ESG Developments This Week
In Washington, D.C., and around the world
Saudi sovereign wealth fund reportedly seeking ESG framework
In Riyadh, Saudi Arabia, the nation’s sovereign wealth fund reportedly has begun the process of developing ESG reporting standards that will, presumably, allow it to raise greater funds in the global debt market. According to Reuters:
“The Public Investment Fund (PIF) sent a request for proposals to banks last month, said the four sources with direct knowledge of the matter, speaking anonymously because the matter is private.
PIF – at the centre of Saudi de facto ruler and Crown Prince Mohammed bin Salman’s Vision 2030 that aims to wean the economy off oil – has been funding itself in recent years with tens of billions of dollars in loans.
One of the sources said developing an ESG framework was likely a precursor for a multibillion dollar bond sale, which would be the Saudi wealth fund’s first.
Once an ESG framework is developed, PIF may need credit ratings and an audit of its finances before it can issue bonds, the source said, adding the fund could sell bonds in the fourth quarter if “all goes smoothly.””
Reuters notes that the Kingdom’s hand is forced here, both by what is described as “growing awareness among international investors about ESG risks” and the fact that the sovereign fund is “the cornerstone investor in NEOM, a futuristic development in Saudi Arabia whose flagship project is a zero-carbon city.”
In the States
Utilities’ ESG ratings tracked
On July 12, Visual Capitalist noted that the National Public Utilities Council (NPUC) had put together a series of graphics designed to demonstrate how American Inventor Owned Utilities (IOUs) are performing in terms of various ESG metrics. This report card was designed to measure what metrics the IOUs report, how consistently those metrics are reported across the various companies, and what disclosures could be improved to increase across-the-board comparison:.
“To complete the assessment of U.S. utilities, ESG reports, sustainability plans, and company websites were examined. A metric was considered tracked if it had concrete numbers provided, so vague wording or non-detailed projections weren’t included.
Of the 50 IOU parent companies analyzed, 46 have headquarters in the U.S. while four are foreign-owned, but all are regulated by the states in which they operate.
For a few of the most agreed-upon and regulated measures, U.S. utilities tracked them almost across the board. These included direct scope 1 emissions from generated electricity, the utility’s current fuel mix, and water and waste treatment.
Another commonly reported metric was scope 2 emissions, which include electricity emissions purchased by the utility companies for company consumption. However, a majority of the reporting utilities labeled all purchased electricity emissions as scope 2, even though purchased electricity for downstream consumers are traditionally considered scope 3 or value-chain emissions….
Even putting aside mixed definitions and labeling, there were many inconsistencies and question marks arising from utility ESG reports.
For example, some utilities reported scope 3 emissions as business travel only, without including other value chain emissions. Others included future energy mixes that weren’t separated by fuel and instead grouped into “renewable” and “non-renewable.”
The biggest discrepancies, however, were between what each utility is required to report, as well as what they choose to. That means that metrics like internal energy consumption didn’t need to be reported by the vast majority.
Likewise, some companies didn’t need to report waste generation or emissions because of “minimal hazardous waste generation” that fell under a certain threshold. Other metrics like internal vehicle electrification were only checked if the company decided to make a detailed commitment and unveil its plans.”
Visual Capitalist concluded that “many of these inconsistencies are roadblocks to clear and direct measurements and reduction strategies.”
On Wall Street and in the private sector
ESG’s effectiveness questioned
On July 13, Bloomberg Green became the latest high-profile media source to feature Tariq Fancy, the former head of sustainable investing for asset-management giant BlackRock, in a profile of former ESG-insiders. Fancy has created quite a stir among financial professionals in the several weeks since he went public with his frustrations and regrets, and it appears that he is not alone:
“Inside the booming world of sustainability, a small but growing cohort of disillusioned veterans are speaking out against efforts by corporations and investors to address an overheating planet, income inequality and other big societal problems. Environmental degradation has worsened, while the gap between the rich and poor has widened. The overemphasis on measuring and reporting sustainability has delayed, and displaced, the urgent action needed to tackle those challenges, they say. Environmental, social and governance investing, or “ESGlalaland,” suffers from “cognitive dissonance,” sustainability veteran Ralph Thurm said in a March report titled “The Big Sustainability Illusion.” ESG ratings only explain “who is best in class of those that say that they became less bad,” he said.
“The bigger problem than greenwash is greenwish,” Duncan Austin, a former partner at Al Gore’s Generation Investment Management, said, referring to greenwashing where environmental benefits are exaggerated or misrepresented. “The win-win belief at the heart of ESG has led to widespread wishful thinking that we’re making more progress on sustainability than we really are.”
Corporations around the world have been clamoring to green their businesses. Hundreds have announced net-zero emissions targets and poured billions of dollars into solar and wind projects, while chief sustainability officers have become ubiquitous in C-suites. In April, Amazon.com Inc. signed deals to add more than 1.5 gigawatts of power to its green energy efforts. Last month, Rolls-Royce Holdings Plc said it will make some plane engines compatible with using sustainable fuels, while Tyson Foods Inc., America’s biggest meat company, pledged to go carbon neutral by 2050.
The veterans acknowledge they were complicit and benefited from the boom in sustainability that got underway in the 1990s. And much good was created along the way, they say. But now they’re coalescing under one message: More aggressive government policies are needed to address the planet’s problems.
“The 20-year focus on corporate social responsibility reporting and the current frenzy on ESG investing have created an impression that more is happening to address social and environmental challenges than is really happening,” said Ken Pucker, a former chief operating officer at Timberland who had worked on the company’s sustainability projects. “Markets alone aren’t sufficient to solve these problems.””
Academic argues lower ESG returns are normal and expected
On July 17, Vikram Gandhi, a senior lecturer at Harvard Business School and the man who developed and teaches the school’s first course on impact investing, penned a piece for MarketWatch in which he made the case that ESG’s below-market returns this year are to be expected. Moreover, he argued that this is, in fact, the way that ESG investing should be. He wrote:
“[I]nvestors seeking to make positive environmental and social impact with their capital may have noticed something else: Since Biden took office on Jan. 20, many ESG-focused stock funds have been trailing the broad U.S. market.
The FTSE4Good U.S. Select Index, which screens for U.S. stocks based on environmental, social, and governance factors, was up 11.6% since Jan. 20 through June 30, while the S&P 500 rose 12.3%, according to investment researcher Morningstar. It’s the same story globally. For example, the MSCI ACWI Sustainable Impact Index was up less than 1% since Biden took office, while the MSCI All-Country World Index gained 8.5%.
In the energy sector, the results were even more pronounced. Traditional oil-related stocks in the S&P 500 gained more than 25% from Jan. 20 through June 30, but shares of sustainable companies in the S&P Global Clean Energy Index — which includes solar, wind, and smart grid exposure — fell almost 25%.”
This, he continues, is exactly what should be expected and that above-market expectations for ESG were always misplaced:
“Is the market sending ESG investors a signal? Actually, no. Such counterintuitive performance was to be expected, and it’s welcome as it demonstrates the normalization of ESG considerations….
Bouts of ESG underperformance are actually a positive development, as it underscores the fact that ESG isn’t some gimmick or silver bullet when it comes to investing. Instead, this shows the natural evolution of sustainable investing from novel idea to thematic tactic to a core strategy that is subject to the same fundamental market forces that affect all other mainstream, long-term holdings.”
Demand for ESG assets increasing
On July 14, Reuters reported that:
“The rush to invest in exchange-traded funds focusing on environmental, social and governance (ESG) issues jumped in the first half of 2021, with monthly turnover more than tripling to nearly 3 billion euros from a year ago, Deutsche Boerse said on Wednesday.
ESG assets are increasingly in demand among investors as companies that perform well on a range of issues from climate change to boardroom diversity are seen as better long-term investments than peers lagging in these areas.
On its Frankfurt-based electronic trading platform Xetra, German stock exchange operator Deutsche Boerse said ESG ETFs now account for more than 16% of total ETF trading turnover on Xetra compared to 6% a year ago.”
On July 18, Reuters reported that:
“Sustainable investments total $35.3 trillion, or more than a third of all assets in five of the world’s biggest markets, a report from the Global Sustainable Investment Alliance on Monday showed.
Investors are increasingly driven by environmental, social and governance-related (ESG) factors that traditionally have not been captured in a company’s balance sheet, but that can influence future returns.
The GSIA, whose member bodies track growth in their region, said professionally managed assets, using a broad gauge of what it means to invest sustainably, account for 36% of total assets under management….
The biennial industry survey looked at assets in the United States, Europe, Australasia, Japan and Canada, using data from end-2019 for all regions except Japan, where the data was to end-March 2020.
Since the last report, total assets across the markets had risen 15%, the report said.
“This growth is being fuelled by rising consumer expectations, strong financial performance and the increasing materiality of social and environmental issues….”
Finally, on July 15, MarketWatch reported that:
“A new Goldman Sachs exchange traded fund is entering the crowded environmental, social and governance (ESG) investing class hoping to stand out: It’s actively managed, transparent about its holdings, invests in global companies of all sizes and isn’t based on an index.
The New York-based investment bank Thursday launched Goldman Sachs Future Planet Equity ETF GSFP, -0.88%, which is investing in companies that are working on environmental problems aligned with five themes: clean energy, resource efficiency, sustainable consumption, the circular economy and water sustainability….
The bank started the ETF because, it says, “we are on the cusp of a sustainability revolution that could have the scale of the industrial revolution and the speed of the digital revolution,” [Katie Koch, co-head of fundamental equity at investment unit Goldman Sachs Asset Management] says, adding that Goldman sees alignment between global governments, corporations and consumers on sustainability.
“We know that the millennial consumer is very committed to a sustainable planet and actually willing to pay a premium for products and services that are aligned with a sustainable planet,” she says.”