Publicly-traded Companies Have Many More Eyes Focused on Their ESG Performance – And Tracking, Measuring, Evaluating, ESG-Linked-Advice to Investors Is Becoming Ever-More Complex

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

Some recent developments for consideration by the boards and C-Suite of publicly-traded companies as established ESG ratings agencies up their game and new disclosure / reporting and frameworks come into play.

The “Global Carbon Accounting Standard” will debut in Fall 2020. Is your company ready? Some details for you…

Financial Institutions – Accounting for Corporate Carbon

The Partnership for Carbon Accounting Financials (PCAF) was organized to help financial institutions assess and then disclose the Greenhouse Gas emissions (GhGs) of their loans and investments to help the institutions identify and manage the risks and opportunities related to GhGs in their business activities.

Think: Now, the companies in lending or investment portfolios should expect to have their carbon emissions tracked and measured by those institutions that lend the company money or put debt or equity issues in their investment portfolios.

The financial sector kimono will be further opened. This could over time lead to a company lagging in ESG performance being treated differently by its institutional partners, whether the company in focus discloses their GhG emissions or not.

For companies (borrowers, capital recipients), this is another wake-up call – to get focused on GhG performance and be more transparent about it.

This effort is described as the to be the “first global standard driving financial institutions to measure and track the climate impact of their lending and investment portfolios.”

As of August 3, 2020, there are 70 financial institutions with AUM of US$10 trillion collaborating, with 16 banks and investors developing the standard…to be a common set of carbon accounting methods to assess and track the corporate emissions that are financed by the institutions’ loans and investments.

Significant news: Morgan Stanley, Bank of America (owners of Merrill Lynch) and Citi Group are all now members of the partnership and Morgan Stanley and Bank of America are part of the PCAF Core Team developing the Standard.

The institutional members of the Core Team leading the work of developing the PCAF Standard are: ABN AMRO, Access Bank, Amalgamated Bank, Banco Pichincha, Bank of America, Boston Common Asset Management, Credit Cooperatif, FirstRand Ltd, FMO, KCB, LandsBankinn, Morgan Stanley, Producanco, ROBECO, Tridos Bank, and Vision Banco.

The work of the PCAF will feed into the work of such climate initiatives as the CDP, TCFD, and SBTi (Science-based Target Initiative).

The work in developing the “Standard” includes an open comment period ending September 30, 2020. The final version of the Standard will be published in November.

Morgan Stanley, in its announcement of participation, explained: MS is taking a critical step by committing to measure and disclose its financial emissions…and those in its lending and investment portfolio. As other institutions will be taking similar steps.

(Morgan Stanley became a bank during the 2008 financial crisis and therefore received federal financial aid designed for regulated banking institutions.)

Tjeerd Krumpelman of ABN AMRO (member of the Steering Committee) explains: “The Standard provides the means to close a critical gap in the measurement of emissions financed by the financial industry. The disclosure of absolute financed emissions equips stakeholders with a metric for understanding the climate impact of loans and investment…”

Bloomberg Announces Launch of ESG Scores

Bloomberg LP has launched proprietary ESG scores – 252 companies are initially scored in the Oil & Gas Sector and Board Composition scores have been applied for 4,300 companies in multiple industries.

This approach is designed to help investors “decode” raw data for comparisons across companies; Bloomberg now presents both (raw data and scores) for investors.

This offers “a valuable and normalized benchmark that will easily highlight [corporate] ESG performance, explains Patricia Torres, Global Head of Bloomberg Sustainable Finance Solutions.

There is usually stronger data disclosure for the Oil & Gas Sector companies, says Bloomberg (the sector companies account for more than half of carbon dioxide emissions, generating 15% of global energy-related Greenhouse Gas emissions).

Governance scoring starts with Board Composition scores, to enable investors to assess board make up and rank relative performance across four key areas – diversity, tenure, overboarding and independence.

Bloomberg describes the “E, S” scores as a data-driven measure of corporate E and S (environmental and social) performance across financially-material, business-relevant and industry-specific key issues.

Think of climate change, and health and safety, and Bloomberg and investor clients assessing company activities in these against industry peers.

This is a quant modelling and investors can examine the scoring methodology and company-disclosed (or reported) data that underly each of the scores.

Also, Bloomberg provides “data-driven insights” to help investors integrate ESG in the investment process. This includes third party data, access to news and research content, and analytics and research workflows built around ESG.

Sustainalytics (a Morningstar company) Explains Corporate ESG Scoring Approach

The company explains its ESG Risk Rating in a new document (FAQs for companies). The company’s Risk Ratings (introduced in September 2018) are presented at the security and portfolio levels for equity and fixed-income investments.

These are based on a two-dimension materiality framework measuring a company’s exposure to industry-specific material ESG risks…and how well the company is managing its ESG risks.

Companies can be placed in five risk categories (from Neglible to Severe) that are comparable across sectors. Scores are then assigned (ranging from 9-to-9.99 for negligible risk up to 40 points or higher for severe risk of material financial impacts driven by ESG factors).

The company explains: A “material ESG issue” (the MEI) is the core building block of Sustainalytics’ ESG Risk Rating – the issue that is determined by the Sustainalytics Risk Rating research team to be material can have significant effect on the enterprise value of a company within an sub-industry.

Sustainalytics’ view is that the presence or absence of an MEI in a company’s financial reporting is likely to influence the decisions made by a reasonable investor.

And so Sustainalytics defines “Exposure to ESG Risk” and “Management of ESG Risk” and applies scores and opinions. “Unmanaged Risk” has three scoring components for each MEI – Exposure, Management, Unmanaged Risk.

There is much more explained by Sustainalytics here: https://connect.sustainalytics.com/hubfs/SFS/Sustainalytics%20ESG%20Risk%20Rating%20-%20FAQs%20for%20Corporations.pdf?utm_campaign=SFS%20-%20Public%20ESG%20Risk%20Ratings%20&utm_medium=email&_hsmi=93204652&_hsenc=p2ANqtz–uiIU8kSu6y0FMeuauFTVhiQZVbDZbLz18ldti4X-2I0xC95n8byedKMQDd0pZs7nCFFEvL172Iqvpx7P5X7s5NanOAF02tFYHF4w94fAFNyOmOgc&utm_content=93203943&utm_source=hs_email

G&A Institute Perspectives: Long established ESG raters and information providers (think, MSCI, Sustainalytics, and Bloomberg, Refinitiv, formerly Thomson Reuters) are enhancing their proprietary methods of tracking, evaluating, and disclosing ESG performance, and/or assigning ratings and opinions to an ever-wider universe of publicly-traded companies.

Meaning that companies already on the sustainability journey and fully disclosing on same must keep upping their game to stay at least in the middle of the pack (of industry and investing peers) and strive harder to stay in leadership positions.

Many more eyes are on the corporate ESG performance and outcomes. And for those companies not yet on the sustainability journey, or not fully disclosing and reporting on their ESG strategies, actions, programs, outcomes…the mountain just got taller and more steep.

Factors:  The universe of ESG information providers, ratings agencies, creators of ESG indexes, credit risk evaluators, is getting larger and more complex every day. Do Stay Tuned!


Proof of Concept: In Time of Crisis, Sustainable Investing Stays Strong and in Favor With Investment Professionals

For almost a decade in this newsletter we’ve brought to you a steady stream of news, research and experts’ perspectives that focus on two related subject areas:  (1) the escalating interest in the investment community in corporate ESG factors and adoption of sustainable investing approaches and (2) the corporate response, clearly in recognition of the intensifying competition for capital and so exerting efforts to excel in ESG strategy-setting, operational performance and disclosure.

It has taken some time for sustainable investing trends to capture wider investor attention and to persuade asset managers of the importance of ESG performance factors in normal times, with skepticism expressed (at first) quite frequently and then over time, less so.

Few mainstream asset managers are expressing doubts these days – and two powerhouse asset management firms (BlackRock and State Street) are very prominent champions of sustainable investing approaches.
We’ve seen the annual survey by the U.S. Forum for Sustainable and Responsible Investing (US SIF) survey of professionals managing assets starting out in the first survey with finding just US$639 billion in 1996 — with respondents indicating they were using sustainable investing policies.

That moved to the level of $3 trillion AUM in 2010 and on to $13 trillion in the 2018 survey.  That’s $1-in $4 of professionally-managed AUM for the assets they manage. (The next survey results will be announced later in 2020.)

Investors and corporate managers are usually looking for proof-of-concept for emerging trends and that has been the case for “SRI” / sustainable investing.  The Covid-19 crisis is providing some of that for sustainable investing — and making the case for corporate sustainability and embrace of the concept of ESG’s importance.

For example, the experts at HIS Markit have been offering perspectives on a range of issues and topics and recently shared the results of in-depth conversations with investors and analysts…during this time of market volatility and economic uncertain.  What are the findings in terms of investor embrace of sustainable investing strategies?

Top lines:  ESG criteria have been more important in the investment process in the coronavirus crisis. Issues in focus inside companies and by investors include such things as employee health & safety, corporate governance, and society-at-large.

Note this from the report:  “Some investors and analysts value ESG now more than ever.  They observe that the companies which have historically exhibited strong governance and the commitment to ESG are more effectively managed through this volatile period.” (Guess which companies may be more successful at attracting and retaining capital.)

The chief investment officer of a U.S. asset management firm told interviewers that the virus crisis has impacted how corporate governance is viewed …companies all over the world need to be thinking more broadly about who they want to be in the world aside from being rich.”

In a period characterized by the virus crisis and social unrest, a United Kingdom analyst interviewed said that “ESG was extremely important throughout last year and start of this year…there is a big demand for sustainable investments…and it’s there no matter if the global economy is weak or if there is a global pandemic…”

To be sure, there has been considerable good news for sustainable investment professionals and corporate sustainability managers in recent weeks, as investment professionals describe the resilience of companies with strong sustainability performance.  There is still skepticism expressed (such as in the IHS survey) and convincing needed on the part of holdout asset owners and managers.

We’ll keep sharing the research results as experts look at the capital markets and the impact of the pandemic and widespread social unrest and protest on sustainability – positive and negative.

There is much more for you in the Top Story this week, in the HIS Markit Perspectives about the firm’s survey of investment professionals.

COMING SOON
Our team is putting the finishing touches on the signature research effort of Governance & Accountability Institute – our annual look at the S&P 500® Index companies and their sustainability / responsibility / citizenship reporting.  Watch for this in July, followed after by the team’s look at the second 500 large-caps in the Russell 1000® Index.  We think you’ll find this year’s research effort very informative and useful in your own business – whether that be managing corporate sustainability and sustainable investment.

Top Stories

The Importance Of ESG During A Global Pandemic
(Source: IHS Markit Perspectives V) Some investors and analysts value ESG now more than ever. They observe that the companies which have historically exhibited strong governance and commitment to ESG are more effectively managing through this volatile period.

We’re also sharing ideas for corporate managers on how to make their company more sustainable, with advice from Earth 911. And from the influential World Economic Forum (WEF) – the Davos folks – we have views of the state of sustainability for 180 WEF-ranked countries and the vitality of their ecosystems.  The virus crisis is placing great pressure on retail brands – how are the companies reacting… what is ahead for brand marketers in the “next normal”?  We have the views of Retail Dive for you in the fourth of our Top Stories this week.

Watching For The Signals That Corporate Sustainability & Sustainable Investing Trends Will Continue to Advance in the Time of the Virus Crisis

By Hank Boerner – Chair & Chief Strategist – and the G&A Institute Team

In each issue of our Highlights newsletter and in other of our G&A Institute communications we have been sharing news, opinion & perspectives and research results that we think will be of value to professionals in the corporate sector, in the capital markets, and in the social sector (not-for-profits, NGOs and other institutions). 

Our objective in structuring our communications over the past decade-plus is to help to inform and educate as corporate responsibility, sustainability and citizenship strategies re-shaped the corporate sector and investors adopted ESG / Sustainability approaches.

Driving “sustainable investing” to $1-in-$4 of professionally-managed AUM according to the latest survey of US SIF. In response 86% of S&P 500(r) firms are publishing sustainability et al reports according to the latest survey by our team. (Updates to both surveys are in the works in 2020.)

Over time, our focus and communications helped to tell the story of a revolution taking place in the private, public and social sectors of our society. Companies re-defining “purpose”. Investors adopting new approaches…SRI, impact, green, sustainable, and other identifiers.

Suddenly, we are all in a new and very challenging (and frightening) operating environment (both personally and in our businesses) and the questions that we have and that are on the sustainability professionals’ minds are…

(1) what might be the impact of the global coronavirus crisis on the corporate sector’s forward movement — are / will companies continue on their sustainability journey, embrace and demonstrate corporate purpose and the new era of stakeholder primacy, demonstrate excellence in corporate citizenship, and

(2) what might be the impact of the virus crisis on the capital markets and investors’ perspectives of the value and importance of embracing sustainable investing as the global capital markets continue to be in turmoil …will the crisis be a plus or minus for ESG / sustainable investing? What might the longer-term effects of the crisis be for both issuer and investors in a prolonged crisis? Will the resilience of the more sustainable enterprises be the winners in the competition for capital?

Our team has been closely monitoring (worldwide!) for news and opinions and research findings to help answer these and other questions and we bring you updates today. 

Thanks to G&A’s Editor-in-Chief Ken Cynar and Senior Sustainability Analyst Elizabeth Peterson for their continuous “captures” of many key items for the newsletter and for G&A’s themed web platforms.  We present the news, perspectives and research in the weekly newsletter and on our web platforms.

There are many more timely news and opinion items on our Sustainability HQ(tm) web platform for your reading – news is captured and posted every day in the categories presented in the newsletter as well as in other categories.  We invite your regular reading.

We are presenting the news of the efforts of companies to lend their support to the people in need by leveraging the corporate assets (and know how!). We’re presenting details of these efforts in this series of blog posts with hashtag #WeRise2FightCOVID-19 and grouped as “Corporate Purpose – Virus Crisis”. Thank you to all of the corporate leaders, managers and workforce doing their best in the crisis to help society.

The G&A Institute team members continue to all be “sheltered in place” working remotely and carrying on the work for clients.  It’s challenging but the good news is that the incredible advances made in technology are making a difference. 

Just imagine this virus crisis occurring in the days before email, private web-enabled networks, group teleconferencing tools, virtual meetings, the global internet ,and the “www” digital highway connecting us all around the world. 

A shout out here to the tech industry innovators who’ve made these tools available over the past three decades. 

And our heartfelt thank you to the men and women who today keep our society moving. Those stocking store shelves, keeping the lights on, policing our streets, responding to fire alarms and ambulance calls, keeping public transportation systems going, and many others working in silence or out of our sight.  A good number of companies are identified as essential business — people are working there every day, not at home.

And many thanks (in adequate word) to our brave first responders in the medical universe who put our needs first as they are exposed to danger. We are all in their debt.

We hope that this blog communication finds you well – please stay safe! 

For more content:  https://www.sustainabilityhq.com/

Five Featured Stories That
Provide Some Context in the Crisis

Coronavirus pandemic will drive responsible investing ‘skywards’   
Source: Financial Mirror – The coronavirus pandemic and its economic fallout will trigger a ‘skyward surge’ in sustainable, responsible and impactful investing over the next 12 months, according to Nigel Green, the CEO of financial advisory deVere Group,…

Are ESG and sustainability the new alpha mantra?   
Source: FT – When fund managers will start to think again about alpha-seeking strategies, as opposed to simply surviving the coronavirus, my bet is that more than a few will tell investors that sustainability and ESG-based screening will top…

COVID-19: A Rapid Human Rights Due Diligence Tool for Companies   
Source: BSR – The critical role of business during the time of COVID-19 is clear for everyone to see. Whether it is providing access to accurate information, continuing to pay hourly waged staff, or ensuring continuity of emergency supplies,…

12 Amazing Documentaries on Sustainability, Regeneration That You Now Have Time to Watch   
Source: Sustainable Brands – As many of us find ourselves with much more time at home due to the COVID-19 crisis, a lot of us are finding opportunities to do things we couldn’t quite get to in the course of our ‘regular lives’ before the widespread lockdowns.

Reserve management and sustainability: the case for green bonds?
Source: BIS – Central banks are playing an increasingly active role in promoting the move towards a sustainable global economy. One area in which they are thus involved is in guiding attempts to mobilise funds to contribute to the large-scale…

Getting Serious About SASB: Company Boards, Execs and Their Investors Are Tuning In. What About Accounting Firms?

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

February 26, 2020

The importance of the work over the recent years of the Sustainable Accounting Standards Board in developing industry-specific ESG disclosure recommendations was underscored with the recent letters to company leadership from two of the world’s leading asset management firms.

Corporate boards and/or executive teams received two important letters in January that included strong advice about their (portfolio companies’) SASB disclosures. 

BlackRock CEO Larry Fink explained to corporate CEOs his annual letter:  “We are on the edge of a fundamental reshaping of finance. Important progress in improving disclosure has been made – many companies already do an exemplary job of integrating and reporting on sustainability but we need to achieve more widespread and standardized adoption.” 

While no framework is perfect, BlackRock believes that the SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics. 

In 2020, BlackRock is asking companies that the firm invests in on behalf of clients to publish a disclosure in line with industry-specific SASB guidelines by year end (and disclose a similar set of data in line with the TCFD’s recommendations). 

In a thought paper, BlackRock explained that disclosures intended for investors need to focus on financially material and business relevant metrics and include supporting narratives. The recommendations of the TCFD and the SASB (standards) are the benchmark frameworks for a company to disclose its approach to climate-related risks and the transition to a lower carbon economy.

Absent such robust disclosure, investors could assume that companies are not adequately managing their risk. Not the right message to send to current and prospective investors in the corporation, we would say.

State Street Sends Strong Signals

Separately, State Street Global Advisors (SSgA) CEO Cyrus Taraporevala in his 2020 letter to corporate board members explained:  “We believe that addressing material ESG issues is a good business practice and essential to a company’s long-term financial performance – a matter of value, not values.” 

The asset management firm [one of the world’s largest] uses its “R-Factor” (R=“responsibility”) to score the performance of a company’s business operations and governance as it relates to financially material and sector-specific ESG issues.

The CEO’s letter continued:  The ESG data is drawn from four leading service providers and leverages the SASB materiality framework to generate unique scores for 6,000+ companies’ performance against regional and global industry peers. “We believe that a company’s ESG score will soon effectively be as important as it credit rating.”

The Sustainable Accounting Standards Board

About SASB’s continuing progress:  Recommendations for corporate disclosure centered on materiality of issues & topics were fully developed in a multi-party process (“codified”) concluding in November 2018 for 77 industry categories in 11 sectors by a multi-party process.

The recommendations are now increasingly being used by public companies and investors as important frameworks for enhanced corporate disclosure related to ESG risks and opportunities. 

To keep in mind: A company may be identified in several sectors and each of these should be seriously considered in developing the voluntary disclosures (data sets, accompanying narrative for context).

Bloomberg LP (the company headed by Mayor Michael Bloomberg, now a presidential candidate seeking the Democratic nomination) is a private company but publishes a SASB Disclosure report. (Bloomberg is the chair of SASB as well as the leader of his financial information firm.)

The company published “robust” metrics using the SASB on three industry categories for 2018: Internet & Media Services; Media & Entertainment; Professional & Commercial Services.

Bloomberg LP is privately-owned; this was an example for public company managements. The report explained:

“The nature of our business directs us to consult three industries (above). We provide a distinct table for each…containing topics we have identified as material and against which we are able to report as a private company. Quantitative data is followed by narrative information that contextualizes the data table and is responsive to qualitative metrics.”

Solid advice for company boards and executives beginning the expansion of disclosure using the SASB.

SASB Guidance

SASB provides a Materiality Map for each sector (SASB uses its SICS® – The Sustainability Industry Classification System) and provides a Standards Navigator for users. There is also an Engagement Guide for investors to consider when engaging with corporates; and, an Implementation Guide for companies (explaining issues and SASB approaches).

The fundamental tenets of SASB’s approach is set out in its Conceptual Framework: Disclosures should be Evidence-based; Industry-specific; Market-informed.  The recommended metrics for corporate disclosure include fair representation, being useful and applicable (for investors), comparable, complete, verifiable, aligned, neutral, distributive.

Accounting and Audit Professionals Advised: Tune In to SASB

Separate of the BlackRock and SSgA advice to companies and investors, accounting and auditing professionals working with their corporate clients are being urged to “tune in” to SASB.

Former board member of the Financial Accounting Standards Board (“FASB”) Marc Siegel shared his thoughts with the New York State Society of CPAs in presenting: “SASB: Overview, Trends in Adoption, Case Studies & SDG Integration”.  The Compliance Week coverage is our Top Story in the newsletter this week.

Marc Siegel is a Partner in E&Y’s Financial Accounting Advisory Service practice, served a decade on the FASB board (managers and shapers of GAAP) and was appointed to the SASB board in January 2019.

He was in the past a leader at RiskMetrics Group and CFRA, both acquired by MSCI, and is recognized as a thought leader in financial services – his views on SASB will be closely followed.

With the growing recognition of the importance of SASB recommendation for disclosure to companies and the importance of SASB’s work for investors, he encouraged the gathered accountants to get involved and assist in implementing controls over ESG data, suggesting that SASB standards are a cost-effective way for companies to begin responding to investor queries because they are industry-specific. 

Accountants, he advised, can help clients by putting systems in place to collect and control the data and CPA firms can use SASB standards as criteria to help companies that are seeking assurance for their expanding sustainability reporting.

This is an important call to action for accounting professionals, helping to generate broader awareness of the SASB standards for those working with publicly-traded companies and for internal financial executives.

The G&A Institute team has been working with corporate clients in recent years in developing greater understanding of the SASB concepts and approaches for industry-specific sustainability disclosure and helping clients to incorporate SASB standards in their corporate reports. 

We’ve also been closely tracking the inclusion of references to “SASB” and inclusion of SASB metrics by public companies in their reporting as part of our GRI Data Partner work. ‘

The G&A Institute analyst teams examine and assess every sustainability report published in the USA and have tracked trends related to how companies are integrating SASB disclosures into their reporting. 

What began as a trickle of SASB mentions in corporate reports several years ago is now increasing and we are capturing samples of such inclusions in our report monitoring and analysis.

Over the past four+ years we’ve developed comprehensive models and methodologies to assist our corporate client teams incorporating SASB disclosures in their public-facing documents (such as their sustainability / responsibility / citizenship reports, in Proxy Statements, for investor presentations and in other implementations).

Our co-founder and EVP Louis Coppola was among the first in the world (“early birds”) to be certified and obtain the SASB CSA Level I credential in 2015.

If you’d like to discuss SASB reporting for your company and how we can help please contact us at info@ga-institute.com

There’s information for you about our related services on the G&A Institute web site: https://www.ga-institute.com/services/sustainability-esg-consulting/sasb-reporting.html

Top Story

Benefits of sustainability reporting: takeaways for accounting 
Source: Compliance Week – According to former Financial Accounting Standards Board (FASB) member Marc Siegel, companies are being asked for sustainability information from many sides and are facing a bumpy road because they are under pressure due to pervasive… 

The Year 2020: Off To Great Start For News About Sustainable Investing

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

January 2020 — Here we are now in a new year, and new decade (already, the third decade of the 21st Century) and much of the buzz is all about (1) climate change and the dramatic impacts on business, finance, government and we humans around the globe; and (2) many investors are moving their money to more sustainable investments.

Oh, of course, there are other important conversations going on, such as about corporate purpose, corporate stewardship, human rights, the circular economy, worker rights, supply chain responsibility, reducing GHG emission, conserving natural resources, moving to a greener and lower carbon economy, workplace diversity, what happens to workers when automation replaces them…and more. 

But much of this is really part of sustainable investing, no?  And corporate purpose, we’d say, is at the center of much of this discussion!

The bold names of institutional investors/asset management are in the game and influencing peers in the capital markets – think about the influence of Goldman Sachs, BlackRock (world’s largest asset manager), State Street/SSgA, The Vanguard Group, and Citigroup on other institutions, to name here but a handful of major asset managers adopting sustainable investing strategies and approaches.

This week’s Top Story is about Goldman Sachs Group Inc’s pivot to “green is good”, moved by Reuters news service and authored by Chris Taylor.  The GS website welcome is Our Commitment to Sustainable Finance

The company announced a US$750 billion, 10-year initiative focused on financing of clean energy, affordable education and accessible healthcare, and reduction of or exclusion of financing for Arctic oil-gas drilling.

Head of GS Sustainable Finance Group John Goldstein explains the company’s approach to sustainable financing and investment in the Reuters story. 

Our other Top Story is from Morningstar; this is an update on the investors’ flows into sustainable funds in 2019…what could be the leading edge of a huge wave coming as new records are set. 

For 2019, net flows into open-end and ETF sustainable funds were $20.6 billion for the year just ended – that’s four times the 2018 volume (which was also a record year). There’s always information of value for you on the Morningstar website; registration is required for free access to content.

And the commentary on the January 2020 letter from BlackRock CEO Larry Fink to the CEOs of companies the firm invests in – we’ve included a few perspectives. 

We’d say that 2020 is off to an exciting start for sustainability professionals, in the capital markets, and in the corporate sector! Buckle your seat belts!

Top Stories for This Week

Green is good. Is Wall Street’s new motto sustainable?   
Source: Reuters – If you have gone to Goldman Sachs Group Inc’s (GS.N) internet home page since mid-December, it would be reasonable to wonder if you had stumbled into some kind of parallel universe. 

Sustainable Fund Flows in 2019 Smash Previous Records   
Source: MorningStar – Sustainable funds in the United States attracted new assets at a record pace in 2019. Estimated net flows into open-end and exchange-traded sustainable funds that are available to U.S. investors totaled $20.6 billion for the… 

BlackRock’s CEO’s 2020 Letter to Corporate CEOs – Explaining the World’s Largest Asset Manager’s Perspectives and Actions on the Global Climate Change Crisis

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

The big news this week for sustainability professionals:  The publication of the much-anticipated annual letter to corporate chief executive officers by Larry Fink, Chair and CEO of BlackRock –– the world’s largest asset manager (with almost US$7 trillion in Assets Under Management). 

Every year CEO Fink as fiduciary for his firm’s clients communicates BlackRock’s positions on key issues — and signals the steps ahead as BlackRock enhances its sustainable investing actions as influential global fiduciary.

This week the 2020 annual letter to corporate CEO’s describes what is headlined as “A Fundamental Reshaping of Finance”.   The focus is on climate change – a defining factor in companies’ long-term prospects, explains Mr. Fink.

 About the impact of climate change on investors:  “Awareness is rapidly changing, and I believe we are on the edge of a fundamental re-shaping of finance.”  Consider some quotes from the letter:

 “In the near future – and sooner than most anticipate – there will be a significant re-allocation of capital.”

 “Climate risk is investment risk.”

 “As I have written in past letters [to CEOs in 2019, 2018] a company cannot achieve long-term profits without embracing purpose and considering the needs of considering the needs of a broad range of stakeholders.  Ultimately, purpose is the engine of long-term profitability.”

 “Every government, company, and shareholder must confront climate change.”

Separately the BlackRock CEO wrote to the firm’s investor clients; he communicated to the corporate CEOs what he is saying to clients about BlackRock actions that will affect them. 

Consider: sustainability will be integral to BlackRock’s portfolio construction and risk management; certain investments will be exited (those presenting high sustainability-related risk, such as coal producers).  There will be new investment products that screen fossil fuels and strengthen BlackRock’s commitment to sustainability and transparency in its investment stewardship activities.

“Over time,” CEO Larry Fink posits, “companies and governments that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate responsiveness…by contrast, will attract investment more effectively, including higher-quality, more patient capital.”

BlackRock was a founding member of the Task Force on Climate-related Financial Disclosures (the TCFD) and is a signatory of the UN Principles for Responsible Investing (PRI) as well as the Vatican’s 2019 statement advocating carbon pricing regimes.

CEO Larry Fink is one of the signatories of The Business Roundtable’s statement on corporate purpose.  BlackRock has just joined the Climate Action 100, a coalition of almost 400 investment manager managing US$40 trillion in AUM. 

There’s a volume of important information for both corporate boards and executives and sustainable investing professionals in the 2020 Larry Fink letter to CEOs of companies in BlackRock’s portfolio.

We can expect going forward in 2020 that many business & financial media will pick up on the BlackRock letter and capital market and corporate sector leaders will weigh in with their perspectives.

We are now a long way from the Professor Milton Friedman school of “shareholder primacy” advanced by the professor, in his books such as “Capitalism and Freedom” (1962) and his September 1970 essay proclaiming “shareholders first” in The New York Times.

Link to the letter.

Top Stories – Start of 2020 Coverage of the BlackRock / Larry Fink Missive

Fortune Magazine’s Coverage:
BlackRock CEO Larry Fink puts climate change at the center of megafund’s investment strategy

Barron’s Coverage for 400,000 Reader-Investors:
BlackRock CEO Larry Fink say’s it’s time to tackle global warming – starting with coal

Bloomberg News:
BlackRock puts climate at center of $7 trillion strategy

Sustainable Investing Has Moved Into the Mainstream — and UBS Survey Results Send Strong Signals This is a Lasting Trend

December 2019

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

There is no doubt now — the world’s largest asset managers are definitely focused on corporate sustainability and sustainable investing (the two go hand-in-hand) as survey upon survey of investment professionals tells us.

In recent years we seen considerable momentum as asset owners and their managers adopt or further enhance their sustainable investing / ESG investing approaches. And to gauge the progress we’re seeing major, global asset managers busily taking the pulse of the capital market players.

For example UBS, the findings from one of the world’s leading asset managers, which regularly surveys asset managers.  James Purcell, Global Head of Sustainable and Impact Investing at UBS Wealth Management shares the latest survey findings in a sponsored editorial post in the Harvard Business Review, and assures executive-level readers:

“Sustainability doesn’t mean one potentially has to give up returns. In fact it may be contributing to the investment process by adding more pertinent non-financial information. In this, we have reached a ‘why not’ moment.”

UBS, the commentator explains, is ambitious in wanting to shape the future of sustainable investing because the company believes these investments can help clients pursue investments according to their values.  And – because UBS is confident that sustainable investing will remain a widely-accepted way of investing.

In the content shared on the HBR platform, the company explains the signals that sustainable investing should be seen as a lasting, major force in the capital markets.  Among these signals:

  • Urgent challenges such as climate change (presented to both companies and investors).
  • The Paris Agreement on Climate Change, the UN Sustainable Development Goals (SDGs), the aims of the EU High Level Expert Group on Sustainable Finance – all of these actively suggest solutions to global challenges that are now at a scale demanding critical mass. (We have but 10 years to go to change the direction of perilous global warming, science experts tell us.)
  • At the same time, customers, shareholders and employees are aligning their values and leveraging their investments for the public good. That is impacting (positively) sustainable investing.
  • In turn, this trend creates new demands on institutions to make ESG performance and sustainable investment part of the long-term strategy.
  • Asset owners are heeding the call – see the Principles for Responsible Investing (PRI) for reports on the progress of asset owners (the PRI signatories) and their asset managers. (PRI was launched in 2006 with 63 investment companies committing to incorporate ESG issues into investment decision.  This year there are 2,450 signatories representing US$82 trillion in collective AUM!)
  • Three of four asset owners surveyed by UBS say that they consider ESG management approaches and results as one of the key issues looked at when choosing an asset manager.
  • These and other factors (outlined in the Harvard Business Review commentary) are clear demonstration – important signals! — of the extent to which the mainstreaming of ESG has evolved over the most recent years.

In the 2018 UBS Investor Watch Global Survey, 81% of respondents said they wanted to align their consumer spending patterns with their values.

In the 2019 UBS survey of investors (“ESG: Do You, or Don’t You?”) more four-of-ten respondents said they already have sustainable investments in their portfolios and expect a positive impact on financial performance. Eight-of-ten respondents said they thoughts “sustainable companies” were good investments (they’re perceived as better managed, more forward-thinking).

In 2019, UBS teamed with Responsible Investor to gauge the extent of ESG investing.  Europe had the highest proportion of asset owners active in ESG investing (82% of owners). North America is catching up with 70% of respondents saying they were “do-ers” (making ESG material their day-to-day activity) and 19% were “adopters” (not yet focused day-to-day on ESG but planning to integrate in the future).

Just in time!

Opening this week’s COP 25 meetings, UN General Secretary Antonio Guterres challenged those assembled at the Conference of Parties’ gathering (and millions more tuning in)  by asking – Do we really want to be remembered as the generation that buried its head in the sand, that fiddled while the planet burned? (Or, follow of path of resolve, of sustainable solutions).

The UBS commentary is a message of hope – and there is a handy sidebar explain sustainable investing which is of value.  We invite your reading of this week’s Top Story and the other items (including more sustainable investment items) that Editor-in-Chief Ken Cynar and the G&A team has selected for you this week.

Top Stories

Is Sustainable Investing Moving Into the Mainstream?
Source: Harvard Business Review – Sustainable investing, which incorporates environmental, social, and governance (ESG) criteria into investment decisions, has been gaining more attention among both individual investors and asset managers in the world’s largest…

Sustainable & Responsible Investment and Asset Manager Perspectives – Today, and Quo Vadis Over the Coming Years…

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

The terms of reference are familiar now to many more institutional owners and their internal and external managers (as well as to a growing number of retail investors who are their clients and beneficiaries).

This movement began as “socially responsible investing” (“SRI”) which evolved over time to “sustainable & responsible investing” and on to “sustainable & responsible & impact investing” in the 21st Century.

In recent months we’re increasingly hearing and using the simplified term “sustainable investing” and “ESG investing”.

The progress is welcomed!  Our esteemed colleague Erika Karp at Cornerstone Capital Group here in New York (she was formerly managing director/head of Global Sector Research at UBS and is one of the founders of SASB) has been saying for some time at public conferences that one day we’ll just be talking about “investing” — and it will all be what today we’re describing as “sustainable investing”. 

So how do investors – the world’s trusted fiduciaries and intermediaries – feel about sustainable investing? 

According to Schroder’s “Institutional Investor Study 2019 – Geopolitics and Investor Expectations” – belief is very high and the proportion of investors worldwide who do not believe in sustainable / ESG investing fell to just 11 percent (from 20% in 2017); the decline was most notable in Latin America (falling to 12% from 29%).

The survey respondents:  pension funds, insurance companies, sovereign wealth funds, endowments, foundations – 650 in total, managing US$25 trillion in assets from 20 global locations.  According to Schroder’s survey of these entities, the “cynics in the asset management sector” fell by 50% in just three years of the survey effort.

Geographic spread of responses:  27%, North America; 38%, Europe; 27%, Asia-Pacific; Latin America, 8%.

Key numbers:  52 percent cite macro and geopolitical risks as greatest concern; 52% look to increase their exposure to private assets; 53% need customized solutions to meet their needs; 67% believe annual total returns will remain above 5% over the next five years; and, 75% believe sustainability will play a more important role over the next five years.

This is an important point to underscore:  Three quarters of respondents expect sustainable investing to grow in importance over the next five years (up from the base of 67% who thought so in the 2017 survey effort). 

Alas, there are still asset managers doubting the value of sustainable investing – almost one-in-five (19%) of investors responding said they do not invest in sustainable investing funds.

Sixty-seven percent of North American survey respondents said greater transparency and better ESG data and benchmarks were important.  

At G&A Institute we’re hearing this argument every day among our capital market colleagues and this is why the major ESG ratings agencies and ESG information providers – such as MSCI, Sustainalytics, Bloomberg, Thomson Reuters/Refinitiv, Vigeo Eiris and ISS — have been strengthening their systems and enhancing their methodologies to meet increasing investor-clients’ demands. 

We have been successfully working with our corporate sector clients in helping them better manage their ESG data profiles and related information in the effort to improve the information available to the rating agencies’ for rankings and data sets in a more efficient and effective manner. And then from the ratings agencies on to their investor clients.

These efforts help the corporate issuer to better represent themselves as a sustainable investment candidate and to make sure they do not get passed over by the dramatically-growing pool of asset managers now focused on corporate ESG as key factors in financial analysis and portfolio management. 

The Schroder’s results as revealed in their latest investor survey are good news all around, we would say!

Schroder’s Global is a 200-year old investment management firm working with institutions, intermediaries and individuals, managing $500 billion-plus in assets for 5,000 people on all continents.

This week’s Top Story is a review of the Schroder’s report for asset managers as published for the readers of Chief Investment Officer.  Information about the Schroder’s report is also available to you here and here.

Each week as part of our Highlights content we bring you news of ESG / Sustainable & Responsible Investment from global sources.

Adding Considerable Value to This Discussion:
Business Insider shared the results of the Merrill Lynch – Bank of America survey of investors. These are the top 10 reasons investors and companies should care about ESG investing. You can read highlights here.

Top Stories

Sustainable Investment Skeptics are Becoming Believers
Source: Chief Investment Officer – The doubters of sustainable investing are rapidly dwindling in numbers, according to a study by asset manager Schroders, which found that cynics of the sector have fallen by nearly 50% in just three years.

Trump Administration Continues Attempts to Unravel U.S. Environmental Protections Put in Place Over Many Years – Now, Shareholder Proxy Resolution Actions on Climate Issues Also In Focus For Investors…

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

We should not have been surprised: in 2016 presidential candidate Donald Trump promised that among his first steps when in the Oval Office would be the tearing up of his predecessor’s commitment to join the family of nations in addressing climate change challenges. 

In late-December 2015 in Paris, with almost 200 nations coming to agreement on tackling climate change issues, the United States of America with President Barack Obama presiding signed on to the “Paris Agreement” (or Accord) for sovereign nations and private, public and social sector organizations come together to work to prevent further damage to the planet.

The goal is to limit damage and stop global temperatures from rising about 2-degrees Centigrade, the issues agreed to. 

As the largest economy, of course the United States of America has a key role to play in addressing climate change.  Needed: the political will, close collaboration among private, public and social sectors — and funding for the transition to a low-carbon economy (which many US cities and companies are already addressing).

So where is the USA? 

On June 1st 2017 now-President Trump followed through on the promise made and said that the U.S.A. would begin the process to withdraw from the Paris Agreement on climate change, joining the 13 nations that have not formally ratified the agreement by the end of 2018 (such as Russia, North Korea, Turkey and Iran).  

Entering 2019, 197 nations have ratified the Agreement.

A series of actions followed President Trump’s Paris Agreement announcement – many changes in policy at US EPA and other agencies — most of which served to attempt to weaken long-existing environmental protections, critics charged.

The latest move to put on your radar:  In April, President Trump signed an Executive Order that addresses “Promoting Energy Infrastructure and Economic Growth”.

[Energy] Infrastructure needs – a bipartisan issue – are very much in focus in the president’s recent EO.  But not the right kind to suit climate change action advocates. 

Important: The EO addressed continued administration promotion and encouraging of coal, oil and natural gas production; developing infrastructure for transport of these resources; cutting “regulatory uncertainties”; review of Clean Water Act requirements; and updating of the DOT safety regulations for Liquefied Natural Gas (LNG) facilities.

Critics and supporters of these actions will of course line up on both sides of the issues.

There are things to like and to dislike for both sides in the president’s continuing actions related to environmental protections that are already in place.

And then there is the big issue in the EO:  a possible attempt to limit shareholder advocacy to encourage, persuade, pressure companies to address ESG issues.

Section 5 of the EO“Environment, Social and Governance Issues; Proxy Firms; and Financing of Energy Projects Through the U.S. Capital Markets.” 

The EO language addresses the issue of Materiality as the US Supreme Court advises.  Is ESG strategy, performance and outcome material for fiduciaries? Many in the mainstream investment community believe the answer is YES!

Within 180 days of the order signing, the Secretary of the Department of Labor will complete a review existing DOL guidance on fiduciary responsibilities for investor proxy voting to determine whether such guidance should be rescinded, replaced, or modified to “ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets”. 

(Think of the impact on fiduciaries of the recommendations to be made by the DOL, such as public employee pension plans.) 

The Obama Administration in 2016 issued a DOL Interpretive Bulletin many see as a “green light” for fiduciaries to consider when incorporating ESG analysis and portfolio decision-making.  The Trump EO seems to pose a direct threat to that guidance.

We can expect to see sustainable & responsible investors marshal forces to aggressively push back against any changes that the Trump/DOL forces might advance to weaken the ability of shareholders – fiduciaries, the owners of the companies! – to influence corporate strategies and actions (or lack of action) on climate change risks and opportunities.  Especially through their actions in the annual corporate proxy ballot process and in engagements. 

You’ll want to stay tuned to this and the other issues addressed in the Executive Order.  We’ll have more to report to you in future issues of the newsletter.

Click here to President Trump’s April 10, 2019 Executive Order.

Facts or not?  Click here if you would like to fact check the president’s comments on withdrawal from the Paris Agreement.

We are still in!  For the reaction of top US companies to the Trump announcement on pulling out of the Paris Accord, check The Guardiancoverage of the day.

At year end 2018, this was the roundup of countries in/and not.

For commentaries published by G&A Institute on the Sustainability Update blog related to the above matters, check out it here.

Check out our Top Story for details on President Trump’s recent EO.

This Week’s Top Stories

Trump Order Takes Aim at Shareholders Pushing Companies to Address Climate Change
(Wednesday – April 77, 2019) Source: Climate Liability News – President Trump has ordered a review of the influence of proxy advisory firms on investments in the fossil fuel industry, a mot that…

When Will Sustainable Investing Be Considered to be in the Mainstream?

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

“Movements” – what comes to mind when we describe the characteristics of this term are some 20th Century examples.

The late-20th Century “environmental movement” was a segue from the older 19th and early 20th Century “conservation movement” that was jump started by President Theodore Roosevelt (#26), who in his 8 years in the Oval Office preserved some 100,000 acres of American land every work day (this before the creation of the National Parks System a decade later).

The catalysts for the comparatively rapid uptake of the environmental movement?  American rivers literally burned in the 1960’s and 1970’s (look it up – Cuyahoga River in Ohio was one).

And that was just one reason the alarm bells were going off.  New York’s Hudson River was becoming an open, moving sewer, with its once-abundant fish dying and with junk moving toward the Atlantic Ocean.  Many East Coast beaches were becoming fouled swamp lands.

One clarion call – loud & clear — for change came from the pen.  The inspired naturalist / author Rachel Carson wielded her mighty pen in writing the 1962 best-seller, “Silent Spring”. 

That book helped to catalyze the rising concerns of American citizens. 

She quickly attracted great industry criticism for sounding the alarm…but her words mobilized thousands of early activists. And they turned into the millions of the new movement.

She explained the title:  There was a strange stillness.  Where had the little birds gone? The few birds seen anywhere were moribund; they trembled violently and could not fly.”  (Hint:  the book had the poisonous aspects of the DDT pesticide at its center as the major villain.)

Americans in the 1960s were becoming more and more alarmed not only of dumping of chemical wastes into rivers and streams and drifting off to the distant oceans —

—but also of tall factory smokestacks belching forth black clouds and coal soot particles;

–of large cities frequently buried beneath great clouds of yellow smog a mile high on what were cone clear days;

–of dangerous substances making their way into foods from the yields of land and sea;

–of yes, birds dropping out of the sky, poisoned;

–of tops of evergreen and other trees on hilltops and mountains in the Northeast burned clean off by acid rain wafting in from tall utility smokestacks hundreds of miles away in the Midwest…and more. 

Scary days. For public health professionals, dangerous days.

We will soon again be celebrating Earth Day; give thanks, we are long way from that first celebration back in spring 1970. (Thank you, US Senator Gaylord Nelson of Wisconsin for creating that first Earth Day!)

Most of our days now are (as the pilots cheer) CAVU – ceiling (or clear) and visibility unlimited. 

We can breathe deep and as we exhale thank many activists for persevering and driving dramatic change and creating the modern environmental movement… and on to the sustainability movement. 

And now – is it time (or, isn’t time!) for another movement along these lines…the sustainable investing movement going mainstream? 

Experts pose the question and provide some perspectives in this week’s Top Story.

In Forbes magazine, they ask:  “Why Hasn’t Sustainable Investing Gone Viral Yet?”

Decio Fascimento, a member of Forbes Council (and chief investment officer of the Richmond Global Compass Fund) and the Forbes Finance Council address the question in their essay.

In reading this, we’re reminded that such mainstream powerhouse asset managers as BlackRock, State Street/SSgA, Vanguard Funds, TIAA-CREF, and asset owners New York State Common Fund, New York City pension funds (NYCPERS), CalPERS, CalSTRS and other capital market players have embraced sustainable investing approaches. 

But – as the authors ask:  what will it take for many more capital market players to join the movement?  There’s interesting reading for you in the Top Story – if you have thoughts on this, send them along to share with other readers in the G&A Institute universe.

Or send comments our way to supplement this blog post.


This Week’s Top Stories

Why Hasn’t Sustainable Investing Gone Viral Yet?
(Wednesday – April 10, 2019) Source: Forbes – Let’s first look at what sustainability looks like in financial terms. In sustainable investing, the ideal scenario is when you find opportunities that produce the highest returns and have the highest positive impact. 

And of further reading for those interested: