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.”

Economy and Society: SEC disclosure rules meet resistance

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

ESG developments this week

In Washington, D.C.

SEC disclosure rules meet resistance from potential ESG allies

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

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

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

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

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

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

On Wall Street and in the private sector   

Data from 2020 show continued ESG growth

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

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

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

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

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

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

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

ESG becomes a new target for SPACs

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

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

Moving from E to S and G

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

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

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

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

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

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

Scholarship and research

Updating the balanced scorecard for ESG

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

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

In the spotlight

Tesla’s bitcoin investment 

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

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