Eyes on Financial Accounting and Reporting Standards – IASB & FASB Consider “Convergence” and Separate Actions

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

March 2021

Investors Call For More Non-Financial Standards for Corporate Reporting, Less Confusion in “Voluntary” Disclosure.

Should there be more clarity in the rules for corporate sustainability accounting and reporting as many more investors embrace ESG/Sustainable analysis and portfolio management approaches?

Many investors around the world think so and have called for less confusion, more comparability, more credible and complete corporate disclosure for ESG matters.

Accounting firms are part of the chorus of supporters for global non-financial disclosure standards development.

Where and how might such rules be developed? There are two major financial accounting/reporting organizations whose work investors and stakeholder rely on: The International Accounting Standards Board (IASB) and in the United States of America, the Financial Accounting Standards Board (FASB). Both organizations develop financial reporting standards for publicly traded companies.

There are similarities and significant differences in their work. The US system is “rules-based” while the IASB’s approach has been more “principles-based” The differences have been diminishing to some degree with the US Securities & Exchange Commission more recently embracing some principles-based reporting.

By acts of the US Congress, FASB (a not-for-profit) was created and has governmental authority to impose new accounting rules — while the IASB rules are more voluntary.

The US system has “GAAP” – Generally Accepted Accounting Principles for guidance in disclosure. The adoption of IFRS is up to individual countries around the world (144 nations have adopted IFRS).

The IASB standards are global; these are the “IFRS” (International Financial Reporting Standards) issued by the IASB.

The FASB standards are used by US-based companies. For years, the two organizations have tried to better align their work to achieve a global financial reporting standard – “convergence”.

The IFRS Foundation is based in the United States and has the mission of developing a single set of “high-quality, understandable, enforceable and globally-accepted accounting standards (the IFRS), which are set by IASB.

In 2022 IASB and FASB will have a joint conference (“Accounting in an Ever-Changing World”) in New York City to “…strengthen connections between the academic and standard-setting communities…” and explore differences and similarities between US GAAP and IFRS Standards.

Consider that the Financial Stability Board (FSB), which launched the TCFD, is on record in support of a single set of high-quality global accounting standards.

Convergence. In the USA, the “whole of government” approach to the climate crisis by the Biden-Harris Administration may result in encouragement, perhaps even rules for, corporate ESG disclosure. The IASB is not waiting.

The IFRS Foundation Trustees are conducting analysis to see whether or not to create another board that would issue global standards for sustainability accounting and reporting.

A proposal will come by the time of the UN Climate Change Conference this fall. Should the IFRS foundation play a role? The International Federation of Accountants (IFAC) thinks so.

Many questions remain for IASB and FASB to address, of course. This is a complex situation, and we bring you some relevant news in the newsletter this week.

TOP STORIES

Here’s an update from the IFRS Foundation and what is being considered:

Meanwhile, the European Commission separately is exploring how to strengthen “non-financial” reporting – there’s the possibility that there could be EU standards developed:

Helpful information about the FASB-IASB differences:

“Sustainable Investing” or Just Plain “Investing” – Where Are We in 2021? Important Milestones Provide Answers…

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

February 22, 2021

About Sustainable / or ESG Investing: We have traveled a far distance over the past four decades, beginning with “ethical” and “faith-based” and the more frequent “socially responsible investing” (SRI), morphing over time into “sustainable & responsible investing” (still SRI for the traditionalist) and on to “ESG investing”.

And now to… how about “investing”? That is, just plain investing, as our friend and colleague Erika Karp, CEO of Cornerstone Capital Group has been long saying.

At various conferences, Erika (a former head of UBS research) would often say to the crowd, “one day it will be ‘investing’ without the adjectives”. That day appears to be here! Let’s see how and why.

We can start making that “just plain investing” case with the results of the US SIF biannual survey of professional asset managers in the United States (2020) – $1-in-$3 of professionally-managed AUM follows some type of ESG/sustainable investing approach. That is $17 trillion of a $55T market and growing in leaps and bounds. We can expect the next survey to report $1-in-$2 or better. (Source: US SIF.)

More recent news: Morningstar looked at “sustainable funds” for 2020 and determined that more than $51 billion flowed into new investments (double the record year of 2019) …accounting for one-quarter of all newly invested money.

Morningstar’s Jon Hale (author of the report) explains that the worsening climate crisis, the Coronavirus pandemic, and the Black Lives Matter movement are among the many reasons for this apparent flight to safety investing trend.

And, the sustainable funds outperformed (on average) more than conventional funds, with three out of four sustainable equity funds ranked in the top half of their Morningstar category in 2020. (There are about 400 “sustainable funds” available for investment, says Morningstar, up from 139 in 2015 as the firm began to separate sustainable funds for close examination from the usual mutual funds.)

Morningstar applies a Sustainability Rating for funds to help investors measure portfolio level risk from ESG factors, using Sustainalytics ratings to measure a company’s material ESG risk; the scores are rolled up to company level scores to come up with the portfolio score.

The World Economic Forum (WEF, the Davos meetings folks) points out an important factor in 2020 investing growth – 10 million new individual investors began investing since the start of the pandemic. The newcomers to investing are often younger, and Millennial Generation (born 1980-2000 by most definitions).

The post-Baby Boomers (born after 1965) stand to inherit an estimated US$30 trillion as their Boomer parents pass along their wealth in coming years. (Boomers are categorized as the post-WWII baby boom born 1946 to 1964.)

Asks WEF: “As this great wealth transfers, what might this mean for wealth inequality and long-term sustainable value creation?”

An important “add” here to note is the moves by Goldman Sachs to issue $750 billion in sustainable financing, investing and advisory activity by 2030 (according to the firm’s CEO).

In this issue we share four Top Story items that add considerable information to the above. Are we ready yet to follow Erika Karp’s advice – just call all of this ‘investing’?

TOP STORIES

Expanding Public Debates About the “What” & “How” of Corporate ESG Disclosure

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

March 2, 2021

Corporate sustainability / ESG reporting — What to disclose? How to frame the disclosures (context matters!)? What frameworks or standards to use?  Questions, questions, and more questions for corporate managers to consider as ESG disclosures steadily expand.

We are tuning in now to many more lively discussions going on about corporate ESG / sustainability et al public disclosures and structured reporting practices — and the growing complexity of all this disclosure effort, resulting often in disclosure fatigue for corporate practitioners!

Corporate managers ponder the important question:  which of the growing number of ESG frameworks or standards to use for disclosures? (The World Economic Forum (WEF) describes some 600 ESG guidelines, 600 reporting frameworks and 360 accounting standards that companies could use for reporting.  These do vary in scope, quantity, and quality of metrics.)

In deciding the what and how for their reporting, public companies consider then the specifics of relevant metrics and the all-important accompanying narrative to be shared to meet users’ rising information needs…in this era of emergent “stakeholder capitalism”.

Of course, there is the question for most companies of which or what existing or anticipated public sector reporting mandates will have to be met in various geographies, for various sectors and industries, for which stakeholders.

We here questions such as — how to get ahead of anticipated mandates in the United States if the Securities & Exchange Commission (SEC) does move ahead with adoption of new rules or at least strong guidance for corporate (and investor) sustainability reporting.

The European Union is today ahead in this area, but we can reasonably expect the USA to make important moves in the “Biden Climate Administration” era.  (The accounting standards boards are important players here as well as regulatory agencies in the sovereign states.)

Company boards, executive committees, professional staff, sustainability team managers wrestle with this complex environmental (for ESG disclosure) as their enterprises develop strategies, organize data flows, set in place data measurement protocols, and assemble the ESG-related content for public disclosure. (And, for expanded “private sharing” with ESG ratings agencies, credit risk agencies, benchmark/index managers, to meet customer ESG data requests, and more).

The list of issues and topics of “what” to disclose is constantly expanding, especially as institutional investors (asset owners and their managers) develop their “asks” of companies.

Climate change topics disclosure is at the top of most investor lists for 2021. Human Capital Management issues have been steadily rising in importance as the COVID-19 pandemic (and spread of variants) affects many business enterprises around the globe.

In the USA, SEC has new guidance for corporate HCM disclosures.  Political unrest is an issue for companies.  Anti-corruption measures are being closely examined.

Diversity & Inclusion (including in the board room and C-suite) is growing in importance to investors.

Also, physical risk to corporate assets in the era of superstorms and changing weather patterns – what are companies examining and then reporting on?  Exec compensation with metrics tied to performance in ESG issues is an area of growing interest.

We are monitoring and/or involved in multiple discussions and organized initiatives in the quest to develop more global, uniform, comparable, reliable, timely, complete, and assured corporate sustainability metrics, and accompanying narrative.  And, to provide the all-important context (of reported data) – what does the data mean?  It’s a complicated journey for all involved!

This week we devote the content of this week’s Highlights newsletter to various elements of the public discussions about the many aspects of the journey.

Here at G&A Institute, our team’s recommended best practice:  use multiple frameworks & standards that are relevant to the business and meet user needs; these are typically then disclosed in hybridized report where multiple standards are harmonized and customized for the relevant industries and sectors of the specific company’s operations and reflect the progress (or even lack of) of the enterprise toward leadership in sustainability matters.

This approach helps to reduce disclosure fatigue for internal corporate teams challenged to choose “which” framework or standard and the gathering of data and other content for this year’s and next year’s ESG disclosures.

We shared our thoughts in a special issue of NIRI IR Update, published by the National Investor Relations Institute, the important organization for corporate investor relations officers:


Here are our top selections in the content silos for this week that reflect the complexity of even the public debates about corporate ESG disclosure and where we are in early-2021.

TOP STORIES

The ever-evolving world of ESG investing from a few different points of view. What are the providers of capital examining today for their portfolio or investable product decision-making?  Here are some shared perspectives:

Picking Up Speed – Adoption of the FSB’s TCFD Recommendations…

January 21 2021

by Hank BoernerChair & Chief StrategistG&A Institute

Countries around the world are tuning in to the TCFD and exploring ways to guide the business sector to report on ever more important climate related disclosures.  Embracing of the Task Force recommendations is a key policy move by governments around the world.

After the 2008 global financial crisis, the major economies that are member-nations of the “G20” formed the Financial Stability Board (FSB) to serve a collective think tank and forum for the world’s leading developed countries to develop strong regulatory, supervisory, and other financial sector policies (guidance, legislation, regulations, rules).

Member-nations can adopt the policies or concepts for same developed collectively in the FSB setting back in their home nations to help to address financial sector issues with new legislative and/or adopted/adjusted rules, and issue guidance to key market players. The FSB collaborates with other bodies such as the International Monetary Fund (the IMF).

FSB operates “by moral suasion and peer pressure” to set internationally-agreed to policies and minimum standards that member nations then can implement at home. In the USA, members include the SEC, Treasury Department and Federal Reserve System.

In December 2015, as climate change issues moved to center stage and the Paris Agreement (at COP 21) was reached by 196 nations, the FSB created the Task Force on Climate-related Financial Disclosures, with Michael Bloomberg as chair.  The “TCFD” then set out to develop guidelines for corporate disclosure on climate change-related issues and topics.

These recommendations were released in 2017, and since then some 1,700 organizations endorsed the recommendations (as signatories); these included companies, governments, investors, NGOs, and others.

Individual countries are taking measures within their borders to encourage corporations to adopt disclosure and reporting recommendations. There are four pillars -– governance, strategy, risk management, and metrics & targets.

A growing number of publicly-traded companies have been adopting these recommendations in various ways and publishing standalone reports or including TCFD information and data in their Proxy Statements, 10-ks, and in sustainability reports.

The key challenge many companies face is the recommendations for rigorous scenario testing to gauge the resiliency of the enterprise (and ability to succeed!) in the 2C degree environment (and beyond, to 4C and even 6C),,,over the rest of the decades of this 21st Century.

Many eyes are on Europe where corporate sustainability reporting first became a “must do” for business enterprises, in the process setting the pace for other regions.  So – what is going on now in the region with the most experienced of corporate reporters are based?  Some recent news:

The Federal Council of Switzerland called on the country’s corporations to implement the TCFD recommendations on a voluntary basis to report on climate change issues.

Consider the leading corporations of that nation — Nestle, ABB, Novartis, Roche, LarfargeHolcim, Glencore — their sustainability reporting often sets the pace for peers and industry or sector categories worldwide.

Switzerland — noted the council — could strengthen the reputation of the nation as global leader in sustainable financial services. A bill is pending now to make the recommendations binding.

The Amsterdam-based Global Reporting Initiative (GRI) is backing an EU Commission proposal for the European Financial Reporting Advisory Group (EFRAG) to consider what would be needed to create non-financial reporting standards (the group now advises on financial standards only). The dual track efforts to help to standardize the disparate methods of non-financial reporting that exist today.

The move could help to create a Europe-wide standard. The GRI suggests that its Global Sustainability Standards Board (GSSB) could make important contributions to the European standard-setting initiative.

And, notes GRI, the GSSB could help to address the critical need for one global set of sustainability reporting standards.  To keep in mind:  the GRI standards today are the most widely-used worldwide for corporate sustainability reporting (the effort began with the first corporate reports being published following the “G1” guidelines back in 1999-2000).

The United Kingdom is the first country to make disclosures about the business impacts of climate change using TCFD mandatory by 2025.

The U.K. is now a “former member” of the European Union (upon the recent completion of “Brexit” process), but in many ways is considered to be a part of the European region. The UK move should be viewed in the context of more investors and sovereign nations demanding that corporations curb their GhG emissions and help society move toward the low-carbon economy.

In the U.K., the influential royal, Prince Charles — formally titled as the Prince of Wales — has also launched a new charter to promote sustainable practices within the private sector.  He has been a champion of addressing climate challenges for decades.

The “Terra Carta” charter sets out a 10-point action plan designed to reduce the carbon footprint of the business sector by year 2030.  This is part of the Sustainable Markets Initiative launched by the prince at the January 2020 meeting in Davos, Switzerland at the World Economic Forum gathering.

Prince Charles called on world leaders to support the charter “to bring prosperity into harmony with nature, people and planet”. This could be the basis of global value creation, he explains, with the power of nature combined with the transformative innovation and resources of the private sector.

We closely monitor developments in Europe and the U.K. to examine the trends in the region that shape corporate sustainability reporting — and that could gain momentum to become global standards.  Or, at least help to shape the disclosure and reporting activities of North American, Latin American, Asia-Pacific, and African companies.

It is expected that the policies that will come from the Biden-Harris Administration in the United States of America will more strenuously align North American public sector (and by influence, the corporate sector and financial markets) with what is going on in Europe and the United Kingdom.  Stay Tuned!

TOP STORIES FOR YOU FROM THE UK AND EUROPE

Items of interest — non-financial reporting development in Europe:

Watching the Major Stock Indexes – For Strong ESG Signals from the Corporate Sector

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

October 2020

Indexes – Indices – Benchmarks – these are very important financial analysis and portfolio management tools for asset owners and their internal and external managers.

We can think of them as a sort of report card; fiduciaries can track their performance against the benchmark for the funds they manage; financial sector players can develop products for investment (mutual funds, Exchange Traded Funds, separate accounts and so on) to market to investors using the appropriate benchmark.

If the investable products are focused on the available equities of the largest market cap companies for investment, the most widely-used indexes will likely be the S&P 500®, created back in March 1957 by Standard & Poor’s and the Russell 1000®, created in 1984 by the Frank Russell Company.

Today the S&P 500 Index is managed by the S&P Global organization.  The Russell 1000 is managed by FTSE Russell, a unit of the LSE Group (London Stock Exchange Group).

There are more or less 500 corporate entities in the S&P 500 Index that measures the equity performance of these companies (those listed on major exchanges).

There are other important indexes by S&P for investors to track:  The S&P Global 1200, S&P MidCap 400, and S&P SmallCap 600, and many more.

Russell 1000® is a subset of the Russell 3000®; it is comprised of the 1000 largest market cap companies in the USA. The R1000 represents more than 90% of the USA’s top publicly-traded companies in the large-cap category.  Both indexes are very important tools for professional investment managers and send strong trending signals to the capital markets.

The G&A Institute team closely tracks the ESG and sustainability  disclosure & reporting practices and each year; since 2010 we’ve published research on the trends, first with the S&P 500, and for 2019 and 2020, we expanded our research into to the larger Russell 1000 index. (The top half of the 1000 roughly mirrors the S&P 500.)

The 500 and 1000 companies are important bellwethers in tracking the amazing expansion of corporate sustainability reporting over the past decade.  Yes, there were excellent choices of select benchmarks for sustainable and responsible investors going back several decades – such as the Domini 400, going back to 1990 — and we tracked those as well.  (The “400” was renamed the MSCI KLD 400 Social Index in 2010).

But once major publicly-traded companies in the United States began escalating the pace of sustainability and ESG reporting, many more investors paid attention.  And media tuned in.  And then the ESG indexes proliferated like springtime blooms!

Those bigger customers (the large cap companies) of other firms began expanding their  ESG “footprint” and considering the supply and sourcing partners to be part of their ESG profile.  So, customers are now queried regularly on their ESG performance and outcomes.

Once the critical mass — 90% of large-cap U.S. companies reporting in our latest S&P 500 research – how long will it be for many more mid-caps, small-caps, privately-owned enterprises to follow the example?  Very soon, we think.  And we’re closely watching!  (And will bring the news to you.)

If you have not reviewed the results of the G&A Institute research on the ESG reporting of the S&P 500 and the Russell 1000 for 2019, here are the links:

Note:  Click here for more helpful background on the S&P 500 and the Russell 1000 large equities/stock indexes, here is Investopedia’s explanation.

Excellent Wrap up From GreenBiz:
At last, corporate sustainability reporting is hitting its stride

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

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:

Corporate Sustainability Performance – Setting the Stage for ESG Data Analysis by Humans and AI Bots Alike

By Pam Styles, Principal and Founder, Next Level Investor Relations, and G&A Institute Fellow

There is an expansive reservoir of ESG data – a.k.a. key performance indicators (KPIs) – across growing corporate ESG disclosure and reporting, commercially advertised metrics and/or data sets subscription access, and proprietary third-party rater, ranker and data provider analytical systems.

While voluntary reporting frameworks and the various third parties jockey for dominance and survival, who is using all this data — and how?

Currently, there are too many ESG-related KPIs and data sets for companies and investors to get a handle on, respond or analyze.  It is impossible to predict how many more KPIs will enter the mix or how soon third-party relationships will naturally consolidate the number of KPI expectations, simply driven by necessity for their own business models’ sustainability.

The corporate disclosure side of this issue is explored in:
The End User Side

Just like corporations, investors have to prioritize which KPIs matter and what reporting framework KPIs, public access information sources, licensed and/or proprietary databases they can rationalize for focus.

CFA-PRI recently joined forces to survey 1100 investment professionals.  Survey results show that fixed income inclusion of ESG in investment decision-making is rapidly catching-up with equity investors.

Source: UNPRI

Analogous to portfolio diversification theory, the number of investments (in both time and money) in ESG data sources has got to naturally reach some optimal number needed to optimize risk/return. Beyond that there is an entire sustainable finance ecosystem too large to address in a simple blog post.

Data Use

There is not an honest person alive who can tell you that they can stay on top of all the current and increasing company ESG data they could analyze, germane to their investment decision-making.

Research of Value

In addition to 90% of S&P 500 companies, Governance & Accountability Institute just announced its annual research update that 65% of Russell 1000 companies also published sustainability reports in 2019 (up from 60% in 2018), including 39% by companies in the smallest half of the index (up from 34% in 2018).

Important Perspective

An article highlighting takeaways from the recent NIRI “Big I – Investor & Issuer Invitational Forum”, quoted speaker Dan Romito, SVP of Business Development & Product Strategy at Nasdaq:

“There is an explosion of non-fundamental data…especially in ESG data…The
SEC found that 90% of data now used in the capital markets has been created during the past two years.”

Artificial Intelligence

AI use as a tool to consume, filter and analyze, huge reservoirs of ESG data is increasingly valuable in investment decision-making. AI providers are jockeying for differentiation and capital.  For instance:

  • AI is being used by investors, such as BlackRock, to not only analyze ESG data that companies are disclosing, but to uncover other information, such as ESG impacts from satellite images of pollution to cars in a parking lot, voice inflection and more.
  • FactSet just announced, on October 20th, a definitive agreement to acquire TrueValue Labs. Founded in 2013, TrueValue is a pioneer in AI-driven ESG data. It applies AI-driven technology to over 100,000 unstructured text sources in 13 languages, to identify positive and negative ESG behavior. Its coverage spans over 19,000 public and private companies.
  • TrueValue LabsTM had previously announced on January 23, 2020, that it was introducing its patent-pending concept of Dynamic Materiality, indicating that every company, industry and sector has a unique materiality signature. The company head of research noted that, “Given how central materiality is to ESG investing and fiduciary duty, it is critical to understand the mechanisms by which ESG factors impact the operational and financial performance of companies.”

The Human Element

“While AI can unearth key data for investors seeking sustainable investments, discerning unreliable information will be a key challenge and humans will not be replaced any time soon.” – as stated in the article titled,  How can AI help ESG investing? –  S&P Global, Sept 2020

“AI is not a replacement for human intelligence, but rather a way to further it… The strategic value of alternative datasets, in particular ESG data, in the financial sector is becoming increasingly visible. As only relevant data has decision-making utility, supervised machine learning is emerging as the most effective mechanism to generate strategic value for businesses.” – Cutting through the noise: demystifying the buzz around artificial intelligence in financial decision-makingRepRisk, Sept 2020

The Final Word

In only the last few years, it became obvious that ESG/Sustainability had finally gone mainstream.  It took over twenty years to catch-on, since the first voluntary ESG reporting framework, GRI, was founded in 1997.  Now it is time to buckle-up for the ride… practically everything ESG/Sustainability-related is advancing at orders of magnitude faster pace than anything we’ve experienced thus far!

Pamela Styles – Fellow G&A Institute – is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.

Advancing Toward a Circular New York

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.

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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.

 

Celebrating Highlights Issue #500 – And Unveiling a New Design

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

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: