Category Archives: Impact Investing

Is Your Mutual Fund or ETF Really “Green” or “Sustainable”? How Do You Know? More Disclosure by Fund Managers and Advisors May Be Coming…

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

What is it about an investable product – a mutual fund, an exchange traded fund (ETF) – that would qualify it as an “ESG” or “sustainable investment” offering to the retail or institutional investor?

That’s a question getting more attention recently.

S&P Global has issued a report that says only 12 percent of so-called “green” or “environmental” investment funds are on track to meet the global climate goals agreed to at the Paris Agreement / COP 21 meetings in 2015.

The goals agreed to by the community of almost 200 nations at that time: try to limit the global temperature to below 2 degrees Centigrade above pre-industrial levels and aim for limiting the increase to 1.5C.

We are sharing some analysis of the S&P report by Mark Segal as published in ESG Today (he’s the founder of the web site).

He explains: S&P Global looked at about 12,000 equity funds and ETFs with US$20 trillion in total market value. Findings: about 300 funds (with $350 billion total valuation) used “green” in their name or investment objectives.

Looking then at the holdings (equities of corporations) using the S&P Global Trucost Paris Alignment Data for 17,000 companies in the universe of 12,000 funds, only 11% were really aligned with the Paris Agreement goals.

What about the smaller universe of 300 (the “green” funds)? Only about 12% were on track to meet Paris goals.

S&P Global noted that some funds are screening out publicly-traded fossil fuel companies for portfolios, including renewable energy companies, and some are engaging with portfolio companies to urge the firms de-carbonize their operations.

Conclusion: “Our analysis,” reports S&P, “points to a systemic issue. Few funds, even those that describe themselves as using green or climate-specific language, are on track to meet the goal of the Paris Agreement. Understanding the trajectory is an important step toward planning for a low-carbon future.”

The marketing of mutual funds and ETFs as “green” is being closely looked at by the Securities & Exchange Commission. SEC is focused on “enhancing ESG investment practices” of certain capital market players.

The agency in May proposed amendments to rules and reporting requirements of investment advisors and investment companies (that manage mutual funds and ETFs) to “promote consistent, comparable, and reliable information for investors” about funds’ and advisors’ incorporation of ESG factors.

The proposed rule would aim to categorize types of ESG investment strategies and require funds and advisors to be more specific in disclosures (such as in prospectuses, annual reports, brochures) to inform investors about ESG strategies being pursued.

Funds with strategies focused on the consideration of environmental factors would be required to disclose the greenhouse gas emissions associated with their portfolios. (That is, the GHG emissions of companies in the assembled portfolios of the mutual funds or ETFs.)

And, funds that use proxy voting and engagement with corporate issuers would be required to disclose their voting and engagement with companies on ESG-related matters.

Morningstar rates “sustainable mutual funds” among the thousands of funds rated by the firm’s analysts and its Sustainalytics unit.

Here’s a look into the challenges fund companies may face if the SEC rules are adopted: “This year has been difficult for many ESG funds,” writes Morningstar’s Katherine Lynch. “After years of solid performance, sustainable investing mutual funds have been roughed up, but a handful of strategies have been able to outperform.”

Which ones? Those holding energy stocks, which some investors in ESG try to avoid. Energy stocks are now outperforming, and most sustainable funds hold little or no oil companies in portfolio because of the connection of oil and gas consumption and climate change.

The conversation about “sustainable investing” and the criteria used by mutual fund management companies is sure to get more complicated in the days ahead.

Our G&A Institute team will continue to monitor developments and keep you updated on the changes to the mutual fund / ETF disclosure requirements.

Here are Top Stories for you to learn more:

  1. Less Than 10% of Climate Funds are Aligned with Global Decarbonization Goals: S&P (ESG Today )https://www.esgtoday.com/nearly-90-of-green-funds-are-not-aligned-with-global-climate-goals-sp/
  2. SEC Proposed to Enhance Disclosures by Investment Advisors and Investment Companies About ESG Investment Practices: https://www.sec.gov/news/press-release/2022-92
  3. 2022’s Top Sustainable Fund Weather a Tough Market: https://www.morningstar.com/articles/1097780/2022s-top-sustainable-funds-weather-a-tough-market



The Private Equity World: Broadening Focus on Sustainability – The Blackstone Group is All In

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May 17 2021

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

The P/E world:  Private equity firms often have a pool of companies wholly owned or invested in and managed and advised by them in portfolio …this is the ambitious domain of the private equity (P/E) universe.

The leading publicly-traded P/E leaders are familiar names to institutional investors:

  • Blackstone (NYSE:BX),
  • The Carlyle Group (NASDAQ:CG),
  • Apollo Global Management (NYSE:APO),
  • Kohlberg, Kravis Roberts (NYSE:KKR).

There also well-known P/E companies not publicly-traded such as TPG Capital and Bain Capital (which owns, invests in and advises portfolio entities).

Focusing on one major P/E firm today – Blackstone Group – we see how sustainability is now being driven across the alternative investment of P/E enterprises.

Blackstone owns and manages key asset categories such real estate (owning the huge Stuyvesant Town complex in NYC), hedge funds, credit & insurance, financial advice, investment (partnering for example with Pfizer and SFJ Pharmaceuticals for therapies), and managing private equity funds and funds of funds for its investment clients.

In the Blackstone investment portfolio are companies with familiar names:  SERVPRO, Ancestry, Refinitiv, Bumble, EPL, Aypa Power.

Blackstone Group Inc has asked the top executives running portfolio companies “controlled by its private equity arm” to regularly report on ESG matters to their boards of directors, according to a news story by Reuters corporate governance reporter Jessica Dinapoli (she covers boards of directors and C-suite trends).

She writes that Reuters obtained a letter from Blackstone’s CEO (“the world’s largest manager of alternative assets such as P/E”) to portfolio companies’ CEOs that is basis of her report.

Her takeaway:  The Blackstone firm’s sustainability credibility would be boosted by portfolio companies disclosing more about their climate risk, environmental certifications, diversity & inclusion, and commitments to protection of human rights.

According to the Reuters report, the letter to portfolio companies’ CEOs advised: “ESG factors are attracting greater focus globally and demand careful attention on your part.”

The latest move by Blackstone could help to “standardize” ESG reporting across the firm’s massive global portfolio.

An accompanying story by Reuters tells us that Blackstone recently hired five managers to beef up its internal ESG team as the firm moves to drive sustainability and diversity across its broad portfolio of holdings.

Adding our perspective why this is a very important development: The company is a member of the American Investment Council (formerly, Private Equity Growth Council).

What about P/E and sustainability? 

That organization says in 2020 the P/E industry invested $24 billion-plus just in renewable and sustainability projects… “playing a critical role in the energy transition and moving our economy in a more sustainable direction.”  P/E has invested $100 billion in renewable energy since 2010 says the AIC.

The Blackstone moves to have portfolio companies “be all in” on sustainability should help to bring about much more ESG disclosure by firms not necessarily doing much reporting today (as they are tucked away in P/E portfolios)l

From experience we know at G&A Institute that when firms move out of P/E portfolio (via IPO, SPAC, acquisition by larger firm, management buyout, other means) the proactive burnishing of corporate ESG reputations can be a big plus in the divestment of today’s P/E entity.

We have the link to the Blackstone report in the Top Story this issue.

TOP STORIES

 

Special Mention – IR Magazine Focus – Our Partners, DFIN

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US SIF Trends 2020 Report Published November16, 2020:

Advancing Toward a Circular New York

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By Kirstie Dabbs – Analyst-Intern, G&A Institute

New York City’s latest OneNYC 2050 strategy outlines an ambitious sustainability agenda that includes goals to achieve zero waste to landfill by 2030, and carbon neutrality by 2050.

New Yorkers who track city- and state-wide environmental goals and regulations are likely aware of the importance of renewable energy and energy efficiency in achieving this climate strategy, but those actions alone won’t fulfill New York’s ambitions.

A circular economy must also be adopted in order to further reduce greenhouse gas emissions and waste, while also conserving resources. Although the OneNYC strategy does make note of this shift, many New Yorkers remain unfamiliar with even the concept of the circular economy, let alone its principles, practices and potential impact.

What is the Circular Economy?

Also known as circularity, the circular economy calls for a reshaping of our systems of production and consumption, and an inherently different relationship with our resources.

Rather than following our current “linear” economic model that extracts resources to make products that are used and disposed of before the end of their useful life, a circular economy follows three core principles to extend the value of existing resources and reduce the need to extract new resources:

  • Design out waste.
  • Keep products and materials in use.
  • Regenerate natural systems.

These three principles — as put forth by the Ellen MacArthur Foundation — create opportunities to reduce and potentially eliminate waste,  from the design phase all the way to a product’s end of life.

Materials Matter

In the design phase, the choice of materials plays a critical role in either facilitating or preventing recirculation of materials down the line. By choosing to manufacture products with recycled materials, companies will drive demand for more post-consumer feedstock, further reducing waste to landfill which is aligned with the City’s waste-reduction goal.

Companies can also choose to manufacture products using responsibly sourced bio-based materials, which enable circularity because they biodegrade at the end of life with the appropriate infrastructure in place.

WinCup and Eco-Products are examples of companies leading the way toward biodegradable paper and plastic cup alternatives. The regenerative process of biodegradation is in line with the third principle of circularity and supports New York City’s waste goals in bypassing the landfill altogether and heading directly to the compost pile.

Durable Design Increases Product Lifespan and Reduces Consumer Demand

In addition to applying material design principles to divert material from landfill, companies can deploy design and marketing strategies to keep their products in use longer.

Designing durable products and those that can be easily repaired not only leads to longer product lives, but also reduces waste and demand for new products. Creating products that will be loved or liked longer – such as “slow” fashion that won’t go out of style – is another tactic to extend the emotional use of a product.

Finally, companies such as Loop that combine durability with reuse offer a solution to the packaging waste dilemma by keeping long-lasting packaging in circulation.

According to a 2019 report from the European Climate Foundation, by recirculating existing products and materials, the demand for new materials will decrease, reducing environmental degradation and product-related carbon emissions.

How Will the Circular Economy Help Reduce Greenhouse Gas Emissions?

The same report also notes that in order to meet the carbon reduction targets outlined by the Intergovernmental Panel on Climate Change, we “cannot focus only on…renewables and energy efficiency” but must also ”address how we manufacture and use products, which comprises the remaining half of GHG emissions.”

A recent press release from the World Economic Forum (WEF) summarized it succinctly: If we don’t link the circular economy to climate change, “we’re not just neglecting half of the problem, we’re also neglecting half of the solution.”

New York’s Steps to Advance the Circular Economy

Although the principles of circularity can be applied to an individual’s or organization’s behavior, to fully achieve a circular economy the economic system as a whole must fully adopt these principles.

According to a recent report by Closed Loop Partners — an investment company dedicated to financing innovations required for a circular economy — the four key drivers currently advancing circularity in North America are investment, innovation, policy and partnership. All are important and increasing; we are seeing the private and public sectors collaborating to take advantage of the economic opportunity offered by circularity while executing this environmental imperative.

The New New York Circular City Initiative

Closed Loop Partners, along with several other private and public organizations, have come together to found the New York Circular City Initiative, officially launching this month.

One of several partners participating in the initiative is the NYC Economic Development Corporation (NYCEDC), and Chief Strategy Officer Ana Arino spoke last year of how the NYCEDC is well-positioned to inspire and implement city-wide changes leading to a circular economy through levers such as real estate assets; programs to support circular innovation; its intersectional position between the private and public sectors; and public-facing awareness campaigns.

The vision of the New York Circular City Initiative is “to help create a city where no waste is sent to landfill, environmental pollution is minimized, and thousands of good jobs are created through the intelligent use of products and raw materials.” Through engagement in this collaborative effort, the City is taking an important step toward circularity, that, if scaled, has the potential to make significant and lasting changes in the local economy—and beyond.

# # #

Kirstie Dabbs is pursuing her M.B.A. in Sustainability with focus on Circular Value Chain Management at Bard College.  She is currently an analyst-intern at G&A Institute working on GRI Data Partner assignments and G&A research projects. In her role as an Associate Consultant for Red Queen Group in NYC she provides organization analyses and support for not-for-profits undergoing strategic or management transitions.

 

Profile:  https://www.ga-institute.com/about-the-institute/the-honor-roll/kirstie-dabbs.html

 

This article was originally published on the GreenHomeNYC blog on September 28, 2020.

 

The United Nations at 75 Years This Week – Corporate CEOs Around the Globe Pledge Support of the Missions

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October 20, 2020

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

Three-quarters of a century of serving humanity — the family of nations celebrates the 75th Anniversary of the founding of the United Nations on October 24th.

After the global conflict of World War Two, with great losses of life, liberty and property, 51 nations of world gathered in San Francisco to put the Charter into force — to collectively explore a better way forward with collaboration not confrontation.  (The Charter was signed as the war was ending in the Pacific and had ended in May in Europe).  We can say that on October 24, 1945, the United Nations “officially” came into existence with the ratification of the Charter by nations and the gathering of delegates.

The United Nations members states — the global family of sovereign nations collaborating peacefully for seven-plus decades to address common challenges — got good news in its 75th anniversary year.

More than one thousand business leaders from 100+ nations endorsed a Statement of Renewed Global Cooperation, pledging to further unite in helping to help to make this a better world…for the many, not the few. Some of the world’s best known brand marketers placed their signatories on the document.

UN Secretary General Antonio Guterres received the CEOs’ messages of support at a Private Sector Forum during the recent General Assembly in New York (September).

The Statement from Business Leaders for Renewed Global Cooperation was created as the nations of the world are coping with the impacts of the Coronavirus, domestic and global economic slowdown, rising political and civic unrest, wars in different regions, critical climate change challenges, the rising demand for equality of opportunity, and more.

The corporate CEOs’ public commitments included demonstration of ethical leadership and good governance (the “G” in ESG!) through values-based strategies, policies, operations and relationships when engaging with all stakeholders.

Now is the opportunity, the statement reads, to realign behind the mission of the UN to steer the world onto a more equitable, inclusive and sustainable path. We are in this together – and we are united in the business of a better world.

“Who” is the “We”? Leaders of prominent brands signing on include Accenture, AstraZeneca, BASF, CEMEX, The Clorox Company, Johnson & Johnson, Moody’s, Nestle, Thomson Reuters, S&P Global, Salesforce, Tesla, and many other consumer and B-to-B marketers. (The complete list of large-cap and medium and small companies accompanies the Statement at the link.)

There are many parts of the global community’s “meeting place” (the UN) that touch on the issues and topics that are relevant to us, the folks focused on sustainability. Think of the work of:

UN Global Compact (UNGC)
This is a non-binding pact (a framework) to encourage enterprises to voluntarily adopt sustainable and socially responsible policies and report on same; 12,000+ entities in 160 countries have signed on to date (the Compact was created in July 2000).

UN Principles for Responsible Investing (PRI)
Founded 2006, this is a global network of financial institutions and others in the capital markets pledging to invest sustainably, using 6 principles and reporting annually; today, there are 7,000+ signatories to date in 135 countries; this is in partnership with UNGC and the UNEP Finance Initiative.

UN Sustainable Development Goals (SDGs)
The SDGs (17 goals with 169 targets) build on the earlier Millennium Development Goals MDGs- (2000-2015).

The Paris Agreement builds on the UN Framework Convention on Climate Change.

The UN Environment Programme (UNEP) plays important roles in protecting the world’s environment.

In all, there are almost three dozen affiliated organizations working to advance humanity through the United Nations System.

 

SHARED PERSPECTIVES: FAYE LEONE
With all of this activity, the UN needs support, and shared ideas, to build even stronger foundations. Our colleague, G&A Institute Senior Sustainability Content Writer Faye Leone, has a decade of experience reporting on the UN.

Her perspectives: “It is exactly right for business leaders to express support for global cooperation– not competition- at this time. This is in the spirit of the UN’s 75th anniversary and critical for the next big challenge for multilateralism and solidarity: to fairly provide a safe vaccine for COVID-19.”

She explains that leading up to its 75th anniversary in September 2020, the UN conducted a year-long ‘listening campaign”. The results, after over one million people around the world participated!

They said they do not want “more of the same” from the UN.  They overwhelmingly called for a more inclusive, diverse, and transparent UN that does a better job of incorporating businesses, cities, vulnerable peoples, women, and young people. They also said the UN should be more innovative.

(View Source)

The Sustainable Development Goals, says Faye, can help with that.  The 17 goals “provide a common language for everyone to combine their strengths. According to the head of B Lab, business’ role is to participate in delivering on the SDGs, use the power of business to solve the world’s most urgent problems, and inspire others to do the same”.

(View Source)

Read more about the UN’s 75th anniversary through Faye’s work with IISD here.

Read more about the UN’s 75th anniversary here.

Mark October 24 on your calendar. That’s the day we commemorate the UN’s official founding after WW II (on 24 October 1945). We invite you to think about how you can support the UN moving toward the century-of-service mark in 25 years (2025) – and what ideas you can share to help this organization of the family of nations to address 21st Century challenges!

TOP STORY

Celebrating Highlights Issue #500 – And Unveiling a New Design

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October 16, 2020

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

Celebrating Highlights issue #500 – this is a landmark achievement, we will say, for this is also the tenth anniversary year of publishing the G&A Institute’s weekly newsletter (G&A Institute’s Sustainability Highlights).  As you will see in reading #500, we are also introducing an enhanced format intended to make the newsletter easier to read or scan as well.

Our G&A Institute’s Sustainability Highlights newsletter is designed to share timely, informative content in topic/issue “buckets” that we think will be of value to you, our reader. So much is happening in the sustainable investing and corporate sustainability spaces these days – and we are working hard to help you keep up to date with the important stuff!

Publishing the Sustainability Highlights newsletter is a team effort here at G&A.

Our company was formed in late 2006 and among our first efforts, Ken Cynar, then and now our Editor-in-Chief, began the daily editing of the then-new “Accountability Central” web site with shared news and opinion. The focus was (and is) on corporate governance, environmental matters, a widening range of societal and corporate-society issues, SRI investing, and more.

Two years later we created the “SustainabilityHQ” web platform – Ken manages content for both platforms today.

Back in those early days there was not the volume of ESG news or opinion pieces that we see today. Whenever we “caught” something of note the rest of the G&A team would quickly share the item with Ken.

Our team had worked together (some for a number of years) at the former Rowan & Blewitt consultancy, specialists in issue management, crisis management and strategic communications for the fortunate Fortune 500s.

That firm was acquired by Interpublic Group of Companies and after 7 years the New York City team created G&A Institute to focus on corporate sustainability, responsibility, citizenship and sustainable & responsible investing.  All of us came equipped with a strong foundation of issue management, risk management, critical issues managements, and corporate communications experience and know-how.

“ESG” had just emerged as a key topic area about the time we began our publishing efforts and soon we saw a steady flow of news, features, research reports, opinions & perspectives that we started sharing.

We had worked on many corporate engagements involving corporate governance, environmental management, a range of societal issues, public policy, and investor activism.  Here it was all coming together and so the G&A enterprise launch to serve corporate clients!

By 2010, as we emerged from the 2007-2008 financial markets debacle, then-still-small-but-solid (and rapidly expanding) areas of focus were becoming more structured for our own information needs and for our intelligence sharing, part of the basic mission of G&A from the start. And so, we created the weekly Highlights newsletter for ease of sharing news, research results, opinion & perspectives, and more.

It is interesting to recall that in the early issues there were scant numbers of corporate CSR or sustainability etc. reports that had been recently published (and so we were able to share the corporate names, brief descriptions of report contents, links of those few reports).  That trickle soon became a flood of reports.

But looking back, it was interesting to see that at the start of the newsletter and our web sites, there were so few corporate sustainability / responsibility reports being published we could actually post them as news for readers. Soon that trickle of corporate reports became a flood.

A few years in, The Global Reporting Initiative (GRI) invited G&A to be the data partner for the United States and so our growing team of ESG analysts began to help identify and analyze the rapidly-increasing flow of corporate reports to be processed into the GRI’s global reporting database.

Hank Boerner and Lou Coppola in the early days worked closely with Ken on the capturing and editing of content.  Lou designed the back end infrastructure for formatting and distribution.

Amy Gallagher managed the weekly flow of the newsletter, from drafts, to layout and then final distribution along with the coordination of a growing body of conference promotions with select partner organizations.

And now with a solid stream of content being captured today, all of this is a considerable effort here at G&A Institute.

Ken is at the helm of the editorial ship, managing the “AC” and “SHQ” web platforms where literally thousands of news and opinion are still hosted for easy access. He frames the weekly newsletter.

Today Ken’s effort is supported by our ESG analysts Reilly Sakai and Julia Nehring and senior ESG analyst Elizabeth Peterson — who help to capture original research and other content for the newsletter.

Hank and Lou are overall editors and authors and Amy still manages the weekly flow of activities from draft to distribution.  Our head of design, Lucas Alvarez, working with Amy created this new format. As you see, it is a team effort!

There is a welcome “flood” — no, a tidal wave! — of available news, research and opinion being published around the world that focuses on key topic areas: corporate sustainability, CSR, corporate citizenship, ESG disclosure & reporting, sustainable investing, and more.  We capture the most important to share in the newsletter and on our web sites.

We really are only capturing a very tiny amount of this now-considerable flow of content, of course, and present but a few select items in the categories below for your benefit.  (The target is the three most important stories or items in each category.)

Much more of the ongoing “capture effort” is always available to you immediately on the SustainabilityHQ web platform (see the “more stories” links next to each category of headlines).

We hope that you find Sustainability Highlights newsletter of value. It’s a labor of love for us at G&A, and we would like to get your thoughts and feedback …including how we can continue to improve it. Thanks for tuning in all of these years to our long-term readers!

TOP STORIES

As example of the timely news of interest for this week we offer these (two) commentaries on the Sustainability Development Goals (SDGs).  We are five years in/with 10 years in which to make real progress…where do you think we are headed?

As students and faculty head back to campus – there’s discussion about “sustainability” and “campus”:

 

Americans Tuning in to Sustainability During Crises, Expecting “More” from Government and Corporate Sector

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August 27 2020

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

According to responses to a June on-line survey of 2,000 adults in the U.S.A. for “clean manufacturing” leader Genomatica, sustainability is now a top-of-mind issue, with an overwhelming majority (85% of respondents) of Americans indicating they’ve been thinking about sustainability the same amount or more…and 56% want brands and government to prioritize sustainability even in the midst of the crises (Coronavirus, economic downturn – plus civil unrest).

According to Genomatica CEO Christophe Schilling: “The collective consciousness on sustainability is rising, and certainly faster than most would have expected during these unprecedented times.

While this shift has been underway for decades, and is particularly strong in Europe, many of us in the U.S. have been inspired by the rapid improvement in air quality and traffic that shine a bright light on how our behaviors and decisions impact our environment and quality of life.”

Other interesting survey findings:

  • 59% of Americans say working from home is more sustainable than working in an office.
  • 37% of Americans are willing to pay a little more for sustainable products, even during an economic downturn. Gen-Z is the most willing age group, at 43%.
  • Half of Americans won’t be comfortable using sharing economy services like Uber or Airbnb (53%), riding public transportation (54%) or carpooling (50%) until there is a vaccine, if ever.

There’s more findings in the Top Story link below:

Part of the “sustainability thinking” is about personal investments…and how to do well financially while doing good with one’s financial activities.

A new report published by the foundation of The Forum for Sustainable and Responsible Investment (US SIF) explores the growth of passive ESG investing and the outpace of investor flows into passive vs. active ESG funds.

The report shows that “net flows into passively-managed ESG funds have in recent years outpaced net flows into their actively managed counterparts” — despite the fact that “the vast majority of sustainably-invested assets are in actively-managed ESG funds.”

Meg Voorhes, Director of Research at the US SIF Foundation explains:  “The advent of passive ESG funds provides more options to investors seeking sustainable impact, and we encourage these fund managers to make commitments to comprehensive ESG approaches.”

Follow Up to Last Week
In last week’s Highlights we told you about Morgan Stanley’s pioneering move to join the Partnership for Carbon Accounting Financials (“PCAF”).  The update:  Citi and Bank of America are on board, too.  Great news moving toward the low-carbon economy. 

Citi, Bank of America join Morgan Stanley in carbon-disclosure group

Individual news releases from the banks with the details:

Lively Discussions: The Move Toward Harmonized Corporate ESG / Sustainability Reporting

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September 22 2020

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

There are lively discussions going on, centered on improving publicly-traded company disclosure and reporting – and especially ESG reporting…that is, storytelling about the company’s “non-financials” (in accounting-speak).  And the story of the corporate sustainability story for those-in-the-know!

The proliferation of ESG / sustainability reporting frameworks, standards, information platforms, industry guidance, stock exchange guidance and much more has been astounding in recent years.

We think of all this as about the organizing of the storytelling about a company’s sustainability journey and what the enterprise has accomplished. 

And why the story matters to society…to investors, employees, customers, suppliers, communities…and other stakeholders.

And it has a been a long journey to the state of today’s expanding corporate ESG disclosure.

The start of mandating of periodic financial and business mandated disclosure goes back to the 1930s with passage of landmark federal legislation & adopted implementation (compliance) rules for publicly-traded companies in the United States.

Corporate financial disclosure in concept is all about providing shareholders (and potential investors) with the information they need to make buy-sell-hold decisions.

The sturdy foundations of mandated corporate disclosure in the U.S. are the laws passed after the 1929 stock market crash – the 1933 Securities Act and 1934 Exchange Act.  These laws and the bodies of rules deriving from them have been constantly updated over the years, including with Sarbanes Oxley legislation in 2002 and Dodd Frank in 2010. These mandate or guide and otherwise provide the rules-of-the-road for financial disclosure for company managements.

Disclosure has steadily moved well beyond the numbers – Sarbanes-Oxley updated the 1930’s laws and addressed many aspects of corporate governance, for example.

Voluntary Disclosure & Reporting – ESG Issues & Topics
Over the past 40 years, beyond the financials, corporate voluntary non-financial disclosure has been steadily increasing, as investors first embraced “socially responsible investing” and moved on to sustainable & responsible & impact investing in the 21st Century.

Asset owner and asset manager (internal and external) requests for ESG information from publicly-traded companies in portfolio has steadily expanded in the depth and breadth of topic and issue areas that institutional investors are focused on – and that companies now address in significantly-expanded ESG disclosures.

Today, investor interest in ESG / sustainability and related topics areas is widespread throughout asset classes – for equities, equity-focused products such as imutual funds and ETFs, fixed-income instruments, and now credit risk, options and futures, fixed assets (such as real estate), and more.

With today’s dramatic increase in corporate sustainability & ESG reporting, the maturation of reporting frameworks and standards to help address the internal need for better organizing non-financial data and information and accompanying ESG financial disclosure.

And all of this in the context of trying to meet investor demands.  Today with expanded ESG disclosure, corporate executives find that while there are more resources available to the company, there is also more confusion in the disclosure process.   Investors agree.

Common Complaints:  Lack of Comparability, Confusion, Demand for Change
The result of increasing demand by a widening range of investors for accurate, detailed corporate ESG information and the related proliferation of reporting frameworks and standards can and has resulted in confusion among investors, stakeholders and companies as to what is important and material and what is frill.

This especially as corporate managements embrace various elements of the available frameworks and standards and industry guidance and ESG ratings for their still-voluntary ESG reporting.

So where do we go from here?  In our selection of Top Stories for you, we bring you news from important players in the ESG reporting process as they attempt to move in the direction of more uniform, comprehensive, meaningful and decision-ready corporate ESG reporting. That investors can rely on.

The news for you is coming from GRI, SASB, GSSB, IIRC, CDSB, and CDP (among others) – all working to get on the same page.

The aim: to benefit corporate reporters – and the users of the reports, especially capital market players.

Because in the end, ESG excellence is all about winning in the competition for access to capital. Accurate, timely, comprehensive comparable ESG information is key!

Top Stories

As Summer 2020 Nears End in Northern Hemisphere – Quo Vadis, Corporate Sustainability and ESG/Sustainable Investing?

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September 14 2020

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

This has been a strange summer in the northern climes, as the corporate sector and capital markets players meet the challenges of the Big Three crises — Corona virus pandemic, economic downturn, and widespread civil protests.

In times of crises (and as we have at least three major crisis situations occurring all at once to deal with this summer) certain actions may take a back seat.  Not so with forward movement of corporate sustainability and ESG/sustainable investing in summer 2020.

We bring you brief updates on some of these trends that continue to shape the interactions of companies and their providers of capital.

First –– worldwide, ESG/sustainable investing index funds reach a record of US$250 billion, with the crises appearing to accelerate investors’ moves into these passive and actively managed investment instruments.

Consider:

  • Before COVID-19, sustainability funds were already experiencing major growth, with assets doubling over the past three years.
  • Actively-managed ESG mutual funds continue to attract the lion’s share of dollars and represent a much larger portion of the sustainable investing landscape. Combined inflows into both active and passive ESG-focused funds reached $71.1 billion during the second quarter — pushing global AUM above the $1 trillion mark for the first time.
  • In the USA, sustainable index funds still make up less than 1% of the market – lots of room for growth here!
  • According to a recent survey conducted by Morgan Stanley’s Institute for Sustainable Investing, nearly 95% of Millennials are interested in sustainable investing, while 75% believe that their investment decisions could impact climate change policy.

On the corporate sustainability side, Goldman Sachs shares the view that oil & gas enterprises could lead the way into a lower-carbon economy. Perhaps.  Will take leadership and action – very soon.

The sector’s leading equities players limped in value this summer and there are many challenges still ahead – but, says a Goldman Sachs report, a new European Union rule in 2021 could accelerate the oil & gas companies’ shift into more sustainable activities.  The industry leaders can leverage their brands and trading capabilities to acquire power customers, thinks GS analysts.  And exert leadership.

And the “octopus” that many retailers see encircling their businesses, Amazon, is pushing ahead with The Climate Pledge (founded by Amazon and Global Optimism in September 2019) with an important commitment:  meeting the Paris Agreement goals a decade early!

Info: https://sustainability.aboutamazon.com/about/the-climate-pledge

Mercedes-Benz is the latest signatory to the pledge.  And look at what these moves can mean in practical business terms:  Amazon will add 1,800 electric Mercedes-Benz vans to its delivery fleet in Europe in 2020!  Other big-name corporate signatories include Verizon, Infosys, and Reckitt Benckiser.

Not quite a quiet summer in the corporate sector and capital markets, we would say!

On to Fall now in the Northern climes and a most welcome Spring season in the Southern Hemisphere, 2020 into 2021.

These are the Top Stories picks for you this week – and there are important items in the categories as well.  Happy Welcome to Autumn and Spring, wherever you are from the G&A Institute team.

Top Stories

The U.S. Department of Labor – Proposed Rule Addressing ESG Investment Selections by Fiduciaries – the Drama Continues As Agency Downplays Importance of ESG

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

August 9 2020

In the early 1970s, Congressional hearings featured allegations of abuses by managers of corporate pension funds taking actions to systemically deny men and women approaching retirement age their promised benefits.  A law was passed to protect plan beneficiaries:  The Employee Retirement Income Security Act of 1974.

This was intended by the Congress of that day to create standards for private-sector plans to protect the financial and health of beneficiaries of corporate plans.

The U.S. Department of Labor was designated is the primary designated arm enforcing “ERISA”,  charged with “protecting the interests of employee benefit plans participants (workers) and their beneficiaries”.

Other agencies have plan oversight responsibilities as well – the U.S. Treasury Department (the IRS) and the Pension Benefit Guaranty Corporation (PBGC).

PBGC is like the FDIC protection for bank customers’ money; when a corporate pension plan fails, the PBGC assumes responsibility for providing retirement benefits to retirees. When a company with a retirement plan goes belly up, filing bankruptcy, or giving up responsibility for the plan, the PBGC takes over to help the plan’s beneficiaries (they don’t get all that was promised by the plan when it was managed by the company they worked for).

Among other elements of the ERISA law and operating rules, there are standards set for fiduciaries and managers of worker retirement plans and welfare benefit plans.

ERISA has been updated since passage 40+ years back and the DOL rules have changed over time.  So have related Internal Revenue Service rules.  In 1978 the Internal Revenue Code was amended to allow taxpayers to have a tax-deferred, defined, voluntary retirement plan of their own – the familiar 401 (k) plan that millions participate in.

In the latest summary from the DOL’s Employee Benefits Security Administration of DOL (“EBSA“) for FY 2013(!) — ERISA rules [then] applied to 684,000 retirement plans, 2.4 million health plans and 2.4 million additional welfare benefits.

These plans covered 140 million workers and beneficiaries – at the time, that was about half of the American workforce – and assets under management of the plans exceeded US$7 trillion.

To simplify what follows here, the rules adopted by federal regulators are intended to explain and enforce the statute passed by Congress – in this case, protection of worker rights and oversight of fiduciaries managing workers’ assets in plans.

There is a structured process for creating the enforcing agency rules-of-the-road for those organizations being overseen (for ERISA, fiduciaries, plan managers) and these rules could be changed from time-to-time and also be “interpreted” by regulators through communications intended to clarify the rules.

ESG Investment and the Department of Labor Perspectives

As “sustainable” or “ESG” investing became a preferred approach for individuals in plans and managers of plans, many more institutions and individuals preferred those investments, alongside or instead of more traditional investments.

Investors want to be able to invest in an ESG-themed mutual fund or ETF along with or instead of a traditional version that may track a benchmark of the same type.

Example:  There are many investment managers whose fund track the widely-used S&P 500 benchmark (from S&P Global) and investable products with an S&P 500 ESG benchmark.

State Street a few days ago launched an S&P 500 ESG Exchange Traded Fund (ETF) “to provide investors an opportunity to tap into ESG investing at the core of their portfolio” (with a very low expense ratio). This “EFIV” tracks the new S&P 500 ESG Index.

SSgA explains: “ESG investing is approaching a critical inflection point…the collective call for change is growing louder and investor increasingly taking a stand through their investment choices.”

How do the regulators of ERISA react to such progress?  To the call for change?  To respond to investors’ call for action?

By moving backward in rule-making with changes in rules to make it more difficult for plan managers and beneficiaries to invest in ESG vehicles.

To be sure, rules are subject to change. The DOL’s first guidance on ESG investment issues as issued back in 1994.

More recently, in 2008 (during the Administration of President George W. Bush) guidance appeared to be designed to restrict ESG investments by plan fiduciaries.

In 2015 (during the Administration of President Barack Obama) DOL guidance gave the green light to ESG investments…if the investment is appropriate based on economic considerations including those that may derive from ESG factors. (See our perspectives here from November 2015: https://ga-institute.com/Sustainability-Update/big-news-out-of-the-u-s-department-of-labor-for-fiduciaries-opportunity-to-utilize-esg-factors-in-investment-analysis-and-portfolio-management/)

And now in 2020, in June DOL’s EBSA proposed a “new investment duties rule” with “core additions” to the regulations.  (“Financial Factors in Selecting Plan Investments” — this to address “recent trends involving ESG investing”).

Among the comments of DOL that really wrankled the ESG investor universe:

  • New text was added to codify DOL’s “longstanding position” that plan fiduciaries must select investments based on financial considerations relevant to the risk-adjusted economic value of an investment (or “course of action”).
  • The reminder that “Loyalty” duty prohibits fiduciaries from subordinating interests of plan participants and beneficiaries to “non-pecuniary goals”.   ESG factors could be “pecuniary” factors — but only if they present economic risk/opportunity under generally-accepted investment theories.
  • New text was added on required investment analysis and documentation for the “rare circumstance” when fiduciaries are choosing among “truly economically-indistinguishable” investments.  (Huh?)
  • A provision that fiduciaries must consider “other” available investments to meet prudence and loyalty duties.
  • A new provision for selection of investment alternatives for 401-K plans describes what is required for “pursuing” one or more ESG-oriented objectives in the investment mandate (or include ESG “parameters” in the fund name).

DOL Comments On These:

“ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy…is to subordinate return or increase risk for the purpose of non-financial objectives.”  And

“Private [Sector] employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives…not in the interest of the plan…ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

After the rule changes were published, numerous investors pushed back – some summaries for you that were published on the 401K Specialist web platform of the responses of some fiduciaries who object to the proposed rule (“Commenters Hammer DOL of Proposed  ESG Rule”).

More than 1,500 comments have been submitted so far to DOL, calling for changes in the proposed rule, withdrawal, and the very short comment period (just 30 days, ended August 3, vs. the usual 90 days).

Investor/Fiduciary Pushback:

T. Rowe Price:   The proposed rule is attempting to solve a problem that does not exist. Worse, the proposed rule discourages fiduciaries from taking into account ESG factors that should be considered.

ICCR/Interfaith Center on Corporate Responsibility:  The rule would impose significant analytical and documentation burdens on fiduciaries of benefit plans governed by ERISA wishing to select (or allow individual account holders to select) investments that use ESG factors in investment analysis, or that provide ESG benefits (signed by 138 member institutions).

ESG Global Advisors: The Proposal has misunderstood and/or mischaracterized the nature and purpose of ESG integration…this is likely to lead to confusion for ERISA fiduciaries and additional costs to plan savers. Plan fiduciaries will struggle to fulfill their obligation to integrate all financially-material ESG risk factors into their investment process.

Morningstar: The Department’s rule is out of step with the best practices asset managers and financial advisors use to integrate ESG considerations into their investment processes and selections. The proposed rule would…erect barriers to considering ESG factors that many financial professionals consider as a routine part of investment management…

Voya Financial Inc.: The Proposal is fundamentally flawed for two reasons…among the many qualitative factors an ERISA fiduciary may appropriately consider…the Proposal singles out ESG factors and subjects them to special tests…second, the Proposal fails to account for the positive effect on investment behavior that the availability of ESG-focused investment options can have…

American Retirement Association: …appropriate investments that include ESG factors should not be prohibited from qualifying as Qualified Default Investment Alternatives (“QDIAs”)…

The Wagner Law Group:  The proposed amendment is inconsistent with existing law and guidance…it would require fiduciaries to only consider pecuniary factors instead of using their judgment and discretion to evaluate investments under the totality of circumstances…a narrow list of permissible factors is inconsistent with the notion that prudence is not determined by a checklist and is a fact-specific determination…

BlackRock:  …the Proposal creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially-material ESG factors…we urge DOL to engage with the industry to understand how investment options incorporating ESG factors are used in ERISA plans…

Members of Congress – the body that passed ERISA during its 93rd session in 1974 – reacted along partisan lines.

Republican members of the House Committee on Education and Labor submitted a letter of support of the DOL action.

Democrat Party members (41 of them) of the House and 20 members of the House Education and Labor Committee expressed opposition to the rule changes.

The Securities & Exchange Commission is looking at ESG investments as well – soliciting public comment “for the appropriate treatment for funds that use terms such as ESG in their name and whether the terms are likely to mislead investors” (also in the Federal Register post).

In May 2020 the SEC Investor Advisory Committee / Investor-as-Owner Subcommittee issued their perspectives on ESG disclosure:  https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf

There are more details for you here (the investor response summaries): https://401kspecialistmag.com/commenters-hammer-dol-on-proposed-esg-rule/

The Department of Labor’s EBSA proposal highlights are here as published in the Federal Register, June 30, 2020: https://ga-institute.com/Sustainability-Update/big-news-out-of-the-u-s-department-of-labor-for-fiduciaries-opportunity-to-utilize-esg-factors-in-investment-analysis-and-portfolio-management/

Notes:  The Secretary of Labor is Eugene Scalia, a nominee of President Donald Trump.

Acting Assistant Secretary for EBSA is Jeanne Klinefelter Wilson (appointed in June 2020).

There is an ERISA Advisory Council with six members.  Effective July 14, 2020:

  • Glenn Butash is chair; he is managing counsel at Nokia Corp.
  • David Kritz is vice-chair; he is deputy counsel at Norfolk Southern Corp.
  • John Harney is partner at law firm O’Donoghue and O’Donoghue.
  • Peter Wiedenbeck is Washington University School of Law professor.
  • James Haubrock is CPA and shareholder, Clark Schaefer Hackett.
  • Lisa Allen is compliance consultant, Altera Group.

Stay Tuned:  We will update you when decisions are announced by the Department of Labor.