Larry Fink’s letter to CEOs - In this letter, Larry Fink discussing the changing face of finance with regards to climate change. He emphasises that climate risk is investment risk and calls for improved sustainability-related disclosure for investors. [Source: BlackRock]
The hidden environmental liabilities - The median environmental impact as a percentage of an organization’s revenues, referred to as environmental intensity, is close to 2% and above 10% in 11 out of 68 industries, suggesting a significant level of ‘hidden liabilities’ and potential for value erosion if environmental impacts are priced. [Source: Harvard Business School]
The Science Based Targets Initiative - An initiative with nearly 1000 signatory companies. The initiative aims to encourage companies to set ambitious and meaningful corporate greenhouse gases (GHG) reduction targets. The targets are considered science-based if they are in-line with the decarbonization required to keep global temperature increase below 2°C. [Source: Science Based Targets]
The ‘S’ in ESG
S is for Social
What is the ‘S’ in ESG - “How can a company manage its relationships with its workforce, the societies in which it operates, and the political environment? This is the central question behind the “S” in ESG investing — the social aspect of sustainable investing.” [Source: S&P Global]
The ‘G’ in ESG - “Investors focused on good corporate governance can screen for companies that include a balanced number of board members and a strong board composition; they may also consider oversight and conflicts of interest.”
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Trends in ESG - Some useful statistics
In 2018, ESG assets worth over $30 trillion were professionally managed - a 34% increase in 2 years. [Source: Global Sustainable Investment Alliance]
Sustainable Fund flows hit records - “Flows into sustainable funds rebounded strongly after the coronavirus pandemic market sell-off, more than doubling to (US)$54.6 billion over the second quarter of 2020.” [Source: Morningstar]
60% of assets managed for EU investors in 2018 incorporated sustainable strategies. [Source: London Stock Exchange]
What is Impact investing? - Providing capital to specific businesses that are aimed at providing positive social impact to stakeholders. [Source: The Global Impact Investing Network]
What is a Circular Economy - An economic system concerned with eliminating waste and continued use of resources. [Source: The Ellen Macarthur Foundation]
What is Divesting? - The act of removing specific stocks from a portfolio based upon ethical and non-financial objections to a specific business practice. [Source: IG Group] For example, the Universities Superannuation Scheme (UK’s largest private pension fund by assets) will divest from tobacco, coal and weapon manufacturing companies. [Source: FT]
What is Financial materiality? (in terms of ESG) - “Financially material ESG factors are factors that could have a significant impact – both positive and negative – on a company’s business model and value drivers”. [Source: Robeco] This Materiality map by SASB identifies ESG issues that are likely to impact the financial conditions of companies in their relevant sectors. [Source: SASB]
An introduction to Green and Climate Bonds - A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects, such as sustainable buildings or wind farms. [Source: Climate Bonds Initiative]
An introduction to Social Bonds - A social bond is a type of fixed-income instrument that is specifically earmarked to raise money for social projects, such as affordable housing or empowerment programmes. [Source: Sustainalytics]
How can integrating ESG create value for companies?
5 ways that ESG creates value: Top line growth, cost reduction, reduced regulatory and legal interventions, employee productivity uplift, and investment and asset optimization. [Source: McKinsey]
ESG as a workforce strategy: - As a workforce strategy, ESG performance has become a competitive advantage — both in engaging today’s employees and attracting tomorrow’s talent. [Source: Marsh & McLennan Advantage]
Why investors are making ESG an imperative for COVID-19 and beyond - ESG reporting for investors is on the rise. 98% of the investors surveyed in this research report that they evaluate nonfinancial performance based on corporate disclosures. 72% conduct structured methodological evaluations, up from just 32% in 2018. [Source: EY]
ESG Frameworks: How can companies measure and report their environmental, social and governance impact?
Most of the world's key stock exchanges now have guidance on how to disclose ESG data. The list of guidance documents can be found here. [Source: SSE Initiative]
A list of the most commonly used reporting instruments for ESG data:
Carbon Disclosure Project (CDP) “runs the global environmental disclosure system. Each year CDP supports thousands of companies, cities, states and regions to measure and manage their risks and opportunities on climate change, water security and deforestation. They do so at the request of their investors, purchasers and city stakeholders.”
The Global Reporting Initiative (GRI) - Covering topics ranging from anti-corruption to water, biodiversity to occupational health and safety, the GRI enables organizations to be transparent and take responsibility for their impacts. GRI is the most widely used reporting instrument.
Task Force on Climate-related Financial Disclosures (TCFD) - “The Task Force on Climate-related Financial Disclosures (TCFD) will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.”
International Integrated Reporting Council (IIRC) - “The IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting profession, academia and NGOs. The coalition promotes communication about value creation as the next step in the evolution of corporate reporting.”
Climate Disclosure Standards Board (CDSB) - “CDSB is an international consortium of business and environmental NGOs, committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital. CDSB does this by offering companies a framework for reporting environmental information with the same rigour as financial information”
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.
United Nations Global Compact (UNGC) - UNGC is the world’s largest corporate sustainability initiative with over 12,000 companies involved worldwide. It is a non-binding pact that encourages businesses to adopt sustainable and socially responsible policies, and to report on their implementation.
Climate Action 100+ - An investor initiative to ensure the world’s largest corporate greenhouse gas emitters take the necessary action to tackle climate change.
The ESG Data Challenge - Problems with ESG standardization such as financial materiality, data acquisition and estimation, aggregation and weighting. [Source: State Street Global Advisors]
Divergence in ESG Rating Agencies - This paper investigates the divergence of environmental, social, and governance (ESG) ratings by investigating disagreement between the ESG ratings of five prominent rating agencies. They find that measurement divergence, i.e. which indicators are used to measure the same attributes, explains most of the rating divergence. [Source: MIT]
Where ESG Fails - This article critiques the ESG approach and suggests an alternative business strategy: shared-value, a profit-driven social impact strategy. [Source: Institutional Investor]
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