Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
Earlier this week, credit ratings provider S&P Global acquired The Climate Service (TCS) for an undisclosed amount to add capabilities to its portfolio of ESG insights and solutions for customers. Founded in 2017, TCS developed the Climanomics platform to quantify physical climate risk analytics for corporations, investors, and governments. Outputs, including modeled transition risk and physical risk analysis presented in financial terms, are aligned with Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The platform models physical risk, such as extreme temperatures, drought, fires, and storms and also supports clients with intelligence on transition risks. The acquisition follows S&P Global’s April 2021 launch of Sustainable1, set to be a single source of sustainability intelligence.
- Teneo Takeaway: S&P Global’s acquisition follows a broader industry trend of financial services companies buying innovative ESG-related startups to augment their own sustainability portfolios. Other recent notable acquisitions include Blackbaud’s of Everfi and JPMorgan’s of OpenInvest, respectively.
A recent Bloomberginvestigation found that BlackRock rounded out influential model portfolios with its primary ESG fund – often unbeknownst to investors. The investigation suggested the ESG ratings BlackRock cites for its popular ESGU fund have “almost nothing to do with the environmental and social impact companies in the fund have on the world.” Bloomberg also reported BlackRock may have inflated actual demand for sustainable investments by not openly marketing portfolios as environmentally and socially conscious. In response, BlackRock emphasized its belief that “greenwashing is a risk to investors, which is why we support regulatory initiatives to enhance the transparency.”
- Teneo Takeaway: BlackRock’s ESG Aware fund charges five times the fees as their S&P 500 fund, a financial incentive that may contribute to their championing of sustainable investing.
Institutional Shareholder Services announced the planned January 10 launch of a new data verification (DV) portal for U.S. corporations ahead of the 2022 annual meeting season. The launch represents a major expansion of its current DV program used by companies that are the subject of ISS’ proxy research and recommendations. Via a newly created portal, this program will verify 400-plus governance and compensation datapoints. Information available for verification are principally those used and reflected in ISS’ proxy research report on companies, like director-level demographic details, board and committee information, and individual executive pay figures. ISS noted that the new portal’s verified data will also be reflected in ISS’ Governance QualityScore and Environmental & Social QualityScore corporate profiles.
- Teneo Takeaway: ESG data quality, and the difficulty of correcting ratings to reflect accurate data, is a leading critique among issuers. ISS’ new portal is likely to expand companies’ ability to fact-check proxy research ahead of annual meetings.
With the pandemic throwing the transportation and shipping industries into disarray over the past two years, recent reports suggest companies are not investing enough to address another problem for the global supply chain: climate change. According to researchers at Bank of America, Bain, HSBC, and multiple universities, the cost of adapting to the effects of climate change and becoming net-zero emitters will reach above $100 trillion total by 2050, with the need to assess operational risks growing daily as temperatures rise. Experts argue that to protect against more widespread disruptions to the global economy, companies must add significantly to their operating budget for their supply chains so they can fully understand, address, and mitigate their vulnerabilities to climate shocks.
- Teneo Takeaway: Fortunately, companies have been investing heavily in supply chain innovation and resilience, a trend that is likely to continue as the pandemic and government restrictions exacerbate existing weaknesses in global supply chains. According to FreightWaves, venture investment into supply chain technologies exceeded $7 billion for each of the first three quarters of 2021.
A number of ESG funds were down last year, including the Invesco Solar ETF and the IShares Global Clean Energy ETF. Meanwhile, Brent crude oil and US benchmark WTI gained more than 50 percent in 2021. Morningstar Direct found that European ESG funds’ Q3 inflows slowed to $108 billion, down from $149 billion in the first three months of 2021. Some analysts remain optimistic about ESG funds and expect more ESG integration in 2022. AllianceBernstein Chief Responsibility Officer Michelle Dunstan views ESG as “a long-term secular trend.”
- Teneo Takeaway: The relative underperformance of ESG funds highlights the nuance inherent to ESG investing: Fund managers cannot merely eschew fossil fuels and overweight technology companies and always expect double-digit returns.
Under a new regulation to be implemented in March, French automakers must include messages on advertisements encouraging viewers to seek more environmentally-friendly travel alternatives. Automakers can choose between three messages, according to France’s official journal: “Consider carpooling,” “For short trips, opt for walking or cycling" or “Use public transportation for everyday trips.” At the end of each message, advertisers must add a hashtag, “#SeDéplacerMoinsPolluer” (roughly translated to #MoveWithoutPollution) or they can be fined up to about $56,000. Car manufacturers must also include a vehicle’s carbon-dioxide emissions class in promotions, according to a Le Monde report. Ads for the highest-polluting vehicles will be banned in 2028. These moves follow years of lobbying by environmental groups calling for a ban on or changes to car ads to reflect their climate impact, like how food companies in France are now instructed to advertise healthy eating.
- Teneo Takeaway: The Elysée’s most recent move comes on the heels of other government policies aimed at reducing the carbon footprint of automobiles in France. The French government’s push for alternatives to driving is likely to be less disruptive than its eco-tax, which in 2018 precipitated weeks of violent protests and riots by the gilet jaunes.
They Said It: ESG Influencers Speak Out
In an interview with Barron’s, sustainable investing pioneer and Domini Impact Investments founder Amy Domini suggested that a main barrier to ESG investing “has recently started to crumble: [The belief] that investors shouldn’t get involved with social issues because that’s the role of government, philanthropy, or religion. Now the public is starting to understand that certain corporate behaviors aren’t easily controlled or affected by government, and you need to have a voice from within. The financial system is a great vehicle for making the world a better place. It’s almost instantaneous in its transmission of information, and it’s capable of incredible innovation and has tremendous resources.”
Looking Ahead: Upcoming ESG Events