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Issue #97: A weekly update on responsible investment.
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\\ Weekly Insights \\

Why Do ESG Funds Own Shares Of Facebook? Time and time again I see articles that say, why do ESG funds own Exxon, Facebook, General Motors etc. This week I saw it on Forbes. In light of that article, I want to dive into some of the confusion around what ESG is and what it isn’t. Furthermore, while headlines claiming green-washing sound provocative, it doesn’t necessarily mean green-washing is happening, more so, that there is a lack of consensus tied to ESG definitions.

First, I want to go into what saying ESG means then go into the popular critiques I see show up on the market.

Some ESG 101 (Skip if you are an expert)

Any of the following strategies could be a part of an ESG fund:

  • ESG Integration: Means investors consider ESG performance when making their investment decisions. It is an enhancement of traditional financial analysis.
  • Exclusion / Negative Screening: Means specifically avoiding types of companies: I.e. Tobacco, Coal, Oil and Gas
  • Positive Screening: Actively look to include companies that have a positive impact on social or environmental outcomes: I.e. Renewable energy, social enterprises.
  • Thematic Investing: Focusing in on a specific E, S or G issue and building a financial product around it. An example would be an Environmental focused fund that focuses on renewables.
  • Impact Investing: Investments made to intentionally generate a positive social or environmental impact.

Another ESG 101 favorite that I have not shared in this newsletter in a long time is the Bridges Spectrum of Capital. Essentially it is the idea that there is not a clear moment where “This is ESG” “This isn’t ESG” occurs. A huge % of ESG occurs at the “Mitigating Environmental, Social and Governance risk” phase,” not fully into the pursuing E, S and G opportunities phase.

The case against Facebook:

“Facebook’s platforms have been engineered to make users angrier and angrier to keep them engaged. They amplify thoughts of suicide among teens, and are used for sex trafficking.” The Forbes article questions why Facebook is such a large percentage of many ESG labelled funds. However, ESG funds first of all, need to mitigate against ESG risks they do not need to completely avoid risks. For example, the fund managers could access the prospective risk tied to potential mental health risks but decide that the benefit of connecting large communities of people outweighs that. On top of this, the reality is, any company over a certain size would struggle to be “perfect” when it comes to ESG as their footprints are just too large. This brings me to another mainstream criticism of ESG. I also saw an article on Vox called “The thorny truth about socially responsible investing.” The article shares: “Plenty of people think they’re investing in ways that match their values when in reality, they aren’t. It’s really easy to slap the ESG label onto an investment product, likely increase fees on it a little bit, and call it a day. Plenty of big investors claim they’re managing their money in an environmentally friendly, socially responsible way — and assume nobody’s peeking behind the curtain.” Again, it could be at a high level the investments in question may not match a specific value but for a highly diversified large fund, any would struggle to 100% match the values of an investor. Take an example of an investor who does not want to invest in Tobacco. Does that mean they only do not want to invest in tobacco companies or are grocery stores that carry tobacco products also a no-go? Overall, we need to get clearer definitions / better expectation setting of ESG for those of us in the industry full time and for those who simply follow the headlines.

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\\ Top Stories \\

Investor scepticism on ESG points to a maturing market
While some worry that environmental, social and governance (ESG) investing is losing credibility, others believe a healthy dose of scepticism indicates that greater rigour is entering the market. With some ESG funds still holding shares in oil or even coal companies, one concern is that unclear definitions of ESG, along with pressure to meet high demand, is resulting in investment products that are not as green as they claim to be. This calling out can be seen as a wake-up call showing market demand for more ESG clarity.
Financial Times.

GRI Launches Major Update to Sustainability Reporting Standards
There has been a major update to GRI’s sustainability reporting standards, incorporating human rights disclosures and applying a due diligence approach addressing the major sustainability risk areas. This is the most significant change since the GRI Standards launched in 2016, the revised Universal Standards set a new global benchmark for corporate transparency. Fully addressing gaps between the available disclosure frameworks and intergovernmental expectations for responsible business, including human rights reporting, they updated standards will enable more effective and comprehensive reporting than ever before.
ESG Today.

ESG 2.0 Is in the Making
Doubts have lingered about the validity of ESG as an indicator of financial performance. Recently, these doubts have expanded to an apparent backlash against the promise of ESG investing, which can be summarized into two spheres of thought.

  1. Any financially material ESG information is already captured by more-traditional market fundamentals. This is an iteration on the efficient-market hypothesis, in which prices are thought to reflect all information. Under this sphere of thought, the empirical studies that suggest a link between ESG and financial performance is either poorly constructed or measures proxy information for a market fundamental rather than a unique impact of ESG.
  2. ESG aspects, by their nature, are externalities to the business, and accepting responsibility for externalities is inherently a cost and drag on financial performance.

ESG represents an enormous and complex system of novel factors for markets. From the uncertainty around climate impact, to the consequences of ecosystem collapse, resource depletion, social instability, and political upheaval, global ESG factors are the epitome of information that will be interpreted differently by market players, resulting in inconsistent pricing.

From Vision to Reality: ESG Integration Proliferating in Private Markets
Robust ESG integration across a comprehensive set of practitioners has quickly become a reality in the private markets. A rapidly rising number of firms license SASB Standards for use in all stages of investment and reporting processes: over the last three years, the number of private markets entities licensing SASB Standards has grown by 8.3x, from nine to 75 firms across 16 countries spanning five continents. In addition to these organizations, an increasing number of asset owners are leveraging the SASB Standards for both their direct investments and assessment and due diligence of their 3rd party manager ESG competency and integration.

What to talk about when we talk about ESG
The IR team should play a leading role in determining which aspects of a company’s ESG story to tell at different events and in different disclosures. Just as management discusses different issues on the earnings call and at the AGM, in the near future we can expect tighter definitions of what to talk about when we talk about ESG.
IR Magazine.

Scope 2 GHG accounting for 24/7 CFE vs. Emissionality

1. What is the carbon footprint associated with their electricity used? (Attributional accounting)

2. What is the carbon impact of different sustainability actions/interventions that they have been or could be undertaking? (Consequential Accounting)”

In a nutshell, the key difference between 24/7 and Emissionality is that 24/7 CFE is answering question #1 and Emissionality is answering question #2.

Taylor Sloane on Medium. [Full disclosure: this is my brother!]

General Motors Is An ESG Play Now
“The stock is cheap.” GM’s estimated price-to-earnings ratio is around 8.1 compared with 20 for the S&P 500, according to data compiled by Bloomberg. “I don’t think there’s any question companies with good ESG (environmental, social and governance) reputations, good ESG scores, have attracted capital, and in many cases have garnered valuation premiums.” “There are certain requirements that have to be met. GM, believe it or not, it fits that.”

Banks Start Dropping Clients to Dodge Costs Tied to ESG Risk
European banks are beginning to drop clients that pose a climate risk rather than face the possibility of higher capital requirements, according to the watchdog overseeing the development. There’s already evidence that upstream oil and gas projects are falling out of favor as banks move beyond coal exclusions. That’s amid growing pressure on the finance industry from regulators and investors to shift over to low-carbon intensity sectors. European lawmakers want to redirect the flow of capital away from industries that pollute, amid unequivocal signs that climate change is already proving deadly and as scientists warn that time is running out.
BNN Bloomberg.

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\\ Report Highlight \\

ESG in a pandemic world
RBC Global Asset Management


  • Adoption of ESG principles remains at peak levels: 72% of global investors integrate ESG principles in their investment approach and decision-making.
  • Europe is in the lead in terms of ESG adoption
  • 83% of investors believe ESG integrated will do as well or better than non-ESG integrated portfolios
  • There may be a slight waning of the impact of the pandemic as a responsible investment issue, as just over a quarter of investors said the pandemic has made them focus more closely on specific ESG factors, versus 36% last year.
  • When it comes to ESG concerns overall, the top three issues selected by global investors were: anti-corruption, cyber-security, and climate change.
  • Diversity issues and metrics garnered a mixed reaction, with a softening in conviction about the value of minority and gender diversity targets on corporate boards by respondents in the U.S. and Canada, while there was continued strong support in both Europe and Asia for these targets as well as for more diversity, equity and inclusion (DEI) and ESG-related disclosures overall.

What issues had increased interest this year: Cybersecurity grew from 50% to 56%. Supply chain risk grew from 40% to 46%

What issues dropped interest this year: Health and safety dropped from 49% to 43%, workplace diversity dropped from 39% to 33%.

Read the full report.

\\ Leading Across ESG \\

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