|by Hank Boerner – Chair & Chief Strategist – G&A Institute
The popular corporate equity “baskets” including the Dow Jones Industrial Index, Nasdaq 100, S&P 500, the Russell 1,000 – 2,000 – and 3,000– in essence consist of the underlying value of the corporate shares in each basket (or benchmark for investors).
Today, there is an ocean of stock indexes for asset managers to license from the creators and then apply process and approaches for keeping track of the companies in the fiduciary portfolio, or to analyze and pick from the underlying issues for their portfolio.
Alternative benchmarks and indexes may be dependent on market cap size and have variations in the index family to fine tune the analysis (think of the varieties of Wilshire, Russell, S&P Dow Jones, etc.).
There has been a steady move by many asset managers from “active management” to passive investment instruments, with this transition key benchmarks become an important tool for the analyst and portfolio manager.
One large-cap index really dominates the capital markets: The S&P 500.
G&A Institute’s Annual S&P 500® Research
Here’s why: The S&P 500 Index is the most-widely-quoted index measuring the stock performance of the 500 largest investable companies listed on American stock exchanges. Asset managers licensees like State Street, MCSI, Invesco Capital and London Stock Exchange Group use this index for their constructing ETFs and other investable products.
This universe of public companies provided for our team a solid foundation for tracking and analyzing the activities of these 500 companies as they began or expanded their sustainability reporting. In 2011, that first year. we found just about 20% of the 500 were publishing sustainability reports.
And here’s the dramatic news:
Tracking the Trends
We charted the broad impact of these market-leading enterprises on such reporting frameworks and standards as the GRI and SASB as those standards evolved and matured and were adopted by the companies in the 500. We saw…
CDP disclosure steadily expanded in structured reports and (stand alone) corporate responses to CDP on carbon emissions, water, supply chain, forestry products.
The adoption of UN Sustainable Development Goals (SDGs) by companies as they were in some way conceptually a part of a company’s sustainability strategy (and subsequent reporting).
And more recently, there was the adoption of TCFD recommendations by corporate issuers in the U.S. – that began to show up in reports recently.
Starting with 2010 reporting, the first G&A analysis, we’ve shared the highlights of the research efforts.
Teams of talented, passionate and bright analyst-interns developed each year’s report (you can see who they are/were in G&A’s Honor Roll on our web site). Most of the team members have moved on to career positions in the corporate, investment, public sector and NGO communities.
We’ve organized the deliverable for both quick scanning and concentrated reviewing. Let us know if you have questions about the research results.
Stay tuned to G&A’s upcoming Russell 1000 Index® analysis of 2019 reporting.
This second important index/benchmark was created several decades ago by the Frank Russell Company and is now maintained by FTSE Russell (subsidiary of the London Stock Exchange Group)
The largest companies by market cap companies are available as benchmarks for investors in the S&P 500 (largest cap) and for the next 500 in the Russell 1000.
The ripple effects of the S&P 500 companies and more recently some of the Russell 1000 companies on corporate sustainability disclosure and reporting is fascinating for us to track.
Many mid-cap and small-cap companies are now adopting similar reporting policies and practices. Privately-owned companies are publishing similar reports. All of this means volumes of ESG data and narrative flowing out to investors – and fueling the growth of sustainable investing. We find this all very encouraging in our tracking of corporate reporting.
Here are the details for you:
90% of S&P 500 Index Companies
What is Greenwashing? The Importance of Maintaining Perspective in ESG Communications
New report measures boardroom diversity at top S&P 500 companies
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).
T. Rowe Price: The proposed rule is attempting to solve a problem that does not exist. Worse, the proposed rule discourages fiduciaries from taking into account ESG factors that should be considered.
ICCR/Interfaith Center on Corporate Responsibility: The rule would impose significant analytical and documentation burdens on fiduciaries of benefit plans governed by ERISA wishing to select (or allow individual account holders to select) investments that use ESG factors in investment analysis, or that provide ESG benefits (signed by 138 member institutions).
ESG Global Advisors: The Proposal has misunderstood and/or mischaracterized the nature and purpose of ESG integration…this is likely to lead to confusion for ERISA fiduciaries and additional costs to plan savers. Plan fiduciaries will struggle to fulfill their obligation to integrate all financially-material ESG risk factors into their investment process.
Morningstar: The Department’s rule is out of step with the best practices asset managers and financial advisors use to integrate ESG considerations into their investment processes and selections. The proposed rule would…erect barriers to considering ESG factors that many financial professionals consider as a routine part of investment management…
Voya Financial Inc.: The Proposal is fundamentally flawed for two reasons…among the many qualitative factors an ERISA fiduciary may appropriately consider…the Proposal singles out ESG factors and subjects them to special tests…second, the Proposal fails to account for the positive effect on investment behavior that the availability of ESG-focused investment options can have…
American Retirement Association: …appropriate investments that include ESG factors should not be prohibited from qualifying as Qualified Default Investment Alternatives (“QDIAs”)…
The Wagner Law Group: The proposed amendment is inconsistent with existing law and guidance…it would require fiduciaries to only consider pecuniary factors instead of using their judgment and discretion to evaluate investments under the totality of circumstances…a narrow list of permissible factors is inconsistent with the notion that prudence is not determined by a checklist and is a fact-specific determination…
BlackRock: …the Proposal creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially-material ESG factors…we urge DOL to engage with the industry to understand how investment options incorporating ESG factors are used in ERISA plans…
Members of Congress – the body that passed ERISA during its 93rd session in 1974 – reacted along partisan lines.
Republican members of the House Committee on Education and Labor submitted a letter of support of the DOL action.
Democrat Party members (41 of them) of the House and 20 members of the House Education and Labor Committee expressed opposition to the rule changes.
The Securities & Exchange Commission is looking at ESG investments as well – soliciting public comment “for the appropriate treatment for funds that use terms such as ESG in their name and whether the terms are likely to mislead investors” (also in the Federal Register post).
In May 2020 the SEC Investor Advisory Committee / Investor-as-Owner Subcommittee issued their perspectives on ESG disclosure: https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf
There are more details for you here (the investor response summaries): https://401kspecialistmag.com/commenters-hammer-dol-on-proposed-esg-rule/
The Department of Labor’s EBSA proposal highlights are here as published in the Federal Register, June 30, 2020: https://ga-institute.com/Sustainability-Update/big-news-out-of-the-u-s-department-of-labor-for-fiduciaries-opportunity-to-utilize-esg-factors-in-investment-analysis-and-portfolio-management/
Notes: The Secretary of Labor is Eugene Scalia, a nominee of President Donald Trump.
Acting Assistant Secretary for EBSA is Jeanne Klinefelter Wilson (appointed in June 2020).
There is an ERISA Advisory Council with six members. Effective July 14, 2020:
- Glenn Butash is chair; he is managing counsel at Nokia Corp.
- David Kritz is vice-chair; he is deputy counsel at Norfolk Southern Corp.
- John Harney is partner at law firm O’Donoghue and O’Donoghue.
- Peter Wiedenbeck is Washington University School of Law professor.
- James Haubrock is CPA and shareholder, Clark Schaefer Hackett.
- Lisa Allen is compliance consultant, Altera Group.
Stay Tuned: We will update you when decisions are announced by the Department of Labor.
by Hank Boerner – Chair & Chief Strategist – G&A Institute
People have questions about corporate sustainability / ESG / responsibility / citizenship disclosure and reporting. Such reporting has been on a hockey stick rise in recent years.
Should ESG/sustainability etc reporting be regulated? How? What would be regulated in terms of disclosure and reporting – what should the guidelines for corporate issuers be? Does this topic become a more important part of the SEC’s ongoing Reg S-K (disclosure) revamping? What information do investors want? What do companies want to have covered by regulation? Many questions!
Some answers are coming in the European Union for both issuers and investors with new and proposed regulations.
And in the main will have to come in the U.S.A. from the Securities & Exchange Commission — at some point.
SEC was created with the adoption of the Securities Exchange Act of 1934. The agency was specifically created by the U.S. Congress to oversee behaviors in the securities and markets and the conduct of financial professionals.
Publicly-traded company reporting oversight is also an important part of the SEC mission. The 1933 and 1934 acts and other subsequent legislation (all providing statutory authority for rulemaking and oversight) provide the essential framework for SEC to do its work.
As Investopedia explains for us, the purpose of the 1934 act is “to ensure an environment of fairness and investor confidence.” The ’34 act gave SEC broad authority to regulate all aspects of the securities industry and to enforce corporate reporting by companies with more than US$10 million in assets and shares held by 500 or more shareowners.
An important part of the ongoing SEC’s mission, we should say here, is to protect investors and be open to suggestions “from the protected” to improve the complicated regimes that guide corporate disclosure. So that investors have the information they need to make buy-sell-hold decisions. Which brings us to S-K.
In recent months, the SEC staff has been working on the steps to reform and updates segments of Reg S-K and has been receiving many communications from investors to suggest reforms, updates, expansion of, corporate disclosure. (Details are below in the news release from SEC in 2019. The SEC proposed rule changes, still in debate, are intended to “update rules” and “improve disclosures” for investors and “simplify compliance efforts for companies”.)
Regulation S-K provides standard instruction for filing forms required under the 1933 and 1934 acts and the Energy Policy and Conservation Act of 1975.
Especially important in the ongoing initiative to update Reg S-K, we believe: the setting out for SEC staff and commissioners of facts and perspectives so that serious consideration is given to the dramatic sea changes in (1) the growth of sustainable investing and the related information needs; (2) and, the vigorous corporate response, particularly in the form of substantial sustainability / ESG reports issued.
Most of the corporate reports published in recent years have been focused on the recommended disclosures as advanced by popular frameworks and widely-recognized reporting standards (such as those of GRI, SASB, CDP, TCFD, et al).
Will we see SEC action on S-K rules reform that will draw applause from the sustainable investors? Now, we point out, including such mainstream players as BlackRock, State Street and Vanguard Funds, to name but a few owners found in almost every corporate top holder list.
Ah, Depends. Political winds have driven changes in rules at SEC. Then again, it is an election year. (To be kept in mind: There are five SEC commission members; two are appointed and confirmed Democrats, two are Republicans – and the chair is nominated by the president…right now, a Republican holds that position.)
Investor input is and should be an important part of SEC rule making. (All of the steps taken by the Commission to address such items as corporate disclosure and reporting in adopting or amending the rules have to follow the various statutes passed by the congress related to the issue. Investor and stakeholder input is an important part of the approach to rule-making. Sustainable investing advocates have been making their views abundantly clear in this initiative to update Reg S-K.)
The SEC Investor Advisory Committee formally makes recommendations to the agency to help staff and commissioners be aware of investor sentiment and help to guide the process through the advice provided.
Recently the committee voted to make recommendations to the SEC on three topics: (1) accounting and financial disclosure; (2) disclosure effectiveness; and, (3) ESG disclosure.
The committee said they decided that after 50 years of discussion on ESG disclosure it is time to make a move, now that ESG / sustainability are recognizably important factors in investing. Given the current political environment in Washington, there probably won’t be much movement at SEC on the issue, many experts agree.
But the marker has been strongly set down in the committee’s recent report, one of numerous markers set down by sustainable investment champions.
Commissioner Hester M. Pierce addressed the Investor Advisory Committee, and shared her perspectives on ESG reporting. “The ambiguity has made the ESG debate a difficult one…” She thinks “the call to develop a new ESG reporting regime…may not be helpful right now…” (She is a Republican nominee, a lawyer in academia.)
We have included her comments in the selection of four Top Stories for you. Another of the items – the comments of SEC Chair Jay Clayton along the same lines about ambiguity and confusion of ratings etc. (he is also a Republican appointee).
To which sustainable investing proponents might say – if not now, when, SEC commissioners!
While the conversation may at times be focused on “what do investors want,” there is also wide agreement among corporate boards and executives that guidance and standardization in corporate ESG / sustainability et al reporting would be very helpful.
With the current comments of the leadership of SEC we are not quite there yet.
Interesting footnote: The October 1929 stock market crash helped to plunge the nation into the Great Depression. The 1932 presidential elections resulted in New York Governor Franklin Delano Roosevelt (a Democrat) moving to the White House in March 1933 and swiftly taking action to address important public policy issues. He brought him his “brains trust”, experts in various public policy issues that helped to create sweeping reforms and creation of powerful regulatory agencies — such as the SEC.
The story goes that there was so much to do that the financial markets and corporate oversight legislation had to be divided into two congressional sessions – in 1933 and 1934 (the congress met for shorter periods in those days – the members were part-timers). Thus, the Securities Act of 1933 and the 1934 act.
Regulation overall was then and today is a very complicated topic!
SEC’s Investor Advisory Committee Makes Disclosure Recommendations (Source: Cooley PubCo)
SEC Chair Warns of Risks Tied to ESG Ratings
(Source: Financial Times)
In addition, see:
by Hank Boerner – Chair & Chief Strategist, G&A Institute
February 26, 2020
The importance of the work over the recent years of the Sustainable Accounting Standards Board in developing industry-specific ESG disclosure recommendations was underscored with the recent letters to company leadership from two of the world’s leading asset management firms.
Corporate boards and/or executive teams received two important letters in January that included strong advice about their (portfolio companies’) SASB disclosures.
BlackRock CEO Larry Fink explained to corporate CEOs his annual letter: “We are on the edge of a fundamental reshaping of finance. Important progress in improving disclosure has been made – many companies already do an exemplary job of integrating and reporting on sustainability but we need to achieve more widespread and standardized adoption.”
While no framework is perfect, BlackRock believes that the SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics.
In 2020, BlackRock is asking companies that the firm invests in on behalf of clients to publish a disclosure in line with industry-specific SASB guidelines by year end (and disclose a similar set of data in line with the TCFD’s recommendations).
In a thought paper, BlackRock explained that disclosures intended for investors need to focus on financially material and business relevant metrics and include supporting narratives. The recommendations of the TCFD and the SASB (standards) are the benchmark frameworks for a company to disclose its approach to climate-related risks and the transition to a lower carbon economy.
Absent such robust disclosure, investors could assume that companies are not adequately managing their risk. Not the right message to send to current and prospective investors in the corporation, we would say.
State Street Sends Strong Signals
Separately, State Street Global Advisors (SSgA) CEO Cyrus Taraporevala in his 2020 letter to corporate board members explained: “We believe that addressing material ESG issues is a good business practice and essential to a company’s long-term financial performance – a matter of value, not values.”
The asset management firm [one of the world’s largest] uses its “R-Factor” (R=“responsibility”) to score the performance of a company’s business operations and governance as it relates to financially material and sector-specific ESG issues.
The CEO’s letter continued: The ESG data is drawn from four leading service providers and leverages the SASB materiality framework to generate unique scores for 6,000+ companies’ performance against regional and global industry peers. “We believe that a company’s ESG score will soon effectively be as important as it credit rating.”
The Sustainable Accounting Standards Board
About SASB’s continuing progress: Recommendations for corporate disclosure centered on materiality of issues & topics were fully developed in a multi-party process (“codified”) concluding in November 2018 for 77 industry categories in 11 sectors by a multi-party process.
The recommendations are now increasingly being used by public companies and investors as important frameworks for enhanced corporate disclosure related to ESG risks and opportunities.
To keep in mind: A company may be identified in several sectors and each of these should be seriously considered in developing the voluntary disclosures (data sets, accompanying narrative for context).
Bloomberg LP (the company headed by Mayor Michael Bloomberg, now a presidential candidate seeking the Democratic nomination) is a private company but publishes a SASB Disclosure report. (Bloomberg is the chair of SASB as well as the leader of his financial information firm.)
The company published “robust” metrics using the SASB on three industry categories for 2018: Internet & Media Services; Media & Entertainment; Professional & Commercial Services.
Bloomberg LP is privately-owned; this was an example for public company managements. The report explained:
“The nature of our business directs us to consult three industries (above). We provide a distinct table for each…containing topics we have identified as material and against which we are able to report as a private company. Quantitative data is followed by narrative information that contextualizes the data table and is responsive to qualitative metrics.”
Solid advice for company boards and executives beginning the expansion of disclosure using the SASB.
SASB provides a Materiality Map for each sector (SASB uses its SICS® – The Sustainability Industry Classification System) and provides a Standards Navigator for users. There is also an Engagement Guide for investors to consider when engaging with corporates; and, an Implementation Guide for companies (explaining issues and SASB approaches).
The fundamental tenets of SASB’s approach is set out in its Conceptual Framework: Disclosures should be Evidence-based; Industry-specific; Market-informed. The recommended metrics for corporate disclosure include fair representation, being useful and applicable (for investors), comparable, complete, verifiable, aligned, neutral, distributive.
Accounting and Audit Professionals Advised: Tune In to SASB
Separate of the BlackRock and SSgA advice to companies and investors, accounting and auditing professionals working with their corporate clients are being urged to “tune in” to SASB.
Former board member of the Financial Accounting Standards Board (“FASB”) Marc Siegel shared his thoughts with the New York State Society of CPAs in presenting: “SASB: Overview, Trends in Adoption, Case Studies & SDG Integration”. The Compliance Week coverage is our Top Story in the newsletter this week.
Marc Siegel is a Partner in E&Y’s Financial Accounting Advisory Service practice, served a decade on the FASB board (managers and shapers of GAAP) and was appointed to the SASB board in January 2019.
He was in the past a leader at RiskMetrics Group and CFRA, both acquired by MSCI, and is recognized as a thought leader in financial services – his views on SASB will be closely followed.
With the growing recognition of the importance of SASB recommendation for disclosure to companies and the importance of SASB’s work for investors, he encouraged the gathered accountants to get involved and assist in implementing controls over ESG data, suggesting that SASB standards are a cost-effective way for companies to begin responding to investor queries because they are industry-specific.
Accountants, he advised, can help clients by putting systems in place to collect and control the data and CPA firms can use SASB standards as criteria to help companies that are seeking assurance for their expanding sustainability reporting.
This is an important call to action for accounting professionals, helping to generate broader awareness of the SASB standards for those working with publicly-traded companies and for internal financial executives.
The G&A Institute team has been working with corporate clients in recent years in developing greater understanding of the SASB concepts and approaches for industry-specific sustainability disclosure and helping clients to incorporate SASB standards in their corporate reports.
We’ve also been closely tracking the inclusion of references to “SASB” and inclusion of SASB metrics by public companies in their reporting as part of our GRI Data Partner work. ‘
The G&A Institute analyst teams examine and assess every sustainability report published in the USA and have tracked trends related to how companies are integrating SASB disclosures into their reporting.
What began as a trickle of SASB mentions in corporate reports several years ago is now increasing and we are capturing samples of such inclusions in our report monitoring and analysis.
Over the past four+ years we’ve developed comprehensive models and methodologies to assist our corporate client teams incorporating SASB disclosures in their public-facing documents (such as their sustainability / responsibility / citizenship reports, in Proxy Statements, for investor presentations and in other implementations).
Our co-founder and EVP Louis Coppola was among the first in the world (“early birds”) to be certified and obtain the SASB CSA Level I credential in 2015.
If you’d like to discuss SASB reporting for your company and how we can help please contact us at firstname.lastname@example.org
There’s information for you about our related services on the G&A Institute web site: https://www.ga-institute.com/services/sustainability-esg-consulting/sasb-reporting.html
Benefits of sustainability reporting: takeaways for accounting
Source: Compliance Week – According to former Financial Accounting Standards Board (FASB) member Marc Siegel, companies are being asked for sustainability information from many sides and are facing a bumpy road because they are under pressure due to pervasive…
by Hank Boerner – G&A Institute Chair & Chief Strategist
January 2020 — Here we are now in a new year, and new decade (already, the third decade of the 21st Century) and much of the buzz is all about (1) climate change and the dramatic impacts on business, finance, government and we humans around the globe; and (2) many investors are moving their money to more sustainable investments.
Oh, of course, there are other important conversations going on, such as about corporate purpose, corporate stewardship, human rights, the circular economy, worker rights, supply chain responsibility, reducing GHG emission, conserving natural resources, moving to a greener and lower carbon economy, workplace diversity, what happens to workers when automation replaces them…and more.
But much of this is really part of sustainable investing, no? And corporate purpose, we’d say, is at the center of much of this discussion!
The bold names of institutional investors/asset management are in the game and influencing peers in the capital markets – think about the influence of Goldman Sachs, BlackRock (world’s largest asset manager), State Street/SSgA, The Vanguard Group, and Citigroup on other institutions, to name here but a handful of major asset managers adopting sustainable investing strategies and approaches.
This week’s Top Story is about Goldman Sachs Group Inc’s pivot to “green is good”, moved by Reuters news service and authored by Chris Taylor. The GS website welcome is Our Commitment to Sustainable Finance.
The company announced a US$750 billion, 10-year initiative focused on financing of clean energy, affordable education and accessible healthcare, and reduction of or exclusion of financing for Arctic oil-gas drilling.
Head of GS Sustainable Finance Group John Goldstein explains the company’s approach to sustainable financing and investment in the Reuters story.
Our other Top Story is from Morningstar; this is an update on the investors’ flows into sustainable funds in 2019…what could be the leading edge of a huge wave coming as new records are set.
For 2019, net flows into open-end and ETF sustainable funds were $20.6 billion for the year just ended – that’s four times the 2018 volume (which was also a record year). There’s always information of value for you on the Morningstar website; registration is required for free access to content.
And the commentary on the January 2020 letter from BlackRock CEO Larry Fink to the CEOs of companies the firm invests in – we’ve included a few perspectives.
We’d say that 2020 is off to an exciting start for sustainability professionals, in the capital markets, and in the corporate sector! Buckle your seat belts!
Top Stories for This Week
Green is good. Is Wall Street’s new motto sustainable?
Source: Reuters – If you have gone to Goldman Sachs Group Inc’s (GS.N) internet home page since mid-December, it would be reasonable to wonder if you had stumbled into some kind of parallel universe.
Sustainable Fund Flows in 2019 Smash Previous Records
Source: MorningStar – Sustainable funds in the United States attracted new assets at a record pace in 2019. Estimated net flows into open-end and exchange-traded sustainable funds that are available to U.S. investors totaled $20.6 billion for the…
While the Federal Government Leaders Poo-Pooh Climate Change, the Sovereign State of California Continues to Set the Pace for America and the World!
Focus on The State of California – the America’s Sovereign State of Superlatives Including in the Realm of Societal Sustainability…
By Hank Boerner – Chair and Chief Strategist – G&A Institute
We are focusing today on the “Golden State” – California – America’s sovereign state of sustainability superlatives!
The U.S.A.’s most populous state is forceful and rigorous in addressing the numerous challenges of climate change, ESG issues, sustainable investing and other more aspects of life in this 21st Century.
Think about this: California is by itself now the fifth largest economy in the world. The total state GDP (the value of goods & services produced within the borders) is approaching US$ 3 trillion. The total U.S.A. GDP is of course the largest in the world (it includes California GDP) and then comes China, Japan, Germany… and the state of California!
The California population is about 40 million people – that means that roughly one-in-eight people in the U.S.A. live in the Golden State.
Stretching for 800+ miles along the coastline of the Pacific Ocean, California is third largest in size behind Alaska (#1) and Texas and takes the honor of setting the example for the rest of the U.S.A. in societal focus on sustainability.
Most investors and public company boards and managements know that the large California pension fund fiduciaries (institutional investors) often set the pace for U.S. fiduciary responsibility and stewardship in their policies and activities designed to address the challenges of climate change, of global warming effects.
The state’s two large public employee pension funds — CalPERS (the California Public Employees’ Retirement System) and CalSTRS (the California State Teachers’ Retirement System) have been advocates for corporate governance reforms for public companies whose shares are in their portfolios.
CalPERS manages more than US$350 billion in AUM; CalSTRS, $220 billion.
A new law in California this year requires the two funds to identify climate risk in their portfolios and to disclose the risks to the public and legislature (at least every three years)
CalSTRS and CalPRS will have to report on their “carbon footprints” and progress made toward achieving the 2-Degrees Centigrade goals of the Paris Accord.
Looking ahead to the future investment environment — in the emerging “low carbon economy” — CalPERS is pointing more of its investments toward renewable energy infrastructure projects (through a direct investment program). The fund has invested in two solar generation facilities and acquired a majority interest in a firm that owns two wind farms.
Walking the Talk with proxy voting: long an advocate for “good governance,” CalPERS voted against 438 board of director nominees at 141 companies this year in proxy voting. CalPERS said this was based on the [companies’] failures to respond to it effort to engage with corporate boards and managements to increase board room diversity.
CalPERS’ votes including “no” cast on the candidacy of numerous board chairs, long-term directors and nominating & governance committee chairs. This campaign was intended to “create heat” in the board room to increase diversity. CalPERS had solicited engagements with 504 companies — and more than 150 responded and added at least one “diverse” director. CalSTRS joins its sister fund in these campaigns.
During the year 2018 proxy voting season, to date, CalPERS has voted against executive compensation proposals and lack of diversity in board room 43% of the time for the more than 2,000 public companies in the portfolio.
Other fiduciaries in the state follow the lead of the big funds.
The San Francisco City/County Employee Retirement Fund
The San Francisco Employees’ Retirement System (SFERS) with US$24 billion in AUM recently hired a Director of ESG Investment as part of a six-point strategy to address climate risk. Andrew Collins comes from State Street Global Advisors (SSgA) and the Sustainable Accounting Standards Board (SASB – based in SFO) where he helped to develop the ESG accounting standards for corporations in 80 industries.
The approach Collins has recommended to the SFERS Investment Committee:
- Engagement through proxy voting and support for the Investor Network on Climate Risk (INCR) proxy resolutions.
- Partnerships with Climate Action 100+, Principles for Responsible Investment (PRI), Ceres, Council of Institutional Investors, and other institutional investor carbon-reducing initiatives.
- Active ESG consideration for current and future portfolio holdings.
- Use of up-to-date ESG analytics to measure the aggregate carbon footprint of SFERS assets; active monitoring of ESG risks and opportunities; continued tracking of prudent divestment of risky fossil fuel assets.
The staff recommendations for the six point approach (which was adopted) included:
- Adopt a carbon-constrained strategy for $1 billion of passive public market portfolio holdings to reduce carbon emissions by 50% vs. the S&P 500 Index.
- Hire a director of SRI to coordinate activities – that’s been done now.
As first step in “de-carbonization” the SFERS board approved divestment of ExxonMobil, Royal Dutch Shell and Chevron (September 2018) and will look at other companies in the “Underground 200 Index”. The pension fund held $523 million in equities in the CU200 companies and a smaller amount of fixed-income securities ($36MM).
Important background is here: https://mysfers.org/wp-content/uploads/012418-special-board-meeting-Attachment-E-CIO-Report.pdf
There are 70,000 San Francisco City and County beneficiaries covered by SFERS.
At the May 2017 SFERS board meeting, a motion was made to divest all fossil fuel holdings. An alternative was to adopt a strategy of positive investment actions to reduce climate risk. The board approved divestment of all coal companies back in 2015.
California Ignores the National Leadership on Climate Change
In 2015, the nations of the world gathered in Paris for the 21st meeting of the “Conference of Parties,” to address climate change challenges. The Obama Administration signed on to the Paris Accord (or Agreement); Donald Trump upon taking office in January 2017 made one of his first moves the start of withdrawal from the agreement (about a three year process).
American states and cities decided otherwise, pledging to continue to meet the terms previously agreed to by the national government and almost 200 other nations – this is the “We are still in movement.”
The State of California makes sure that it is in the vanguard of the movement.
This Year in California
The “Global Climate Action Summit” was held in San Francisco in September; outgoing Governor Jerry Brown presided. The meeting attracted leaders from around the world with the theme, “Take Ambition to the Next Level,” designed to encourage collaboration among states, regions, cities, companies, investors, civic leaders, NGOs, and citizens to take action on climate change issues.
Summit accomplishments: there were commitments and actions by participants to address: (1) Healthy Energy Systems; (2) Inclusive Economic Growth; (3) Sustainable Communities; (4) Land and Ocean Stewardship; and (5) Transformative Climate Investments. Close to 400 companies, cities, states and others set “100 percent” renewable energy targets as part of the proceedings.
New “Sustainability” Laws
The California State Legislature passed the “100 Percent Clean Energy Act of 2018” to accelerate the state’s “Renewable Portfolio Standard” to 60% by year 2030 — and for California to be fossil free by year 2045 (with “clean, zero carbon sourcing” assured). Supporters included Adobe and Salesforce, both headquartered in the Golden State; this is now state law.
Governor Jerry Brown issued an Executive Order directing California to achieve “carbon neutrality” by the year 2045 — and to be “net zero emissions” after that.
The state legislature this year passed a “Investor Network on Climate Risk (INCR) ” measure that is now law, directing the California Energy Commission to create incentives for the private sector to create new or improved building and water heating technologies that would help reduce Greenhouse Gas emissions.
Water Use Guidelines
Water efficiency laws were adopted requiring the powerful State Water Resources Control Board to develop water use guidelines to discourage waste and require utilities to be more water-efficient.
About Renewables and Sustainable Power Sources
Walking the Talk: Renewables provided 30% of California power in 2017; natural gas provided 34% of the state’s electricity; hydropower was at 15% of supply; 9% of power is from nuclear. The state’s goal is to have power from renewables double by 2030.
California utilities use lithium-ion batteries to supplement the grid system of the state. PG&E is building a 300-megawatt battery facility as its gas-generating plants go off-line.
Insurance, Insurers and Climate Change Challenges
There are now two states — California and Washington — that participate in the global Sustainable Insurance Forum (SIF); the organization released a report that outlines climate change risks faced by the insurance sector and aims to raise awareness for insurers and regulators of the challenges presented by climate change. And how insurers could respond.
The Insurance Commissioner of California oversees the largest insurance market in the U.S.A. and sixth largest in the world — with almost $300 billion in annual premiums. Commissioner Dave Jones endorsed the 2017 recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (the “TCFD”) and would like to see the now-voluntary disclosures be made mandatory by the G-20 nations. (The G-20 created the Financial Stability Board after the 2018 financial crisis to address risk in the financial sector).
In 2016 the Insurance Commissioner created the requirement that California-licensed insurance companies report publicly on the amount of thermal coal enterprise holdings in portfolio — and asked that the companies voluntarily divest from these enterprises. Also asked: that insurers of investments in fossil fuel companies (such as thermal coal, oil, gas, utilities) survey or “data call” on these companies for greater public financial disclosure.
What About a Carbon Tax for California?
The carbon tax – already in place. California has a “cap and trade” carbon tax adopted in 2013; revenues raised go into a special fund that finances parks and helps to make homes more energy efficient. The per ton tax rate in 2018 was $15.00. The program sets maximum statewide GhG emissions for covered entities in power and industrial sectors and enables them to sell allowances (the “trade” part of cap & trade). By 2020, the Cap and Trade Program is expected to drive more than 20% of targeted GhG emissions still needed to be reduced.
As we said up top, the “Golden State” – California – is America’s sovereign state of sustainability superlatives!
There is more information for you at G&A Institute’s “To the Point!” management briefing platform:
Brief: California Leads the Way (Again) – State’s Giant Pension Funds Must Now Consider Portfolio Climate Risks & Report on Results – It’s the Law