The trends driving ESG data
There is growing evidence that company performance regarding environmental, social, and governance (ESG) factors contributes to that company’s financial success. Boston Consulting Group (BCG) published an article discussing the trends driving demand for financial material ESG data.
Hyper Transparency
Mounting scientific evidence is driving the speed at which ESG issues become material to business. For example, academic research links gender-diverse boards to improved financial performance. This in turn prompts the debate on workforce gender diversity among policymakers and investors. Furthermore, technologies such as artificial intelligence, blockchain, and virtual reality are creating unprecedented levels of transparency, enabling investors and other stakeholders to look beyond publicly reported ESG data.
Stakeholder activism
Key influencers can increase the materiality of a sustainability issue to a business. These activists can create narratives that change societal expectations or prompt action by regulators or investors. Investors must pay more attention to these efforts because, in the long term, they could lead to regulatory shifts that have sector-level impacts on asset values.
Societal expectations
Whether it is policymakers shaping legislation, consumers making purchasing choices, or employees choosing which company to work for, these influencers can have a direct impact on a company’s profitability. For example, looking at employees, 67% of millennials expect the companies they work for to be purpose-driven and their jobs to have societal impact.
Investor emphasis on ESG
More and more investors are evaluating companies from an ESG perspective and using the results to inform portfolio construction. If an influential investor raises public awareness of a certain issue, management teams need to pay attention. This type of investor activism is rapidly growing. As an example, in the US, shareholder resolutions that focused on environmental and social issues — as varied as climate change, diversity, and human rights — made up half the total in 2017, up from 33% from 2006 to 2010.
COVID-19
On top of the above trends driving ESG data, ESG funds have seemed to weather the Covid-19 storm better than their non-ESG counterparts. Reuters produced a graphic showing how ESG versus non-ESG funds have weathered this market downturn.
In the graphic below, all funds were domiciled in Europe and state in their prospectus that they use ESG criteria as a key part of their security-selection process, or indicate that they pursue a sustainability-related theme or seek a measurable positive impact alongside financial return.
Subscriber Feature:
GreenMoney’s new April 1st issue on “Women & Responsible Investing” is now online featuring Tami Kesselman of LOHAS Advisors and Aligned Investing Global: and Julie Gorte of Impax Asset Management and Pax World Funds. Also articles on ImpactAssets and the Investing to Advance Women Guide as well as a video with Mindy Lubber of CERES discussing Shareholders & Sustainability with Joel Makower at GreenBiz 20 Conference. Read more at Green Money.
Altiorem, an online library and resource centre designed to support the finance industry in the shift towards sustainability launched last week. The goal of the platform is to reach as many people both within the finance industry and outside of it who want to influence it towards a more sustainable way of operating and to deliver on the promise that finance has in making the world a better place. Read about their launch.
Top stories:
ESG analysis for investments will become even more relevant after the current crisis
It would be tempting to assume that, once the fear of the pandemic is behind us, we will all focus on getting production levels and financial performance back to normal at the expense of everything else, notably ESG considerations. On the contrary, post-Covid19, investors should be even more demanding as far as companies’ ESG disclosures are concerned, especially those focused on social aspects. Understanding how companies have used government financial support, how they are treating their various stakeholders from suppliers to employees and investors, will be key to ensuring a new financial resiliency.
Axel Pierron on LinkedIn.
What COVID-19 Tells Us About The Materiality Of ESG Factors
This research — captured in a WEF white paper — yields a number of insights. One is that several factors are causing ESG trends to manifest as systemic risks, posing unprecedented threats to portfolio resilience. While climate change features most prominently, investors are increasingly concerned about everything from rising inequality to biodiversity loss — and now, global pandemics. These risks are also highly interdependent. For example, risks to health and biodiversity will increase as a result of climate change. And not every ESG factor will be material to all businesses and sectors. This means companies and investors will need to increase capabilities to assess a wider range of potential issues, and deepen the level of constructive engagement to manage those that are.
Veronika Chau on LinkedIn.
‘Social Washing’ Is Becoming Growing Headache for ESG Investors
Much like the greenwashing that exaggerates or misrepresents the environmental credentials of a project or a company, social washing can occur when the impact of an investment on labor rights or human rights are falsely overstated. In the past six weeks, NatWest has seen a significant increase in inquiries from clients on issues such as sick leave for workers and the rights of contract workers. The Coronavirus outbreak is awakening fund managers who consider environmental, social and governance issues when investing to blind spots in their analysis of companies. The spreading pandemic is prompting investors to put a greater emphasis on the “S” of ESG and consider how companies treat employees during the pandemic.
Bloomberg.
How investors are approaching ESG today?
Kara Mangone, Chief Operating Officer of Goldman Sachs’ Sustainable Finance Group, discusses how the global pandemic is impacting the way corporates and investors approach ESG. She shares how the global economic crisis that is associated with Covid-19, specifically underscores the ESG footing of companies. She mentions that Goldman continues to still work heavily on 1. ESG Financings, 2. Data and Disclosure, 3. Focus on combating climate change and prioritizing decarbonization plans. She explains that companies who show leadership in their Covid-19 response are those who will also be the best placed to differentiate themselves in the future.
View Goldman Sach’s full video.
BlackRock to advise EU on green regulation for banksBlackRock has secured a key role in advising the EU on how to integrate sustainability into banking regulation, underlining its close relationship with policymakers around the world and marking a win in the asset manager’s efforts to burnish its climate-protecting credentials. The European Commission said BlackRock’s Financial Markets Advisory will study how the EU could use environmental, social and governance-related factors in the prudential supervision and regulatory risk analysis of the region’s banks. BlackRock will also analyse how the EU could boost the growth of green finance and the market for sustainable financial products. It beat eight unnamed rivals to secure the role.
Financial Times.
Addressing climate change in a post pandemic world
Given the scope and magnitude of this sudden crisis, and the long shadow it will cast, can the world afford to pay attention to climate change and the broader sustainability agenda at this time? Our firm belief is that we simply cannot afford to do otherwise. Not only does climate action remain critical over the next decade, but investments in climate-resilient infrastructure and the transition to a lower-carbon future can drive significant near-term job creation while increasing economic and environmental resiliency. And with near-zero interest rates for the foreseeable future, there is no better time than the present for such investments.
McKinsey.
Paper Highlight of the Week:
Analyzing Active Managers’ Commitment to ESG: Evidence from United Nations Principles for Responsible Investment.
Aaron Yoon, Northwestern University
This paper analyses active managers’ commitment to ESG using United Nations Principles for Responsible Investment (PRI), which is the largest global initiative to incorporate ESG. It finds a significant increase in fund flow to signatory funds regardless of their prior fund-level ESG score. However, signatories do not improve fund-level ESG score while exhibiting a decrease in return. Furthermore, they vote less on environmental issues and stocks in their portfolio experience increased environmental controversies. Funds that are smaller, younger, and previously had a higher historical alpha are more likely to sign PRI but only quant-driven and institution-only funds improve ESG post signing. Overall, only a small number of funds improve ESG while many others use the PRI status to attract capital without making notable changes to ESG. Read full paper.
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Another interesting paper: Public Sentiment and the Price of Corporate Sustainability by George Serafim of Harvard Business School.
“The evidence suggests that public sentiment influences investor views about the value of sustainability activities and that big ESG data can be useful in identifying “value” ESG stocks.”
