Can there be a list to determine if a company is greenwashing?
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Issue #78: A weekly update on responsible investment.
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\\ Weekly Insights \\
Topic 1: Green Washing
In the 1.5 years I have been writing this newsletter, I have noticed the following ESG learning cycle play out many times:
- ESG will save the world!
- Nope, it is just green-washing
- Slight progress is made in the ESG industry to prevent green-washing
- More acronyms are introduced
- New group of people get interested in ESG
- ESG will save the world!
- Nope, it is just green-washing
- Slight progress is made in the ESG industry to prevent green-washing
- More acronyms are introduced
- New group of people get interested in ESG
- ESG will save the world!
- Etc.
One of the biggest concerns for those of us choosing to spend our careers in ESG, is we do not want it to be a vehicle for helping companies ‘fake their credentials.’ However, anytime there is a new phenomenon that can get you more money, there will be people who try to exploit it. Ie: Re-branding a fund to a green-fund to get more capital but not fundamentally changing anything about the investment approach. It is our role as industry participants to slowly be aware of the risks of green-washing and over time make it harder and harder for bad-actors to exist.
With this in mind, I wanted to highlight a lively LinkedIn thread I saw started by Guido Palazzo, a professor from University of Lausanne on the topic of ESG and green washing:
I would recommend reading the comments from the post directly but overall I think he presents a good starting point of a list. A few of the most helpful additional items from the comments are:
- The board of directors is the active sponsor
- Executive compensation is partly tied into progress
- Quantitative measurement of progress & analysis of variances from targets are formalized as core to understanding success
- Strategies consider social as well as environmental; social challenges are the root of environmental, as people struggling today won’t be able to think about climate tomorrow.
- The company pivots its product or service offering so that sustainability is inbuilt in the business model (and profit structure) and not an extraneous nice-to-have accessory. This way sustainability leads to profit, not simply being a cost centre.
- Public reporting and possibility of independent audit.
- Transparency on the means to achieve objectives
Topic #2: Management Matters
Basecamp is a technology company based out of the US that has recently lost ⅓ of their employees after a controversial blog post from their CEO.
It started with a blog post from their CEO Jason Fried where he outlined a new philosophy:
- No more societal and political discussions on our company Basecamp account.
- No more paternalistic benefits.
- No more committees
- No more lingering or dwelling on past decisions.
- No more 360 reviews.
- No forgetting what we do here.
The post became extremely controversial so the company co-founder David Heinemeier Hansson said the company would offer generous severance packages to anyone who disagreed with the new stance.
A large number of Basecamp employees decided to take Hansson up on his offer, roughly ⅓ of the company’s 57 employees accepted the buyouts. The societal and political statement was the one that created the most controversy.
\\ Nossa News \\
This week is a double issue!
Last week was a UK bank holiday and instead of writing this newsletter I spent the day with some family members that are now vaccinated and I had not been able to see since the pandemic started. It is a lovely thing starting to come to the other side of a tough year and I hope many of you take the time to see family and loved ones. In my view: The ultimate goal of ESG is ensuring we build and grow businesses in a way that allows us to have a healthy planet and strong interpersonal relationships. With this in mind, this will be a meatier issue than normal as I will feature content from the last two weeks. Hope you enjoy!
- Julianne
\\ Top Stories \\
How to Create a Proprietary ESG Investment Process
When creating an ESG methodology you first need to ask yourself: What your organization is trying to achieve — what are your objectives, and what is the strategy for meeting them? Are you about impact investing or is it more of a screening mechanism? Are you using external or internal inputs — in other words, ratings that you ingest and use for scoring, or are you coming up with your own formulation?
The article features a nice framework to understand how you are doing:
ESG BS Detector: iShares Low Carbon ETF
Around the world, investment firms, corporations and governments are scrambling to respond to calls for increased climate action and societal justice with pledges to measure everything against an environmental, social and governance (ESG) yardstick. But in the ESG stampede, insiders warn that too many stocks are getting tossed into green funds without enough oversight. At the heart of the problem is the lack of agreed-upon standards for qualifying for, say, an “ESG-aligned” investment fund. Though that’s starting to change. In March, the U.S. Securities and Exchange Commission announced a new Climate and ESG Task Force in its enforcement division, tasked with “proactively identifying ESG-related misconduct.”
Corporate Knights.
US Companies Boost Sustainability Scores
Investors are demanding more information from companies on everything from carbon emissions to boardroom diversity amid a growing belief that companies which perform well on ESG issues will have a stronger performance financially over time. To help rank companies’ efforts, a number of data providers, including Refinitiv, assess corporate disclosures and other data sources. Investors can use them as a starting point for their own analysis before deciding whether to invest. Latest rankings from Refinitiv based on company annual reports for 2020, shows the average ESG score of 137 U.S. companies, with a market cap of at least $5 billion, is 44.2, compared with 42.8 in 2019.
Reuters.
ESG for start-ups: What responsible investment means for tech innovation
The pandemic has increased the urgency of ESG investment: 55% of investors said the crisis had made ESG factors more important to their investment decisions. This urgency is felt by start-up founders too. In a survey of founders by US accelerator 500 Startups, 90% said they believe ESG practices have become more important since Covid-19. “It is unquestionably way more of a topic than it was even a year ago,” says Edward Lascelles, partner at UK firm AlbionVC. Why? Because start-ups have a social and environmental impact like any other business. The 500 Startups survey identified a zero-tolerance policy on gender and racial discrimination, privacy protections, and carbon emissions reductions targets as relevant ESG measures for start-ups.
Tech Monitor.
BlackRock’s former head of sustainable investing says ESG and sustainability are distractions
Environmental social and governance criteria, a.k.a. ESG, “creates a giant societal placebo where we think that we’re making progress even though we’re not.” Tariq Fancy argues that systematic government oversight is the only way to scalable climate solutions.
“Fancy: While leading the charge to incorporate environmental, social and governance considerations into all of our $8.7 trillion of investment activities at BlackRock, I started realizing that there’s not a lot of value at all in this data. It didn’t — and it does not — work in most [investment] strategies, since many are short-term and don’t care about long-term issues, and also because, frankly, acting irresponsibly is often profitable. I realized this data was not at all useful to invest in, or at least not nearly as much as [Fink] was implying. It was mainly marketing.
Worse, I also started to realize that all the stuff on “stakeholder” capitalism was hollow marketing — it seemed almost intended to dupe the public into believing that we don’t need the overdue government regulation that we need immediately to address the climate crisis.”
Reconciling corporate profitability pressure and ESG risks
Historically, the focus on shareholder return has been the primary objective of company directors. However, the emergence of environmental, social and corporate governance (ESG) risks is forcing directors to give equal consideration to the impact a corporation has on society and the environment.
Failing to seriously consider ESG issues can cause significant damage to businesses since:
- Shareholder activism related to ESG issues is on the rise.
- The impact of ESG is increasingly driving investor decision-making.
- New avenues for litigation risks are opening up.
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\\ Weekly Report Feature \\
ESG Disclosure Landscape for Banks and Capital Markets in Europe
Association for Financial Markets in Europe
This Report has two purposes.
- It provides a detailed inventory of the key elements of the European regulatory landscape for ESG disclosures, as well as the voluntary TCFD Framework, and aims to help the industry navigate its interrelated components by analysing them through different lenses.
- The Report also functions as a practical, easy-to-read summary of how financial institutions can navigate these complex and interrelated requirements.
The timeline captures the evolution and forward-looking timeline for key regulatory milestones with regard to ESG disclosure and reporting for banks — at the entity and product level, highlighting specific factors (i.e., climate, environmental and ESG more broadly) that the respective transparency requirements pertain to. The timeline demonstrates the complexity and number of these different initiatives, pointing towards the significant effort, in terms of resources and cost, to operationalise them.
A high level comparison of primary ESG disclosures standards impacting financial services firms:
Other interesting reading:
IFRS Foundation Trustees’ Feedback Statement on the Consultation Paper on Sustainability Reporting
The responses indicated a growing demand to improve the global consistency and comparability of sustainability reporting, as well as a recognition that there is an urgent need for action. The responses also illustrated widespread support for the IFRS Foundation to play a role in global sustainability reporting.
Strategic feedback:
- Investor focus for enterprise value — the new board would focus on information that is material to the decisions of investors and other participants in the world’s capital markets.
- Sustainability scope, prioritising climate — due to the urgent need for better information about climate-related matters, the new board would initially focus its efforts on climate-related reporting, while also working towards meeting the information needs of investors on other ESG matters.
- Building on existing frameworks — the new board would build upon the well-established work of the TCFD, as well as work by the alliance of leading standard-setters in sustainability reporting focused on enterprise value.
- Building blocks approach — by working with standard-setters from key jurisdictions, standards issued by the new board would provide a globally consistent and comparable sustainability reporting baseline, while also providing flexibility for coordination on reporting requirements that capture wider sustainability impacts.
IFRS.
McKinsey: Global Private Market Review
This report touches on some of the ESG trends taking shape in the private market. TL:DR: More private markets investors are starting to pay attention to ESG metrics: “Capital flowing into ESG-related investment strategies saw unprecedented growth in 2020: nearly $400 billion in cumulative ESG-focused private capital was raised from 2015 to 2020, with over a quarter being raised in 2020 alone.”
\\ Leading Across ESG \\
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Julianne
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Julianne Sloane
Co-founder of Nossa Data
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