The Financial Sector and Corporate Universe – the “ESG Factors” Are Now Everywhere When Companies Seek Capital

September 8 2020

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

The roots of today’s “sustainable investing” approaches go back decades; the organizing principle often was often around  what investors viewed as “socially responsible”, “ethical”, “faith-based” and “values” investing, and by other similar titles.

“SRI” over time evolved into the more dominant sustainable or ESG investing in the 21st Century — with many more mainstream investors today embracing the approach.

And busily shaping trends, there is a universe of ESG ratings agencies and information distributors providing volumes of ESG ratings, scores, rankings and opinions to institutional investor clients and a broad base of asset managers, index creators and more.

Recently, the three major credit risk agencies increased their focus on ESG factors for their investor and lending clients.

Access to and cost of capital for companies is a more complicated situation today for financial executives  — and the steady flow of “sustainable investing” products to asset owners and asset managers increases the importance of a publicly-traded firm “being in” the sustainable product for institutional and retail investors.

Such as having the company being present in an ever-wider range of ESG indexes, benchmarks, mutual funds, exchange-traded funds, and now even options and futures.

All of this can and does increase pressures on the publicly-traded corporation’s management to develop, or enhance, and more widely promote the company’s “public ESG profile” that financial sector players will consider when investing, lending, insuring, and more.

The latest expansion / adoption of ESG approaches for investable products are from Cboe Global Markets.

The new “Cboe S&P 500 ESG Index”(r) options (trading starts September 21) will align with investor ESG preferences, says the exchange.

The traditional S&P 500 index is a broad-based equity benchmark used by thousands of investment managers and is the leading equities benchmark representing about 85% of total USA publicly-traded equities (all large-cap companies).  Availability to investment managers of the S&P 500 ESG Index is a more recent development.

The S&P 500® Index (equities) measures the stock performance of 500 large-cap companies whose issues are traded on US stock exchanges.  It was created in 1957.

The newer S&P 500 ESG Index targets the top 75% of companies in the 500 universe within their GICS® industry group.(Exclusions include tobacco, controversial weapons and UNGC non-compliance.) Asset managers link sustainability-focused products for investors to this index, including Invesco and State Street (SPDRs) for their ETFs.

Note that the S&P 500 ESG Index uses S&P DJSI ESG scores and other data to select companies for inclusion —  increasing the importance of the Corporate Sustainability Assessment (CSA) that for two decades has been used to create the Dow Jones Sustainability Indexes (“DJSI”). (The CSA is managed by SAM, now a unit of S&P Global.)

About Futures:  In November 2019 CME Group launched its CME E-mini S&P 500 ESG Index futures as a risk management tools — aligning, it pointed out, with ESG values.

About the CME Group: You probably know the Chicago-based firm by its units, the Chicago Mercantile Exchange, New York Mercantile Exchange, Chicago Board of Trade, Kansas City Board of Trade, and others.  The organization’s roots go back to 1848 as the Chicago Board of Trade was created. This is the world’s largest financial derivatives exchange trading such things as futures for energy, agriculture commodities, metals, interest rates, and stock indexes.

Investors have access to fixed-income instruments and foreign exchange trading (such as Eurodollars).  The “trading pit” with shouted orders and complicated hand signals are features many are familiar with. Of course CME has electronic platforms.

About Cboe Global Markets:  This is one of the world’s largest exchange holding companies (also based in Chicago) and offers options on more than 2,000 companies, almost two dozen exchanges and almost 150 ETFs.  You probably have known it over the years as the Chicago Board Options Exchange, established by the Chicago Board of Trade back in April 1973.  (The exchange is regulated by the SEC.)

The Cboe offers options in US and European debt and equity issues, index options, futures, and more.  The organization itself issued its own first-time ESG report for 2019 performance, “referencing” GRI, SASB, TCFD, SDGs, and the World Federation of Exchanges (WFE), Sustainable Stock Exchanges (SSE) initiatives. Now ESG is part of the mix.

Considering equities, fixed-income, stock indexes, futures, options, mutual funds, exchange-traded funds, financial sector lending, “green bonds” and “green financing” – for both publicly-traded and privately-owned companies the ESG trends are today are very much an more important part of the equation when companies are seeking capital, and for the cost of capital raisedl.

And here clearly-demonstrated and communicated corporate ESG leadership is critical to be considered for becoming a preferred ESG issuer for many more investors and lenders.

Top Stories

A Big Year, 2018 – Tipping Points For Developments in Corporate Sustainability & Sustainable Investing…

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

Volume & Velocity!
Those may be well the key characteristics of developments in corporate sustainability and in sustainable in the year 2018.

Linda-Eling Lee, Global Head of Research for MSCI’s ESG Research Group and her colleague Matt Moscardi (Head of Research Financial Sector, ESG) this week described what they are projecting in the traditional early-in-the-year setting out of key ESG trends to watch by the influential MSCI ESG team:

Bigger, faster, more – that’s how Linda describes the “onslaught of challenges happening soon and more dramatically that many could have imagined” in the corporate sector” (including public policy, technology, and climate change as key factors).

Investors (in turn) are looking for ways to better position their portfolios to navigate the uncertainty of the 2018 operating environment in the corporate sector.

As the “heads up” for investors and companies– the five key 2018 trends projected by MSCI’s ESG researchers/analysts:

  • Investors will be using ESG “signals” to navigate the size/shape of the Emerging Markets investment universe to pick the winners for portfolios.
  • The first steps are coming in “scenario testing” for climate change (this is systematically looking at risks emanating from company carbon footprints across asset classes, with short- and long-term transition scenarios).
  • The fixed-income universe will see acceleration (velocity) with the alignment of ESG frameworks by investors across all asset classes.
  • And this is very important for the corporate sector:

Investors are looking beyond the growing volume of corporate disclosure and reporting for data.
Keep In Mind: 65% of a company’s rating by MSCI is based on data sources beyond the corporate reporting!

 

  • MSCI sees 2018 as the Year of the Human – it’s about human talent, talent, talent!  That is, what companies do to help in the transitioning to new working environments (with the changes brought about by automation, artificial intelligence, robotics) that will be factored into the analysis of public companies by the MSCI ESG team, and measured over time (for outcomes over a 3-year horizon).

Linda Eling-Lee observed:  These are the major trends that we think will shape how investors approach the risks and opportunities in 2018.

Already, at the Davos meetings this week, major global firms in IT are creating an initiative to “tech-reskill” one million people to meet the global skills gap challenge inherent in the “Fourth Industrial Revolution” (firms are Cisco, Accenture, CA Technologies, HP, Infosys, Salesforce, SAP, Tata Consultancy, others).

What we think company managements / boards should expect in the “volume and velocity” context:  many more investors (the volume / especially large fiduciaries) are embracing comprehensive ESG factors in their analysis and portfolio management approaches with a faster uptake of this trend among the mainstream elements of the capital markets players (the velocity).

Voluntary reporting by companies has its limits in providing a full picture of the companies’ ESG risks,” the MSCI ESG researchers note. “In 2018 we anticipate that the disclosure movement reaches a tipping point, as investors seek broader data sources that balance the corporate narrative and yield better signals for understanding the ESG risk landscape actually faced by portfolio companies”

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Buzzing:  The Larry Fink CEO-to-CEO Message for 2018

Speaking of significant influence, the head of the world’s largest asset management firm sent an important CEO-to-CEO letter to stress the importance of companies having “a social purpose”

Background:  BlackRock engages with about 1,500 companies a year on a range of ESG issues, meeting with boards of directors and CEOs, and other shareholders when that is needed.

Each year, CEO Fink reaches out to the CEOs of companies in portfolio to alert them to the key issues in focus for BlackRock (as fiduciary).

For 2017-2018, the key Investment Stewardship priorities are:

  • Corporate Governance / Accountability
  • Corporate Strategy
  • Executive Compensation Policies
  • Human Capital (again — there’s the focus on talent management)
  • Climate Risk Disclosure

Larry Fink is the Founder, Chair, and CEO of BlackRock and heads the firm’s “Global Executive Committee.” BlackRock is about to celebrate its 30th anniversary in 2018.  It now manages more than US$6 trillion (Assets Under Management-AUM).

Of this, $1.7 trillion is in active funds managed by the company.  As one of the world’s most important and influential (and trend-setting) fiduciaries BlackRock engages with company management to drive the sustainable, long-term growth clients need to meet their goals.

“Indeed,” CEO Fink said in his letter to CEOs, ”the public expectations of your company has never been higher.”

“Society is demanding that companies, both public and private, serve a social purpose…to prosper over time, every company must show it makes a positive contribution to society.”

“Without a sense of purpose, no company…can achieve its full potential…it will ultimately lose the license to operate from key stakeholders…”

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The Key Word on Responsible Investing Growth is Global, RBC Reported

In October 2017, RBC Global Asset Management (RBC GAM) conducted its second annual global survey of asset managers.  Two-out-of-three respondents said they used ESG considerations, and 25% will increase their allocations to managers with ESG investment strategies to offer in 2018.

Does ESG mitigate risk…or drive alpha?  Answers were mixed.  Some asset managers are increasing their allocation and others are skeptical, especially about the accuracy and value of the available data on corporate ESG performance.

For 2018:  RBC sees responsible investing as a global trend, with many managers incorporating ESG in analysis and portfolio management due to client (asset owner) demand.

# # #

Tracking Company Behaviors – The RepRisk ESG Risk Platform

One of the leading producers of research and business intelligence for the banking and investment communities is RepRisk, based in Zurich, Switzerland. The firm started in 2006 to serve bank clients wanting to be alerted to real or possible risk issues in the corporate sector.

RepRisk developed artificial intelligence and data mining tools, that along with human analysis, “reduces blind spots and sheds light on risks that can have reputational, compliance and financial impacts on a company…”

Today, there are 100,000-plus companies in the RepRisk database (both listed and non-listed, from all countries and sectors). The firm started out monitoring 100 companies for clients.  The daily screening is delivered in 16 languages and about 50 companies a day are added for screening.  Is your company one of those tracked?  What are the risks tracked?

# # #

Does Adoption of ESG Approaches Sacrifice Corporate Performance?

Robeco, one of the world’s leading financial services firms (based on The Netherlands), and a sister company of RobecoSAM, managers of the Dow Jones Sustainability Indexes, looked at the question of whether or not the adoption of ESG / sustainability approaches “cost” the company performance.

Adopting sustainability approaches does require investment, but companies with poor ESG performance also have greater risks and “seriously under-perform” their peers.  And investors “win” by investing in the better performers (that reduce risk, strategize around climate change, reduce bad behaviors).

Says Robeco:  “…a growing body of evidence concludes that companies which are progressively more sustainable today will reap the rewards of the future…and it may save their businesses…”

The Company’s positioning:  “Robeco is an international asset manager offering an extensive range of active investments, from equities to bonds. Research lies at the heart of everything we do, with a ‘pioneering but cautious’ approach that has been in our DNA since our foundation in Rotterdam in 1929. We believe strongly in sustainability investing, quantitative techniques and constant innovation.”

# # #

CalPERS, America’s Leading Public Employee System – Corporate Engagement on Diversity Issues

“CalPERS: is the California Public Employee’s Retirement System, the largest state investment fund in the United States with about $350 billion in total fund market AUM.

CalPERS sent letters to 504 companies in the Russell 3000 Index to engage on the issue of diversity on the companies’ boards of directors.

CalPERS request:  the company should develop and then disclose their corporate board diversity policy, and the details of the plan’s implementation (to address what CalPERS sees as lack of diversity in the companies).

“Simply put, board diversity is good for business,” said Anne Simpson, CalPERS’ investment director for sustainability.

Starting in Fall 2017 and into 2018, CalPERS is monitoring companies’ progress on the matter and making it a topic for engagement discussions.  If a company lags in progress, CalPERS will consider withholding votes from director-candidates at annual voting time (at annual meetings).

# # #

The Climate Action 100+ Investor Initiative

 Sign of the times: More than 200 investors supporting action on climate change by the corporate sector are focusing on the board room of such companies as ExxonMobil, Boeing, GE, P&G, Ford, Volvo, PepsiCo, BP, Shell, Nestle, Airbus, and  other  enterprises (the “100” plus companies in focus) to dialogue on their GhG emissions as contributions to global warming.

The 100 corporates are said to account for 85% of the total GhG emissions worldwide – they need to step up, says the Coalition, and develop strategies and take action (and disclose!) to address the issue.  The investors manage more than $26 trillion in AUM, and are coordinating their efforts through five partnerships…

# # #

McKinsey Weighs In – ESG No Longer “Niche” – Assets Are Soaring

The McKinsey & Co. experts studied ESG investing and reported to corporate clients that of the $88 trillion in AUM in the world’s capital markets (in late-October), more than $1-in-$4 (25%-plus) are invested according to ESG principles.  That’s a growth of 17% a year, and ESG has become “a large and fast-growing market segment.”

# # #

Investors Are Not Forgetting – Rana Plaza Still in Focus

One of the characteristics of the sustainable investing market players is having-the-memory-of-the-elephant.  Do you remember the Rana Plaza apparel factory tragedy of five years ago?  Most media reporters and commentators have moved on to other crisis events.

Investors are signing on to a statement – “Investors Call on Global Brands to Re-commit to the Bangladesh Accord for Fire and Building Safety” – with focus on the upcoming fifth anniversary of the statement signed (in May 2013) after the accident that killed more than 1,000 workers in Bangladesh.

Reforms were promised in the Accord by industry participants and trade unions.

# # #

Another Example of Investor Action – McDonald’s

“In a win for the health of the world’s oceans,” began the As You Sow shareholder advocacy group announcement, “McDonald’s Corp. agreed to end the use of polystyrene foam packaging – worldwide! – – by the end of 2018.

The advocacy group had campaigned to have the fast food retailer stop using foam cups and takeout containers.

A shareholder proposal filed by As You Sow in May 2017 requested the company stop using polystyrene and 32% of shares voted (worth $26 billion at the time) voted to support.

# # #

Finally – What a Low-Carbon Economy Looks Like – California Dreamin’

The State of California is the world’s sixth largest economy all by itself!

While President Donald Trump upon taking office fulfilled one of his signature campaign promises – beginning the process of withdrawal from the historic COP 21 Paris Accord on climate change – California Governor Edmund (Jerry) G. Brown, Jr is moving ahead with his state’s plans to move to a low-carbon economy.

The Global Climate Change Action Summit is scheduled for September 2018 in San Francisco, California.

The theme, as described by the governor:  “Sub-national governments” (cities & states), business sector leaders, investors and civil society leaders will gather to “demonstrate the groundswell of innovative, ambitious climate action from leaders around the world, highlight economic and environmental transition already underway and spur deeper commitment from all parties, including national governments.”

Says the governor: “California remains committed to a clean energy future and we welcome the responsibility to lead on America’s behalf…”

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Coming:  ISS QualityScores for “E” and “S” for 1,500 Companies

As we communicated in early January, Institutional Shareholder Services (ISS) has expanded its long-term focus on corporate governance to encompass “E” and “S” issues for its QualityScore product for fiduciaries (its client base).  In late-January it is expected that ISS will issue the first wave of scores for 1,500 companies in six industries, expanding to 5,000 companies in additional industries by mid-year 2018.

The first 1,500 companies to be scored are in Autos & Components; Capital Goods; Consumer Durables & Apparel; Energy; Materials; and, Transportation.

The QualityScore is a Disclosure and Transparency Signal that investor-clients are seeking, says ISS, and an important resource for investors to conduct comparisons with corporate peers.

Keep in mind:  ISS serves its 1,700 clients with coverage in 117 global markets.

# # #

There’s much more information on this and other critical 2018 tipping points for corporate managers and investment professionals in the comprehensive management brief from the G&A Institute team posted on our G&A Institute’s “To the Point!” platform for you.

We’re presenting here more details on the MSCI trends forecast, the BlackRock CEO-to-CEO letter about Social Purpose for the Corporation, California’s move toward a low-carbon economy,  RepRisk’s focus areas for corporate behavior…and a host of additional important developments at the start of the year 2018 that will shape the operating environment throughout the year – and beyond! Read the brief here!

The DJSI – Analytical Game Changer in 1999 – Sustainable Investing Pacesetter in 2014

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

updated with information provided to me by RobecoSAM for clarification on 17 September 2014.

It was 15 years ago (1999) that an important — and game-changing  “sustainability investing” resource came in a big way to the global capital markets; that year, S&P Dow Jones Indices and Robeco SAM teamed to create the Dow Jones Sustainability Indices. This is described by the managers as “…the first global index to track the financial performance of the leading sustainability-driven companies worldwide,” based on analysis of financially material economic, environmental and social (societal) factors. Breakthrough, game-changing stuff, no?

Note “financially material” – not “intangible” or “non-financial,” as some capital market holdouts initially (and continue to) described the sustainable investing approach.  There were but handfuls of “sustainability-driven” companies in world capital markets for selection for the World benchmark.  1999 — -that year the Global Reporting Initiative (GRI) was assembling its first comprehensive framework for corporate reporting (G#) byond the numbers alone.  Interfaith Center for Corporate Responsibility (ICCR) was a steadily maturing organization mounting proxy campaigns to challenge the risky behavior of major companies that were polluting the Earth.  The Investor Responsibility Research Center (IRRC) was the go-to source for information on corporate behaviors, particularly related to corporate governance issues.  (And CG issues were rapidly expanding – the governance misbehaviors of unsustainable companies such as of Enron, WorldCom, et al, were not yet as evident as when they collapsed three years later.). Robert Monks and Nell Minow were active in Hermes Lens Asset Management, continuing to target poorly managed companies and encouraging laggard CEOs to move on. (Monks’s book, “The Emperor’s Nightingale,” was just out that year.)

Over the next 15 years, the managers of DJSI benchmarks steadily expanded their analysis and company-picking; the complex now offers choices beyond “World” —  of Dow Jones Sustainability Asia Pacific; Australia; Emerging Markets; Europe; Korea; and North America.

A handful of “sustainability-driven” companies have been aboard “World” for all of the 15 years; this is the honors list for some investors:  Baxter International (USA); Bayer AG; BMW; BT Group PLC; Credit Suisse Group; Deutsche Bank AG; Diageo PLC; Intel (USA); Novo Nordisk; RWE AG; SAP AG; Siemens AG: Storebrand; Unilever; United Health Group (USA).  Updated:  And Sainsbury’s PLC.

Though the DJSI indices have been availble to investors for a decade-and-a-half, it is only in the past few years that we hear more and more from corporate managers that senior executives are paying much closer attention.  “The CEO wants to be in the DJSI,” we frequently hear now.

Each year about this time the DJSI managers select new issues for inclusion and drop some existing component companies.  Selected to be in the World:  Amgen; Commonwealth Bank of Australia; GlaxoSmithKline PLC.  Out of the DJSI World:  Bank of America Corp; General Electric Co; Schlumberger Ltd.

DJSI managers follow a “best-in-lcass” approach, looking closely at companies in all industries that outperform their peers in a growing number of sustainability metrics.  There are about 3,000 companies invited to respond to RobecoSAM’s “Corporate Sustainability Assessment” — effective response can require a considerable commitment of time and resources by participating companies to be considered.  Especially if the enterprise is not yet “sustainability-driven.”  We’ve helped companies to better understand and respond to the DJSI queries; it’s a great exercise for corporate managers to better understand what DJSI managers consider to be “financially material.”  And to help make the case to their senior executives (especially those wanting to be in the DJSI).

updated informationRobecoSAM invites about 2,500 companies in the S&P Global Broad Market Index to participate in the assessment process; these are enterprises in 59 industries as categorized by RobecoSAM, located in 47 countries.

The new G$ framework from GRI, which many companies in the USA, EU and other markets use for their corporate disclosure and reporting, stresses the importance of materiality — it’s at the heart of the enhanced guidelines.  The head of indices for RobecoSAM (Switzerland), Guido Giese, observes:  “Since 1999, we’ve heled investors realize the financial materiality of sustainability and companies continue to tell us that the DJSI provides an excellent tool to measure the effectiveness of their sustainability strategies.”

Sustainability strategies — “strategy” comes down to us through the ages from the Ancient Greek; “stratagem”…the work of generals…the work of the leader…generalship…”  Where top leadership (and board) is involved, the difference (among investment and industry peers) is often quite clear.

At the S&P Dow Jones  Index Committee in the USA, David Blitzer, managing director and chair of the committee, said about the 15 years of indices work: “Both the importance and the understanding of sustainability has grown dramatically over the past decade-and-a-half…the DJSI have been established as the leading benchmark in the field…:”

The best-in-class among the “sustainability-driven” companies that we see in our close monitoring as GRI’s exclusive Data Partner in the USA, UK and Ireland, the company’s senior leadership is involved, committed and actively guiding the company’s sustainability journey.  And that may be among the top contributions to sustainable investing of DJSI managers over these 15 years.

Congratulations and Happy Anniversary to RobecoSAM and S&P Dow Jones Indices (a unit of McGraw Hill Financial).  Well done!  You continue to set the pace for investors and corporates in sustainable investing.

The SAM Group in Focus / Now RobecoSAM / New Names for Indices Debuts

Around the world, the names are familiar to senior corporate executives, corporate directors, and to many asset owners and their managers: SAM Group, and the Dow Jones Sustainability Indexes (DJSI). There are important changes taking place that we are sharing with you today.

The well-known SAM Group (“Sustainable Asset Management”) has a new name: RobecoSAM. This is the Swiss-based investment specialist organization focused on sustainable investing; products and services include asset  management, indices, private equity, impact analysis & sustainable assessments, and benchmarking. Continue reading