"A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC"
March 15, 2021: The SEC posted this notice on their website, essentially giving notice to public companies and their investors that climate change is on their menu. While this has been predicted for years, it's suddenly happening. The SEC is heading down the regulatory track of climate and other ESG disclosures for listed companies.
Meanwhile, across the dotted line in Canada...the Supreme Court backed the federal government's carbon pricing policies.
March 28, 2021: "In a 6-3 decision, the country’s highest court has ruled the federal price on carbon, which affects both consumers and large industrial emitters, does not violate the rights of individual provinces and is a critical response to the existential threat of climate change." Nice to see the Canucks leading this charge in the Americas! Expect similar moves in the US given the Biden Administration's climate agenda.
On Trend: CFO’s Speak ESG
In the past, CFO’s have been known to resist ESG language, and even resist ESG as a value driving thesis. That seems to have changed. In the fourth quarter of 2020, the term ESG was mentioned 205 times by global CFOs during investor calls, as compared to 84 in the same period in 2019 and 34 in 2018. In the US, S&P 500 earnings calls between Oct-Dec 2020 mentioned ESG or sustainability 20 times, compared to only six times in 2017.
Because having and communicating ESG targets attracts new investors while lowering borrowing costs and expenses. It seems that CFOs like this kind of thing and they really like to share these results with investors. To put it straight: “It helps broaden our investor base,” said Schneider Electric CFO Hilary Maxson. “It…makes it easier for institutional equity investors to find Schneider and also to invest....” Here’s the Wall Street Journal’s take on it.
The definitive study: ESG Drives $$$ (Rockefeller Asset Management)
For those who still need more proof, another mega study of 1,141 peer-reviewed papers and 27 other meta-reviews of another ~1,400 studies published between 2015-2020, (basically a lot of qualified brains) concludes that ESG strategies do indeed deliver better financial performance. Findings include:
Frothy Carbon Credits?
In today’s world of speculative trading, carbon may be the new play to watch. Hedge funds are threatening a smooth cap and trade transition in the EU by bidding up the cost of the carbon credits (permits) needed by energy-using facilities (emitters). EU emitters need these permits to meet cap and trade regulation, whereby they submit permits to cancel out their excess GHG emissions. This incents the switch to lesser-polluting technologies rather than continually paying for permits.
A smooth increase in carbon futures is critical to a successful cap-and-trade system, as the EU ramps up to carbon neutrality by 2050. Record prices are causing more hedge funds to dive in, driving carbon benchmark futures to hit 40 euros ($US 49/metric ton) for the first time ever, gaining 16% last week alone. Hedge funds are betting carbon will rise much faster, to as high as 100 euros this year or next. In response, the EU is considering measures to curb the speculatory hedge fund buying. Move over Bitcoin, you may have company in the ‘artificial commodity’ category.
S&P Global Gauntlet: Net Zero 2040; reduce 25% by '25
Not satisfied with a mere 2050 net zero target, S&P Global* throws down the gauntlet this week, by setting its net zero clock to 2040 and committing to a Science Based Targets (SBTi) 25% reduction in emissions by 2025. These ambitious targets are consistent with reductions needed to keep warming to 1.5°C, which is the most ambitious scenario available in the SBTi process. We bow to S&P Global, for leading by example and having the gumption to set moonshot interim targets!
*S&P Global provides credit ratings, benchmarks and analytics for global capital and commodity markets; divisions include S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices and S&P Global Platts.
It’s the Supply Chain, Stupid (so says some very smart people)
For years now, global companies have been dialing down on the GHG emissions in their operations (aka Scope 1 and Scope 2). Currently, the World Economic Forum’s new rallying call is to tackle supply chain emissions (Scope 3). In their hot-off-the-press report, ‘Net Zero Challenge: The Supply Chain Opportunity’, co-authored with the Boston Consulting Group, they make a compelling argument as to why: “Addressing supply-chain emissions enables many customer-facing companies to impact a volume of emissions several times higher than they could if they were to focus on decarbonizing their own direct operations and power consumption alone – and achieving a net-zero supply chain is possible with very limited additional costs.” World Economic Forum and Boston Consulting Group, Jan. 2021
Some other Scope 3 myth-busting data points..
Eight supply chains generate more than 50% of global emissions!
For the Birds: Task Force on Nature Related Financial Disclosure (TNFD)
Just when you thought you were on top of your ESG acronym game, having mastered how to say 'Task Force on Climate Related Financial Disclosure' outloud, and spell the acronym in the intuitively wrong, but factually correct way, along comes another one to mess you up!
The Task Force on Nature Related Financial Disclosure (TNFD) is in early days, having launched on September 30, 2020 at the UN Biodiversity Summit, where the UN Secretary General said: “the new Task Force on Nature-Related Financial Disclosures will help financial institutions to shift finance from destructive activities and toward nature-based solutions.” Fear not, you have a bit of time to get this rolling off your tongue–maybe a year before you start seeing it everywhere and 2023 for take-up by your financial institutions.
To read more and get ahead of the significant impact this will have on corporate reporting and access to capital, go here for the TNFD website, which also lists the heavy-hitter financial institutions in the 'Informal Working Group'. For those who want to dig in further, go here for the just released report “Unearthing investor action on biodiversity” prepared by the esteemed Responsible Investor, in partnership with Credit Suisse.
**8 GHG-heavy supply chains: food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight.
3 Things This Week (ok…4 - it was busy!): Blackrock's ESG Edict, Biden's Green Dream Team, FED GONE GREEN, Net Zero Pension Funds
Larry Fink, Blackrock Founder/CEO, Touts SASB, TCFD & Corporate Purpose
On Tuesday, January 27, Larry Fink, released his 2021 Letter to CEOs. As the head of the world’s largest asset manager, it’s never a bad idea for all CEOs to consider his advice:
Biden’s Dream Green Team
As expected, after Biden rejoined the Paris Agreement on day one, over the balance of the week he expanded on plans to use climate change as the economic driver needed to pull the country out of Covid.
To execute on the vision, here’s a summary of the Climate Dream Team Biden has assembled. Stay tuned for details on the $2-3 trillion economic stimulus package focused on green infrastructure and energy and the impact that will have on access to and cost of capital for businesses. The trickle-down effect will be a faster and greater impetus for public companies to report on ESG.
The US Fed has Gone Green
The US Federal Reserve has joined the Network for Greening the Financial System, a group of 75 central banks committed to addressing climate change risk in banking systems. This move signals an upcoming faster pace of adoption of ESG information to drive decision-making in financial institutions.
Pension Funds Joined the Net Zero Club
With so many global brands daily announcing commitments to achieve net zero by 2050 and the wide-spread adoption of the Task Force on Climate Related Disclosure’s reporting recommendations, it was just a matter of time before major pension funds joined the club. To wit, last week one of Canada’s largest pension funds, the Ontario Teachers’ Pension Plan Board (OTPP), announced their commitment to net-zero GHG emissions by 2050. Very soon, as in weeks from now, the OTPP will release their progressive targets for portfolio emissions, meaning companies in or aiming to be in their portfolio will need to report GHGs and their own reduction target achievements. Standby for more and more funds to make similar announcements this year.
It’s week two of 2021, and ESG is evolving daily.
Each week at ESG Café we share three things to keep you abreast of ESG and sustainability trends that could impact your business – and the investors you attract.
In 2020, it was challenging to keep up with the pace of change, but possible. In this era of unknowns, the one thing we do know is that 2021 will be a year of hyper-responsiveness, hyper-accountability, and hyper-competitiveness, and that applies to your customers, employees and investors.
So, in 2021 we will need even more nimble corporate leadership to respond to the evolving sustainability trends that investors, employees and customers are driving.
Which brings us to the acceleration of ESG reporting in companies. By moving off the sidelines of sustainability and ESG performance, companies that report their ESG performance have used reporting as a platform for communicating how they are adjusting to systemic change, and the value their company provides to their key stakeholders beyond the products or services they provide. The intensity of investor interest in this information has intersected, for the first time ever, with a desire by corporations to share this information as a way to differentiate their brand, compete for customers and employees, and secure cost-efficient capital.
Watch 2021 become the pivotal year in sustainability performance and ESG disclosure in companies of all sizes, including small and mid-cap companies. Staying on the sidelines of ESG disclosure is no longer a low-risk strategy, it's a high-risk gamble where access to capital, customers, and skilled employees is at stake.
Sustainability and ESG performance requires some common sense, attention to details and a competitive mindset.
Does it require a bit of front-end prioritizing? Yes. Some jockeying for agreement on resources? Yup. Convincing some key people to put in some extra hours. For sure. Following some best practises? That's always a good starting point. It this sounds to you like a typical project management exercise, and therefore a tad dull, you are not wrong. But it gets much more interesting very quickly.
Once you get past the starting phase of the work and the team starts digging into ESG initiatives that mean something to the company, that's when the magic happens. I'll be back weekly with industry chatter, resources, news that's fit to print, industry moves that may have implications for decisions you will be making today, or in the near future.
See you back here at ESG Cafe. We promise not to bore you.