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ESG developments this week
In Washington, DC and around the world
SEC weighs human capital disclosures
On August 18, SEC Chairman Gary Gensler tweeted: to explain for investors, asset managers and corporations what the next step on the SEC’s ESG agenda is. He wrote:
Investors want to better understand one of a company’s most critical assets: its people.
I have asked staff to propose recommendations for the Commission’s consideration on human capital disclosure.
This can include a number of metrics such as employee turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.
In recent months, ESG proponents have focused on expanding the kind of disclosures companies should focus on, arguing that the E (environmental) aspect of ESG should not override the S (social) aspect.
Chinese companies oppose ESG debt
According to Bloomberg, Chinese companies are opposing the global trend toward sustainability-oriented debt. Most of the rest of the worldand most of the rest of Asiahave embraced debt instruments that adjust interest rates in line with measured compliance with ESG metrics and promises (ie the closer you are to the metric, the lower your rate; the farther you are, the higher the rate). Bloomberg speculates on the reasons for the resistance of companies based in China:
Chinese companies are lagging behind their regional competitors in a key financing method to meet sustainability goals, even as the world’s second largest economy aims to become carbon neutral by 2060.
So-called sustainability loans typically offer creditors additional margins if borrowers fail to meet their environmental targets, incentivizing companies to put in extra effort. While the volume of such debt in the rest of Asia-Pacific has grown at a record pace, few deals are being made in China.
The volume of sustainability loans is faltering in China, in part because, in a market that is heavily focused on official statements, policymakers have said little about it while encouraging other forms of sustainable finance. For example, environmental lending guidelines by the Peoples Bank of China published in late May emphasized green lending but did not mention sustainability-linked debt.
Chinese borrowers may also be reluctant to risk damaging their green reputation by missing the targets specified by the loans.
Report Suggests Higher ESG Risks For Asian Companies
Last weekend, the Federation of Korean Industries (FKI) released its analysis of a recent Sustainalytics report that tracks the ESG risks of thousands of companies around the world. According to FKI the report shows that Asian companies are considered to have higher ESG risks, leaving European countries significantly behind:
Asian companies face higher environmental, social and governance (ESG) risks than companies in Europe, the Federation of Korean Industries (FKI) said Sunday.
The FKI has released an analysis of the ESG risk assessments of 3,456 companies around the world released earlier this month by research firm Sustainalytics. The FKI used raw data from Sustainalytics for its ‘Global Companies ESG Risk Map’.
ESG risks refer to issues that can affect a company’s performance and value. A company’s ESG risk assessment score may vary by rating agency, as each of the factors carries a different weight.
Companies listed on the Greater China stock markets had the highest level of ESG risk in the world, with an average of 36.1 points for companies listed on the Shanghai Stock Exchange, 32.9 points for companies on the Shenzhen Stock Exchange and 30.5 points for companies on the Hong Kong Stock Exchange. Kong scholarship.
Companies listed on the Korea Exchange had the fourth highest ESG risk, averaging 30.1 points. Companies listed on the National Stock Exchange of India were the fifth highest, with 28.6 points.
The lowest scores came from European countries, with 20.6 points for companies listed on Euronext and 21.6 points for companies on the London Stock Exchange. They were followed by the Nasdaq at 22.1 and 22.4 for the Taiwan Stock Exchange.
On Wall Street and in the Private Sector
The UN Climate Report and ESG
Earlier this month, the United Nations Intergovernmental Panel on Climate Change released a summary of the first part of its latest report on climate change. It’s already impacting ESG investment professionals:
The assessment by the Intergovernmental Panel on Climate Change, released Monday, should prompt investors to review their commitments to tackle climate change and take action, said Fiona Reynolds, chief executive of the UN-backed Principles for Responsible Investment. .
Praxis Mutual Funds, one of the oldest socially responsible investment firms, which manages about $2 billion, said the IPCC report demonstrates the need to act faster in the short term and invest in green debt that can have a greater real-world impact. It changes the calculus, said Chris Meyer, manager of research and advocacy for stewardship. We will have to have a sharper focus. This report shows that investors are not acting fast enough.
Schroders is one of the fund managers committed to setting up a path to net zero. The adoption of these targets has not yet reduced emissions, as the IPCC report makes clear. Finance alone cannot solve the climate threat. Ultimately, this is a matter of any group taking significant and sustained steps to reduce emissions, said Andy Howard, Schroders’ head of sustainable investment. Anyone looking at the same image and data should definitely come to a similar conclusion.
With the scientific consensus now clear that the global average temperature is very likely to rise at least 1.5 degrees Celsius above pre-industrial levels by 2040, investors may need to pay even more attention to their contribution to limiting warming. That’s where temperature tuning stats come in. These rank portfolios are based on the expected production of greenhouse gases in their possession.
It can be helpful to show what a fair share a given company has to do to meet its carbon budget and how companies can be exposed to valuing the impact of the transition, said Christopher Kaminker, head of research and strategy for sustainable investments at Lombard. Odier Group.
The perceived conflict between those who now believe that ESG investors should be more committed than ever to addressing what they describe as a climate crisis and those who (as documented above) believe that ESG can and should focus more on social impact and social justice will arise investors with both uncertainties and opportunities, according to Pensions & Investments:
It is possible for investors to meet the challenge identified in the IPCC report, said Gordon L. Clark, a professorial fellow at Oxford University’s Smith School of Enterprise and the Environment. “The climate crisis offers huge opportunities for investors with a horizon of 15, 20 or 30 years. It’s an opportunity that long-term investors will embrace and continue to embrace. You can already see that with UK and European pension funds investing in alternative energy solutions, said Mr Clark. “It is the duty of pension administrators to invest in the future.”
In the spotlight
More pressure and rewards for ESG performance
An ESG tactic that appears regularly in this newsletter is the application of: alignment theory to ESG performance. For decades, companies have been rewardingor punishedmanagers and directors for business performance by linking their pay to the success of their company (or lack thereof). Typically, executives and others are compensated with stock in their company, meaning they will be rewarded if the company does well and attract investment and will do poorly if the reverse occurs. Over the past year, many companies have begun to move alignment theory in a different direction, linking executive compensation to performance based on ESG metrics rather than (or in addition to) stock market performance. .
In Europe, this trend has taken on a new dimension, with an emphasis on the role of the financial sector in promoting ESG, such as: Bloomberg reports:
European bankers will soon have to show that they contribute to a cleaner environment, a better society and good governance – or receive a smaller salary package.
In the latest sign that ESG is reforming funding, most of the 20 major European banks surveyed by Bloomberg said they were either working on, or already had, a model that links employee pay to a company’s performance in in the field of sustainability measures. That’s because European regulators are explicitly adding ESG risks to compensation guidelines, and the change is due to take effect by the end of 2021.
Nicole Fischer, who advises German financial institutions on compensation at Willis Towers Watson, said the industry is now in a transformation phase where ESG is firmly anchored in compensation.
The development opens a new avenue for policy makers in Europe to try to redefine capitalism. The ultimate goal is ideally to make it financially attractive to be good.
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