There Were Many Positive Developments for Sustainability Professionals in 2018 and Much Promise for What’s To Come in 2019 – We Are Watching For You

There were many positive developments and trendlines in 2018 that we believe were encouraging for corporate sustainability & responsibility managers, sustainable investing champions, NGO managers and members, and other stakeholders.  The analyses and wrap-ups are beginning to appear now in the many media outlets and platforms that we monitor.  We bring you some highlights in this first newsletter of the exciting new year, 2019!

One of the most compelling and sweeping of essays to kick off the year was the commentary of Andrew Winston in the Harvard Business Review – “The Story of Sustainability in 2018:  We Have About 12 Years Left.”

Author Winston came to broad attention with the publication of his books, “Green to Gold” and “Green Recovery”, and the recent “The Big Pivot”.  In his end-of-year HBR commentary, the author begins with the important 2018 sustainability themes that he sees as having lasting impact, and his belief that the year just ended brought “incredible clarity” about the scale of our challenges and opportunities.”

Clarity:  the world’s scientists sound a “final” alarm on the climate — citing the Intergovernmental Panel on Climate Change/IPCC report on where we are; that is, dear reader, in a global, universally-perilous state with just a dozen years left for bold, collective action on carbon emissions.

Clarity:  the key elements of the government of the United States of America told a similar story in the U.S. National Climate Assessment released at Thanksgiving time (with the White House attempting to bury on a slow Friday after holiday) – climate change inaction could knock off 10% of this, the world’s leading economy’s enormous GDP.  The U.S. GDP was US$19.39 trillion in 2017, said sources including the World Bank.

Clarity:  Business must dramatically change how it operates and companies must push well past their comfort zones.

There’s lots of information for you regarding the threats and challenges posed by dramatic climate change.  And, Andrew Winston points out the positive developments as well, by corporate leaders at organizations such as Unilever, Salesforce, Nike, Kroger, and Danone (which became the world’s largest B Corporation in 2018).

We present Winston’s wrap up for you in this week’s Top Story:

The Story of Sustainability in 2018: “We Have About 12 Years Left” 
(Wednesday – January 02, 2019) Source: Harvard Business School – We have about 12 years left. That’s the clear message from a monumental study from the Intergovernmental Panel on Climate Change (IPCC). To avoid some of the most devastating impacts of climate change, the world must slash carbon…

The State of Sustainable / ESG Investment in 2018: The State of Corporate Sustainability Reporting & How We Got Here

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

In this issue of our weekly newsletter we brought you two important Top Stories that capture the state of sustainable investing from varying points-of-view. 

We selected these research efforts for their value to both corporate managers and investment professionals.

  • Corporate staff can use the findings to “make the case” upward to C-suite and boardroom using both documents.
  • Investors not yet on board with Sustainable / ESG investing can gain valuable insights from both reports.

First is the report by Guido Giese and Zoltan Nagy at MSCI – “How Markets Price ESG” – addressing the question “have changes in ESG scores affected market prices?”

MSCI examines the changes in companies ESG scores, “ESG momentum” — either strong or negative for the companies being rated. Using the firm’s model, the research showed that markets reacted “most sensitively” to improvements in a public company’s characteristics rather than to declines in ESG performance, among many other takeaways in the full report.

The takeaway is that changes in ESG profiles of companies certainly affect company valuations.  The change in ESG characteristics showed the strongest move in equity pricing over a one-year horizon compared to shorter or longer time frames.  The report contains a well designed, thorough methodology which clearly demonstrates the importance of a public company’s ESG profile.

The MSCI score, the authors point out, is a proxy for the ESG-related information that the market is processing. (All MSCI ESG scores are updated at least once a year.)  There’s good information for both corporate managers and investment professionals in the 25-page report.

The second report is a snapshot of the “State of Integrated and Sustainability Reporting 2018” — issued by the Investor Responsibility Research Institute (IRRCI)Sol Kwon of the Sustainable Investments Institute (Si2) is the author and colleague Heidi Welsh is editor.  (IRRCI and Si2 regularly publish research reports together.)

The report charts the evolution of corporate sustainability reporting, which got off to a modest start in the 1980s – then on to the 1990s when corporate sustainability reports as we know them today as investors and companies adopted ESG or Triple Bottom Line approaches.

Key:  Another transition is underway, writes author Kwon, the “value creation” (a/k/a shared value) which should lead to more holistic reporting of inputs and outputs…and the emergence of the integrated report.

In 2013, IRRCI had Si2 look at the state of integrated reporting among the S&P 500® companies and examined practices again for this year’s report.  (The earlier work focused on what companies were reporting without regard to status as “mandated” or “voluntary” disclosure.)  Much progress has been made – for one thing, investor attention on ESG matters is much higher today…making corporate sustainability reporting ripe for the next phase.

The details are set out for you in the IRRCI report including trends and examples in use of reporting frameworks (GRI, SASB, IIRC), Quality, Alignment with SDGs, Inclusion of Sustainability in Financial Reports, Investor Engagement / Awareness, Board Oversight, Incentives, and many other important trends.

This an important comprehensive read for both corporate managers and investment professionals, with a sweep of developments presented in an easy-to-read format.

Example:  What drives ESG integration into investment strategy?  The drivers are identified and presented in a graphic for you.

Important note for you regarding IRRCI:  in 2019 the organization’s intellectual properties will be assumed by the Weinberg Center at the University of Delaware.  The center conducts research and holds conferences on corporate governance and related issues and is headed by Charles Elson, one of the most highly-regarded thought leaders on corporate governance in the U.S.

Important Study on ESG Momentum by MSCI: 
https://www.msci.com/www/research-paper/how-markets-price-esg-have/01159646451

State of Integrated and Sustainability Reporting 2018:
https://irrcinstitute.org/wp-content/uploads/2018/11/2018-SP-500-Integrated-Reporting-FINAL-November-2018.pdf

The Survey Results Are Here: $12 Trillion in Professionally Managed Assets Are Guided by Sustainable Investing / ESG Approaches in the USA – That’s $1-in-$4 of All Capital Market Assets Under Professional Management At End of 2017

The results of the 2018 survey of asset owners, asset managers and community investment professions conducted by The Forum for Sustainable and Responsible Investment (“US SIF”) were announced last week.

Dramatic results were highly anticipated  — and the US SIF trends survey delivered:  at the end of 2017, ESG / sustainable assets under professional management (AUM) totaled US$12 trillion.  That’s 1-in-$4 of total professional managed assets (AUM) in the U.S. capital markets ($46 trillion).

The survey universe consisted of 496 asset owners, 385 asset managers and 1, 145 community investing financial institutions.

These professional money managers pursued ESG integration for a variety of reasons, including:  (1) to meet increasing institutional and retail client demand for “sustainable investing”; (2) to fulfill stated mission and pursuing social benefits; (3) to address a number of societal issues such as climate change, diversity, human and labor rights, weapons manufacturing, and corporate political spending.

High net worth individuals and retail investors increasingly utilized ESG / sustainable investing approaches reporting $3 trillion in sustainable assets.

One of the leading sponsors of the every-other-year study since the 2010 survey report is the Wallace Global Fund.  The managers have embraced sustainable investing and Executive Director Ellen Dorsey commented:  “We support this research as a critical tool to track crucial trends in the industry and benchmark our own goal of 100 percent mission alignment, as we promote an informed and engaged citizenry, help fight injustice and protect the diversity of nature.”

The Trends report breaks out the top ESG issues for investors – nine types of financial institutions (public employee funds, insurance companies, labor funds, and more), mutual funds, ETFs, money management firms, foundations, venture capital funds, and community investing institutions.  There is a tremendous amount of useful data and information or you in the Trends report available from US SIF.  The two top stories this week provide you with highlights.

We encourage readers to order the full report and keep it handy…for the next two years, volumes of content will be cited by investors, investor coalitions and advocates, media, academics, NGOs, government agencies, and others. To get started in digesting the sustainable investing trends, start with our two Top Stories below.

This Week’s Top Story

Breaking News: $12 Trillion in Professionally Managed Sustainable Investment Assets — $1-in-$4 of Total U.S. Assets
(Thursday – November 01, 2018) Source: Hank Boerner – Chair and Chief Strategist – G&A Institute – Call it “sustainable and responsible investing” or “SRI” or “ESG investing” or “impact investing” – whatever your preferred nomenclature, “sustainable investing” in the U.S.A. is making great strides as demonstrated in a new…

US SIF Foundation Releases 2018 Biennial Report On US Sustainable, Responsible And Impact Investing Trends
(Thursday – November 01, 2018) Source: US SIF Foundation – The US SIF Foundation’s 2018 biennial Report on US Sustainable, Responsible and Impact Investing Trends, released today, found that sustainable, responsible and impact investing (SRI) assets now account for $12.0 trillion—or one…

Breaking News: $12 Trillion in Professionally Managed Sustainable Investment Assets — $1-in-$4 of Total U.S. Assets

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

Call it “sustainable and responsible investing” or “SRI” or “ESG investing” or “impact investing” – whatever your preferred nomenclature, “sustainable investing” in the U.S.A. is making great strides as demonstrated in a new report from US SIF.

The benchmark report issued today – “The Report on US Sustainable, Responsible and Impact Investing Trends 2018” – by the U.S. Forum for Sustainable and Responsible Investment (US SIF) puts things in perspective for investors and corporate managers:

  • At the beginning of 2018, the institutional owners and asset management firms surveyed reported total sustainable investment at US$12 trillion AUM – that is 26% of the total assets under professional management in the U.S.A. — $1-in-$4 of all investable assets!
  • That’s an increase of 38% since the last US SIF report at the start of 2016. The AUM of sustainable investments then was $8.72 trillion. That was $1-in-$5.
  • And that was an increase of 33% since the survey of owners and managers at the start of 2014.
  • Sustainable investing jumped following the 2008 financial crisis, with growth of 240% from 2012 to 2014.

The US SIF bi-annual survey of investors began in 1995, when the total of sustainable investments professionally managed was pegged at $639 billion. There has been an 18-fold increase in sustainable investing assets since then – at a compound rate of 13.6% over the years since that pioneering research was done.

The researchers queried these institutions in 2018:

  • 496 institutional owners (fiduciaries such as public employee pension funds and labor funds – these represented the component of the survey results at $5.6 trillion in ESG assets**).
  • 365 asset/money managers working for institutional and retail owners;
    private equity firms, hedge fund managers, VC funds, REITS, property funds;
    alternative investment or uncategorized money manager assets);
  • 1,145 community investing institutions (such as CDFIs).

What is “sustainable investing”?  There are these approaches adopted by sustainable investors:

  • Negative/exclusionary screening (out) certain assets (tobacco, weapons, gaming);
  • Positive/selection of best-in-class considering ESG performance (peer groups, industry, sector, activities);
  • ESG integration, considering risks and opportunities, ESG assets and liabilities);
    Impact investing (having explicit intention to generate positive social and environmental impact along with financial return);
  • Sustainability-themed products.

The top ESG issues for institutional investors in 2018 included:

  • Conflict Risk (terror attacks, repressive regimes) – $2.97 trillion impact;
  • Tobacco related restrictions – $2.56 trillion
  • Climate Change / Carbon-related issues – $2.24 trillion
  • Board Room issues – $1.73 trillion
  • Executive Pay – $1.69 trillion

Asset managers identified these issues as among the most important of rising concerns:

  • Climate change and Carbon
  • Conflict risk

Prominent concerns for asset owners included:

  • Transparency and Corruption
  • Civilian firearms / weapons
  • a range of diversity and equal employment opportunity issues.

The Proxy Voting Arena

The shareowners and asset managers surveyed regularly engage with corporate executives to express their concerns and advocate for change in corporate strategies, practices and behaviors through presentation of resolutions for the entire shareholder base to vote on in the annual corporate elections.

From 2016 to 2018 proxy seasons these resolutions were focused on:

  • Proxy access for shareowners (business associations have been lobbying to restrict such access by qualified shareowners).
  • Corporate Political Activity (political contributions, lobbying direct expenses and expenses for indirect lobbying by business groups with allocated corporate contributions).
  • A range of environmental and climate change issues.
  • Labor issues / equal employment opportunity.
  • Executive compensation.
  • Human Rights.
  • Call for independent board chair.
  • Board Diversity.
  • Call for sustainability reporting by the company.

Public employee pension systems/funds led the campaigns with 71% of the resolutions filed in 2016, 2017 and 2018.

Labor funds accounted for 13% of filings.

Asset/money management firms accounted for 11.5%.

A total of 165 institutional owners and 54 asset managers filed or co-filed resolutions on ESG issues at the beginning of the 2018 proxy voting season.

The ESG Checklist

The institutions and asset managers queried could answer queries that addressed these ESG, community, product factors in describing their investment analysis, decision-making and portfolio construction activities. This is a good checklist for you when discussing ESG issues and topics with colleagues:

The “E” – Environmental:

  • Clean technology
  • Climate change / carbon (including GhG emissions)
  • Fossil fuel company divestment from portfolio, or exclusion
  • Green building / smart growth solutions
  • Pollution / toxics
  • Sustainable Natural Resources / Agriculture
  • Other E issues

The “S” – Social (or “societal”):

  • Conflict risk (repressive regimes, state sponsors of terrorism)
  • Equal employment opportunity (EEO) / diversity
  • Gender lens (women’s socio-economic progress)
  • Human rights
  • Labor issues
  • Prison-related issues (for-profit prison operators)
  • Other S issues

The “G” – Corporate Governance:

  • Board-related issues (independence, pay, diversity, response to shareowners)
  • Executive pay
  • Political contributions (lobbying, corporate political spending)
  • Transparency and anti-corruption policies

Product / Industry Criteria:

  • Alcohol
  • Animal testing and welfare
  • Faith-based criteria
  • Military / weapons
  • Gambling
  • Nuclear
  • Pornography
  • Product safety
  • Tobacco

Community Criteria:

  • Affordable housing
  • Community relations / philanthropy
  • Community services
  • Fair consumer lending
  • Microenterprise credit
  • Place-based investing
  • Small and medium business credit

The report was funded by the US SIF Foundation to advance the mission of US SIF.

The mission: rapidly shift investment practices towards sustainability, focusing on long-term investment and the generation of positive social and environmental impacts. Both the foundation and US SIF seek to ensure that E, S and G impacts are meaningfully assessed in all investment decisions to result in a more sustainable and equitable society.

The bold name asset owners and asset managers and related firms that are members of US SIF include Bank of America, AFL-CIO Office of Investment, MSCI, Morgan Stanley, TIAA-CREF, BlackRock, UBS Global Asset Management, Rockefeller & Co, Bloomberg, ISS, and Morningstar.

Prominent ESG / sustainable investment players include Walden Asset Management, Boston Common Asset Management, Clearbridge, Cornerstone Capital, Neuberger Berman, As You Sow, Trillium Asset Management, Calvert Investments (a unit of Eaton Vance), Domini Impact Investments, Just Money Advisors, and many others.

The complete list is here: https://www.ussif.org/institutions

Information about the 2018 report is here: https://www.ussif.org/blog_home.asp?display=118

About the US SIF Report:  The report project was coordinated by Meg Voorhees, Director of Research, and Joshua Humphreys, Croatan Institute.  Lisa Woll is CEO of US SIF.  The report was released at Bloomberg LP HQs in New York City; the host was Curtis Ravenel, Global Head of Sustainable Business & Finance at Bloomberg. q1

Governance & Accountability Institute is a long-time member. EVP Louis D. Coppola is the Chair of the US SIF Company Calls Committee (CCC) which serves as a resource to companies by providing a point of contact into the sustainable investment analyst community

** Institutional owners include public employee retirement funds, labor funds, insurance companies, educational institutions, foundations, healthcare organizations, faith-based institutions, not-for-profits, and family offices.

California – America’s Sovereign State of Sustainability Superlatives!

While the Federal Government Leaders Poo-Pooh Climate Change, the Sovereign State of California Continues to Set the Pace for America and the World!

Focus on The State of California – the America’s Sovereign State of Superlatives Including in the Realm of Societal Sustainability…

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

We are focusing today on the “Golden State” – California – America’s sovereign state of sustainability superlatives!

The U.S.A.’s most populous state is forceful and rigorous in addressing the numerous challenges of climate change, ESG issues, sustainable investing and other more aspects of life in this 21st Century.

Think about this: California is by itself now the fifth largest economy in the world. The total state GDP (the value of goods & services produced within the borders) is approaching US$ 3 trillion. The total U.S.A. GDP is of course the largest in the world (it includes California GDP) and then comes China, Japan, Germany… and the state of California!

The California population is about 40 million people – that means that roughly one-in-eight people in the U.S.A. live in the Golden State.

Stretching for 800+ miles along the coastline of the Pacific Ocean, California is third largest in size behind Alaska (#1)  and Texas and takes the honor of setting the example for the rest of the U.S.A. in societal focus on sustainability.

Most investors and public company boards and managements know that the large California pension fund fiduciaries (institutional investors) often set the pace for U.S. fiduciary responsibility and stewardship in their policies and activities designed to address the challenges of climate change, of global warming effects.

The state’s two large public employee pension funds —  CalPERS (the California Public Employees’ Retirement System) and CalSTRS (the California State Teachers’ Retirement System) have been advocates for corporate governance reforms for public companies whose shares are in their portfolios.

CalPERS manages more than US$350 billion in AUM; CalSTRS, $220 billion.

A new law in California this year requires the two funds to identify climate risk in their portfolios and to disclose the risks to the public and legislature (at least every three years)

CalSTRS and CalPRS will have to report on their “carbon footprints” and progress made toward achieving the 2-Degrees Centigrade goals of the Paris Accord.

Looking ahead to the future investment environment — in the  emerging “low carbon economy” — CalPERS is pointing more of its investments toward renewable energy infrastructure projects (through a direct investment program). The fund has invested in two solar generation facilities and acquired a majority interest in a firm that owns two wind farms.

Walking the Talk with proxy voting: long an advocate for “good governance,” CalPERS voted against 438 board of director nominees at 141 companies this year in proxy voting. CalPERS said this was based on the [companies’] failures to respond to it effort to engage with corporate boards and managements to increase board room diversity.

CalPERS’ votes including “no” cast on the candidacy of numerous board chairs, long-term directors and nominating & governance committee chairs. This campaign was intended to “create heat” in the board room to increase diversity. CalPERS had solicited engagements with 504 companies — and more than 150 responded and added at least one “diverse” director.  CalSTRS joins its sister fund in these campaigns.

During the year 2018 proxy voting season, to date, CalPERS has voted against executive compensation proposals and lack of diversity in board room 43% of the time for the more than 2,000 public companies in the portfolio.

Other fiduciaries in the state follow the lead of the big funds.

The San Francisco City/County Employee Retirement Fund

The San Francisco Employees’ Retirement System (SFERS) with US$24 billion in AUM recently hired a Director of ESG Investment as part of a six-point strategy to address climate risk.  Andrew Collins comes from State Street Global Advisors (SSgA) and the Sustainable Accounting Standards Board (SASB – based in SFO) where he helped to develop the ESG accounting standards for corporations in 80 industries.

The approach Collins has recommended to the SFERS Investment Committee:

  • Engagement through proxy voting and support for the Investor Network on Climate Risk (INCR) proxy resolutions.
  • Partnerships with Climate Action 100+, Principles for Responsible Investment (PRI), Ceres, Council of Institutional Investors, and other institutional investor carbon-reducing initiatives.
  • Active ESG consideration for current and future portfolio holdings.
  • Use of up-to-date ESG analytics to measure the aggregate carbon footprint of SFERS assets; active monitoring of ESG risks and opportunities; continued tracking of prudent divestment of risky fossil fuel assets.

The staff recommendations for the six point approach (which was adopted) included:

  • Adopt a carbon-constrained strategy for $1 billion of passive public market portfolio holdings to reduce carbon emissions by 50% vs. the S&P 500 Index.
  • Hire a director of SRI to coordinate activities – that’s been done now.

As first step in “de-carbonization” the SFERS board approved divestment of ExxonMobil, Royal Dutch Shell and Chevron (September 2018) and will look at other companies in the “Underground 200 Index”.  The pension fund held $523 million in equities in the CU200 companies and a smaller amount of fixed-income securities ($36MM).

Important background is here:  https://mysfers.org/wp-content/uploads/012418-special-board-meeting-Attachment-E-CIO-Report.pdf

There are 70,000 San Francisco City and County beneficiaries covered by SFERS.

At the May 2017 SFERS board meeting, a motion was made to divest all fossil fuel holdings.  An alternative was to adopt a strategy of positive investment actions to reduce climate risk. The board approved divestment of all coal companies back in 2015.

California Ignores the National Leadership on Climate Change

In 2015, the nations of the world gathered in Paris for the 21st meeting of the “Conference of Parties,” to address climate change challenges. The Obama Administration signed on to the Paris Accord (or Agreement); Donald Trump upon taking office in January 2017 made one of his first moves the start of withdrawal from the agreement (about a three year process).

American states and cities decided otherwise, pledging to continue to meet the terms previously agreed to by the national government and almost 200 other nations – this is the “We are still in movement.”

The State of California makes sure that it is in the vanguard of the movement.

This Year in California

The “Global Climate Action Summit” was held in San Francisco in September; outgoing Governor Jerry Brown presided. The meeting attracted leaders from around the world with the theme, “Take Ambition to the Next Level,” designed to encourage collaboration among states, regions, cities, companies, investors, civic leaders, NGOs, and citizens to take action on climate change issues.

Summit accomplishments:  there were commitments and actions by participants to address: (1) Healthy Energy Systems; (2) Inclusive Economic Growth; (3) Sustainable Communities; (4) Land and Ocean Stewardship; and (5) Transformative Climate Investments.  Close to 400 companies, cities, states and others set “100 percent” renewable energy targets as part of the proceedings.

New “Sustainability” Laws

The California State Legislature passed the “100 Percent Clean Energy Act of 2018” to accelerate the state’s “Renewable Portfolio Standard” to 60% by year 2030 — and for California to be fossil free by year 2045 (with “clean, zero carbon sourcing” assured). Supporters included Adobe and Salesforce, both headquartered in the Golden State; this is now state law.

Governor Jerry Brown issued an Executive Order directing California to achieve “carbon neutrality” by the year 2045 — and to be “net zero emissions” after that.

Building “De-Carbonization”

The state legislature this year passed a “Investor Network on Climate Risk (INCR) ” measure that is now law, directing the California Energy Commission to create incentives for the private sector to create new or improved building and water heating technologies that would help reduce Greenhouse Gas emissions.

Water Use Guidelines

Water efficiency laws were adopted requiring the powerful State Water Resources Control Board to develop water use guidelines to discourage waste and require utilities to be more water-efficient.

About Renewables and Sustainable Power Sources

Walking the Talk: Renewables provided 30% of California power in 2017; natural gas provided 34% of the state’s electricity; hydropower was at 15% of supply; 9% of power is from nuclear. The state’s goal is to have power from renewables double by 2030.

California utilities use lithium-ion batteries to supplement the grid system of the state. PG&E is building a 300-megawatt battery facility as its gas-generating plants go off-line.

Insurance, Insurers and Climate Change Challenges

There are now two states — California and Washington — that participate in the global Sustainable Insurance Forum (SIF); the organization released a report that outlines climate change risks faced by the insurance sector and aims to raise awareness for insurers and regulators of the challenges presented by climate change. And how insurers could respond.

The Insurance Commissioner of California oversees the largest insurance market in the U.S.A. and sixth largest in the world — with almost $300 billion in annual premiums.  Commissioner Dave Jones endorsed the 2017 recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (the “TCFD”) and would like to see the now-voluntary disclosures be made mandatory by the G-20 nations. (The G-20 created the Financial Stability Board after the 2018 financial crisis to address risk in the financial sector).

In 2016 the Insurance Commissioner created the requirement that California-licensed insurance companies report publicly on the amount of thermal coal enterprise holdings in portfolio — and asked that the companies voluntarily divest from these enterprises.  Also asked: that insurers of investments in fossil fuel companies (such as thermal coal, oil, gas, utilities) survey or “data call” on these companies for greater public financial disclosure.

What About a Carbon Tax for California?

The carbon tax – already in place. California has a “cap and trade” carbon tax adopted in 2013; revenues raised go into a special fund that finances parks and helps to make homes more energy efficient. The per ton tax rate in 2018 was $15.00.  The program sets maximum statewide GhG emissions for covered entities in power and industrial sectors and enables them to sell allowances (the “trade” part of cap & trade). By 2020, the Cap and Trade Program is expected to drive more than 20% of targeted GhG emissions still needed to be reduced.

As we said up top, the “Golden State” – California – is America’s sovereign state of sustainability superlatives!

There is more information for you at G&A Institute’s “To the Point!” management briefing platform:

Brief:  California Leads the Way (Again) – State’s Giant Pension Funds Must Now Consider Portfolio Climate Risks & Report on Results – It’s the Law

 

 

The FSB Task Force (TCFD) on Climate-Related Financial Disclosure And The Dramatic Contents of the Intergovernmental Panel on Climate Change – Hot Topics

A Brief Checklist of the Discussion for You This Week…

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

The Intergovernmental Panel on Climate Change (IPCC) was organized by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) in 1988 (30 years ago!) to provide a “clear scientific view of the current state of knowledge in climate change and its potential environmental and socio-economic impacts”.

In the late 1970s, the discussion about climate change and global warming began to, well, pardon the pun – heat up!  Foreign Affairs magazine, in 1978 posed the question:  “What Might Man-Induced Climate Change Mean?”

“The West Antarctica Ice Sheet and CO2 Greenhouse Gas Effect” appeared in the authoritative publication, Nature in the same year.  The debate was on — and multi-lateral organizations and governments began to take note and respond. Ten years later the IPCC debuted on the global scene.

Over the years since there have many meetings and studies produced, with 195 countries eventually joining the IPCC membership.  Including, significantly, China, the USA, the United Kingdom, the Russian Federation, Germany, France, Italy, Ireland, Israel… and many other sovereigns. The membership list is here: http://www.ipcc.ch/pdf/ipcc-faq/ipcc_members.pdf

Thousands of scientists – subject matter experts – regularly participate in the work of the organization, which is typically around task forces and delving into specific issues.  This gives the IPCC findings and recommendations “a unique opportunity to provide rigorous and scientific information to decision-makers”. The work is policy-relevant but also policy-neutral and never policy-prescriptive.

In October 2018 the IPCC issued a Special Report on Global Warming of 1.5C (above pre-industrial levels) and the rising threat of climate change, as well as sustainable development (think of the SDGs) and efforts to wipe out poverty.

The report and related materials are here for you: http://www.ipcc.ch/

Our Top Story comes from our colleagues at Ethical Corporation, authored by Karen Luckhurst.  She reports on the related activities during a two-days of  meetings at which the FSB’s Task Force on Climate-Related Financial Disclosure (TCFD) recommendations and the  IPCC Special Report were analyzed and discussed by corporate and organizational leaders.

She shares with us 10 top takeaways from the TCFD discussions and includes the comments on key players – Richard Howitt, CEO of the IIRC; Susan Beverly of Abbott; Richa Bajpai of Goodera; GRI’s Pietro Bertazzi (head of sustainable development); Laura Palmeiro of Danone; Professor Donna Marshal at USC College of Business; Mark Lewis at Carbon Tracker; Katie Schmitz Eulitt of the Sustainable Accounting Standards Board; Mairead Keigher of NGO Shift (human rights organization); Daniel Neale at Corporate Human Rights Benchmark; Craig Davies at EBRD (investments); and Andre Stovin at AstraZeneca.

Richard Howitt of IRRC told the group that there is a major alignment soon to be announced with other reporting standards agencies (GRI, CDP) – watch for that.

Do read the Top Story this week.  And, mark your calendars – the Ethical Corp “Responsible Business Summits” are coming to San Diego, CA on November 12th; to New York City on March 18, 2019 and on to London for June 10th convening.  There is more information at:http://www.ethicalcorp.com/events.

Governance & Accountability Institute has been a long-term event media partner of Ethical Corporation events for going on 8 years.

This Week’s Top Story

Ten takeaways from the Sustainability Reporting and Communications Summit
(Tuesday – October 16, 2018) Source: Ethical Corp – Reporting on the SDGs, alignment between reporting standards, and the Task Force on Climate, Climate-Related Financial Disclosure were big topics during two days of high-level discussion…

Seven Compelling Corporate Sustainability Stories For You – How Entrepreneurs Are Managing Their Sustainable Business and Meeting Society’s Needs

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

How do we structure a more sustainable (and responsible) business – it’s a question we are regularly asked here at G&A Institute. By big firms and small companies — publicly-traded or privately-owned (and numerous planning to go public).

As we get into the conversation, what often becomes clear is that the company really was founded to meet some kind(s) of societal need, and sometimes it actually created a need (think of the popularity of the Apple eco-system or the early days of the Ford Motor Company and the “horseless carriage”) that it fills, benefiting society.

And in the firm’s “growing up and maturing” phase the leaders want to be recognized as a sustainable and responsible enterprise.

There are well-known corporate models that can help point the way for a management team.  We explain the successes of our “top performers and reporters” roster as examples of how the industry leaders (depending on sector and industry) have achieved clear, recognized leadership in sustainability. Their stories are inspirational as well as instructive.

(Tip:  read the companies’ GRI reports for a deep dive into corporate strategies, programs, collaborations, and achievements – our team dives into 1,500 corporate reports and more each year in our work as GRI Data Partners for the USA, UK and Republic of Ireland.)

But what about smaller enterprises, not “giants” in their industry, or niche players, run by talented entrepreneurs and managers who want to do the right thing as they build their business?  How do we find their stories?

You know, like the early story of Ben & Jerry’s (ice cream), two young guys with borrowed money operating a small store (a renovated gas station) in downtown Burlington, Vermont; the founders, Ben Cohen and Jerry Greenfield, built their business as a pioneer in social responsibility. (In 1985, the Ben & Jerry’s Foundation got 7.5% of annual pre-tax profits to fund community-oriented projects and supporting dairy family farming was a priority – like the duo’s support of Farm Aid.)

What we have for you today are the stories of seven perhaps less well-known firms briefly profiled by tech blogger Kayla Matthews in her guest commentary on the Born2Invest platform.  The quick-read profiles explain the companies’ business models and how they try to operate as sustainable enterprises.

These are: Prime Five Homes (building $1 million eco-mod homes in Los Angeles); LaCoste (marketing the well-known crocodile brand of clothing); Liberty Bottleworks (recycled water bottles); Cleancult (paving the way for more efficient detergents); Andean Collection (marketing jewelry from the rainforest and providing Ecuadorian women with jobs ); Blockchain (technology); Wash Cycle Laundry (eco-friendly local laundry service).

What is interesting is that each of the companies, the author explains, develop products and manufacturing processes that benefit employers, employees and Mother Earth by striving for and being (more) sustainable.  The stories are fascinating – and very appealing in this age of anxiety for many of us.

These stories remind us of the 2018 “Sense of Purpose” letter sent to public company CEO’s by Chairman and CEO Larry Fink, who heads the world’s largest asset manager, BlackRock. As a fiduciary, he explains, BlackRock engages with companies to drive the sustainable, long-term growth that the firm’s clients (asset owners) need to meet their goals.

And society, he explains to the CEOs receiving the letter, “…is demanding that companies, both public and private, serve a social purpose.”

To prosper over time, Mr. Fink wrote, “…every company must not only deliver financial performance but also show how it makes a positive contribution to society…without a sense of purpose, no company can achieve its full potential.”

You can read Larry Fink’s letter to corporate CEOs here – it well worth the read: https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

You can follow Kayla Matthews on her tech blog, Productivity Bytes, where she often connects technology and sustainability topics: https://productivitybytes.com/

And do read our top story – it’s a fascinating and brief read to learn more about these innovative companies striving for greater sustainability and societal responsibility.

This Week’s Top Story

How 7 Eco-Friendly Businesses Are Changing The Sustainability Game
(Tuesday – September 11, 2018) Source: Born To Invest – To save the planet, it’s going to take cooperation from everyone, including both individuals and corporations. In fact, an increasing number of corporations are realizing that modern consumers are growing more environmentally…

Critical Development for CDP Responders in 2018 & 19: CDP Introduces Additional Alignment With FSB Task Force on Climate-Related Financial Disclosures Recommendations

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

Corporate ESG Data, Data, Data – it’s now everywhere and being digested, analyzed and applied to corporate equity analytics and portfolio decision-making.

Whether your public company participates in the annual round of organizing responses to the ever-more comprehensive queries from leading ESG / sustainability / CR rating agencies or not, there is a public ESG profile of your company that investors (asset owners, managers and analysts) are examining and applying to their work.

If you don’t tell the story of your firm’s progress in its sustainability journey, someone else will (and is).  And if you have not embarked on the journey yet…and there is not much to disclose and report on…you are building the wrong kind of moat for the company.  That is, one that will ever-widen and impair access to capital and affect the cost of capital.  And over time, perhaps put the company’s issues on the divestiture list for key investors.

This sounds a bit dramatic, but what is happening in the capital markets these days can be well described as a dramatic shift in focus and actions, with corporate ESG strategies, actions, programs, achievements, and disclosure becoming of paramount importance to a growing body of institutional and retail investors.

Consider these important developments:

  • The influential Barron’s editors, reaching hundreds of thousands of investors every week, beginning in Fall 2017 made coverage of corporate sustainability and sustainable investing a mainstay of the magazine’s editorial content.
  • Morningstar, the premier ranker of mutual fund performance, added sustainability to the analysis of funds and ETFs with guidance from Sustainalytics, one of the major ESG rating firms (and Morningstar made a significant investment in the firm).
  • SustainableInvest, headed  by Henry Shilling, former leader on sustainability matters for Moody’s Investor Service, noted that in 2Q 2018 as the proxy season was ending, 2018 voting was notable for the high level of “E” and “S” proposals, some achieving majority votes in shareholder voting at such firms as Anadarko Petroleum, Kinder Morgan and Range Resources.  Assets in 1,025 sustainable funds analyzed added $14 billion during 2Q and ended in June at US$286 billion; more than $1 billion was new net cash inflows, demonstrating investor interest in the products.

Significant:  according to the Harvard Law School Forum on Corporate Governance and Financial Regulations, two-thirds of investor-submitted proxy resolutions focused on having the company follow through on the 2-degrees scenario (testing) were withdrawn and company boards and managements agreed to the demand for climate risk reporting.

The FSB TCFD Impact on Corporate Sector and Financial Services Sector

The Financial Stability Board, an organization founded by the central bankers and financial leaders of the G-20 nations, created a Task Force on Climate-related Financial Disclosures (“TCFD”) to develop climate-related financial disclosures for adoption by financial services sector firms and by publicly-traded companies in general.

The 32-member Task Force, headed by Mayor Michael Bloomberg, announced financial recommendations for companies and investors in June 2017.

The essence of the recommendations:

  • Corporate boards and managements should focus on the risks and opportunities present and in the future taking into account a global temperature risk of 2-degrees Centigrade (3.5-F), and in the future, 4-C and even 6-C global temperature rises.

The risks (presented are not just to the affected companies but to the financial sector institutions investing in the company, institutions lending funds to the company, carriers insuring the company, etc.).

The risks and opportunities related to climate change should be thoroughly analyzed using the scenario testing that the company uses (an example would be projecting future pricing, regulations, technologies, and “what ifs” for an oil and gas industry company).

The company should consider in doing the scenario testing and analyzing outcomes the firm’s corporate governance policies and practices; strategies for the long-term; risk management policies and resources; establishing targets; and, putting metrics in place for measuring and managing climate risk.  Then, the next step is disclosing this to investors and other stakeholders.

Key Player:  CDP and its Wealth of Corporate, Institutional and Public Sector Data

The CDP – formerly known as the Carbon Disclosure Project – was founded almost two decades ago (2000) as a United Kingdom-based not-for-profit charity at the urging of the investment community, to gather corporate “carbon” data.

Timing:  soon after the start of meetings of the “Conference of the Parties” (or “COP”), organized by the United Nations as the Climate Change Conferences. (The “UNFCCC”.)

In the mid-1990s, the Kyoto Protocol emerged that legally-bound nations to their pledge to reduce Greenhouse Emissions (GHGs).  The U.S.A. did not sign on to the global protocol during the tenure of President George W. Bush, and the agreement reached in Paris at the COP meeting in 2015 was finally agreed to by President Barack Obama.

And then began the process of withdrawal under President Donald Trump.  The U.S.A. is now the prominent holdout (among the community of 197 nations signed on) in the global effort to address global warming before the danger point is passed.  In Paris, the COP agreed that the threshold was 2-degrees Centigrade.

Today, a growing universe of investors and many other stakeholders are increasingly focused on the role of carbon emissions in the framing of questions about what to do as scientists charted the warming of Earth’s climate.

And so — ESG / environmental data is critical to the mission of determining “what to do” and then implementing measures to address climate change challenges.

The Critical Role of CDP 

CDP over almost two decades since its founding has become the premier repository of corporate data related to climate change – with more than 6,000 companies’ data collected and shared in organized ways with the investment community.  (That includes the ESG data of half of the world’s public companies by market cap.)

The CDP emissions data focused has broadened over 16 years to now include water, supply chain, forestry (for corporates) and environmental data from more than 500 cities and some 100 states and regions available to investors.

Key user base:

  • 650-plus institutional investors with US$87 trillion in Assets Under Management.
  • Corporate Supply Chain members (such as Wal-Mart Stores) that collect data from their suppliers through CDP—a universe of 115 companies with over $3.3 trillion in combined purchasing power.

When the TCFD recommendations were being developed, CDP announced a firm commitment to align with the task force recommendations.

Following their release of the Task Force recommendations in July 2017, CDP held public consultations on a draft version of the TCFD-aligned framework. The current 2018 Climate Change questionnaire that corporations received from CDP is fully aligned with the TCFD recommendations on climate-related disclosures related to governance, risk management, strategy, and metrics and targets.

The TCFD recommendations are already aligned with the majority of CDP’s longstanding approach to climate change disclosure, including most of the recommendations for climate-related governance, strategy, risk management as well as metrics and target disclosure.

However, this year CDP has modified some questions and added new ones — the most impactful being on climate-related scenario analysis to ensure complete alignment.

Some modifications include:

The Governance section now asks for more information about oversight of climate change issues and why a company doesn’t have board-level oversight (if applicable). CDP also requests information about the main individual below the board level with the highest responsibility — and how frequently they report up to the board.

Next, in the risks and opportunities section, CDP now asks for the climate-related risk & opportunity identification, and assessment process.

As in past years, questions are posed in the Business Strategy module to allow companies to disclose whether they have acted upon integrating climate-related issues into their strategy, financial planning, and businesses.

CDP has also added a question for high impact sectors on their low carbon transition plans, so data users can gauge and further understand the sustainable and strategic foresight that these companies aim to achieve.

CDP also added a new question on scenario analysis, explaining that scenario analysis is a strategic planning tool to help an organization understand how it might perform in different future states.

A core aim of the TCFD recommendations is for companies to improve their understanding of future risks and develop suitable resilience strategies.

Finally, the TCFD recommendations highlighted five (5) sectors as the most important. In 2018, CDP rolled out sector-specific questions for the four non-financial sectors that the TCFD highlighted (they are energy, transport, materials, and agriculture).

TCFD also highlighted the financial sector – looking forward, in 2019, CDP is planning to release a financial sector-specific climate change questionnaire.

The TCFD resources for investors and corporate managers are embodied in three documents – (1) the Main Report; (2) an Implementation Annex; (3) the Technical Supplement for Scenario Analysis.  These are available at:  www.fsb-tcfd.org

G&A Institute Perspectives:

Our team has been assisting corporate managers in organizing the response to the CDP annual survey and we’ve tracked over the years the steady expansion of information requested of companies.

Our advice to companies not reporting yet:  get started!  The CDP staff members are very cooperative in assisting new corporate reporters in understanding what data are being sought (and why) and providing answers to questions.

CDP’s founding CEO Paul Simpson cautions:  “Big companies:  get better at telling those who hold the purse strings how climate risks could affect your bottom line.”

And so, our mission at G&A includes helping corporate issuers tell a better sustainability and ESG story, including the story told in the data sets communicated to 650-plus institutional investors by CDP!

CDP data is everywhere, we advise clients, including for example being part of the volumes of ESG data sets that Bloomberg LP shares on its terminals (through the terminal ESG Dashboard).

On the supply chain side, we point out that more than US$3 trillion is the collective spend of companies now addressing their supply chain sustainability factors and environmental impacts (customers see suppliers as part of their own CDP footprint).  Corporate leaders in this effort include Apple, Honda and Microsoft, CDP points out.

Resources:

CDP’s Technical Notes on the TCFD are available at: https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/guidance_docs/pdfs/000/001/429/original/CDP-TCFD-technical-note.pdf?1512736184

The “A” List of CDP naming the world’s business leaders on environmental performance (160 firms) is at: https://www.cdp.net/en/scores-2017

The CDP USA Report 2017, focused on key findings on Governance, ESG and the Role of the Board of Directors is available at: https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/002/891/original/CDP-US-Report-2017.pdf?1512733010

There’s an excellent interview with CDP CEO/Founder Paul Simpson at: http://www.ethicalcorp.com/disruptors-paul-simpson-atypical-activist-who-woke-c-suites-climate-risk

You can check out Henry Shilling’s SustainableInvest.com at: https://www.sustainableinvest.com/second-quarter-2018-sustainable-funds-investing-review/

 

About Sustainability Ratings: CPAs Are Being Educated by Their Profession’s Journal – A Good First Effort to Push Information to All Levels of CPAs

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

The professional CPAs working inside a public company, or in the outside accounting firm working with a company may or may not yet be involved in assisting corporate managers in responding to a growing number of third-party surveys focused on the company’s ESG strategies, actions and achievements.  Responses to these periodic surveys and engagements by other means with the ratings and rankings organizations are increasingly shaping outcomes – that is, investor opinions of the company.

Many more companies are now receiving surveys from and responding to a growing number of third-party ESG rating providers – and as we are told by our corporate connections, very often managers are straining under the effort to effectively respond given the breadth of information sought and the information available in the corporation.

As we advise corporate managers, it is important to know that there is a publicly-available ESG profile of your company that investors are considering in various ways – and either you will shape the profile and tell the company’s sustainability progress story, or someone else will.  That “someone else” would be the global universe of ESG rating providers — and their output is directed to their investor clients. The ones who invest in, or could invest in, your company.

Savvy corporate managers of course “get it” and really make the effort to effectively respond to as many queries and surveys as possible.  But what about the internal financial managers and outside accountants – are they involved?  At some firms, yes, and other firms no — or not yet.

The Big Four are tuned in to corporate ESG / sustainability disclosure and reporting.  But many smaller CPA firms are not.

And among small- and mid-cap publicly-traded firms, the role of the ratings and rankings service providers could still be an unknown and under-appreciated factor in shaping the firm’s reputation, valuation, access to and cost of capital, and other considerations. The article in the influential CPA Journal this month is a worthwhile attempt to educate professional CPAs, whatever their position.

Five professors — co-authors and colleagues at the Feliciano School of Business, Montclair State University — explored the question, “Are Sustainability Rankings Consistent Across Rating Agencies?”  One obvious element in the piece that we noticed is something happening in both the corporate sector and investment community:  the fluid interchangeability of terms of reference.

Is what is being explored by the ESG ratings and rankings service providers and their investor clients performance related to …CSR (corporate social responsibility)…ESG performance factors (environment/social/governance)…corporate sustainability…corporate citizenship…sustainable investing?  Combinations? All of these?
The authors use the terms interchangeably, as do company managers and capital markets practitioners in discussing the ever-more important role that “corporate sustainability rating providers” play in investor decision-making.

They cite the 2014 overview of rating agencies by Novethic Research (7 international rating agencies, 2 non-financial data providers, 8 specialized agencies and 20 local/regional agencies). Several studies and books are identified as reference sources.

Specific CSR rankings examined for 2015 results:  Newsweek’s Greenest Companies; Forbes Global 100 Most Sustainable Corporations; and, CSR Magazine Top 100 Global RepTrak companies.

We offer the perspectives of the Journal authors in our Top Story so that you can see what CPA’s will be reading in their Journal.

There are important points raised — but the three rankings examined do not cover the full breadth of the expanding universe of ESG rating organizations.  And we are light years away from 2015 in terms of the rating agencies’ influence.

The three rankings cited are not as “investor decision-useful” as would be the analytical work of teams at such firms as MSCI, Sustainalytics, Institutional Shareholder Services (ISS); what was offered in 2015 doesn’t compare to the depth of ESG data available today via Bloomberg and T-R Eikon terminals; the RobecoSAM Corporate Sustainability Assessment (CSA) ratings that influence inclusion in the DJSI; and, volumes of information made available by CDP (formerly the Carbon Disclosure Project).

The G&A Institute team assists corporate managers in responding to these important players and an ever-widening range of third-party ESG service providers.

We’d like to share three basic observations with you and with CPAs: (1) the third party queries are becoming more probing in the information and data sought; (2) the corporate response effort is much more organized and thorough these days; (3) the results of both of these efforts are increasingly important to, and utilized by, the institutional investment community (both asset owners and their managers).

So — the more information that CPAs have about sustainable investing and corporate ESG performance, the better equipped they’ll be to support their clients.  The article is a good start in this regard.

The journal authors are academics Betsy Lin, Silvia Romero, Agatha Jeffers, Laurence DeGaetano, and Frank Aquilino.

Top Story

Are Sustainability Rankings Consistent Across Ratings Agencies?
(Thursday – July 26, 2018) Source: CPA Journal – As more and more companies begin to devote serious attention to sustainability reporting, many different systems of rating the depth and effectiveness of sustainability efforts have arisen. The authors compare three leading…

Sustainability & ESG Trends in View -– The G&A Institute Team Closely Monitors Developments For You

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

Every week G&A Institute assembles the value-added content that our team gathers for you as we closely monitor trends and developments in corporate sustainability, corporate responsibility, corporate citizenship, sustainable investing, and related topics and issues.

Our Editor-in-Chief Ken Cynar leads the daily effort and you see the results of his work in each issue of Highlights (note we are on #406 this week).  We hope that you benefit from this effort, part of our information-sharing and educational mission.

One of the benefits for us on the G&A Institute team is the yield from the close and continuous tracking and deep analysis of important trends in the related fields in every corner of the world, and in varying spheres of influence.   We are monitoring thought leaders on the corporate sector side, on the asset owner and manager side, from the perspective of the NGO or civic activist, the regulators, the academics, the ESG research service providers, and many more.

As the Global Reporting Initiative’s  (GRI) Data Partner for the United States of America, the United Kingdom and the Republic of Ireland, our team collects, analyzes and databases considerable volumes of data and narrative from the more than 1,200 reports we process each year (the reports are then made part of the GRI global inventory for public access).

From the thousands of corporate & institutional sustainability reports we process year-after-year, the yield includes value-added information on long-term trends, emerging trends, and “might-be-a-trend-taking-shape” development.  And so high on our list is news, information, research results related to corporate sustainability and responsibility reporting.  We highlight a few for you at the top of the newsletter this week.

We share volumes of information through our communication platforms, such as this weekly newsletter; our G&A Institute company website; the Accountability Central and Sustainability HQ web platform; the  G&A Sustainability Update blog; our TwitterFacebook, and other social media feeds; and more in-depth management briefs through our “G&A Institute To the Point!” platform.

IMPORTANT:  As always, we welcome your engagement, invite your queries, your feedback, your suggestions for issues and trends to watch, and suggestions for the guidance of the information-sharing that we do.  We’d also welcome the opportunity to speak with you about our consulting services.  Email us at info@ga-institute.com.

In this week’s issue, we’ve identified an especially higher number of important trends for you that are worth “tuning in to” as you continue on your sustainability journey.

“Sustainability “ trends that are the march – worldwide!

“Warm regards to you” from The Team at G&A Institute this sweltering summer in most parts!