The ESG Blindspot, what is happening with small companies?
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Issue #81: A weekly update on responsible investment.
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\\ Weekly Insights \\
I hope my American subscribers enjoyed Memorial Day and UK subscribers enjoyed their Spring bank holiday!
Institutional Investor came out with a piece explaining that many smaller companies are being overlooked by ESG investors.
What is the problem?
Corporate and public pensions, endowments, and foundations invest the majority of assets earmarked for ESG into the largest public companies.
Why do smaller companies get left out?
ESG initiatives don’t come cheap and big public companies have used their deep pockets to adopt expensive reporting, standards, and disclosure programs, whether or not those policies ultimately lead to better ESG outcomes. At the same time, they’ve also been able to define some ESG best practices, such as the optimal structure of a board — even when those practices may not make sense for smaller companies. On top of this, rating agencies are biased towards providing better scores to larger companies.
What is the opportunity:
Many small-cap companies are doing meaningful work around ESG, but don’t publicise those programs.
Anything else that is helpful about owning smaller companies? Engagement strategy is much more important in smaller companies. This means investors could hold a non-negligible amount of floating shares and be able to discuss issues with management, influence some practices, and gather data that is lacking.
What can be done to fix this gap?
More ESG investors should begin looking at smaller-cap companies when it comes to ESG and standards need to be set for what is good practice reporting with smaller companies.
**If any readers know some great ESG guidelines / resources for small cap companies please reply to this email with links! I would love to include them in the future.
Exxon / Chevron / Shell : The pressure is on Oil and Gas companies
In case you missed it: There was a lot of discussion last week around shareholders for Exxon and Chevron voting for measures that could force them to take more responsibility for their emissions. Similarly, Dutch court is forcing Shell to slash its pollution.
Read the feature on The Verge.
Who are the biggest oil producing countries in the world?
- United States: 19.51 million bpd
- Saudi Arabia: 11.81 million bpd
- Russia: 11.49 million bpd
- Canada: 5.50 million bpd
- China: 4.89 million bpd
- Iraq: 4.74 million bpd
- United Arab Emirates (UAE): 4.01 million bpd
- Brazil: 3.67 million bpd
- Iran: 3.19 million bpd
- Kuwait: 2.94 million bpd
Want to see an example of a well down integrated report? Check out this ESG Highlights sheet by Philip Morris International.
**Surprising learning about ESG reporting** Industries that have been hit by exclusion strategies ie Oil and Gas, Mining and Tobacco are often the most advanced thinkers in terms of ESG. Look at the ESG disclosures of the top rating companies in those industries and you will get a good sense of what needs to be done to become a top performer in other industries.
Your chance to provide feedback: The CFA is asking for feedback on its required ESG disclosure on investment products. To read the draft document and learn how to submit feedback visit here.
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We were featured by FinTech Alliance!
“Building trust: How Nossa Data drills down on ESG” Read the article here (must register to access)
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\\ Companies Making Statements \\
- JP Morgan — Announced its carbon reduction targets to align its financing with the #ParisAgreement. Its ESG report detailed its steps towards carbon neutrality including energy efficiency initiatives.
- Unilever — Announced earlier in the year that everyone who directly provides goods and services to the company earns at least a living wage or income by 2030.
- Nestle — Forest positive agenda. Nestlé Annual Progress Report 2021 on tackling #deforestation highlights its commitment to ending deforestation in its supply chain.
\\ Top Stories \\
Quality vs Quantity: The (Very) Mixed Bag of ESG ETFs in the Market
Focusing on 388 ESG ETFs with the highest and lowest sustainability scores, we discovered ETFs with an ESG rating of C or D are growing at a similar rate to those with high grades. iShares, for example, has 36 ESG ETFs that have been awarded A grades (A+, A, A-) for sustainability, but has also launched 39 with C grades or below (C+, C, C-, D), according to TrackInsight. To put this into context, TrackInsight shows that just over three in four (78%) ESG-branded ETFs in the marketplace contain a portfolio of assets that rates higher that their non-ESG equivalents, while 15.4% of ESG ETFs rank the same, and 6% actually rank worse. In short, almost one in four ESG ETFs in the market are no better than their non-branded peers.
Capital Monitor.
The ESG disconnect: When ratings and corporate monitoring don’t match up
Most ESG ratings and indices are derived from hundreds — if not thousands — of metrics, based largely on self-disclosed, annual average corporate data, reported to meet the requirements of one or more frameworks. There are many cases where the operational reality of a company’s ESG performance, as exposed on the web, does not live up to its ‘official’ ESG rating, as published by most formal ratings agencies. This could happen, for example, where a company’s operational impacts on local environments and communities, such as from chemical spills and accidents, is not reflected in the formal ESG reporting data. Or it may be where a company has repeated prosecutions for failure to get environmental permits, allegations of failure to consult prior to construction or deforestation, or where there have been regular product recalls relating to sub-standard quality control.
IR Magazine.
Nuveen Slams Sustainability-Linked Bonds on Structural Loopholes
Nuveen, the $1.2 trillion money manager, is staying away from one of the hottest part of the sustainable bond market. While investors embrace newly minted sustainability-linked bonds, or SLBs, and companies are increasingly serious about managing climate risk, the debt structure is “lacking” from the perspective of an impact investor. Unlike green or social bonds that can only be used to fund specific projects, proceeds from sustainability-linked bonds can be used for just about anything. The issuer simply pledges to meet some sort of social or environmental target.
Bloomberg Quint.
Why investors are better placed than they think to address biodiversity
In recent years, biodiversity loss has been consistently identified as one of the top risks to global business. The World Economic Forum’s 2020 Global Risks Report warns that biodiversity loss has come to “threaten the foundations of our economy.” The investment community grasps the scale of the problem, yet a knowledge gap exists about how to manage the risks and opportunities associated with biodiversity.
Industry Tracker: New Climate Research House for Investors Launches
Industry Tracker, a new research house for investors, launched last week by the same team that launched Carbon Tracker and Planet Tracker. It is being created to address a gap in the market for independent, in-depth research and analysis on industrial sectors that are critical to economies and will be a key component of the pathway towards achieving net zero emissions. It will provide investors with the evidence base they need to engage with companies in these climate-critical sectors on their transition plans and facilitate the redirection of capital to provide the deep emissions cuts needed for the decarbonisation of the global economy. ** The team at Nossa Data is very excited about this launch both because it is a needed gap in the market and because one of our old interns has joined their team — congrats to Ella Gibbs!
Read the press release.
* Want to make your ESG processes digital?
** Schedule a call to speak with Nossa Data
*** Email Team@nossadata.com
\\ Weekly Paper Feature \\
Amplifying the S in ESG. Investor Myth Buster
The ESG Working Group
Myth 1: Financial materiality: Social performance is less financially material than environmental performance.
Myth 2: Starting point: It is too difficult to know how and where to start assessing social performance
Myth 3: Data: The “S” indicators are too hard to measure; there is no reliable and comparable data
Read the full white paper to learn more.
White Paper: Scaling Up Institutional Investment for Place-Based Impact
By: The Good Economy, Impact Investing Institute and Pensions for Purpose
\\ Leading Across ESG \\
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Hi, I want to say thank you for subscribing to Nossa Data’s weekly email on ESG. There is a growing expectation that the same way a company’s financial information should be accessible, so should a company’s ESG or non-financial information.
This is why we spend time every week to shine a light on ESG.
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Thank you for joining us on our ESG journey,
Julianne
—
Julianne Sloane
Co-founder of Nossa Data
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