The year ESG became mainstream

Issue #61: A weekly update on responsible investment. Forwarded by a friend? Subscribe here.

This is our last issue of 2020. We hope everyone takes time to reflect on what has been a very abnormal year and (hopefully) a return to more normalcy in the year ahead. I’m looking forward to continuing this newsletter with more ESG focused content in 2021!

Before Covid-19, before the Black Lives Matters protests, ESG was off to a strong start in the beginning of 2020 as Larry Fink, CEO of BlackRock wrote a letter to CEOs emphasizing:

“Companies must be deliberate and committed to embracing purpose and serving all stakeholders — your shareholders, customers, employees, and the communities where you operate.”

Since that point ESG has risen higher and higher in importance. What will be the top ESG trends in 2021? Jonquil Hackenberg a contributor at Forbes believes:

  1. Mental Health: 64% of people recorded common signs of depression, while 57% suffered from anxiety during March and May. Businesses must address this.
  2. Diversity isn’t just a number: Simply hiring a certain number of people from diverse backgrounds is not enough to create true diversity in the workplace. Everyone has to feel that they can reach the top of the ladder, irrespective of their race, gender, disability or any factor which isn’t related to merit.
  3. Increased Consumer Awareness: 73% of customers now expecting online retailers and brands to use recyclable packaging, while 35% will only purchase products which have been naturally, locally or sustainably sourced.
  4. A unified effort for ESG: Businesses must seek help and work together to achieve their ESG goals.
  5. Industry Cross Pollination: Throughout the pandemic, we have seen the cross pollination of industries to satisfy essential spikes in demand. Dyson is the perfect example, as it rapidly shifted its production to supply life-saving ventilators as the pandemic took hold.

What should you consider for your year end reporting given this growth? Deloitte lays out questions for audit committees to consider.

What we are writing:

Driving stakeholder capitalism forward by polling the American people — JUST Capital
Our team interviewed Charlie Mahoney, Director of ESG Business Development at JUST Capital. JUST Capital firmly believes that the world needs more just companies. Those that believe in fair pay, equal worker treatment, strong communities and a healthy planet. JUST is dedicated to measuring and ranking companies on the issues Americans care about most so you can then act on that knowledge with your voice, purchase decisions, or your investments. Learn more about JUST in our feature.
Read our article.

What are the UNGC 10 principles and why do they matter?
The UNGC 10 Principles are a set of principles that guide business policy and conduct. They also establish a common ethical and practical framework for those organisations that commit to the voluntary initiative. The 10 principles were finalised in 2004 and fall under four areas: human rights, labour, environment and anti-corruption.
Read our article.

5 people to look out for in ESG:

This newsletter is only possible thanks to all the excellent work others are doing in the field of ESG. To help highlight more of these voices each week we highlight 5 people in ESG. You can also follow along from our LinkedIn page.

Juliet Davenport
Juliet is the Founder and CEO of Good Energy. She sits on the boards of the Renewable Energy Association and Innovate UK, is the Vice President of the Energy Institute and was recently appointed to the board of The Crown Estate.

Lucas Joppa
Lucas is the Chief Environmental Officer at Microsoft. He is an Associate Editor in Chief for the Ecological Society of America EcoSphere journal and honorary Fellow at the UNEP-WCMC.

Tessa Khan
Tessa is a climate change and human rights lawyer. She is the Co-founder of the Climate Litigation Network and lawyer for Urgenda. She is passionate about holding governments accountable in the climate crisis.

Nicholas Stern
Nicholas is an LSE Prof. and Chairman of the Grantham Research Institute on Climate Change & the Environment. He headed the Stern Review on the Economics of Climate Change and was appointed Companion of Honour for services to economics, international relations and tackling climate change.

Julie Hirigoyen
Julie is the CEO of the UK Green Building Council (UKGBC). She was previously UK Head of Sustainability and an International Director at JLL. Julie sits on boards including the Green Construction Board, the Igloo Footprint Advisory Board and the Carbon Trust Advisory Panel.

Top Stories

Why ESG ratings are currently more patchwork than armour plating
There are already several EGS ratings vying for attention, and their guidance is often contradictory. The correlation between the MSCI’s and Sustainalytics’ view on a given company is pretty low. Ratings agencies are good at collecting qualitative and quantitative data, but ESG teams and managers should do their own homework as well says Ketan Patel, a fund manager at EdenTree. Patel also believes ratings agencies are experiencing a watershed moment, as there have been two high-profile fall-outs this year: Wirecard and Boohoo. Both companies were rated relatively highly on a variety of ESG scores. ‘People are now thinking: hang on, the ratings say these look OK but underneath there are huge structural issues.’
CityWire Selector.

Focusing on the ‘S’ in ESG — How disclosure and action can aid diversity
As COVID-19 spread around the world, commentators increasingly noted the social disparities the pandemic was revealing. Key workers — those responsible for keeping the economy running while the authorities were facing down the virus ­– are overwhelmingly from lower-income households. People from ethnic minority backgrounds reportedly faced a greater health risk from the disease. Women and minorities have suffered more severe economic hardships as countries shielded themselves and shut down.
Delphine Riou at BNP Paribas.

Is ESG Investing a Price Bubble? Probably Not.
Has the acceleration of inflows and strong performance driven up prices for high-ESG-rated companies and thus pushed up returns for ESG investments (as proxied by leading MSCI ESG indexes)? In other words, has the flow of funds into ESG investments created a price bubble? Overall, our findings deflate the notion of an ESG bubble during our sample period. If rising inflows into ESG investing had created a price bubble, we would expect to see rising valuations for these companies (as measured by increasing P/E ratios). Instead, our return decomposition showed little support for this theory. We found that outperformance of ESG was mainly driven by companies’ earnings growth and better dividend yields.
MSCI.

State Street adds ESG screen to £21bn of AUM
The screen will target controversial companies in violation of the UN Global Compact principles, meaning holdings such as weapons manufacturers will be eliminated. “These new screens reflect the appetite for exclusionary principles from our clients and in the case of pension schemes ultimately their members and underline our ongoing commitment to effective ESG implementation,” said Carlo Funk, EMA head of ESG investment strategy for State Street Global Advisors. Blackrock also says it plans to double sustainable investing allocations in the next 5 years.
Investment Week.

Former Apple employees have accused the company of turning a blind eye to suppliers that were violating Chinese labor laws
Apple was fully aware that from 2014 its suppliers were violating Chinese labor laws, but did nothing because it didn’t want to put a dent in its product launches or increase costs, according to a report by The Information on Wednesday. Four former Apple employees said the tech giant has ignored suppliers violating Chinese labor laws since 2014. It has done so because it was concerned about delays in product launches and increased costs.
Business Insider.

Paper Highlight

Beyond Bunny Hugging: ESG, Investor Expectations and Reporting Trends
Public and private companies face a variety of formal and informal stakeholders with increasing interest in ESG information, which is beginning to play a significant role in consumer and investor decision-making. Any snippet of negative information can be amplified by traditional and social media, resulting in a significant short or long-term impact on brand reputation, sales, and share price. Companies struggle to find the sweet spot of ESG reporting, somewhere between reporting too little and reporting too much.

This paper attempts to provide a definition and context for the term, Environmental, Social and Governance (“ESG”), explain how and why it is used, demonstrate how investors are driving the proliferation of ESG reporting, illuminate how investor reliance on ESG information creates new risks for reporting companies, and suggest steps attorneys can take to help mitigate the risks. This paper also provides a short summary on some hot topics in the ESG world.

JD Supra.

Other interesting reads

Finding the sustainable path through the ESG jungle. How asset managers will succeed.
By PwC.

ESG Oversight: The Corporate Director’s Guide.

By PwC.

What content do you want to see next week?
Nossa Data aims to curate content on responsible investment and ESG to support leaders around the world in staying informed. Keep us posted on the content that is most relevant for you to learn about by replying to this email. We will do our best to include it in a future issue.

Kind regards,

The Nossa Data Team

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Nossa Data is a stealth-mode start-up. We provide companies with easy to use tools to streamline ESG reporting.