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!


In Focus: Climate Change Challenges for Financial Sector Players and the Companies They Provide With Capital – Measuring and Managing the Risk

August 2 2020

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

Some encouraging developments for you from the (1) capital markets community and (2) the corporate sector and (3) the combining of forces of each.

To start: Morgan Stanley has become the first major U.S. bank to join the Partnership for Carbon Accounting Financials and will begin measuring and disclosing the emissions generated by the businesses that it lends to and invests in.

Big deal, we say:  the sources of capital telling the world what the companies they lend to, invest in, are emitting…whether the company discloses that or not. 

PCAF is a global collaboration of financial institutions aiming to standardize carbon accounting for the financial sector.

The work of the partnership could profoundly change the way that financial institutions and their corporate clients address climate change issues (and disclose the result of same).

Morgan Stanley will lend its insights and expertise to help the coalition development global standard that can be used by all financial institutions to measure and reduce their own climate impact.

In addition to measuring its Scope 3 emissions – including financed emissions, defined by the Greenhouse Gas Protocol as Category 15 emissions.

Morgan Stanley’s announcement comes a year after the institution released a report outlining the financial benefits of decarbonization for businesses — with an earnings potential between US$3-to-$10 billion.

Also involved in the standards project on the Steering Committee: ABN AMRO, Amalgamated Bank, ASN Bank, Tridos Bank, and the Global Alliance for Banking on Values (GABV).

Today there are 66 institutions involve in the partnership, with $US5 trillion-plus in collective AUM. The partnership is planning on releasing the standard at the COP 26 global gathering.

The Morgan Stanley Institute for Sustainable Investing builds “finance solutions” that seek to deliver competitive financial returns while driving positive “E” and “S” solutions.  Audrey Choi is the bank’s Chief Sustainability Officer and CEO of the Institute.  More information is at: www.morganstanley.com/sustainableinvesting.

And here is the encouraging news from the corporate sector and the investor service provider community:  Microsoft (MSFT) is teaming with MSCI – the global investment community advisor on risk and ESG issues – to “accelerate innovation among the global investment industry”.

MSFT’s cloud and AI technologies along with MSCI’s portfolio of tools will be aligned to “unlock innovations for the industry and enhance the ESG ratings agency’s products, data and services”.

The collaboration begins with migration of MSCI’s products onto the Microsoft Azure cloud platform with Index and Analytics solutions and then on to the MSCI ESG products and ratings.

Going forward MSFT and MSCI will explore possibilities to further drive development of climate risk and ESG solutions for investors and corporates.

Third item:  Microsoft is aiming to become a Zero-Carbon Enterprise.  The company announced a “suite” of  initiatives to wipe out the carbon “debt” acquired  — get ready – over the lifetime of this tech company.  Every bit of carbon “debt” ever generated over several decades!

MSFT is joining forces with Maersk, Danon, M-Benz, Natura, Nike, Starbucks, Unilever and Wipro to create a new coalition – Transform to Net Zero. (Environmental Defense Fund/EDF is a founding member).  MSFT peer/competitor/fellow transformation of society company Apple is aiming to have net-zero impact on every product in the next 10 years.

These Top Stories are of a “fit” – as financial institutions develop new approaches to meeting climate change challenges the Global Carbon Accounting Partnership moves forward to bring a new standard to the financial services community.

And the MSCI / MSFT collaboration will be developing tools and resources that align with the standards effort.  MSFT itself is moving toward to become Zero Carbon tech company.  Do stay tuned!  Some details for you….

Morgan Stanley Becomes First U.S. Bank To Measure Carbon Footprint Of Its Loans (Source: OilPrice) Morgan Stanley has become the first U.S. bank to start measuring the emissions generated by the businesses it lends to and invests in, the bank said in a press release.

The news from Microsoft and MSCI on their collaboration:
https://www.msci.com/documents/10199/b8849622-7a48-1901-123e-29d39cca3814

As we prepared the above perspectives in our weekly newsletter, more related news came in:  Stefanie Spear, our colleague at As You Sow, alerted us that Bank of America and Citi Group joined Morgan Stanley in the commitment to publicly disclosure carbon emissions from loans and investments. (The two institutions are part of the Partnership for Carbon Accounting Financials, a global framework for financial institutions to measure and disclose the emissions from their lending and investment portfolios.)

And one more for you – Polly Ghazi of Triple Pundit (part of 3BL Media) prepared an excellent roundup of recent news that includes Morgan Stanley, BlackRock and Boston Consulting.  (And thank you to her for the mention of the G&A Institute’s S&P 500 research results on corporate reporting.)

We present 3BL media roundups in the weekly G&A newsletter, Sustainability Highlights — here is Polly’s post: https://www.triplepundit.com/story/2020/sustainability-reporting-new-highs/121006

“Total Impact Valuation” – Monetizing the Enterprise’s “Cost-Benefit Analysis” of the Impact on Society? This is for CEOs – Advice From The Conference Board

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

Today’s question for corporate CEO’s:  Have you examined your company’s “Total Impact Valuation,” a new approach being advanced by The Conference Board, wherein the enterprises’ impact on society is monetized (cost/benefit evaluated and value attached)?

A small group of companies is doing these exercises. Think of their efforts to date as expanding the usual reporting of “Input/Output” to seriously consider (1) Outcomes, (2) Impacts, (3) Cost and Benefit to Society (and to the company).

Such firms as BASF (the German chemical giant), cement industry leaders Holcim/Ambjua Cement and LafargeHolcim, Samsung, Akzonobel (materials), ABN AMRO (Holland, financial services), Volvo (vehicles), and Argo (materials, Colombia) have been doing something along these lines and reporting results for a few years now on web sites, in sustainability reports, in financial statements, in a “total contribution report” or “value-added statement”, and by other means.

Some of these disclosures are third party assured (Argo’s is by Deloitte) and otherwise guided; the big accounting firms are involved (PwC and KPMG included).

This appears to us to have the potential to take corporate sustainability reporting to expanded (new) levels for at least the publicly-traded large caps – that is, if enough investors jump aboard the concept and ask for the information.  (Think about public discussion of the company’s “plus or minus” impact on society beyond the fences.)

Thomas Singer, Corporate Leadership research leader at The Conference Board, presents findings of his sampling of firms (those identified above) and shares his perspectives on the concept in Chief Executive Magazine – it’s our Top Story for you this issue.

BASF shares its “Value to Society” model (there’s a link to this in the article).  The company, explains Singer, monetizes more than 20 different types of environmental, social and economic impacts, including direct and indirect suppliers and even customer industries.

Author Thomas Singer turns out a good amount of strategic advice to company leaders and has been focusing more in his Director Notes on ESG and corporate sustainability.  There’s links to his papers and publications for you in the link.

A major drawback here in the U.S.A.: there is no standard benchmark for measuring progress or lack of, and to guide reporting; there is in turn no way to compare company “A” to “B” for investors, ratings analysts and others.

So what do you think – is this a “we’re a long way from Kansas, Toto” moment for corporate leaders in terms of expectations of shareholders and stakeholders for what the companies will share in their disclosures of the future?  (The “Kansas” reference being the bad old days practices of chemicals and other companies “externalizing” costs to society for environmental mismanagement and minimizing the actual costs of clean up in financial reports.)

The total value practice got underway in Europe – and we will be watching to see if U.S.-based public companies pick up on the concept. Especially those where their foreign peers have the modeling and techniques underway.  That is what happened with corporate sustainability and ESG reporting over time.

Top Stories

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