Will ESG continue to rise for another year?

Issue #62: A weekly update on responsible investment. Forwarded by a friend? Subscribe here.

Happy New Year readers!! I hope you all had a lovely holiday season. To help improve the next year of issues I have prepared a ~2 minute survey to get feedback. I would love it if some of you could take the time to share your thoughts on how I can improve this content!

ESG saw an unprecedented rise in 2020, what is the overall prediction about ESG in 2021? It will not slow down. BlackRock says the global health and economic challenges did not impact demand and they expect investors to double their allocations over the next five years.

With its continued rise, it is important to stay on top of the trends and a great resource I follow is FT Moral Money. The Financial Times publication focuses on writing about socially responsible business, sustainable finance, impact investing, environmental, social and governance (ESG) trends, and the UN’s Sustainable Development Goals. They published a list, 20 [ESG] things to watch in 2020. Some of my favorites are:

1. Standards Standards Standards: First on Moral Money’s list and most importantly, can we figure out a true standards? There has been major progress thanks to initiatives like TCFD but there is still a long way to go.
2. Endowments will be pushed to go fossil free: The significant rise in youth-led climate protests are pushing university endowments to go fossil free.
3. UN PRI Kicking out Signatories: As ESG rises in popularity, UN PRI is under increased pressure to assess its signatories. While the requirements have been relatively simple to achieve thus far, expect higher expectations going forward.
4. Increased attention on biodiversity: Biodiversity concerns is quickly gaining attention from investors as it is closely linked to Climate Change and two SDG goals (#14 life below water & #15 life on land).
5. ESG’s rise in the bond market: Bond holders are being called to do more to engage companies on ESG. More and more funds are getting tied to companies that seek sustainability.

Top Stories

ESG Reporting: What do your investors want?
Companies that take their ESG reporting seriously stand to benefit. For those that don’t, it’s not merely a matter of cost of capital anymore — there’s a real prospect of the loss of access to significant pools of capital in the medium term. Here are 6 things investors want in terms of ESG disclosures:

1. Meaningful disclosures on climate change
2. More focus on the ‘S’
3. Increased emphasis on materiality
4. Management fluency in ESG topics
5. Increased convergence in ESG reporting frameworks
6. Transparency, consistency and assurance

KPMG.

Finance chiefs face pressure to get to grips with sustainability
Pressure for companies to demonstrate their sustainability credentials is growing for CFOs. This means alternative data sources such as satellite imaging and other technologies are becoming increasingly relevant to the work of the CFO. The technologies are evolving at a rapid pace. Remote sensors and artificial intelligence tools now make it possible to track everything from water pollution and deforestation to “dark fleets” of vessels whose fishing practices breach environmental or human rights regulations.
Financial Times.

ESG data quality tops list of investor concerns in 2020
Investors have continued to sound the alarm over the quality and fragmentation of ESG data in 2020, yet the market has exploded with providers offering data sets on every sustainability trait imaginable. So what gives? First, not all ESG data is created equal. At company-level, the gold standard is still information which is disclosed directly by firms. A recent study on corporate carbon emissions, a commonly used data point, found that self-reported data is 2.4 times more accurate than estimates provided by third parties. Researchers concluded that the current reliance on estimated emissions in some cases made investors highly susceptible to greenwash.
Responsible Investor.

Toyota named top ESG brand in Japan survey
The online survey covered 560 corporate brands in Japan. There were 21,000 valid responses. Toyota ranked first in four of 12 environmental areas, including “making efforts to address climate change” and “making efforts to save energy.” In the social category, the company topped the list in six of 12 areas, including “paying attention to the safety and health of employees, such as by preventing industrial accidents,” and “paying attention to product safety.” In governance, the automaker was the highest rated company in all 12 areas, including “top management is keenly aware of governance.”
Nikkei.

Tesla: Not an Automatic Addition to the S&P 500 ESG Index
Since S&P Dow Jones Indices announced that Tesla would be added to the S&P 500® on Dec. 21, 2020, many investors have contacted us asking when this transformative company will become a member of the S&P 500 ESG Index. This will not happen automatically. The main driver of whether a company is selected to join the S&P 500 ESG Index is its S&P DJI ESG Score. This score is derived from the annual Corporate Sustainability Assessment (CSA), which is administered by SAM, a part of S&P Global. The CSA is a highly granular, industry-specific questionnaire based on financial material ESG metrics.
Nasdaq.

As net-zero, diversity targets abound, stakeholders want more robust data
While more major companies around the world are disclosing climate change data and have improved their overall climate stewardship in recent years, gaps remain across all sectors in the total number of companies reporting and the quality of disclosures. ESG stakeholders are also seeking better data when it comes to corporate diversity. How exactly do you measure things like race and sexual orientation when data is scarce or nonexistent? Gender data is somewhat more robust.
Nasdaq-listed consumer companies by gender diversity on the board:

S&P Global.

Initiative Highlight

Instead of a report highlight this week I bring you an initiative highlight. Launched in December 2020 The Net Zero Asset Managers initiative comes ahead of the fifth anniversary of the Paris Agreement. The initiative aims to galvanise the asset management industry to commit to a goal of net zero emissions. Further signatories are expected in the coming weeks and months in the run up to COP26.

What are Asset Managers committing to?

“The Net Zero Asset Managers Commitment

In line with the best available science on the impacts of climate change, we acknowledge that there is an urgent need to accelerate the transition towards global net zero emissions and for asset managers to play our part to help deliver the goals of the Paris Agreement and ensure a just transition.

In this context, my organisation commits to support the goal of net zero greenhouse gas (‘GHG’) emissions by 2050, in line with global efforts to limit warming to 1.5°C (‘net zero emissions by 2050 or sooner’). It also commits to support investing aligned with net zero emissions by 2050 or sooner.

Specifically, my organisation commits to:

1. Work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management (‘AUM’)
2. Set an interim target for the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner
3. Review our interim target at least every five years, with a view to ratcheting up the proportion of AUM covered until 100% of assets are included

In order to fulfil these commitments my organisation will:

1. For assets committed to be managed in line with the attainment of net zero emissions by 2050 or sooner (under commitment b)
   Set interim targets for 2030, consistent with a fair share of the 50% global reduction in CO2 identified as a requirement in the IPCC special report on global warming of 1.5°C
2. Take account of portfolio Scope 1 & 2 emissions and, to the extent possible, material portfolio Scope 3 emissions
3. Prioritise the achievement of real economy emissions reductions within the sectors and companies in which we invest
4. If using offsets, invest in long-term carbon removal, where there are no technologically and/or financially viable alternatives to eliminate emissions
5. As required, create investment products aligned with net zero emissions by 2050 and facilitate increased investment in climate solutions
6. Across all assets under management
7. Provide asset owner clients with information and analytics on net zero investing and climate risk and opportunity
8. Implement a stewardship and engagement strategy, with a clear escalation and voting policy, that is consistent with our ambition for all assets under management to achieve net zero emissions by 2050 or sooner
9. Engage with actors key to the investment system including credit rating agencies, auditors, stock exchanges, proxy advisers, investment consultants, and data and service providers to ensure that products and services available to investors are consistent with the aim of achieving global net zero emissions by 2050 or sooner
10. Ensure any relevant direct and indirect policy advocacy we undertake is supportive of achieving global net zero emissions by 2050 or sooner
11. Accountability
    Publish TCFD disclosures, including a climate action plan, annually, and submit them to the Investor Agenda via its partner organisations for review to ensure the approach applied is based on a robust methodology, consistent with the UN Race to Zero criteria, and action is being taken in line with the commitments made here

We recognise collaborative investor initiatives including the Investor Agenda and its partner organisations (AIGCC, CDP, Ceres, IGCC, IIGCC, PRI, UNEPFI), Climate Action 100+, Climate League 2030, Paris Aligned Investment Initiative, Science Based Targets Initiative for Financial Institutions, UN-convened Net-Zero Asset Owner Alliance, among others, which are developing methodologies and supporting investors to take action towards net zero emissions. We will collaborate with each other and other investors via such initiatives so that investors have access to best practice, robust and science based approaches and standardised methodologies, and improved data, through which to deliver these commitments.

We also acknowledge that the scope for asset managers to invest for net zero and to meet the commitments set forth above depends on the mandates agreed with clients and clients’ and managers’ regulatory environments. These commitments are made in the expectation that governments will follow through on their own commitments to ensure the objectives of the Paris Agreement are met, including increasing the ambition of their Nationally Determined Contributions, and in the context of our legal duties to clients and unless otherwise prohibited by applicable law. In some asset classes or for some investment strategies, agreed net zero methodologies do not yet exist. Where our ability to align our approach to investment with the goal of net zero emissions by 2050 is, today, constrained, we commit to embark with determination and ambition on a journey, and to challenge and seek to overcome the constraints we face.”

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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