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Issue #93: A weekly update on responsible investment.
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\\ Weekly Insights \\

“Sustainable investment funds often contain oil stocks, based on the rationale that these companies perform best on ESG criteria within their industry. Many would argue this is greenwashing because burning oil is causing climate change. So, how can a fund be called ‘sustainable’ if it contains unsustainable companies? Likewise, a fund that excludes fossil fuel stocks may offer good conscience to climate-aware investors but do nothing to stop the burning of fossil fuels. How can a fund be called ‘sustainable’, if it does not contribute to making the economy more sustainable?”

I really enjoyed an article this week in Responsible Investor which discusses challenges related to sustainable finance can come down to the way different individuals define a sustainable investment. The article explains lack of clarity about why we want to invest sustainably can lead to confusion. With the example from above the draw a comparison to sports cars:

“Without distinguishing between these objectives, it is unfair to make greenwashing accusations. It is like complaining that a sports car does not have sufficient cargo volume or that a truck does not look elegant.”

The article then breaks down three different objectives which typically bring people into the sustainable investment ecosystem. Depending on which of these objectives you align with, it can fundamentally change how you view a sustainable investment and greenwashing.

Financial Performance: Sustainable Investment Objective #1

You want to reduce your risks by integrating sustainability information into investment decisions. You seek exposure to companies operating in sustainable industries because you believe this can help you increase future returns.

Value Alignment: Sustainable Investment Objective #2

You want to be invested only in firms that are consistent with your personal values. You do not want to profit from industries or business practices that you disagree with. Your objective is to align investments with your personal values — irrespective of whether this leads to a better world or not, and without concern for return implications.

Impact: Sustainable Investment Objective #3

You want to make real-world impact with your investments and therefore you want your investments translate into real-world change. This could be done by using shareholder votes and engagement dialogue to convince the dirtiest oil companies to improve their environmental practices; or by investing in young companies that tackle global challenges but struggle to attract sufficient capital.

These different investment outcomes are distinct, and each needs to be addressed by different investment products. Without understanding the expectation of investors against each of these 3 objectives, we cannot classify if a specific sustainable fund is meeting its objectives or not.

\\ Nossa News \\

Introducing Aakash, our Head of Business Development

Why is gaining traction in the ESG space so important right now? The timing is perfect right now. The space is growing in importance and is already becoming the norm. At some point, all investor relations teams and investment analysts will be expected to have some ESG expertise. All portfolio managers will have to answer to asset owners about their sustainability risk assessment, before winning a deal. The days of ESG being a niche job function are limited, so now is the time to make sure you understand key concepts and keep up with what’s happening.

Hear us pitch at the Techstars Sustainability Roundtable
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\\ Top Stories \\

Credit Suisse ESG Head Wants ‘More Pressure’ on Rating Firms
A growing chorus of industry professionals calling for the regulation of ESG ratings. There’s currently inadequate oversight of the firms that grade businesses on their environmental, social and governance metrics. Neither the data the ratings firms use nor the approaches they take are clear. You need to be able to understand why a rating ended up where it did, where the underlying assumptions were. What are some differences between ESG ratings and credit ratings? First of all ESG ratings are done on an investor-pays model and credit ratings on an issuer pays. Credit has very established processes to measure risk of default while different firms put different emphasis on a wide range of ESG factors.

Record High Number of S&P 500 Companies Discuss ESG on Earnings calls
FactSet Document Search (which allows users to search for key words or phrases across multiple document types) was used to answer this question. Through Document Search, FactSet searched for the term “ESG” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from June 15 through September 5.

At the sector level, five of the 11 sectors recorded an increase in the number of companies citing “ESG” on a quarter-over-quarter basis.


Sustainable Investing Faces the Beginnings of a Backlash
On August 25th reports emerged that the sec and its German counterpart were investigating whether dws, a large German asset manager that has boasted of its sustainable edge, had misled customers about how much it used esg metrics to place money. The firm denies wrongdoing. But industry practitioners admit there are so many variants of sustainable investing that savers may well be confused. Selecting firms to invest in often involves little more than a box-ticking exercise confirming that the right grade of recycled paper was used to publish the annual report. The Economist.

The world is heating up and so is the carbon industry
Cecilia Manduca from Talis Capital shares her analysis of the Climate Infrastructure community. Climate Analytics she defines as: “Climate analytics companies are key to bringing awareness and data-driven insights to consumers, corporates and governments about the current state of carbon emissions and potentially suggest ways to reduce and offset them.”

Read her full analysis.

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\\ Report Highlight \\

Latest Research on ESG Integration on the FTSE 100

In this report, the researchers examine 39 annual reports from FTSE 100 companies. Using the London Stock Exchange’s industry labels, the most recent reports of the two largest companies in each industry by market cap, covering:

  • ESG integration
  • ESG materiality
  • ESG strategy
  • ESG performance
  • ESG governance
  • Independent standards and frameworks.

The report offers practical advice on integrating ESG into corporate reporting and what best practice looks like today.

How is ESG discussed within an annual report?

  • ESG discussed in key sections throughout entire report: 54%
  • ESG discussed primarily in ESG section but briefly elsewhere in the report 33%
  • ESG discussed only in separate ESG section 8%
  • No qualitative ESG discussion outside mandatory statements 5%

TCFD Disclosure:

  • No mention of TCFD or data: 10%
  • Company discloses intention to align to TCFD 10%
  • Company beginning to report on TCFD 31%
  • Company discloses a full TCFD report 49%

Read the report.

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