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

Posted on June 28, 2022 by Hank Boerner, Chairman & Chief Strategist

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:

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/
SEC Proposed to Enhance Disclosures by Investment Advisors and Investment Companies About ESG Investment Practices: https://www.sec.gov/news/press-release/2022-92
2022’s Top Sustainable Fund Weather a Tough Market: https://www.morningstar.com/articles/1097780/2022s-top-sustainable-funds-weather-a-tough-market

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

Posted on December 11, 2020 by Hank Boerner, Chairman & Chief Strategist

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

Corporate Sustainability Reporting: Changes in the Global Landscape – What Might 2021 Bring?

Posted on December 10, 2020 by Hank Boerner, Chairman & Chief Strategist

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

Change is a-coming – quite quickly now – for corporate sustainability reporting frameworks and standards organizations. And the universe of report users.

Before the disastrous October 1929 stock market crash, there was little in the way of disclosure and reporting requirements for companies with public stockholders. The State of New York had The Martin Act, passed in 1921, a “blue sky law” that regulates the sales and trades of public companies to address fraud issues. That was about it for protecting those buying shares of public companies of the day.

Under the 100 year old Act, the elected New York State Attorney General is the “Sheriff of Wall Street — and this statute is still in effect. (See: AG Eliot Spitzer and his prosecution of the 10 large asset managers for analyst shenanigans.)

President Franklin Delano Roosevelt, elected two-term governor of NY before his election to the highest office in November 1932, brought along a “brains trust” to Washington and these colleagues shaped the historic 1933 Securities Act and 1934 Securities Exchange Act to regulate corporate disclosure and Wall Street activities.

Story goes there was so much to put in these sweeping regulations for stock exchanges, brokerage houses, investor protection measures and corporate reporting requirements that it took two different years of congressional action for passage into law in the days when Congress met only briefly and then hastened home to avoid the Washington DC summer humidity and heat.

The Martin Act was a powerful influence on the development of foundational federal statutes that are regularly updated to keep pace with new developments (Sarbanes-Oxley, 2002, updated many portions of the 1934 Act).

What was to be disclosed and how? Guidance was needed by the corporate boards and executives they hired to run the company in terms of information for the company’s investors. And so, in a relatively short time “Generally Applied Accounting Principles” began to evolve. These became “commonly accepted” rules of the road for corporate accounting and financial reporting.

There were a number of organizations contributing to GAAP including the AICPA. The guiding principles were and are all about materiality, consistency, prudence (or moderation) and objectivity like auditor independence verifying results.

Now – apply all of this (the existing requirements to the Wild West of the 1920s leading up to the 1929 financial crash that harmed many investors — and it reminds one of the situations today with corporate ESG, sustainability, CR, citizenship reporting. No generally applied principles that all can agree to, a wide range of standards and frameworks and guidance and “demands” to choose from, and for U.S. companies much of what is disclosed is on a voluntary basis anyway.

A growing chorus of institutional investors and company leaders are calling for clear regulatory guidance and understanding of the rules of the road from the appointed Sheriffs for sustainability disclosures – especially in the USA, from the Securities & Exchange Commission…and the Financial Accounting Standards Board (FASB), now the two official keepers of GAAP.

FASB was created in the early 1970s – by action of the Congress — to be the official keeper of GAAP and the developer of accounting and reporting rules. SOX legislation made it official; there would be two keepers of GAAP — SEC and FASB. GAAP addressed material financial issues to be disclosed.

But today for sustainability disclosure – what is material? How to disclose the material items? What standards to follow? What do investors want to know?

Today corporates and investors debate the questions: What should be disclosed in a consistent and comparable way? The answers are important to information users. At the center of discussion: materiality – everyone using corporate reports in their analysis clamors for this in corporate sustainability disclosure.

Materiality is at the heart of the SASB Standards now developed for 77 industry categories in 11 sectors. Disclosure of the material is an important part of the purpose that GAAP has served for 8-plus decades.

Yes, there is some really excellence guidance out there, the trend beginning two decades ago with the GRI Framework in 1999-2000. Publicly-traded companies have the GRI Standards available to guide their reporting on ESG/sustainability issues to investors and stakeholders.

There is the SAM Corporate Sustainability Assessment (CSA), now managed entirely by S&P Global, and available to invited companies since 1999-2000. (SAM was RobecoSAM and with Dow Jones Indexes managed the DJ Sustainability Indexes – now S&P Global does that with SAM as a unit of the firm based in Switzerland.)

Since 2000, companies have had the UN Global Compact principles to include in their reporting. Since 2015 corporate managers have had the UN Sustainable Development Goals (SDGs) to report on (and before that, the predecessor UN Millennium Development Goals, 2000-2015). And the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations were put in place in 2017.

The Securities & Exchange Commission (SEC) in February 2010 issied “guidance” to publicly-traded companies reminded corporate boards of their responsibility to oversee risk and identified climate change matters as an important risk in that context.

But all of these standards and frameworks and suggested things to voluntarily report on — this is today’s thicket to navigate, picking frameworks to be used for telling the story of the company’s sustainability journey.

Using the various frameworks to explain strategy, programs, actions taken, achievements, engagements, and more – the material items. Profiling the corporate carbon footprint in the process. But there is no GAAP to guide the company for this ESG reporting, as in the example of financial accounting and reporting.

Institutional investors have been requesting more guidance from the SEC on sustainability et al reporting. But the commission has been reluctant to move much beyond the 2010 risk reminder guidance even as literally hundreds of publicly-traded companies expand their voluntary disclosure. And so we rely on this voluntary disclosure on climate change, diversity & inclusion efforts, political spending, supply chain management, community support, and a host of other ESG issues. (Human Capital Management was addressed in the recent Reg S-K updating.)

We think 2021 will be an interesting year in this ongoing discussion – “what” and “how” should companies be disclosing on sustainability topics & issues.

The various providers of existing reporting frameworks and standards and those influencing the disclosures in other ways are moving ahead, with workarounds where in the USA government mandates for sustainability reporting do not yet exist.

We’ve selected a few items for you to keep up with the rapidly-changing world of corporate ESG disclosures in our Top Stories and other topic silos.

There are really important discussions! We watch these developments intently as helping corporate clients manage their ESG / sustainability disclosures is at the heart of our team’s work and we will continue to keep sharing information with you in the Highlights newsletter.

More about this in The Wall Street Journal with comments from G&A’s Lou Coppola: Companies Could Face Pressure to Disclose More ESG Data (Source: The Wall Street Journal)
TOP STORIES

CDSB and SSE announce intention to collaborate on capacity building initiatives (Source: CDSB)
IIRC and SASB announce intent to merge in major step towards simplifying the corporate reporting system (Source: IIRC)
GRI welcomes consolidation of value reporting organizations (Source: GRI)
Deutsche Börse acquires leading governance, ESG data and analytics provider ISS (Source: ISS)
S&P Global Agrees to Buy IHS Markit for About $44 Billion (Source: The Wall Street Journal)

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

Posted on November 17, 2020 by Hank Boerner, Chairman & Chief Strategist

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 20^th, 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 Labs^TM 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-making – RepRisk, 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.

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

Posted on October 20, 2020 by Hank Boerner, Chairman & Chief Strategist

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

Business Leaders From More Than 100 Countries Pledge Support for Multilateralism as the United Nations Turns 75 (Source: United Nations Global Compact)

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

Posted on September 22, 2020 by Hank Boerner, Chairman & Chief Strategist

September 8 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Top Stories

Cboe Expands ESG Investing Universe with S&P 500 ESG Index Options (Source: ESG Today)

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

Posted on August 9, 2020 by Hank Boerner, Chairman & Chief Strategist

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 93^rd 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.

There, In The Company’s 401-K Plan – Do You Have the Choice of ESG Investments? Ah, That Would Have Been Good For You to Have in the Recent Market Downturn…

Posted on June 16, 2020 by Hank Boerner, Chairman & Chief Strategist

June 2020

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

As many more institutional investors — asset owners, and their internal & outside managers — move into ESG / sustainable investing instruments and asset classes, the question may be asked: What about the individual investor…the family huddling to discuss what to do in the midst of the virus crisis to protect their retirement savings?

Are they offered “resilient choices” to stash their future funds? Bloomberg Green provides some answers in “ESG Funds Are Ready for Your Retirement Plan”.

Emily Chasan, in our view one of the finest of the sustainability editors in the nation today, explores the impact (or lack of) on individual / family investors in mutual funds and ETFs aiming to better protect their nest egg for the future.

For starters, fortunately, while some ESG mutual fund management (advisory) companies may not have set out to protect their investors in an unforeseen global pandemic…but…the ESG funds they manage are proving to be quite resilient during the recent market collapse. These would seem to be good choices for individuals. But the opportunity to partake is missing.

Fund managers, Emily explains, avoided risk (deliberately) by using corporate ESG scores as an important proxy for assembling their roster of well-managed, adaptable, investable companies…such as those companies with far-sighted executives who were planning for an existential climate shock. That planning paid off in the pandemic crisis.

Prioritized by leading asset managers for their [ESG} funds: tech, financial services and healthcare equities, and renewable energy companies. For demonstration of concept, Allianz, BlackRock, Invesco and Morningstar found their ESG investments were performing better than the more traditional investment vehicles in the dark market days of early 2020.

And, a BlackRock study found that more than three-quarters of sustainable indexes outperformed better than the traditional investor benchmarks from 2015 to the market drop in 2020. (How about this for proof of concept: 94% of sustainable indexes outperformed!)

Speaking at a World Business Council for Sustainable Development (WBCSD) conference, BlackRock’s director of retirement investment strategy, Stacey Tovrov, explained: “Sustainable Investment can provide that resilience amid uncertainty [when we really want to ensure we’re mitigating downside for retirement savers]’”.

So how come, asks Bloomberg Green, why are ESG funds largely missing from a US$9 million “chunk of the market, comprised of corporate retirement plans”?

In the USA, retirement accounts represented one-third of all household wealth going into the market downturn (investment in the family home is larger). But only 3% of 401-k plans offered ESG funds. And less than 1% of these funds are invested in ESG vehicles.

Perhaps the fiduciaries (the employer sponsoring he retirement plan, the outside investment advisors hired on to manage the plan) are just too cautious, too concerned that ESG investing will in some way negatively impact them.

So, we can say, these results should (operative word!) convince corporate retirement managers overseeing 401-k plans that the individual investor is actually being negatively impacted by being absent from the ESG choices, from the opportunities offered by ESG / sustainable investing approaches that many institutions enjoy.

As “Human Capital Management” steadily becomes an important aspect of board and C-suite strategy, oversight, measurement and management (and results), Emily Chasan suggests that the coronavirus crisis will reshape the fundamental relationship between employers and their workforce.

Re-structuring the retirement plan offerings is a good place for C-suite to start re-examining the why, what and how of offerings in their sponsored plans. “One place to start changing attitudes might just be offering workers the chance of a more resilient retirement,” Emily Chasan tells us.

For corporate executives and managers seeking more information about this we recommend our trade association’s web site. Numerous members of the U.S. Forum for Sustainable and Responsible Investment (US SIF) offer mutual funds, ETFs, separate accounts, and other investment opportunities. There’s information on Climate Change and Retirement on the website. See: https://www.ussif.org/

We also offer a selection of ESG / Sustainable & Responsible Investment items for you this issue.

Top Stories

ESG Funds Are Ready for Your Retirement Plan
(Source: Bloomberg Green / Emily Chasan) Not many ESG fund managers set out to protect investors from a global pandemic. But their funds have nevertheless proven resilient during the subsequent market collapse.

Other Top Stories of Interest

S&P Launches ESG Scores Based on 20 Years of Corporate Sustainability Data (Source: Environmental & Energy Leader) S&P Global has announced the launch of its S&P Global environmental, social, and governance (ESG) Scores with coverage of more than 7,300 companies, representing 95% of global market capitalization.

MSCI Makes Public ESG Metrics for Indexes & Funds to Drive Greater ESG Transparency (Source: MSCI) MSCI today announced that it has made public the MSCI ESG Fund Ratings provided by MSCI ESG Research LLC for 36,000 multi-asset class mutual funds and ETFs, and MSCI Limited has made public ESG metrics for all of its indexes covered by the European Union (EU) Benchmark Regulation (BMR). The ESG ratings and metrics are available as part of two new search tools now available to anyone on the MSCI website.

ESG Funds Outperforming S&P 500 this Year (Source: Pension & Investments) Investment funds set up with ESG criteria remain relative safe havens in the economic downturn caused by the coronavirus pandemic, according to an analysis released Wednesday by S&P Global Market Intelligence.

Five Actions Business Leaders Can Take to Create A More Sustainable Future (Source: D Magazine) As a Dallas-based business executive and environmentalist, I believe the marketplace can offer solutions for the environment. These solutions need not be at odds with economic growth and can actually be profitable when consumers…

Reporting and Disclosing Corporate ESG & Sustainability Results– Key Resources Roundup

Posted on June 16, 2020 by Hank Boerner, Chairman & Chief Strategist

By Kelly Mumford – Sustainability Reporting Analyst Intern – G&A Institute

Sustainability, Corporate Responsibility, and Environmental Social Governance (ESG) – these are some of the key buzz words circulating in capital markets’ circles that have become increasingly more important to both investors and corporate leaders as the risks of climate change to business organizations steadily increase.

We are now at the critical tipping point where it is necessary for all businesses to publicly report on and in various ways amply disclose how climate related risks — and related opportunities – and other issues such as Human Rights and Human Capital Management (HCM) might affect their business. And, to disclose what they are doing to address and mitigate such risks.

A recent institutional investor survey report by the Harvard Law School Forum on Corporate Governance that focused on ESG risk and opportunities found that investors recognize the growing risks of non-financial factors such as climate change, which is at the top of the agenda.

Climate change issues and human capital management were cited in the 2020 survey as the top sustainability topics that investors are focusing on when engaging with their boards.

Regardless of sector, all companies understand the importance of engaging with these topics. With that said, ESG and sustainability topics are playing a more concrete role in the private sector.

The good news is that there are significant resources available to help companies measure and report on sustainability and ESG, promote greater transparency, demonstrate better risk management, talk about improved performance, and in turn better promote the corporate brand value and reputation.

Such corporate disclosure and reporting have been shown to help to create higher shareholder returns and improve corporate economic performance.

With this in mind, standardized frameworks and indices are being used by corporations to provide more accurate and transparent information to their investors as well as all of their stakeholders.

However, as more diverse resources become available (examples are sustainability and responsibility frameworks, indices, and standards) there is also a need for distinctions to be made among them. To group all of these resources together would be inaccurate and misleading as each has unique advantages and distinction for both investors and corporate reporters.

Some of the key resources available in this space include: SASB, MSCI, Sustainalytics, Institutional Shareholder Services (ISS), Dow Jones Sustainability Index (the DJSI), TCFD, CDP, SDGs, and GRI.

To more easily understand their similarities and differences these can be grouped into broader categories. Such categories include: reporting standards, ESG ratings, indices, disclosure frameworks, investor surveys, and international goals. We’ll explain these in this commentary.

ABOUT CORPORATE REPORTING STANDARDS
The leading reporting standards present an effective way for companies to structure and publicly disclose “non- financial” information — such as strategies, actions, performance and outcomes for governance, environmental, and social impacts of the company. (That is, impacts affecting stakeholders, including investors.)

These important disclosures can be identified in the form of “sustainability, corporate responsibility, corporate citizenship” reporting. Many such corporate reports explain how a company measures ESG performance, sets goals, and manages programs effectively – and then communicates their impact to stakeholders.

Reporting standards help to streamline the process of corporate reporting and allow stakeholders to better identify non-financial disclosures against widely used and accepted standards.

THE GLOBAL REPORTING INITIATIVE (GRI)
This is a long-established, independent organization (a foundation) that has helped to pioneer sustainability reporting. Since 1997 the organization has been working with the business sector and governments to help organizations (corporations, public sector and social sector organizations) communicate their impact and sustainability issues –such as climate change, human rights, governance and social well-being.

The current GRI sustainability reporting standards evolved out of four prior generations of frameworks dating to 1999-2000 (when the first reports were published, using “G1”) — and today is one of the most commonly-used with diverse multi stakeholder contributions to standards-setting.

GRI has been responsible for transforming sustainability reporting into a growing practice and today about 93% of the largest corporations report their sustainability performance using the GRI Standards.

Advantage of use for reporters: corporate reporting using the GRI standards helps to create consistent disclosures and facilitates engagement with stakeholders on existing and emerging sustainability issues. Further, use of GRI standards helps to create a more consistent and reliable landscape for sustainability reporting frameworks for both the reporters and their constituencies, especially including investors.

THE SUSTAINABILITY ACCOUNTING STANDARDS BOARD (SASB)
These more recent standards enable business leaders to identify, manage, and communicate financially-material sustainability information to investors. There are now 77 industry-specific standards (for 11 sectors) available for guidance. These standards for an industry (and many companies are classified in more than one industry) help managers to identify the minimal set of financially-material sustainability topics and associated metrics for companies in each industry.

SASB standards help company managements to identify topics most relevant to their enterprise, and communicate sustainability data more efficiently and effectively for investors.

Can be used alone, with other reporting frameworks, or as part of an integrated reporting process. The G&A Institute team in assisting companies with their reporting activities use a hybrid approach, using both GRI and SASB as best practice.

ESG RATINGS/ DATA SUPPLIERS
A growing number of independent third-party providers have created ESG performance ratings, rankings and scores, resulting from assessment and measurements of corporate ESG performance over time against peers for investor clients. These ratings often form the basis of engagement and discussion between investors and companies on matters related to ESG performance.

There are several major ratings with varying methodology, scope, and coverage that are influencing the capital markets. Keep in mind there are numerous ESG data providers and ratings providing information to investors and stakeholders; however, for the scope of this post not all are mentioned.

INSTITUTIONAL SHAREHOLDER SERVICES (ISS) — ESG GOVERNANCE QUALITYSCORES(R)
ISS is a long-time provider of “corporate governance solutions” for institutional asset owners, their internal and external managers, and service providers. ISS provides a variety of ESG solutions for investors to implement responsible investment policies. The firm also provides climate change data and analytics and develops a Quality Score (for G, S and E) that provides research findings on corporate governance as well as social and environmental performance of publicly-traded global companies for its investor clients.

The ESG Governance QualityScore is described as a scoring and screening solution for investors to review the governance quality and risks of a publicly-traded company.

Scores are provided for the overall company and organized into four categories — covering Board Structure, Compensation, Shareholder Rights, and Audit & Risk Oversight.

Many factors are included in this score but overall the foundation of scoring begins with corporate governance, the long-time specialty of this important provider.

ISS Advantage: as a leading provider of corporate governance, the ISS ESG Governance QualityScore leverages this firm’s deep knowledge across key capital markets. Further, these rankings are relative to an index and region to ensure that the rankings are relevant to the market that the public company operates in.

MSCI ESG RATINGS
MSCI has a specific ESG Index Framework designed to represent the performance of the most common ESG investment approaches by leveraging ESG criteria. Indexes are organized into three categories: integration, values, and impact.

MSCI also creates corporate ESG ratings by collecting data for each company based on 37 key ESG issues. AI methodology is used to increase precision and validate data as well as alternative data to minimize reliance on voluntary disclosure.

Consider:

MSCI is the largest provider of ESG ratings with over 1,500 equity and fixed-income ESG Indexes. The firm provides ESG ratings for over 7,500 global companies and more than 650,000 equity and fixed-income securities (as of October 2019).
Advantages for investors: Focuses on intersection between a company’s core business and industry-specific issues that can create risks and opportunities. ESG ratings gives companies a rated score of AAA-to-CCC, which are relative to industry peers. Companies are rated according to their exposure to risk and how well they manage risks relative to peers. Companies are analyzed on calendar year basis and are able to respond to the profile developed for investors by MSCI analysts.

SUSTAINALYTICS
This organization rates sustainability of exchange-listed companies based on environmental, social, and corporate governance (ESG) performance. The focus is on ESG and corporate governance research and ratings.

What makes them unique: their ESG Risk Ratings are designed to help investors identify and understand material ESG risks at the security and the portfolio level.

The corporate ESG risk rating is calculated by assessing the amount of unmanaged risk for each material ESG issue that is examined. The issues are analyzed varying by industry and depending on industry, a weight is given to each ESG issue.

Key: The assessment focuses on most material risks, using a two-dimensional lens to assess what risks the corporation faces and how well leadership manages the identified risks. Absolute ratings enable comparability across industries and companies for investors; corporate governance ratings are integrated into the ESG risk rating, and controversy research is also considered for the risk ratings. The performance is based on both quantitative metrics and an assessment of controversial incidents, allowing for the complete picture to be demonstrated with the ESG ranking.
Unique point: Total ESG risk score is also presented as a percentile so it can be compared across industries. This allows for a better understanding of how the industry performs as a whole, so to better assess how well a company is performing relatively.

SOME OF THE LEADING INDICES
Indexes / benchmarks help to make capital markets more accessible, credible, and products or approaches better structured for investors. They allow for performance benchmarks to represent how equity and/or fixed-income securities are performing against peers.

Specialized ESG indices specifically have been gaining in favor over the recent years as investors become more interested in responsible / sustainable investing. This out-performance is evident in the time of the coronavirus crisis with ESG funds inflow exceeding outflow of traditional indexes. Investors see this as a sign of resilience and excellence in risk performance for ESG companies.

It is evident that ESG index funds have been outperforming key core indexes — such as the S&P 500 Index(r). (The new S&P 500 ESG Index has been outperforming the long-established sister fund.)

Also, the growing abundance of ESG data and research has helped to promote the development and embrace of corporate ESG ratings, which in turn allows for the construction of even more such indices.

Because these indexes represent the performance of securities in terms of ESG criteria relative to their peers, it helps define the ESG market and availability of sustainable investing options.

There are now numerous ESG Indices available to investors – to cover them all that would require another blog post. So, for the sake of this brief post only DJSI is mentioned, as it is one of the mostly widely-known and frequently used by global investors.

DOW JONES SUSTAINABILITY INDICES (DJSI)
This is a family of indices evaluating the sustainability performance of thousands of publicly-traded companies. DJSI tracks the ESG performance of the world’s leading companies in terms of critical economic, environmental, and social criteria. These are important benchmarks for investors who recognize that corporate sustainable practices create shareholder value. The indexes were created jointly with Dow Jones Indexes, and SAM, now a division of S&P Global Ratings (which owns the DJSI).

This was the first global sustainability index – created in 1999 by SAM (Sustainable Asset Management of Switzerland) and Dow Jones Indices. Today, owned and managed by S&P Global Ratings.
Advantage for investors: Combines the experience of an established index provider with the expertise of a sustainable investing analytics to select most sustainable companies for the indexes from across 61 industries. Calculated in price and total return disseminated in real time. This is an important benchmark for many financial institutions.
Selection process is based on companies’ total sustainability score from annual SAM Corporate Sustainability Assessment (the important CSA that results in the corporate profile). All industries are included, and the top 10% (for global indices, top 20% for regional indices, and top 30% for country indices) of companies per industry are selected

CORPORATE DISCLOSURE FRAMEWORKS
Disclosure frameworks are used to improve the effectiveness of financial disclosures by facilitating clear communication about certain criteria. There are long-standing frameworks such as created by the Financial Accounting Standards Board (FASB) that establish standards for U.S. corporate financial accounting.

Similarly, there is now a suggested disclosure framework related to the corporation’s financial information but that focuses on climate related risks and opportunities — the Financial Stability Boards’ “Taskforce on Climate-related Financial Disclosures” — or TCFD. (The FSB is an organization of the G20 countries; member participants are the securities and financial services administrators and central bankers of the largest economies. The U.S. members include SEC, the Federal Reserve System and the Treasury Department. The FSB considers future regulations that could be considered in the member countries.)

As the capital markets players interest in corporate sustainability and ESG grows, and public policy makers recognize the threat of many ESG issues to the health of their nations, it is not surprising that there would be a specific resource developed for corporate climate-related financial disclosures.

Investors have a heightened awareness of the risks that climate change issues poses to their holdings, so it is now considered to be a best practice for company managements to report and disclose on these risks and responses to address them – using among other resources the TCFD recommendations for disclosure. Here is what you need to know:

TASKFORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES (TCFD)
Developed by the Financial Stability Board (FSB) to encourage voluntary, consistent, climate related financial disclosures that could be useful to investors. N.Y.C. Mayor/Bloomberg LP founder Michael Bloomberg serves as the chairman and founder of the task force (which has a 32-member board).

The “TCFD” recommendations for corporate disclosure are intended to help both publicly-traded companies and investors consider the risks and opportunities associated with the challenges of climate change and what constitutes effective disclosures across industries and sectors.

This approach enables users of financial information to better assess risk and helps to promote better corporate disclosure. The recommendations call for disclosure around four core areas — governance, strategy, risk management, and metrics and targets.

To keep in mind:

The initial recommendations applied to four financial sector organizations (bankers, insurers, asset owners, asset managers). And to four industry categories – oil & gas; food & agriculture; transport; building materials and management.
Advantage for companies: following the TCFD recommendations represents an opportunity for companies following the recommendations to bring climate-related financial reporting to a wider audience.

INVESTOR-FOCUSED SURVEYS – CORPORATE RESPONSES
Investor interest surveys — such as those conducted by CDP – can provide an advantage for companies in responding to disclose important ESG data and take part in the movement towards building a carbon-neutral economy.

The information provided to CDP by companies makes up the most comprehensive dataset tracking global climate progress. Investors use these volumes of data on climate change, deforestation, supply chain management and water security to inform decision-making, engage with companies, and identify risks and opportunities.

Corporate response to the annual, global surveys benefits investors and provides companies with ways to inform investor engagement strategies.

CDP
Established by investors 20 years ago as the Carbon Disclosure Project, CDP today is an organization that supports the movement of cities and companies toward greater measurement, management and disclosure of key data and information to promote a carbon neutral economy.

These data helps to manage risks and opportunities associated with climate change, water security and deforestation. More than 2,000 companies in North America and 8,000 globally disclose data through CDP.

Disclosure is key, not only for measuring impact but also for setting goals and targets that enable climate action. CDP has been at the forefront of the disclosure movement to track and measure global progress towards building a more sustainable world.

Advantage: reporting to CDP is advantageous because it helps companies get ahead of regulatory and policy changes, identify certain ESG risks, and find new opportunities to manage those risks in a way that is beneficial for both business — and the planet.
TCFD Connection: The CDP response questions have been aligned with the TCFD and a good comprehensive CDP response can provide a baseline for a majority of the necessary disclosures for TCFD.

INTERNATIONAL GOALS – THE SUSTAINABLE DEVELOPMENT GOALS (SDGS)
The United Nations Sustainable Development Goals are unique in that they are a set of widely-accepted international goals. Countries, cities, and companies all over the world and use these goals as a way to inform and inspire action on sustainable development goals. The goals are very broad in aims so it allows for parties to adapt and use the goals that are most relevant. They are non-binding and therefore their implementation depends on local government or corporate polices to be upheld.

These are a United Nations-developed plan to [among the goals] end extreme poverty, reduce inequality, and protect the planet. The SDGs succeeded the Millennium Goals (2000-to-2015) and extend collaborative and independent action out to year 2030 by public, private and social sector organizations. The goals (17 in all with 169 underlying targets) have been adopted by 193 countries and emerged as a result of the most comprehensive multi-party negotiations in the history of the United Nations.

The SDGs focus on ways to generate impact and improve the lives of all people. The goals are related to themes such as water, energy, climate, oceans, urbanization, transport, and science and technology.

The SDGs are not focused on any sector or stakeholder in specific. Instead they serve as a general guidance that can be used at any level.
Distinctions: as one of the most widely recognized frameworks for corporate consideration, companies and stakeholders can use the Goals as a way to guide their sustainability initiatives. Many companies recognize them in corporate reports and many align certain aspects of their mission to relevant SDGs.

# # #

AUTHOR’S CONCLUSION
As asset owners and asset managers now expect – and demand – greater corporate disclosure on climate change-related topics and issues, there are numerous resources available for managers to create and inform comprehensive, compelling reports for public access.

It is up to company leaders to identify the category of resources that would best benefit them, whether that be aligning with a disclosure framework, answering a CDP survey, or using ESG ratings. Most leading companies are taking a hybrid approach and utilizing the best features of the most common frameworks to maximize the ROI of their investments in this area. We’ve identified some of the most-utilized here but there are still many more resources available in each category depending on industry, sector, geography, nature of the business, and other factors.

While the large universe and diversity of sustainability and ESG disclosure and reporting resources might be confusing to make sense of, it is increasingly obvious that investors are relying on ESG factors when making decisions and that the importance of climate change is only growing.

The team at Governance & Accountability Institute are experts in helping corporate clients work with the frameworks, etc. profiled here. I serve as a reporting analyst-intern at, reviewing literally dozens of corporate sustainability / ESG / citizenship – responsibility – citizenship et al reports each month.

ABOUT KELLY MUMFORD
Kelly Mumford is a graduate of the Development Planning Unit at the University College London. She graduated with a Master’s of Science in Environment and Sustainable Development (with Merit). Her course focused on environmental planning and management in developing countries and culminated with a month of field work in Freetown, Sierra Leone. She led a group during their research on the water and sanitation practices of a coastal community in the city of Freetown. Her work in preparation for this fieldwork includes a policy brief, published by their partner research organization.

Kelly has been very active in the environmental sector and prior to this interned at Natural Resources Defense Council. She holds a Sustainability Associate Credential from the International Society of Sustainability Professionals and has been an active member of the organization, planning and executing a successful N.Y.C. chapter’s whale watching event. She holds a B.A. in Environmental Studies and a minor in Spanish studies from the University of Delaware. She plans to pursue a career in sustainability, focusing on ESG and leveraging her research experience and knowledge of sustainability reporting.

ADDITIONAL RESOURCES

Which Are the “Best Of” Sustainable Companies in the Important Annual Rankings? Mirror, Mirror on the Wall – What Reflection for Our Company?

Posted on February 13, 2020 by Hank Boerner, Chairman & Chief Strategist

February 7 2020

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

Mirror, mirror on the wall – who is the most sustainable company of them all? (Paraphrasing that most memorable line from the Queen in the Walt Disney Studios’ 1930s big screen classic, Snow White and the Seven Dwarfs,)

“Best Of” is being regularly applied now by a ever-widening range of third party players in examining the performance and achievements of U.S., North American and global companies’ sustainability efforts (and applying their methodologies to focus on an ever-widening list of ESG criteria for users of the lists, rankings and so on).

The results are published for many or all to see – such as this week’s Corporate Knights’ “2020 Global 100” unveiling at the World Economic Forum in Davos — which we are sharing in our Top Stories of the week.

Looking at (or for) the “fairest” of them all, or the best-in-class, or most sustainable, or leading in corporate citizenship rankings, et al — there are now many more ESG ratings organizations, publishers, NGOs, investor coalitions, trade / professional associations, and others in the “ratings, rankings, scores and other recognitions” arena.

And these ratings, rankings, scores, best-of lists are published in many more forms and value-added variations. Keeping current and in the ESG ratings & rankings game is a full-time job at many companies today.

The third party evaluation approach can be better understood in how they apply their research to arrive at rankings and ratings, and assigning scores, with shared (privately or publicly) rationale to explain the selections of the individual company for benchmark, or the rankings assigned.

Therein, important stories are being told about companies on the list or assigned a high ranking or in an index. Investors can better understand the why and how of the selection.

(And, we should say, stories are told in the ratings & rankings et al processes about those companies that are omitted or not selected or having a lower rating compared to peers).

For example, look at investable products. S&P Global recently launched an index based on the widely-used benchmark, the S&P 500(R), focused on ESG performance. The bottom 25% — 100 companies! — were not included in the first go-round. Story subtly told – company is in or out.

Besides the welcomed opportunity for corporate leaders to bask in the sunshine of the valued third party recognitions (“look, we got in this year’s best companies list focused on…”), and to admire the reflection in the “best of mirror mirror” on the board room or C-Suite wall, there are very practical aspects to these things.

Such as: As explained, the inclusion of a corporation in a key ESG equity index / investing benchmark or investable product offering and more recently, reflections of the company in the mirror mirror of credit risk ratings and ratings opinions on fixed-income instruments.

The decision to issue a “green” bond to the market may or will be affected by third party views of the planned issue – green enough or not! That’s beginning to happen in the EU markets.

The Positives

With the many in-depth third party examinations of companies’ ESG strategies and resulting outcomes (considering company’s actions, performance, achievements) now taking place, and with the results becoming more transparent, some of the scoring / ranking / etc results have the effect of enabling a more complete, accurate and comparable corporate ESG profile to be developed by the company.

With better understanding of the ranking & rating etc the issuer’s leadership can assign more resources to improve their public ESG profile, especially those developed by the key ESG rating agencies for their investor clients.

Important to understand in 2020: These close examinations of companies’ ESG performance are becoming more and more decision-useful for portfolio management for asset owners and managers.

And lenders, And bankers. And the company’s insurers. And business partners. And customers. And present and future employees wanting to work for a more sustainable, doing-the-right-thing company.

As board room top leaders better understand the importance of these ratings, rankings etc. exercises (and the importance of engaging with raters & rankers & list makers), with more internal resources allocated to the task of improving the profile — the company will tend to make more information publicly-available for the third party examinations.

The virtuous cycle continues — more information disclosed and explained, better ratings could result, year-after-year. As we always say, it is a sustainability journey.

More ESG information is now being made public by companies for delivery on critical ESG delivery platforms (such as on “the Bloomberg” and the Refinitiv Eikon platforms, in S&P Global platforms).

This in turn leads to better packaging of ESG data and narrative to inform and influence investors; and, leads to improved investment opportunity for being recognized as a leader in a particular space by key investor coalitions (ICCR, INCR, Investor Alliance on Human Rights, Climate Action 100+, and other).

The latter means a multiplier effect — quickly bringing the company’s sustainability news to more investors gathered in a community-of-interest on a topic.

(Think of the volumes of information now being made available by companies focused on GHG emissions, climate change risk, diversity & inclusion, labor rights, human rights, reducing ESG impacts on communities, greater supply chain accountability, use of renewable energy, water conservation, and more,)

Mirror, Mirror 2020: At the recent World Economic Forum meeting Davos, Switzerland, the “100 most sustainable companies of 2020” report was announced.

Publisher Corporate Knights’ much-anticipated annual ranking of “most sustainable companies in the world” was the basis of the announcement.

That annual survey looks at 7,400 companies having more than US$1 Billion in revenues, examining 21 KPIs. The stories of the companies from Fast Company and The Hill provide the details for you. (This is the 17th year of the survey.)

At the Davos gathering this year, participants learned that almost half of the most sustainable companies were based in Europe (49); 17 were HQ in the U.S.A; 12 in Canada; 3 in Latin America, 18 in Asia, and one company in Africa.

For the U.S.A., Cisco Systems is highest ranked (at #4, thanks to $25 billion generated for “clean revenues” from products with “environmental core attributes”). The #1 company is worldwide is Orsted of Denmark (renewable energy).

Our G&A Institute team closely monitors these and many other third party rankings, ratings, scores, corporate ESG profiles, and other critical evaluations of companies.

This is an example of the knowledge we gain in this [ratings/rankings] arena, which becomes a vital part of the various tools and resources we’ve created to help our corporate clients qualify for, get selected for, and lead in the various “best of lists”.

In sum, achieving better rankings, ratings, scores — so their mirror mirror on the wall question reflects back a very welcoming image!

In these newsletters, we work to regularly share with you the relevant news items and other content that helps to tell the story of the dramatic changes taking place in both the corporate community and in the capital markets as as the focus on corporate ESG sharpens. Like this week’s Top Stories.

Top Stories for This Week

The 100 most sustainable companies of 2020
Source: The Hill – A ranking of the most sustainable organizations was unveiled at the World Economic Forum in Davos, Switzerland, Tuesday.

These are the most sustainable corporations in the world
Source: Fast Company – Canadian research firm Corporate Knights releases its annual list of most sustainable corporations in the world, with some new entries in the top 10.

For a the complete list and important background, go to:
Corporate Kings’ 2020 Global Ranking

And also from Davos:
World Economic Forum calls on business chiefs to set net-zero targets
Source: Edie.com – In a letter from the Forum’s Founder and executive chairman Klaus Schwab and the heads of Bank of America and Royal DSM Brian Moynihan and Feike Sijbesma, businesses have been urged to respond to climate science through the…

Sustainability Update

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