ESG metrics and definition of materiality as it relates to ESG matters.

Commissioner argues against integrating ESG concerns into SEC mission 

On April 14, the same day as now-Chairman Gensler was confirmed by the Senate, Commissioner Hester Peirce, one of two Republicans on the SEC, released a statement (also published in the April 2021 edition of Views – the Eurofi Magazine) in which she argued against the Commission’s plans to integrate ESG concerns into its mission. “The challenge we face in addressing the ever-increasing number of issues underlying E, S, and G is daunting,” Commissioner Peirce conceded, but “The task before us is to find a way to bring about lasting, positive change to our countries on a range of issues without sacrificing in the process the very means by which so many lives have been enriched and bettered.” She continued:

“At first glance, everything sounds good—common metrics demonstrating a joint commitment to a better, cleaner, well governed society. Common disclosure metrics, however, will drive and homogenize capital allocation decisions. A single set of metrics will constrain decision making and impede creative thinking. Unlike financial accounting, which lends itself to a common set of comparable metrics, ESG factors, which continue to evolve, are complex and not readily comparable across issuers and industries. The result of global reliance on a centrally determined set of metrics could undermine the very people-centered objectives of the ESG movement by displacing the insights of the people making and consuming products and services.

Hampering the ability of the markets to collect, process, disseminate, and respond to price signals by boxing them in with preset, government-articulated metrics will stifle the people’s innovation that otherwise would address the many challenges of our age. Moreover, converging standards would be antithetical to our existing disclosure framework, which is rooted in investor-oriented financial materiality and principles-based requirements to accommodate the wide variety of issuers.

The European concept of “double materiality” has no analogue in our regulatory scheme and the addition of specific ESG metrics, responsive to the wide-ranging interests of a broad set of “stakeholders,” would mark a departure from these fundamental aspects of our disclosure framework. The strength of our capital markets can be traced in part to our investor-focused disclosure rules and I worry about the implications a stakeholder-focused disclosure regime would have. Such a regime would likely expand the jurisdictional reach of the Commission, impose new costs on public companies, decrease the attractiveness of our capital markets, distort the allocation of capital, and undermine the role of shareholders in corporate governance.

Let us rethink the path we are taking before it is too late.”

On Wall Street and in the private sector

Top holdings in BlackRock’s new ESG Fund are tech-focused

In the previous edition of this newsletter, we noted BlackRock’s launch, two weeks ago, of its U.S. Carbon Transition Readiness ETF (ticker LCTU), which attracted $1.25 billion in its first day of trading, a record in the history of exchange-traded funds. While investors flocked to the new offering from the largest asset management firm in the world, Bloomberg Green’s Claire Ballentine noted on April 14 that the ETF suffers, in her view, from the same perceived problem that plagues many other funds in the ESG arena, namely, it is less E, S, or G-focused than it is tech-focused. She wrote:

“As the biggest launch in the history of ETFs, it’s a ringing endorsement of all things ESG. But beyond its billion-dollar debut, BlackRock Inc.’s new fund might feel awfully familiar to most investors.

The top holdings in the U.S. Carbon Transition Readiness ETF (ticker LCTU) — which lured about $1.25 billion in its first day on Thursday — turn out to be Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. and Facebook Inc.

The same five companies, in the same order, are the top stakes in the largest environmental, social and governance ETF on the market, the $16.5 billion iShares ESG Aware MSCI USA ETF (ESGU). That’s also from BlackRock with a fee of 0.15%, half the price of LCTU.

In fact, those tech megacaps form the bedrock of many exchange-traded funds, both in the ESG space and beyond. For example, four of them also are among the five largest holdings of the $167 billion Invesco QQQ Trust Series 1 ETF (QQQ), which is simply tracking the Nasdaq 100….

The record launch comes while many questions linger in the still-maturing ESG sector. A report released Friday by the U.S. Securities and Exchange Commission cautioned that some firms are mis-characterizing their products as ESG, possibly even violating securities laws in the process. The agency didn’t name any companies.”

JPMorgan Chase to invest in ESG

JPMorgan Chase & Co., the biggest bank in the United States and the second biggest in the world, announced last Thursday that the bank will invest significant amounts in ESG efforts over the next decadea potential blow to fossil fuel energy companies. Reuters reported the story as follows:

“JPMorgan Chase & Co (JPM.N) aims to lend, invest and provide other financial services for up to $2.5 trillion of banking business to be done for companies and projects tackling climate change and social inequality over the next decade.

In a statement on Thursday, JPMorgan said green initiatives will account for $1 trillion of that total – the largest environmental, sustainable and governance (ESG) financing target announced by a U.S. bank to date.

That could mean lending or investing in companies that develop clean-energy technology for the trucking, aviation or industrial manufacturing sectors, the bank’s head of sustainability, Marisa Buchanan, told Reuters in an interview….

JPMorgan is among the leading U.S. lenders to fossil fuel companies, having provided $317 billion of lending and underwriting since 2016, according to a recent study by environmental activist group Rainforest Action network….

JPMorgan pledged to share more details about its ESG initiatives, including its work establishing emission targets for companies in its financing portfolio, in its next climate report, due out this spring.”

In the spotlight

Report: Are ESG ETF’s sustainable?

Impact Cubed, a sustainability analytics and research company based in London and partnered with some of the oldest activist asset management firms, released a report late last month, examining the impact of some of the biggest passively managed ESG funds in the world. According to Impact Cubed many such funds are, in its view, falling short of the impact achieved by actively managed funds. And some, it claims, are making sustainability matters worse:

“Passive ESG funds are designed to avoid ESG risk, but do they have positive impact? 

Impact Cubed turned its model onto some popular passive ESG funds to peel back the marketing and look under the hood. Top findings include:

·         Some passive ESG funds actually have an overall negative impact. 

·         ESG performance varies four-fold between the ‘best’ and ‘worst’.  

·         Smart investors who know what to look for can find a passive ESG fund with positive impact and lower tracking error. 

Many passive funds still have ESG growing pains and will need to measure impact if they are to improve and attract investor interest. 

Larry Abele, CIO of Impact Cubed and report co-author, advises “As ESG investing becomes more mainstream, passive ESG fund managers who want to secure a proper perch in the pecking order for capital allocation will need to be more transparent about the impact provided by their approach.””

Notable quotes

“Proponents have filed at least 435 shareholder resolutions on environmental, social and sustainability issues for the 2021 proxy season, with 313 pending as of February 19. Securities and Exchange Commission (SEC) staff have allowed the omission of 24 proposals so far in the face of company challenges; companies have lodged objections to at least 74 more that have yet to be decided—12 more than at this time last year. Proponents have already withdrawn about 90 proposals, however, up from 78 at this time last year and 71 in mid-February 2019.

Annual totals are down from a bit from the all-time high of just under 500 in 2017. About 40 percent of filed resolutions have gone to votes each year since 2018, around 45 percent have been withdrawn and between 13 and 16 percent omitted.

The tumultuous events of 2020 prompted a slew of new shareholder proposals investors will consider in 2021. New angles are most apparent in the big increase in resolutions about racial justice and equal opportunity, but proponents also are raising fresh ideas about worker safety, climate transition planning and lobbying.”

Economy and Society: Greater fund disclosure on voting behavior

ESG developments this week

In Washington, D.C.

Greater fund disclosure on voting behavior

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

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

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

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

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

In the states   

West Virginia Attorney General threatens SEC with lawsuit over ESG disclosures

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

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

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

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

ESG opportunity and risk in state environmental laws 

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

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

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

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

Student activism and divestment in Nebraska

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

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

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

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

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

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

On Wall Street and in the private sector

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

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

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

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

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

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

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

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

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

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

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

Pershing Square declares ESG a life (and world) saver

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

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

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

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

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

In the spotlight

Agency theory in the United Kingdom

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

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

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

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

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

Economy and Society: SEC broadening definition of materiality

ESG developments this week

In Washington, D.C.

SEC broadening definition of materiality

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

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

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

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

On Wall Street and in the private sector   

Former BlackRock official voices ESG criticism

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

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

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

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

ESG’s higher management fees

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

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

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

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

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

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

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

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

Research estimates one-in-four dollars invested in ESG

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

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

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

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

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

Putting the “S” in ESG

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

Vanguard increasing its ESG capacity      

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

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

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

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

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

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

In the spotlight

Agency theory and Canadian corporate governance

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

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

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

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

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

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

Notable quotes

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

Labor Department ends enforcement of Trump administration ESG rule

ESG developments this week

In Washington, D.C.

Labor Department ends enforcement of Trump administration ESG rule 

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

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

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

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

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

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

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

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

On Wall Street and in the private sector   

Investors managing $33 trillion create new ESG investment standards

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

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

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

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

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

Investment banking firm assigning ESG scores to companies

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

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

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

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

CFA Institute offering new ESG certification

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

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

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

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

In the spotlight

ESG-related debt instruments continue growth

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

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

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

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

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

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

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

Notable quotes

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

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

ESG developments this week

In Washington, D.C.

SEC reviewing ESG disclosure practices of publicly traded companies

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

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

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

SEC announces ESG enforcement task force

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

ESG in Sweden

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

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

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

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

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

On Wall Street and in the private sector   

Putting the ‘S’ in ESG

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

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

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

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

ESG in Asia

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

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

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

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

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

In the spotlight

Agency theory in ESG

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

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

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

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

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

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

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

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

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

Notable quotes

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

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

Economy and Society: Congressional hearing puts focus on ESG opposition

ESG developments this week

In Washington, D.C.

Congressional hearing puts focus on ESG opposition

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

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

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

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

In the States

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

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

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

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

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

On Wall Street and in the private sector   

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

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

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

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

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

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

Asset managers face increased scrutiny around ESG efforts

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

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

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

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

Scholarship and research

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

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

In the spotlight

Index sees ESG become the core of its business

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

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

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

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

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.”