Global investor interest in environmental, social and governance (ESG) hasintensified this year as the buy-side has made ESG a top priority and is increasingly putting pressure on companies to improve and report on sustainability practices.
ESG has been around for years, but only recently started to gain traction among investors globally. European countries have led the way in terms of implementing sustainable business practices. U.S. investors and companies, however, only shifted their attention to ESG in the last couple of years.
“When we look at the U.S. markets, we’ve seen such a change,” said Foli Pontillo, global head of Nasdaq’s Perception Practice. “Five years ago, we weren’t really talking about ESG with U.S. investors. Over the past couple of years, we’re talking about ESG in about 50% of the conversations that we’re having.”
Research by Robert Eccles, a professor of management practice at Saïd Business School at the University of Oxford, supports Pontillo’s experience. Eccles interviewed 70 senior executives at 43 global institutional investing firms, including the world’s three biggest asset managers – BlackRock, Vanguard, and State Street – as well as massive asset owners, such as the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), and the government pension funds of Japan, Sweden and the Netherlands.
“We found that ESG was almost universally top of mind for these executives,” Eccles wrote for Harvard Business Review. “It was clear to us that corporate leaders will soon be held accountable by shareholders for ESG performance-if they aren’t already.”
Pontillo noted that when she speaks with buy-side investors, they talk about having revised mandates that force them to think more about ESG and how it’s evolving. Many firms are looking for quantitative data on sustainable practices – some rely on ESG rating agencies to direct their path, but others are gathering information in house, Pontillo said.
The overall uptick in buy-side ESG interest has been partly driven “by us taking a proactive stance and saying to our corporate clients that this is something that’s here to stay, and why not take your pulse and get a feel for how the relevant investment universe feels about ESG and how they are incorporating into their investment decision-making process,” Pontillo said. “In essence, we don’t want them to miss an opportunity to attract new investment capital and position their story in an effective way.”
Environmental, social and governance (ESG) is a discipline that has been around for many years, particularly in European countries, but U.S. companies have only recently started to take notice and implement good ESG practices. Over the past several years, ESG has grown in importance, due to major groups supporting the movement, emerging themes in business, and environmental and geopolitical events that warrant attention.
“It’s a huge evolution,” said Danielle Chesebrough, a senior analyst for Global Compact and Principles for Responsible Investments at the United Nations. Chesebrough also noted that people used to look at ESG from a risk perspective, and are now looking at the opportunities ESG presents.
“[ESG] has emerged as a discipline in and of itself,” said Nasdaq’s Head of Sustainability Evan Harvey. “It is everything that’s not on the balance sheet; it’s everything that’s not in the Q or the K [filings].”
To explain the momentum behind ESG in recent years, Harvey outlined the three main factors that have brought it into the mainstream.
The rise of the number of institutional investors that view ESG topics as a source of insight and value has been vital for the growth of sustainable investing. Institutional investors are increasingly baking ESG considerations, such as corporations’ efforts to reduce their carbon footprint and companies’ financing of environmentally-friendly projects, into their algorithms and valuation process because they find that there are greater returns, Harvey noted.
Companies are also disclosing more about their ESG efforts, not only because some feel a heightened sense of responsibility when it comes to what they are doing for the surrounding communities, but also because highlighting ESG initiatives allows them to talk more about their intangible assets and brand value.
Regulators are starting to take notice of ESG topics as well, particularly in the European Union and Asia. For years, the Nordic and Baltic regions led the world in sustainable investing practices, but now they’re spreading across the globe. Harvey noted that while the U.S. has done little in terms of ESG disclosure and regulation, there is a “coming wave.”
Meanwhile, non-government organizations (NGOs) are increasingly getting involved in ESG matters. The United Nations is trying to improve markets by promoting disclosure. The organization has created 17 sustainable development goals as a blueprint, establishing objectives such as eliminating poverty and hunger and improving education and gender equality.
Younger generations have also become keenly aware of the environmental crisis presented by climate change. With severe weather threats emerging – from wildfires to hurricanes to melting ice caps – millennials have shown greater interest in working for companies that are environmentally and socially conscious.
Themes such as the emergence of big data and new management styles have further propelled the discipline of ESG.
Through big data, companies can better track their efforts on ESG initiatives, such as measuring gender and wage equality and reducing waste. Harvey acknowledged that more data is being included in corporate and investing strategies.
More companies are also incorporating ESG considerations into their human capital management practices, creating volunteer organizations or employee-networks, and their supply chain operations, requiring suppliers to meet certain environmental standards.
One reason that companies are taking on ESG initiatives recently is that more CEOs are willing to be advocates for implementing better governance within their company, enhancing its environmental efforts and creating a more inclusive workplace.
Because these objectives evolve over time, the ESG discipline emphasizes the importance of long-termism, encouraging companies to plan years in advance, rather than focus on short-term goals.
Extraneous events, from severe storms to financial crises, are bringing ESG into the mainstream.
Severe weather threats in recent years have seemingly grown in scale and devastation, increasing the urgency for actions to mitigate harmful behaviors to the environment and implement new, cleaner exercises. Some are even concerned about a budding energy crisis, caused by civilization’s current dependence on finite resources until viable sources of renewable energy are further developed.
Globalization has also created a more connected world, meaning companies across the globe are now more closely linked. This geopolitical environment is part of why the U.S. Housing Crisis in 2008 became a global financial crisis, but, hopefully, companies are now heeding the lessons about disclosure, noted Harvey.
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Welcome to Moral Money! This week we have stories on a possible German green Bund, the dark side of the Internet of Things and an exclusive on divestment from the deputy mayor of London.
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A Teutonic shift for sustainable investing?
When Germany went to the polls a few weeks ago in European elections, support for the Green party doubled. Now its capital markets are getting a greener tinge too.
Moral Money has learnt that the mighty Germany finance ministry is preparing to issue the country’s first “green Bund”, a sovereign debt instrument whose proceeds will be used to support environmental initiatives such as clean energy.
Berlin is not the first AAA-rated nation to do this: last year France sold €7bn of debt with a 22-year maturity and this year the Netherlands issued a 20-year green bond worth almost €6bn in a climate of voracious investor demand (€21bn of orders, to be precise, leaving many investors disappointed to receive just a sliver of the issue).
However, it is the German bond — or Bund — that investors really need to watch, given that Bunds are a benchmark for the eurozone. A successful Teutonic issue could encourage a flurry of similar moves from public entities, particularly since the pricing is likely to be extremely attractive. Investor demand for green bonds is still outstripping supply and the yields of regular eurozone sovereign bonds — “brown” bonds — are already at rock bottom lows.
Of course, cynics might question what shade of “green” these Bunds will really be. The industry has a plethora of different standards and labels for green instruments, and charges of “greenwashing” abound.
The good news is that the labelling system for green securities is improving: just this week FTSE and Russell announced new indices to enable investors to judge the environmental credentials of sovereign countries and regions. That is helping to spark green issuance in all manner of unlikely places, even Brazil.
So perhaps the other question investors should ask is whether the US Treasury might follow the German (or French) lead. Donald Trump claimed this week that he wants the US to support environmentally friendly innovation (yes, really) and some American states are experimenting, irrespective of anything Washington does. Connecticut, say, recently issued a $240m bond to support a “clean water” fund that shattered state records for investor demand. The ripples from these initiatives are likely to spread. (Gillian Tett)
I scream, you scream, we all scream for good governance
Last month, a judge at the Delaware Supreme Court fired a warning shot at corporate boards, saying it would reopen a case covering directors’ responsibilities regarding health and safety.
So far, the story has not gotten much coverage in the global press but legal experts in the US are watching it like hawks. What happens in Delaware can have far-ranging ramifications due to the number of companies registered in the state, and while Delaware’s legal system has traditionally given rigid primacy to shareholder rights, there is debate about what this decision means.
The case in question involves Blue Bell, an ice-cream company at the centre of a listeria outbreak in 2015 that killed three people. In the original lawsuit, shareholders claimed that the board had not done enough to oversee the company’s food safety procedures and should be held liable for the incident.
That claim was initially dismissed, with the Delaware court determining that the company had complied with Food and Drug Administration regulations and the board had made a “good faith effort to implement an oversight system” — which is all the existing law requires. That decision came as no surprise, as proving a board acted in bad faith is notoriously difficult. So when the lawsuit was revived on appeal in June, people sat up and took notice.
The decision to reverse the dismissal shows a board’s responsibility “goes beyond mere compliance with laws”, attorneys at Sullivan and Cromwell wrote. “Companies should ensure that they have written processes and procedures in place for the board to be timely informed about, and to monitor regularly, compliance, safety and business developments that are important to the company, or may be viewed as critical to the company in hindsight”, said the lawyers.
The fallout could expand to issues beyond food safety. With the rise of the #MeToo movement, this decision could open the door to holding directors responsible for sexual harassment problems at the companies they oversee, Agenda reports.
Moral Money will be watching to see what happens. (Billy Nauman)
London drops Exxon as divestment drive rolls on
The London Pensions Fund Authority is moving ahead with its plan to fight climate change, cutting another oil company — ExxonMobil — from its portfolio last week, deputy mayor Shirley Rodrigues told Moral Money. The £5.6bn fund, which is responsible for the pensions of 52,000 current and former government and non-profit employees, adopted a climate policy in 2017 that calls for a mix of engagement and divestment to mitigate its exposure to climate risk. The fund has already divested from Coal India, BP and Shell, reducing its fossil fuel exposure to about 0.4 per cent of its total assets.
Divestment has been taking off in recent months, with a growing number of funds — from Norway’s sovereign wealth fund to the UK’s National Trust — dropping fossil fuels. The biggest reason for divestment is risk management, Ms Rodrigues said. If investors are not thinking about the risk of stranded assets, they aren’t doing their fiduciary duty, she explained. Only about one in eight of the world’s highest greenhouse gas emitters are on pace to meet the goals set out in the Paris climate accord, a new report from the Transition Pathway Initiative has found, so the risk is large.
Some institutions, such as the Church of Scotland, take a different stance, and prefer to stay invested and campaign for change rather than divest the holdings. Other critics argue that it is unclear how much impact a divestment campaign can have on fossil fuel companies.
However, the Royal College of Emergency Medicine and the Royal Society of Arts also announced plans to divest last week, and Jonathan Rowson, a former director of the RSA, insists that it was right to take this step even if it fails to have a tangible impact on the companies’ bottom line. “The money being removed doesn’t put them out of business. It removes the social licence to operate,” he said.
London mayor Sadiq Khan wants more public investors to take up the charge. “In London, we have 30 local authorities and we’ve made a call on them to divest,” Ms Rodrigues said. Thirteen of them have agreed so far. The push is not limited to London, either. New York City has joined the movement and Montreal and Pittsburgh have also decided to divest, Ms Rodrigues said, and divestment is just the beginning. “Divestment isn’t the [only] goal. It’s about switching that funding into more social responsible green funds.” (Billy Nauman)
Grit in the oyster
Many companies and investors say they try to “do well by doing good”. As a reminder that many still fall short, here’s a little grit in the ESG oyster.
The Internet of Things is coming and it could be bringing a sustainability crisis in its wake. An enormous number of batteries will be required to power all the wireless sensors needed for the IoT, and the world will need to increase its lithium output threefold to meet the expected demand, according to the FT’s Special Report on Rethinking Energy. To put it lightly, that could be a recipe for disaster. Mining, of course, is a dirty business, and as Gillian Tett has pointed out, consumers’ typical myopia toward global supply chain sustainability is only amplified when it comes to the tech industry. (Billy Nauman)
Chart of the week
American consumption of meat alternatives jumped significantly this Fourth of July, and that’s good news for climate-minded investors. The cattle industry expels almost the same amount of greenhouse gases as the entire United States (and it is not just farts). So if companies such as Impossible Foods and Beyond Meat can convince enough red-blooded carnivores to choose their meat-alternative products, it will go a long way towards slowing climate change — and investors hope they’ll make a beefy profit along the way. One challenge for investors, though, is how to value these groups, given that we are in uncharted waters (or appetites).
Smart reads (and listens)
Cities are magnets for greenhouse gas emissions, study finds
The world’s megacities are gathering data about their greenhouse gas emissions to better understand how they can cut pollution. Vox writes about a study from C40, a group of cities chaired by the mayor of Paris, that explored consumption-based greenhouse gas emissions (for example, pollutants created by city denizens buying hamburgers). Though they are currently hard to categorise and measure, consumption emissions from goods, food and services are huge, the study found — and could become a new metric for carbon regulation.
Carbon: the new cash crop
Carbon in the air? Bad. Carbon in the ground? Good. That’s the premise driving Boston-based start-up Indigo, which wants to pay farmers to store carbon in soil and then sell carbon credits to companies, the latest example of so-called negative emissions technology. FT reporters Leslie Hook and Emiko Terazonodiscuss Indigo’s business model and its prospects for dealing with global warming.
Tips from Tamami
Nikkei’s Tamami Shimizuishi keeps an eye on Asia to help you stay up to date on stories you may have missed from the eastern hemisphere.
Asia has been a laggard in sustainable investing. But that is changing. A survey from Standard Chartered has provided a rare glimpse on what high net worth investors in China, Hong Kong, Singapore and India are doing — and this poll suggests they are putting almost one-fifth of their portfolio into sustainable investments, with more to come in the future.
That represents a lot of money. HNW investors in the Asia-Pacific region will have $12.6tn in investable assets by 2021, according to EY, so if they continue to place 20 per cent of that money into sustainable projects, that could go some way towards helping the UN find the money it needs to fund its Sustainable Development Goals.
Why is this sum rising? Motives are mixed: almost 70 per cent of investors apparently make sustainable investments to create a better future, but 59 per cent believe sustainable products will help them outperform the market. Worth noting, though: knowledge about the sector remains very low, since only 30 per cent of Asian HNW investors can define what sustainable investing is, up from 20 per cent last year. “Some misconceptions still exist,” admits Didier von Daeniken, global head of private banking and wealth management at Standard Chartered. Philanthropists (and eager bankers) are keen to correct this.
Interested in learning more about Japan’s efforts to accomplish the SDGs? Check out Nikkei’s SDG Forum in New York on July 16.
Abigail Disney was anything but mousy in her Lunch with the FT interview with Andrew Edgecliffe-Johnson. Ms Disney, a self-proclaimed class traitor, unloaded on inequality — both at the company that bears her name and in society as a whole. “It’s like the ego of the wealthy has been swelling like an enormous blister and it’s got to give at some point,” she said. (FT)
Insurance companies need to pay special attention to ESG risks, and rating agencies are putting them under the microscope. (FT)
One in three board directors in the European financial services sector are women. The rest of the world has some catching up to do. (FT)
The EU’s plan to fight climate change by raising carbon prices could backfire if the polluting companies just pick up and move elsewhere, Benjamin Jones of the Cru Group argues. His solution: a carbon border tax. (FT)
Tech companies have flocked to Africa under the auspices of making the world a better place. But some argue they are simply continuing the centuries-old colonial tradition of extracting wealth from the continent. (FT)
Institutional investors are finding that pursuing social and environmental goals can also help their bottom line and provide security to their clients and beneficiaries. (FTfm)
The key to getting more people to invest in sustainable products? It all comes down to returns. (FT Alphaville)
The FT’s special report on Rethinking Energy has a wealth of information for anyone interested in sustainability, including multiple great pieces on the battery industry. (FT Special Report)
Amazon warehouse workers are planning a strike on one of the company’s busiest days of the year to protest against their working conditions. White-collar employees are planning to join in solidarity. (Bloomberg)
SunTrust has joined the growing ranks of banks refusing to finance the private prison industry. (Reuters)