Looking to 2021- Michael Bloomberg Advises: What President Biden Should Do

December 31, 2020

by Hank Boerner – Chair & Chief Strategist – G&A Institute

This is my last post of 2020 – indeed, a chaotic, challenging and tumultuous year for corporate managers and investment professionals.  And the rest of us!

At this time last year we were looking forward to continued peace and economic growth. That new virus spreading infection inside China was a blip on the horizon for many people. 

Most of us did not foresee the rapid spread of this dangerous virus to all corners of the globe, and the resulting tragedy of the immensity of deaths, as many families lost loved ones,  We were not adequately prepared for the resulting economic upheaval posing serious challenges to leaders in the private sector, public sector and capital markets.  At year end we are still working our way through the mess. 

And so we come the start of a new calendar year — 2021! — with all of humanity wishing for better days! 

Many eyes are on the United States of America, the world’s largest economy, which will soon have new leadership in the White House and the important arms of the federal government, the cabinets. Those are State, Treasury, Defense, Interior, Energy, Labor, Commerce, and other departments as well as in key agencies such as the Securities & Exchange Commission, and the Environmental Protection Agency (US EPA).

The better days could start on January 20th when a new President and Vice President are sworn in and a new Congress will already be in office (the 117th Congress will convene on January 5th with 100 Senators and 435 Members of the House of Representatives). 

And there is much work for all of those leaders to do!  There are especially high expectations of soon-to-be President Joe Biden and Vice President Kamala Harris…and the men and women they will appoint or nominate (for U.S. Senate confirmation) to help in leading the USA forward, working in cabinet offices or federal agencies. .

President Biden has said that his will be the “climate change administration” and that meeting the challenges posed by climate change is a top priority.

What should / can be done as these leaders settle into the office?

Mayor Michael Bloomberg, head of the Bloomberg LP organization — he with the loudest megaphone to reach and influence capital markets players, government leaders, NGOs, climate activists, multilateral organizations leaders, and many more leaders and influentials — has some specific suggestions for the Biden-Harris team as they assume office.

Here are some of the highlights of Mayor Mike’s suggestions:

  • “Biden Needs to Lead on Climate Reporting” (the headline of the editorial with the suggestions – there’s a link below).
  • Biden’s pledge to rejoin the Paris Agreement should be carried out and this will send a strong signal to the world. But that will take us back four years (when Secretary of State John Kerry led the US delegation in joining the agreement).
  • To move forward President Biden on his first day in the Oval Office should begin the effort to bring together the leaders of the G-20 nations (the world’s leading economies*)  to endorse a mandatory standard for global businesses to measure and then report on risks all nations face from climate change.

There are mechanisms and players in place to help make rapid progress.

Remember that Michael Bloomberg heads the TCFD – the Task Force on Climate-related Financial Disclosures — which was formed by the Financial Stability Board (FSB) —  the board a creation of the G20 nations after the disaster of the 2008 financial crisis. 

The concept of the FSB is to serve as a sounding board and think tank for the leading economies of the world to address among critical issues risks to the financial system. 

This is the organization’s official description: “The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system.  The FSB promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies. FSB fosters a level playing field by encouraging coherent implementation of these policies across sectors and jurisdictions.”

This means that the FSB, working through its member organizations, seeks to strengthen financial systems and increase the stability of international financial markets. The policies developed in the pursuit of this agenda are then implemented by jurisdictions and national authorities.  

Members include the US Department of the Treasury, the Federal Reserve System, and the Securities & Exchange Commission.  

The TCFD is a creation of these and other members. 

The TCFD issued recommendations for companies to measure, manage and report on risks and opportunities related to climate change — which Mayor Bloomberg sees as key driver in directing capital to companies with smarter, more responsible leadership that protect and company and seize opportunities related to climate change.

The TCFD guidelines have been adopted or endorsed by 1,000-plus companies and organizations in 80 countries on six continents, Michael Bloomberg pointed out in his editorial.  Sovereign members of the G20 are among the endorsers — Japan, Canada, France, New Zealand, the United Kingdom. 

And so the United States of America — the world’s largest economy — could serve as the catalyst, the unifier, the key player in the drive for adoption of global standards under Biden-Harris leadership. 

This would serve to bring a coordinated effort to deal with the challenges posed by climate change on a global basis, help to develop the right regulations for the world’s family of nations to develop uniform, comparable regulations for climate change disclosure and reporting, and remove uncertainty for corporate leaders and their providers of capital. 

Michael Bloomberg, whose own company’s widely-used platform (“the Bloomberg”) carries volumes of ESG data, tapping his own knowledge of ESG data, advises us that such data must be useful, comparable, and not be confusing (as is frequently now the case). 

Even with the increasing flow of ESG data, the world’s financial markets, Michael Bloomberg points out, operate in the dark today in terms of climate change – which he sees as the biggest risk to the global economy.

Michael Bloomberg is urging the Biden-Harris team to take action “…to help to develop a single global disclosure framework for climate risks that helps drive a faster and more effective response to climate change”.

Or else we will continue “with competing frameworks that make it harder for investors and businesses to identify risks, leading to more economic harm and lower progress”.

Mayor Bloomberg’s summing up his views:  “Climate disclosure is not flashy but it’s one of the important tools we have to speed progress on prevent climate change and economic hardship…which could dwarf the effects of the financial crisis.  The faster we make [disclosure] standard practice globally, the safer and stronger the economy will be.  The US can help lead the way.”

There’s the complete editorial and more perspectives shared at bloomberg.com/opinion.

And so we end 2020 (farewell!) and begin a new year, filled for many people with great hope and promise for better days.  Stay Tuned!  And best wishes to you for the new year.  

#  #  #

P.S. Michael Bloomberg was also the Chair of the Sustainable Accounting Standards Board (SASB) Foundation, 2014-2018 and remains supportive of the organization.

You can follow Michael Bloomberg on his web site:  https://www.mikebloomberg.com/

*  The G20 nations are the USA, UK, Germany, France Italy, Japan, Canada (these are the G7); Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey.  Plus “guests” – Spain; two African countries; the International Monetary Fund; World Bank; United Nations; the World Trade Organization; the Financial Stability Board (all attend G20 summits).  

To understand the influence of the Financial Stability Board, here are the members: https://www.fsb.org/about/organisation-and-governance/members-of-the-financial-stability-board/

The members of the Task Force (TCFD) and other information: https://www.fsb-tcfd.org/about/

Watching the Major Stock Indexes – For Strong ESG Signals from the Corporate Sector

by Hank Boerner – Chair & Chief Strategist – G&A Institute

October 2020

Indexes – Indices – Benchmarks – these are very important financial analysis and portfolio management tools for asset owners and their internal and external managers.

We can think of them as a sort of report card; fiduciaries can track their performance against the benchmark for the funds they manage; financial sector players can develop products for investment (mutual funds, Exchange Traded Funds, separate accounts and so on) to market to investors using the appropriate benchmark.

If the investable products are focused on the available equities of the largest market cap companies for investment, the most widely-used indexes will likely be the S&P 500®, created back in March 1957 by Standard & Poor’s and the Russell 1000®, created in 1984 by the Frank Russell Company.

Today the S&P 500 Index is managed by the S&P Global organization.  The Russell 1000 is managed by FTSE Russell, a unit of the LSE Group (London Stock Exchange Group).

There are more or less 500 corporate entities in the S&P 500 Index that measures the equity performance of these companies (those listed on major exchanges).

There are other important indexes by S&P for investors to track:  The S&P Global 1200, S&P MidCap 400, and S&P SmallCap 600, and many more.

Russell 1000® is a subset of the Russell 3000®; it is comprised of the 1000 largest market cap companies in the USA. The R1000 represents more than 90% of the USA’s top publicly-traded companies in the large-cap category.  Both indexes are very important tools for professional investment managers and send strong trending signals to the capital markets.

The G&A Institute team closely tracks the ESG and sustainability  disclosure & reporting practices and each year; since 2010 we’ve published research on the trends, first with the S&P 500, and for 2019 and 2020, we expanded our research into to the larger Russell 1000 index. (The top half of the 1000 roughly mirrors the S&P 500.)

The 500 and 1000 companies are important bellwethers in tracking the amazing expansion of corporate sustainability reporting over the past decade.  Yes, there were excellent choices of select benchmarks for sustainable and responsible investors going back several decades – such as the Domini 400, going back to 1990 — and we tracked those as well.  (The “400” was renamed the MSCI KLD 400 Social Index in 2010).

But once major publicly-traded companies in the United States began escalating the pace of sustainability and ESG reporting, many more investors paid attention.  And media tuned in.  And then the ESG indexes proliferated like springtime blooms!

Those bigger customers (the large cap companies) of other firms began expanding their  ESG “footprint” and considering the supply and sourcing partners to be part of their ESG profile.  So, customers are now queried regularly on their ESG performance and outcomes.

Once the critical mass — 90% of large-cap U.S. companies reporting in our latest S&P 500 research – how long will it be for many more mid-caps, small-caps, privately-owned enterprises to follow the example?  Very soon, we think.  And we’re closely watching!  (And will bring the news to you.)

If you have not reviewed the results of the G&A Institute research on the ESG reporting of the S&P 500 and the Russell 1000 for 2019, here are the links:

Note:  Click here for more helpful background on the S&P 500 and the Russell 1000 large equities/stock indexes, here is Investopedia’s explanation.

Excellent Wrap up From GreenBiz:
At last, corporate sustainability reporting is hitting its stride

About “Stakeholder Capitalism”: The Public Debate

Here is the Transition — From the Long-Dominant Worldview of “Stockholder Capitalism” in a Changed World to…Stakeholder Capitalism!

by Hank Boerner – Chair & Chief Strategist – G&A Institute

October 2020

As readers of of G&A Institute’s weekly Sustainability Highlights newsletter know, the shift from “stockholder” to “stakeholder” capitalism has been underway in earnest for a good while now — and the public dialogue about this “21st Century Sign of Progress” has been quite lively.

What helped to really frame the issue in 2019 were two developments:

  • First, CEO Larry Fink, who heads the world’s largest asset management firm (BlackRock) sent a letter in January 2019 to the CEOs of companies in portfolio to focus on societal purpose (of course, in addition to or alongside of corporate mission, and the reasons for being in business).
  • Then in August, the CEOs of almost 200 of the largest companies in the U.S.A. responded; these were members of influential Business Roundtable (BRT), issuing an update to the organization’s mission statement to embrace the concepts of “purpose” and further cement the foundations of stakeholder capitalism.

These moves helped to accelerate a robust conversation already well underway, then further advanced by the subset discussion of Corporate America’s “walking-the-talk” of purpose et al during the Coronavirus pandemic.

Now we are seeing powerful interests weighing in to further accelerate the move away from stockholder primacy (Professor Milton Friedman’s dominant view for decades) to now a more inclusive stakeholder capitalism.  We bring you a selection of perspectives on the transition.

The annual gathering of elites in Davos, Switzerland this year — labeled the “Sustainable Development Impact Summit” — featured a gaggle of 120 of the world’s largest companies collaborating to develop a core set of common metrics / disclosures on “non-financials” for both investors and stakeholders. (Of course, investors and other providers of capital ARE stakeholders — sometimes still the inhabiting the primacy space on the stakeholder wheel!)

What are the challenges business organizations face in “making business more sustainable”?

That is being further explored months later by the World Economic Forum (WEF-the Davos organizers) — including the demonstration (or not) of excellence in corporate citizenship during the Covid-19 era. The folks at Davos released a “Davos Manifesto” at the January 2020 meetings (well before the worst impacts of the virus pandemic became highly visible around the world).

Now in early autumn 2020 as the effects of the virus, the resulting economic downturn, the rise of civil protests, and other challenges become very clear to C-suite, there is a “Great Reset” underway (says the WEC).

The pandemic represents a rare but narrow window opportunity to “reflect, reimagine, and reset our world to create a healthier, more equitable, and more prosperous future.”

New ESG reporting metrics released in September by the World Economic Forum are designed to help companies report non-financial disclosures as part of the important shift to Stakeholder Capitalism.

There are four pillars to this approach:  People (Human Assets); Planet (the impact on natural environment); Prosperity (employment, wealth generation, community); and Principles of Governance (strategy, measuring risk, accounting and of course, purpose).

The WEF will work with the five global ESG framework and standard-setting organizations as we reported to you recently — CDSB, IIRC, CDP, GRI, SASB plus the IFAC looking at a new standards board (under IFRS).

Keep in mind The Climate Disclosure Standards Board was birthed at Davos back in 2007 to create a new generally-accepted framework for climate risk reporting by companies. The latest CDSB report has 21 core and 34 expanded metrics for sustainability reporting. With the other four collaborating organizations, these “are natural building blocks of a single, coherent, global ESG reporting system.”

The International Integrated Reporting Council (IIRC, another of the collaborators) weighed in to welcome the WEF initiative (that is in collaboration with Deloitte, EY, KPMG and PWC) to move toward common ESG metrics. And all of this is moving toward “COP 26” (the global climate talks) which has the stated goal of putting in place reporting frameworks so that every finance decision considers climate change.

“This starts”, says Mark Carney, Governor, Bank of England, and Chair of the Financial Stability Board, “with reporting…this should be integrated reporting”.

Remember, the FSB is the sponsor of the TCFD for climate-related financial disclosure.  FSB is a collaboration of the central banks and treasury ministries of the G-20 nations.

“COP 26 was scheduled for November in Glasgow, Scotland, and was postponed due to the pandemic. We are now looking at plans for a combined 26 and 27 meeting in November 2021.”  Click here for more information.

There is a lot of public dialogue centered on these important moves by influential players shaping and advancing ESG reporting — and we bring you a selection of those shared perspectives in our Top Stories in the Sustainability Highlights newsletter this week.

Top Stories On Davos & More

And then there is this, in the public dialogue on Stakeholder Capitalism, adding a dash of “reality” from The New York Times:

US Banks and Climate Change – What’s the Exposure to Climate Risk?

by Hank Boerner – Chair & Chief Strategist  – G&A Institute

October 27 2020

Banks have long been at the center of the U.S. economy, and federal policies (federal legislation, rules) for the last century have been designed to support, encourage and protect banking institutions, and the customers the banks serve.

The Federal Reserve System – America’s vital central bankers – was one of the last central banks of the industrial nations to be organized (through the 1913 Federal Reserve Act). The Fed plays a critical role in U.S. bank oversight and support.

There is also a robust state-level banking oversight and protection system. Take New York State  — for many years, the state’s bank licensure activities were second only to the Federal governments. Many foreign banks “land” in NY and obtain a state license to begin to operate.

In all this oversight and protection [of the banking system], in all the laws, rules and regulations for the U.S. banking sector, risk is regularly addressed. It is central to bank regulation and the foundation of rules etc.

The questions centered on risk become more critical in this, an era of fast-rising climate change challenges.

What is the broad scope the financial services sectors’ (and the banking industry’s) responsibilities and accountabilities as seas rise, super storms roar ashore, flood waters rise, enormous wildfires occur, and more?

The Ceres organization’s “Ceres Accelerator for Sustainable Capital Markets” looked at the U.S. banking sector’s exposure to climate risk – to ask and try to answer: what are the systemic and financial risks of climate change for stakeholders, for the banking industry, and the broader economy?  That’s our Top Story pick for you this week.

The researchers looked at the risk associated with the syndicated lending of major U.S. banks in climate-relevant sectors of the economy. Key quote: “Our future depends on banks’ understanding of, and disclosure of, their exposure to major risks like climate change” (Steven Rothstein, MD of the accelerator).

The good news is that a growing number of the major U.S. banks have announced moves to look more closely at climate change impacts. Bank of America, for example, joined other big banks in disclosing the “E” effect of its lending practices. The big banks (like Citi Group) have joined forces in the Partnership for Carbon Accounting Financials Initiative.

Some 70 banks and investors from five continents are involved (with US$9 trillion in AUM). Lots going on in banking circles related to climate change challenges these days!

TOP STORIES

The Ceres Accelerator for Sustainable Capital Markets report on banking:

Something we were pleased to be a part of — WSJ Feature Section on “Leadership and Sustainability”. Journalists Dieter Holger and Fabiana Negrin Ocha interviewed the G&A leadership team in the “Show Us The Numbers” feature:

Big News: US SIF Report on US Sustainable and Impact Investing Trends 2020 Released

Big News:   As 2020 Began, $1-in-$3 of Professionally Managed AUM in the United States Had ESG Analysis and/or Portfolio Management Strategies Applied…US$17.1 Trillion Total

November 2020 — Every two years, since 1996, the influential trade organization for sustainable, responsible and impact investment (US SIF) conducts a year-long survey of professional asset managers to determine the total of USA-based assets under management (“AUM”) that have ESG analysis and/or portfolio management applied.

The Trends report just released charts the AUM with ESG analysis and strategies in the United States at $16.6 trillion at the start of 2020 – that’s 25X the total since the first Trends report in1996, with compounded growth rate of 14 percent. (The most rapid growth rate has been since 2012, says US SIF.)

Consider: This means that today, $1-in-$3 of professionally managed assets in the United States follows analysis and/or strategies considering ESG criteria. (The total of US assets under professional management at the start of 2020 was $51.4 trillion.)

This is a dramatic 43% increase over the survey results of the 2018 Trends report – that effort charted a total of $11.6 trillion in ESG-managed AUM in the USA at the start of 2018.

The survey respondents for the current Trends report identified the ESG-focused AUM practices of 530 institutional investors; 384 money managers; 1,204 community investment institutions – all applying environmental, social, and corporate governance criteria in their portfolio management.

What are top ESG issues identified by money management professionals in the survey effort?

  • Climate Change-Carbon: $4.18 trillion – #1 issue
  • Anti-Corruption: $2.44T
  • Board Room Issues: $2.39T
  • Sustainable Natural Resources/Agriculture: $2.38T
  • Executive Compensation: $2.22T
  • Conflict Risk (such as repressive regimes or terrorism, this cited by institutional investors): $1.8T

Note that many strategies and ESG analysis and portfolio management approaches can be overlapping.

Lisa Woll, US SIF Foundation CEO explains: “Money managers and institutional investors are using ESG criteria and shareholder engagement to address a plethora of issues including climate change, sustainable natural resources and agriculture, labor, diversity, and political spending. Retail and high net worth individuals are increasingly using this investment approach, with $4.6 trillion in sustainable investment assets, a 50% increase since 2018.”

The 2020 Trends report counts two main strategies as “sustainable investing” – (1) the incorporation of ESG factors in analysis and management of assets and (2) filing shareholder resolutions focused on ESG issues.

What are the top issues for the professional asset owners, their managers, and other investment professionals participating in the survey? Gauging the leading ESG issues for 2018-to-2020, examining the number of shareholder proposals filed, the Trends report charts the following in order of importance:

  • Corporate Political Activity
  • Labor & Equal Employment Opportunity
  • Climate Change
  • Executive Pay
  • Independent Board Chair
  • Special Meetings
  • Written Consent
  • Human Rights
  • Board Diversity

Looking at the 2020 Trends report, we have to say — we’ve certainly come a long, long way over the years. When first Trends survey was conducted at the end of 1995, the total AUM was just US$639 billion. The shift to sustainable, responsible, impact investment was underway! (The report released on November 16th is the 13th in the series.)

For information about the US SIF Report on US Sustainable and Impact Investing Trends 2020, and to purchase a copy of the report: https://www.ussif.org/trends

Governance & Accountability Institute is a long-time member of the Forum for Sustainable and Responsible Investment (US SIF) and a sponsor of the 2020 Trends report. US SIF is the leading voice advancing sustainable and impact investing across all asset classes.

Members include investment management and advisory firms, mutual fund companies, asset owners, research firms, financial planners and advisors, community investment organizations, and not-for-profits. The work is supported by the US SIF Foundation that undertakes educational and research efforts to advance SIF’s work.

Louis Coppola, G&A EVP and Co-founder, is chair of the SIF Company Calls Committee that arranges meetings of SIF member organizations with publicly-traded companies to discuss their ESG/Sustainability efforts.

US SIF Trends 2020 Report Published November16, 2020:

Corporate Sustainability Reporting: Changes in the Global Landscape – What Might 2021 Bring?

by Hank Boerner – Chair & Chief Strategist, G&A Institute

Change is a-coming – quite quickly now – for corporate sustainability reporting frameworks and standards organizations.  And the universe of report users.

Before the disastrous October 1929 stock market crash, there was little in the way of disclosure and reporting requirements for companies with public stockholders. The State of New York had The Martin Act, passed in 1921, a “blue sky law” that regulates the sales and trades of public companies to address fraud issues.  That was about it for protecting those buying shares of public companies of the day.

Under the 100 year old Act, the elected New York State Attorney General is the “Sheriff of Wall Street — and this statute is still in effect. (See: AG Eliot Spitzer and his prosecution of the 10 large asset managers for analyst shenanigans.)

President Franklin Delano Roosevelt, elected two-term governor of NY before his election to the highest office in November 1932, brought along a “brains trust” to Washington and these colleagues shaped the historic 1933 Securities Act and 1934 Securities Exchange Act to regulate corporate disclosure and Wall Street activities.

Story goes there was so much to put in these sweeping regulations for stock exchanges, brokerage houses, investor protection measures and corporate reporting requirements that it took two different years of congressional action for passage into law in the days when Congress met only briefly and then hastened home to avoid the Washington DC summer humidity and heat.

The Martin Act was a powerful influence on the development of foundational federal statutes that are regularly updated to keep pace with new developments (Sarbanes-Oxley, 2002, updated many portions of the 1934 Act).

What was to be disclosed and how? Guidance was needed by the corporate boards and executives they hired to run the company in terms of information for the company’s investors. And so, in a relatively short time “Generally Applied Accounting Principles” began to evolve. These became “commonly accepted” rules of the road for corporate accounting and financial reporting.

There were a number of organizations contributing to GAAP including the AICPA. The guiding principles were and are all about materiality, consistency, prudence (or moderation) and objectivity like auditor independence verifying results.

Now – apply all of this (the existing requirements to the Wild West of the 1920s leading up to the 1929 financial crash that harmed many investors — and it reminds one of the situations today with corporate ESG, sustainability, CR, citizenship reporting.  No generally applied principles that all can agree to, a wide range of standards and frameworks and guidance and “demands” to choose from, and for U.S. companies much of what is disclosed is on a voluntary basis anyway.

A growing chorus of institutional investors and company leaders are calling for clear regulatory guidance and understanding of the rules of the road from the appointed Sheriffs for sustainability disclosures – especially in the USA, from the Securities & Exchange Commission…and the Financial Accounting Standards Board (FASB), now the two official keepers of GAAP.

FASB was created in the early 1970s – by action of the Congress — to be the official keeper of GAAP and the developer of accounting and reporting rules.  SOX legislation made it official; there would be two keepers of GAAP — SEC and FASB.  GAAP addressed material financial issues to be disclosed.

But today for sustainability disclosure – what is material?  How to disclose the material items?  What standards to follow?  What do investors want to know?

Today corporates and investors debate the questions:  What should be disclosed in a consistent and comparable way? The answers are important to information users. At the center of discussion: materiality everyone using corporate reports in their analysis clamors for this in corporate sustainability disclosure.

Materiality is at the heart of the SASB Standards now developed for 77 industry categories in 11 sectors. Disclosure of the material is an important part of the purpose that GAAP has served for 8-plus decades.

Yes, there is some really excellence guidance out there, the trend beginning two decades ago with the GRI Framework in 1999-2000. Publicly-traded companies have the GRI Standards available to guide their reporting on ESG/sustainability issues to investors and stakeholders.

There is the SAM Corporate Sustainability Assessment (CSA), now managed entirely by S&P Global, and available to invited companies since 1999-2000. (SAM was RobecoSAM and with Dow Jones Indexes managed the DJ Sustainability Indexes – now S&P Global does that with SAM as a unit of the firm based in Switzerland.)

Since 2000, companies have had the UN Global Compact principles to include in their reporting. Since 2015 corporate managers have had the UN Sustainable Development Goals (SDGs) to report on (and before that, the predecessor UN Millennium Development Goals, 2000-2015). And the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations were put in place in 2017.

The Securities & Exchange Commission (SEC) in February 2010 issied “guidance” to publicly-traded companies reminded corporate boards of their responsibility to oversee risk and identified climate change matters as an important risk in that context.

But all of these standards and frameworks and suggested things to voluntarily report on — this is today’s thicket to navigate, picking frameworks to be used for telling the story of the company’s sustainability journey.

Using the various frameworks to explain strategy, programs, actions taken, achievements, engagements, and more – the material items. Profiling the corporate carbon footprint in the process. But there is no GAAP to guide the company for this ESG reporting, as in the example of financial accounting and reporting.

Institutional investors have been requesting more guidance from the SEC on sustainability et al reporting.  But the commission has been reluctant to move much beyond the 2010 risk reminder guidance even as literally hundreds of publicly-traded companies expand their voluntary disclosure.  And so we rely on this voluntary disclosure on climate change, diversity & inclusion efforts, political spending, supply chain management, community support, and a host of other ESG issues. (Human Capital Management was addressed in the recent Reg S-K updating.)

We think 2021 will be an interesting year in this ongoing discussion – “what” and “how” should companies be disclosing on sustainability topics & issues.

The various providers of existing reporting frameworks and standards and those influencing the disclosures in other ways are moving ahead, with workarounds where in the USA government mandates for sustainability reporting do not yet exist.

We’ve selected a few items for you to keep up with the rapidly-changing world of corporate ESG disclosures in our Top Stories and other topic silos.

There are really important discussions!  We watch these developments intently as helping corporate clients manage their ESG / sustainability disclosures is at the heart of our team’s work and we will continue to keep sharing information with you in the Highlights newsletter.

More about this in The Wall Street Journal with comments from G&A’s Lou Coppola: Companies Could Face Pressure to Disclose More ESG Data (Source: The Wall Street Journal)
TOP STORIES

Corporate Sustainability Performance – Setting the Stage for ESG Data Analysis by Humans and AI Bots Alike

By Pam Styles, Principal and Founder, Next Level Investor Relations, and G&A Institute Fellow

There is an expansive reservoir of ESG data – a.k.a. key performance indicators (KPIs) – across growing corporate ESG disclosure and reporting, commercially advertised metrics and/or data sets subscription access, and proprietary third-party rater, ranker and data provider analytical systems.

While voluntary reporting frameworks and the various third parties jockey for dominance and survival, who is using all this data — and how?

Currently, there are too many ESG-related KPIs and data sets for companies and investors to get a handle on, respond or analyze.  It is impossible to predict how many more KPIs will enter the mix or how soon third-party relationships will naturally consolidate the number of KPI expectations, simply driven by necessity for their own business models’ sustainability.

The corporate disclosure side of this issue is explored in:
The End User Side

Just like corporations, investors have to prioritize which KPIs matter and what reporting framework KPIs, public access information sources, licensed and/or proprietary databases they can rationalize for focus.

CFA-PRI recently joined forces to survey 1100 investment professionals.  Survey results show that fixed income inclusion of ESG in investment decision-making is rapidly catching-up with equity investors.

Source: UNPRI

Analogous to portfolio diversification theory, the number of investments (in both time and money) in ESG data sources has got to naturally reach some optimal number needed to optimize risk/return. Beyond that there is an entire sustainable finance ecosystem too large to address in a simple blog post.

Data Use

There is not an honest person alive who can tell you that they can stay on top of all the current and increasing company ESG data they could analyze, germane to their investment decision-making.

Research of Value

In addition to 90% of S&P 500 companies, Governance & Accountability Institute just announced its annual research update that 65% of Russell 1000 companies also published sustainability reports in 2019 (up from 60% in 2018), including 39% by companies in the smallest half of the index (up from 34% in 2018).

Important Perspective

An article highlighting takeaways from the recent NIRI “Big I – Investor & Issuer Invitational Forum”, quoted speaker Dan Romito, SVP of Business Development & Product Strategy at Nasdaq:

“There is an explosion of non-fundamental data…especially in ESG data…The
SEC found that 90% of data now used in the capital markets has been created during the past two years.”

Artificial Intelligence

AI use as a tool to consume, filter and analyze, huge reservoirs of ESG data is increasingly valuable in investment decision-making. AI providers are jockeying for differentiation and capital.  For instance:

  • AI is being used by investors, such as BlackRock, to not only analyze ESG data that companies are disclosing, but to uncover other information, such as ESG impacts from satellite images of pollution to cars in a parking lot, voice inflection and more.
  • FactSet just announced, on October 20th, a definitive agreement to acquire TrueValue Labs. Founded in 2013, TrueValue is a pioneer in AI-driven ESG data. It applies AI-driven technology to over 100,000 unstructured text sources in 13 languages, to identify positive and negative ESG behavior. Its coverage spans over 19,000 public and private companies.
  • TrueValue LabsTM had previously announced on January 23, 2020, that it was introducing its patent-pending concept of Dynamic Materiality, indicating that every company, industry and sector has a unique materiality signature. The company head of research noted that, “Given how central materiality is to ESG investing and fiduciary duty, it is critical to understand the mechanisms by which ESG factors impact the operational and financial performance of companies.”

The Human Element

“While AI can unearth key data for investors seeking sustainable investments, discerning unreliable information will be a key challenge and humans will not be replaced any time soon.” – as stated in the article titled,  How can AI help ESG investing? –  S&P Global, Sept 2020

“AI is not a replacement for human intelligence, but rather a way to further it… The strategic value of alternative datasets, in particular ESG data, in the financial sector is becoming increasingly visible. As only relevant data has decision-making utility, supervised machine learning is emerging as the most effective mechanism to generate strategic value for businesses.” – Cutting through the noise: demystifying the buzz around artificial intelligence in financial decision-makingRepRisk, Sept 2020

The Final Word

In only the last few years, it became obvious that ESG/Sustainability had finally gone mainstream.  It took over twenty years to catch-on, since the first voluntary ESG reporting framework, GRI, was founded in 1997.  Now it is time to buckle-up for the ride… practically everything ESG/Sustainability-related is advancing at orders of magnitude faster pace than anything we’ve experienced thus far!

Pamela Styles – Fellow G&A Institute – is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.

Looking Back to Look Ahead – The Promise of Biden-Harris Administration to Return to the Hopes of Action on Climate Change Issues

November 9, 2020

By Hank Boerner – Chair & Chief Strategist – G&A Institute

For almost four l-o-n-g, long years we have been watching – and decrying! – the antics of the Trump Administration in the attempt to roll back vital federal environmental protections that have been put in place (and protected) by elected representatives of both parties over five decades.

It was President Richard M. Nixon – a Republican and conservative leader – who signed the National Environmental Policy Act of 1969 (NEPA) into the law of the land. NEPA was established by the 91st Congress and became law on January 1, 1970.

This also established the President’s Council on Environmental Quality. What flowed thereafter was important…

…the Environmental Protection Agency (US EPA) was created;
The Clean Air Act was enacted into law;
The Clean Water Act soon followed; and then
Toxic Substances Control Act (TSCA);  and 
…”Superfund” for clean up of contamination (actually, CERCLA-Comprehensive Environmental Response, Compensation and Liability Act);  and
Emergency Planning and Community Right-to-Know Act;  and 
Endangered Species Act;  and
Federal Insectiside, Fungicide, and Rodenticide Act; and 
Energy Policy Act; and
Chemical Safety Information, Site Security and Fuels Regulatory Relief Act;
…and much more!

Beginning almost immediately as the Trump Administration took charge of the EPA and other cabinet agencies, these historic legislative achievements were being undermined and protections whittled away.

There will be new environmental overseers coming to town in 2021 and the great hopes pinned on the Biden-Harris Administration include rebuilding the important rules, oversight mechanisms and enforcement of the laws/rules by EPA, Interior, Energy and other agencies.

The New York Times today outlined the first steps that could be taken – issuance of presidential Executive Orders (EOs) and President Memoranda that would undo the same mechanisms employed by President Trump and EPA political leaders to undermine environmental protection measures.

We read in — “Biden Will Roll Back Parts of the Trump Agenda With Strokes of a Pen” – that on Day One, we can expect action on climate change, writes Michael D. Shear and Lisa Friedman.

That starts with notice to the United Nations that the U.S.A. will rejoin the Paris Agreement.

The move to revoke Trump era EOs and re-issue Obama-Biden Administration orders can be immediate; or, President Joe Biden in 2021 can issue new orders along the same lines of prior EOs addressing climate change issues.

Important: The new Executive Orders would create important policies for the heads and rank and file members of the departments – Defense, EPA, Labor, Commerce, Interior, SEC, and many others that in some way directly or indirectly are affected by climate change.

Attitudes do matter – and Presidential Executive Orders to heads of agencies really matter!

2021 is looking like climate change matters will move to front-and-center on the public policy agenda. The Financial Times today pointed out that candidate Joe Biden set a policy of having a target to reach zero carbon

While Donald Trump led the effort to isolate the United States from world affairs, China moved to pledge net zero by 2060 and Japan and South Korea set net zero targets.

With the USA back on board, real progress can be made toward meeting Paris Agreement goals. Exciting to consider: The United States of America as once again a leader in the drive to make the world a safer, healthier place for billions of us!

For a reminder of the Trump moves in 2017 to reverse a half-century and more of environmental protection, here’s my March 2017 look at what was underway just two months into the new administration, with a new leader (Administrator Scott Pruitt) at the helm of the EPA.

Let’s go back to March 2017 – Just two months into the Trump Administration – with bad news on climate change all around!

http://ga-institute.com/Sustainability-Update/climate-change-nah-the-deniers-destroyers-are-work-white-house-attempts-to-roll-back-obama-legacy/


Cradle-to-Cradle: Method Case Study

Guest Column by Lama Alaraj – Analyst-Intern, G&A Institute

We live in a world where our society is run through consumerism and capitalist gains. As a result, this system has had adverse effects on the health of our environment.

One of the major industries in our economies is cleaning products, where demand is unlikely to decrease. Consumer behavior influences the supply of cleaning products in our economy, and as a result there is a rise in demand for the ‘green products’.

As consumers it is important for us to know what hazardous chemicals we are bringing into our homes. In this industry transparency is not enough, as the average human cannot understand chemical labels (citation, Grotewohl, 2018 – see bibliography at end).

I believe that we need more companies to shift their business model to be more of a commitment towards achieving holistic sustainability.

There are many different strategies and business models that companies can apply to experience financial growth, with sustainability and the environment in mind.  The focus of this essay will be on the cradle-to-cradle approach — a more sustainable business model that has proven to work in the cleaning products industry.

The cradle-to-cradle approach is a system that moves away from the conventional linear manufacturing process, which focuses on taking raw materials to produce products that will end up disposed, towards a circular approach by closing the loop in production and eliminating waste.

• This process requires businesses to change their business model towards one that incorporates conscious sustainable thinking at the core (Brennan et al, 2015).

• The approach talks about two types of metabolism: biological and technical (Severis et Rech, 2019).

• Each has corresponding nutrients — ‘biological nutrients’ — are materials that can be safely returned to the biosphere, and ‘technical nutrients’ are manmade materials that can be reused (Severis et Rech, 2019).

Goal: Reuse or Return to the Environment

The goal of this approach is to create products that can either be reused or return to the environment (such as though composting) and therefore eliminating the concept of waste at the end of the life cycle of a material which is related to the common cradle-to-grave operation (Severis et Rech, 2019).

An important term that was a prelude to the birth of the cradle-to-cradle approach is the strategy of being eco-effective. This strategy is defined as using resources that maximize the benefits of a product or a service in order for the material to have a continuous life cycle (Brennan et al., 2015).

For the cradle-to-cradle approach to be successful and sustainable in its application by a business, it needs to adhere to three guidelines: waste equals food, use renewable energy, and celebrate diversity (Brennan et al, 2015). For example:

(1) Waste equals food is essentially where the concept of upcycling comes from. By not creating more waste, companies can look at resources that have already been used and recycled, and utilize these materials to their maximum potential.

This guideline pushes businesses to be creative and innovative, enabling them to design a product that has multiple life cycles, and does not lose its value or superiority when it is recycled into something different (Brennan et al, 2015).

(2) The second guideline, use of renewable energy, pushes firms to switch from fossil fuels and to generate clean energy through the use of solar, wind, hydro or biomass technologies. This fits the framework of using what is naturally present and contributes to a holistic approach (Severis et Rech, 2019).

The final approach is about incorporating diversity within the business, through innovation. As part of this guideline firms are required to design products that “support biodiversity, socio-cultural diversity and conceptual diversity” (Ankrah et al.,2015).

This encourages business leaders and their firms to look outside the box and design products that avoid environmental pollution and strive for maximum material reutilization.

Cradle-to-Cradle Certification

To encourage and enable business to apply the cradle-to-cradle approach, the Cradle-to-Cradle certification was established in 2005. Since then, 200-plus companies have produced products that are certified (Source: Cradle to Cradle Products Innovation Institute, 2020).

The rise in Cradle-to-Cradle certified products is influenced by increased environmental awareness, growing consumer demands for green products and business financial savings.

According to research through the Ellen MacArthur Foundation, businesses in the European Union could save up to US$630 billion a year by switching to a cradle-to-cradle model and operating through a circular production system (Cradle-to-Cradle Products Innovation Institute, “CCPII” – 2020).

For instance, Shaw industries, a global carpet manufacturer, switched to a cradle-to-cradle business model in 2007 and as part of this switch, Shaw achieved a 48% increase in water efficiency, and improved energy efficiency, both of which have major environmental benefits (CCPII, 2020).

Financial benefits of this approach allowed Shaw to save US$2.5 million in 2012 alone (CCPII-2020). The benefits of this approach can be vast and are realized through economic, social and environmental gains.

One economic benefit is cost reduction — savings achieved through the reuse of materials, and resource efficiency by saving on water and energy spending (CCPII-2020).

Moreover, these benefits are eliminating toxic waste and pollution, and giving more than one life cycle to a product, through upcycling the material and creating something different in order to operate through environmental awareness and positive sustainable practices (Brennan et al, 2015)

Looking at Cleaning Products

Cleaning products typically contain many hazardous chemicals that can contaminate our groundwater, lakes and oceans, and lead to the formation of algal blooms which threaten marine life. Not only do these chemicals harm our ecosystems, they can also have adverse effects on humans, if exposed to high levels of these chemicals (Grotewohl, 2018).

This is where Method — a United States-based company — decided to take matters into their own hands. They are the “People against dirty”, their infamous slogan is an homage to their commitment against traditional cleaning products that are harmful to our environment, and us.

Method is one of the first green cleaning companies to have a full line of cradle-to-cradle certified products. The company uses non toxic, and full biodegradable formulas, ensuring their products adhere to the unique process of cradle-to-cradle for maximum reutilization (Ryan et al, 2011).

This sophisticated and innovative company values renewable energy at the core of their production process, ensuring to me the renewable energy guideline of cradle-to-cradle fundamentals.

The firm has even opened the first LEED-platinum -certified plant in their industry (Chow, 2015). Everything at this factory is made on site, a one-stop shop approach. The plant runs on wind and solar energy; they have utilized the space in an environmentally-conscious way by allowing Gotham Greens to use the plant’s entire rooftop as a greenhouse in order to harvest organic produce for the local markets and communities (Chow, 2015).

In this way Method demonstrates that the management thinks beyond profitability of the end product, and also looks to maximize every space in their factory and seek inclusivity and to benefit society through their community centered approach, meeting both the renewable energy and diversity guideline of the cradle-to-cradle approach.

The process of recycling actually produces toxins and pollution, so companies encouraging their consumers to recycle is not enough because they are not breaking the system of waste, just contributing to it (Ryan et al., 2011).

Competitors in the cleaning industry typically use white PET to package their goods, as a way to brand their green commitment. However, this type of plastic does not filter through recycling plants and so ends up in landfills (Ryan et al., 2011).

Method’s leaders did their homework, and rather than sticking to traditional industry trends, they designed packaging that is 100% recyclable and made from Post Consumer Recycled PET (Ryan et al., 2011).

In addition to Method’s cleaning materials being sustainably sourced, their packaging is made of 100% recycled bottles, reducing waste in their production process. By upcycling its waste, Method uses up to 70% less energy to manufacture its products (Ryan et al., 2011). Moreover, the plastics used are carefully chosen to ensure they can be recycled and reused, operating a closed loop production system.

For Method, waste is truly fuel, upholding the first guideline in the approach.

Looking at Laundry Detergents

Laundry detergent on the commercial scale is typically water intensive (“80% of detergent is water”), and causes a lot of waste (Ryan et al., 2011). Conventionally, it is packaged to make consumers believe that more is better, so consumers use more detergent than needed (like an optical illusion of sorts).

The first breakthrough in innovation a better detergent was in 2004, when Method launched their ‘three times concentrated’ formula, which uses a lot less water and a lot less energy to clean, making it more environmentally friendly than conventional detergents (Ryan et al., 2011).

This sparked a competitive race in the industry, and major names in the game launched their own versions of concentrated detergents (Ryan et al., 2011). Method creators did not patent their formula, rather they wanted to encourage their competitors to produce more environmentally-friendly and cleaner detergents (Ryan et al., 2011).

In 2010 Method made waves again, and launched their eight times concentrated detergent, and this time it became the first detergent to receive an official cradle-to-cradle certification for its innovative design, non toxic, biodegradable and reduced water formula (Gittell et al., 2012).

Moreover, because it does not require the same amount of energy to clean clothes, it does not require the same amount of detergent either — proving to be resource efficient.

The product is dispensed through a pump, is a lot smaller, and weighs less. This demonstrates the diversity aspect of cradle-to-cradle, because the product used design as a way to reduce excessive and wasteful amounts of detergent that we as consumers have mindlessly done, and by reducing we are benefiting the environment (Gittell et al., 2012,).

Looking Beyond Traditional Business Models

The cradle-to-cradle approach aims to push beyond traditional business models that lean on eco- efficiency policies and towards eco-effective strategies. Typically eco-efficiency relies on the three Rs: reduce, reuse, recycle, and operate on zero waste strategies (Brennan et al., 2015).

With this mindset there are some problems that can arise, as this is still adhering to a linear business model. For instance, with recycling, the product loses its value, and hence its life cycle is significantly shortened. We need to do better than that as businesses and go from downcycling, to upcycling, from eco-efficient, to eco-effective.

Method in my view is a cradle-to-cradle success story and I think it is a role model for companies to take that plunge. Since its conception, as a small two person company, Method has grown to be a US$100 million dollar company (Gittell et al., 2012).

Management has never broken the commitment to true sustainability, and has proved that having a cradle-to-cradle business strategy can result in positive environmental impacts & commercial growth. From breaking conventional trends in the industry, to pushing their giant competitors to adopt the three times cycled detergent, i see Method as a force to be reckoned with.


# # #

Lama Alaraj is a graduate of Dalhousie University (Nova Scotia, Canada) with double major in economics and international development studies. She is a marketing consultant for Web.com. She was an analyst-intern with G&A Institute and was a key member of the team producing the S&P 500 Index annual research on sustainability reporting, and was very much involved in the G&A Institute’s GRI Data Partner duties.



Link: https://www.ga-institute.com/about-the-institute/the-honor-roll/lama-alaraj.html

Bibliography

Ankrah, N. A., Manu, E., & Booth, C. (2015, December). Cradle to Cradle Implementation in Business Sites and the Perspectives of Tenant Stakeholders. Elsevier, 83(Energy Procedia), 31-40. https://www.sciencedirect.com/science/article/pii/S1876610215028581#abs0005

Brennan, G., Tennant, M. and Blomsma, F. (2015). Chapter 10. Business and
production solutions: Closing Loops & the Circular Economy, in Kopnina, H. and Shoreman-Ouimet, E. (Eds). Sustainability: Key Issues. Routledge: EarthScan, pp.219-239

Chow, L. (2015, July 29). Gotham Greens + Method = World’s Largest Rooftop Greenhouse Coming to Chicago. EcoWatch. Cradle to cradle products innovation institute. (2020). Impact Study Executive Summary. www.c2ccertified.org. https://www.c2ccertified.org/impact-study

Gittell, R., Magnusson, M., & Merenda, M. (2012). The Sustainable Business Case Book (Vol. Chapter 6). Saylor Foundation. https://2012books.lardbucket.org/books/sustainable-business-cases/index.html

Grotewohl, E. (2018). Chapter 830: Cleaning Products Are Coming Clean. University of Pacific Law Review, 49(2). Scholarly Commons. https://scholarlycommons.pacific.edu/cgi/viewcontent.cgi?article=1161&context=uoplawreview

Ryan, E., Lowry, A., & Conley, L. (2011). The Method Method: Seven Obsessions That Helped Our Scrappy Start-up Turn an Industry Upside Down. Penguin.

Severis, R., & Rech, J. (2019). Cradle to Cradle: An Eco-effective Model. In Earth and Environmental Science Reference Module Physical and Materials Science. Springer, Cham. https://link.springer.com/referenceworkentry/10.1007/978-3-319-71062-4_62-1

Food! Will We Have Enough to Feed an Ever-Hungrier Planet? – Are Food & Ag Industries “Sustainable” – Let’s Explore…

by Hank Boerner – Chair & Chief Strategist, G&A Institute 

October 30 2020

The United Nations projection is for today’s global population of an estimated 7.6 billion people to expand to a global population of 8.6B by 2030 and 9.8B by 2050…and then to 11.2 billion in 2100 (so says the UN Department of Economic and Social Affairs report, June 2017).

Each year, says the UN, 83 million more people are added to the world’s population.

If we go back 1,000 years, the world population was an estimated 300 million people.

And then, only 4% (about 4 million square kilometers) was used for farming, according to the University of Oxford (source: ourworldindata).

Today, half of the world’s habitable land is used for agriculture (excluding deserts, beaches, rocks, etc.) – that is 51 million KMs. T

There is also land (an additional 40 million KMs) used for livestock, meat, and dairy. Protein supply is largely from plant-based food for much of the world population. (Data – UN Food and Agricultural Organization).

So as the population grows and grows, will we be able to feed millions and then billions of additional people? Where will the capital be needed for food & ag expansion?

Will investors and other stakeholders have enough information – especially reliable, comparable data sets – to understand where the food & ag industry players are…to meet the daily food needs of many more people…to use available arable land wisely and sustainably…to understand what food manufacturers and marketers are doing to be more sustainable and responsible?

We’ve selected a few items in our Top Stories to explore these questions, especially as investors look for agriculture and food trends that fit into the ESG bucket.

TOP STORIES

  1. Forbes contributor Hank Cardello looks at the food industry and the magazine’s list of “100 most sustainably managed public companies” – finding food processing companies “a no show among the top companies”:Food Industry is a No-Show in New Sustainability Study (Source: Forbes)
  2. This ESG / Financial Times article explores why the food sector is difficult to assess from an ESG perspective – to quote, “ESG investors are finding it hard to incorporate food in their portfolios…food businesses’ far-reaching impacts are difficult to measure, making it unclear whether they meet ESG criteria”:Food Proves Hard for ESG Investors to Digest (Source: Financial Times)
  3. This article talks about ESG not being covered in farm media and opines that primary producers don’t have to rely on ESG reporting to get access to capital. So – it seems like these factors could cause difficulty for downstream customers to report on the ESG metrics of their supply chains. Contributing analyst Elaine Kub advises the ag industry that convincing investors a company is operating sustainably and making long-term decisions…and deserves to be in the “ESG category”, but is nary a mention of this in farm media…yet: ESG: Another Acronym for Ag to Know (Source: Progressive Farmer)
  4. 4-A new study from the U.S. Department of Agriculture (USDA) charts organic ag sales have increased 31% from 2016 to 2019:2019 Organic Survey Results Show Sales Up 31% from 2016 (Source: USDA)

Sources: