“Climate change poses new challenges to central banks, regulators and supervisors. This book reviews ways of addressing these new risks within central banks’ financial stability mandate. However, integrating climate-related risk analysis into financial stability monitoring is particularly challenging because of the radical uncertainty associated with a physical, social and economic phenomenon that is constantly changing and involves complex dynamics and chain reactions. Traditional backward-looking risk assessments and existing climate-economic models cannot anticipate accurately enough the form that climate-related risks will take. These include what we call “green swan” risks: potentially extremely financially disruptive events that could be behind the next systemic financial crisis. Central banks have a role to play in avoiding such an outcome, including by seeking to improve their understanding of climate-related risks through the development of forward-looking scenario-based analysis. But central banks alone cannot mitigate climate change. This complex collective action problem requires coordinating actions among many players including governments, the private sector, civil society and the international community. Central banks can therefore have an additional role to play in helping coordinate the measures to fight climate change. Those include climate mitigation policies such as carbon pricing, the integration of sustainability into financial practices and accounting frameworks, the search for appropriate policy mixes, and the development of new financial mechanisms at the international level. All these actions will be complex to coordinate and could have significant redistributive consequences that should be adequately handled, yet they are essential to preserve long-term financial (and price) stability in the age of climate change.”
“We are an international group of institutional investors delivering on a bold commitment to transition our investment portfolios to net-zero GHG emissions by 2050. Representing over US$ 4.5 trillion in assets under management, the United Nations-convened Net-Zero Asset Owner Alliance shows united investor action to align portfolios with a 1.5°C scenario, addressing Article 2.1c of the Paris Agreement.
This Alliance was initiated by Allianz, Caisse des Dépôts, La Caisse de dépôt et placement du Québec (CDPQ), Folksam Group, PensionDanmark, and SwissRe. Since then, Alecta, AMF, CalPERS, Nordea Life and Pension, Storebrand, and Zurich have joined as founding members. Aviva, AXA, CNP Assurances, Fonds de Réserve pour les Retraites (FRR), Generali, the Church of England, Munich Re and ERAFP have recently joined the growing group. Convened by UNEP’s Finance Initiative and the Principles for Responsible Investment, the Alliance is supported by WWF and is part of the Mission 2020 campaign, an initiative led by Christiana Figueres, former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC).”
Climate change presents an emerging, but also rapidly evolving challenge for the global community of accounting practitioners, academics and standard setters and the Market is increasingly concerned about the physical, liability and transition risks arising from climate change. To mitigate such risks, through the provision of relevant information to the market, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) published recommendations for climate-related disclosures by companies in 2017.
Research undertaken by a team from the University of Sydney examined the challenges corporate entities face in seeking to measure and disclose their climate-related financial risks, as well as the challenges investors face in analysing such risks.
The findings indicate that demand for climate-related financial disclosures is escalating rapidly. The ability for preparers of financial reports to provide such information in a manner that is decision-useful is, however, limited by three fundamental problems, including:
a) The lack of specification and guidance available;
b) The nature of the measurements required, which are often complex and require significant scientific expertise; and
c) The desire for investors to see, in the market, forward-looking information pertaining to organisational strategy, stress-tested against a variety of climate change ‘scenarios’. This latter information is inevitably uncertain, as well as being possibly commercially sensitive in nature.”
“From fires to floods, the warming climate is reshaping the globe. In fact, the decade of the 2010s was the hottest ever recorded on Earth. And although activists and scientists have long been sounding the alarm, a new voice joined the chorus recently: investment firm BlackRock. William Brangham talks to BlackRock’s Brian Deese about how climate change is altering American business and finance.”
I will remember 2019 for many things, including the fact that both my parents died during the year; he aged 98, she 97. They saw vast changes during their unusually long lives. He learned to fly on rickety biplanes, then, little more than a decade after fighting in the Battle of Britain, was monitoring the fallout from nuclear bomb tests in the Pacific and later flying jets that would once have been inconceivable. Born into a radio world, they died enmeshed in the internet.
Even so, I believe the next couple of decades will see more change than they saw in nine. Let me explain. My forecast for the 2020s, which I have come to call “the exponential decade”, is that this will be a period where things move at a blistering pace and in directions that take many – perhaps most – of us by surprise.”
“2020 ESG trends to watch” by Linda-Eling Lee, Meggin Thwing Eastman, and Ric Marshall. From the summary page that gives a link to the full report:
· “The resurgence of stakeholder capitalism means that shareholders are no longer alone in finding channels to hold companies accountable.
· Whether it’s accessing capital or embarking on a workforce makeover, the top echelon of corporate management will find that deft management of ESG issues becomes a critical core competency.
· Climate change accelerates as an investment theme, driving a looming re-valuation for "brown" properties and a search by investors for opportunities through mining alternative data sources.
ESG themes are long-term, but some can emerge with sudden force. We are watching five trends we believe will unfold in 2020 to catapult ESG investing into the new decade.
“The 2020 Edelman Trust Barometer reveals that despite a strong global economy and near full employment, none of the four societal institutions that the study measures—government, business, NGOs and media—is trusted. The cause of this paradox can be found in people’s fears about the future and their role in it, which are a wake-up call for our institutions to embrace a new way of effectively building trust: balancing competence with ethical behavior.”
“Interest in “sustainable Investing” - incorporating various environmental, social, and governance (“ESG”) related concerns or objectives into investment decisions – has soared in the past several years. By one measure, assets under management (AUM) in ESG mutual funds and exchange-traded funds (ETFs) globally has grown from $453B in 2013 to $760B in 2018, with estimates of continued significant growth in the coming decade.1 These figures do not even include the growing private funds investing directly in sustainable infrastructure and other assets.
As investor interest in sustainable investment products has increased, the area has rightly taken on greater focus for policy makers and a broad set of stakeholders as well. Two policy considerations quickly come to the fore. First, a well-regulated sustainable finance ecosystem is needed to support broader sustainability-related policy initiatives at the global level, most pointedly to mobilize the massive amount of capital needed to address climate change. Second, and by no means unrelated, is the concern that robust standards exist to mitigate the risk of “greenwashing” – the risk that either through confusing or outright misleading investment approaches, asset owners cannot make informed choices about the actual sustainability characteristics of their investments.”
“NEW YORK, NY, JANUARY 29 2020– As investor interest in “sustainable” investment strategies grows, many asset managers are expanding their sustainability-related services. In response, the Money Management Institute (MMI) and The Investment Integration Project (TIIP) convened industry experts and investment gatekeepers to discuss how best to support due diligence officers, financial consultants, and investors in distinguishing between the increasing number of sustainability-focused managers and products available and identify those that align with their interests and goals.
The resulting report, entitled Sustainable Investment Products and Due Diligence, shares insights and reflections from the convening and aims to prompt further dialogue on the nature and types of sustainability products on the market and to identify questions that arise in assessing their quality and success.
“Investors are increasingly asking their financial advisors to align their investment portfolios with their personal values and help address certain societal and environmental issues,” said Craig Pfeiffer, President and CEO of MMI. “This report is an acknowledgement that the sustainable investment landscape is changing rapidly, and that due diligence techniques must change with it. We hope these insights from leading experts and stakeholders will advance the conversation about that evolution.”
"Foreign direct investment (“FDI”) can be an important vehicle for development. However, in recent years, the focus has not just been on development generally, but sustainable development specifically. Thus, this paper focuses on how countries can increase levels of FDI geared toward projects likely to contribute as much as possible to their sustainable development—in other words, how countries can increase flows of sustainable FDI. To that end, and in light of the World Trade Organization’s ongoing Structured Discussions on a multilateral framework for Investment Facilitation for Development, this paper outlines four issues and related proposals whose implementation through an investment facilitation framework for development would help to ensure that FDI makes a maximum contribution to sustainable development: (1) How can one identify, ex ante, sustainable FDI, to assist countries in facilitating and targeting inflows of sustainable FDI? (2) How can one promote corporate social responsibility (“CSR”)? (3) How could one create the special category of “Recognized Sustainable Investor” to incentivize international investors to implement their CSR commitments and engage in sustainable FDI? (4) What role can home countries play in promoting CSR standards and in facilitating outward FDI flows, especially the flow of sustainable FDI? Looking at the question of a multilateral framework from the perspective of its objective—namely “for development”—is particularly important as this objective should guide the negotiations of such a framework.”
· In 2017, we called on boards to incorporate sustainability into long-term company strategy.
· Over the past three years we have seen some progress, in that directors now acknowledge the importance of environmental, social and governance (ESG) issues to the business.
· During engagements, however, we sense some ambivalence about the board’s role in overseeing ESG. Directors are seeking more guidance about what to focus on and what actions to take.
· In response, we have developed guidance designed to help boards prioritize ESG within their organizations, including:
o State Street Global Advisors’ approach to contextualizing ESG issues within the current board oversight framework.
o R-Factor™, our transparent ESG score that measures the performance of your company’s business operations and governance as it relates to financially material ESG issues facing your industry.
o Our ESG oversight framework for directors that can serve as a road map for what actions are needed to further integrate sustainability into long-term strategy.
· Board members have a critical role to play as catalysts for change on ESG issues. We look forward to engaging with you on this matter and partnering with you in the coming year to build stronger companies and capital markets.”
“Transnational corporations, the engines of global capitalism, have become the target of efforts to create an economic system both socially just and environmentally sustainable. The unprecedented power and impact of these leviathans on society and ecology raises critical questions: What is corporate purpose? To whom should corporations be held accountable? And how, in fact, can that be accomplished? To these weighty questions, recent civil society and governmental efforts—under the rubric of “corporate social responsibility” (CSR)—have offered a tepid response: prod corporations to self-regulate. The inadequacy of self-regulation has become starkly evident: the interests of shareholders remain supreme, while those of workers, communities, and the environment remain subordinate. Moving beyond CSR to “corporate redesign” politics is an urgent strategic necessity for a Great Transition.”
“There is a growing concern that the trading dynamics of our equity markets are too short-term focused, ultimately leading to corporate decision-making that satisfies near-term financial goals while sacrificing long-term value creation. Such short-term behavior seems to have a negative impact on performance and job creation1. In engaging with us, CEOs and their teams have also expressed frustration at the earnings call as the dominant medium for communicating their narrative to the capital markets and have shown interest in increasing the proportion of long-term investors in their investor base.
As a result, public companies are seeking methods to convey their long-term strategy for value creation to investors in a coherent and efficient way. This is an imperative recognized not only by CECP and Edelman, but also by large institutional holders, the Business Roundtable and the National Investor Relations Institute (NIRI), among others.
Below are strategies to enable companies to respond to this urgent long-term value imperative.”
“As sustainability rises to the top of the fashion industry’s agenda, the question of how fashion companies will transform to achieve a sustainable operating model becomes pivotal. Progress to date falls short—and winning in the next decades will require disruptive innovation in the form of new materials, processes, technologies, and business models. Although an expanding innovation pipeline has emerged, only a fraction of all available capital reaches fashion and textile tech, leaving many innovators stuck in the financing gap, unable to advance their solutions to market.
To bring the necessary innovations to scale, fashion brands, supply chain partners, investors, and others need to step up to create the conditions that accelerate innovation. Financing will flow into the fashion space when investors are presented with manageable risk, attractive returns, and measurable impact. With its $2 trillion market size, the fashion industry offers major untapped opportunities for investors and companies. BCG and Fashion for Good calculate a financing opportunity of $20 billion to $30 billion per year to be directed toward developing and scaling the disruptive innovations and business models needed to achieve a step change in sustainability by 2030.”
“It’s one thing to talk about sustainable finance, it’s another thing to put it into practice. Studies show that adopting environmental, social and governance (ESG) principles is good for business, but doing it right requires companies to develop a proper framework that communicates their purpose with sustainability as a prominent driver. If investors and businesses aren’t thinking about integrating ESG, they will need to start soon as sustainability is here to stay. This is the third in a three-part series on sustainable finance.”
“Global risks and opportunities mean that financial information alone cannot give a full picture of a company’s performance. Climate change, environmental degradation, social unrest and internally generated intangibles are addressed by non-financial information (NFI) reporting. However, the hundreds of NFI reporting initiatives available are leading to confusion and the potential for greenwashing. For an effective response to these global issues and stakeholder demands, NFI reporting needs to be harmonised and interconnected with financial reporting.
In this paper, we introduce nine criteria and apply them to four approaches to interconnected sstandard setting for corporate reporting. We set out our vision and offer ideas on how we can make progress towards a global corporate reporting structure.
We are reaching a tipping point for a system change, with stakeholders looking for reliable, consistent information. A global solution to interconnected standard setting can meet this need.
We also make a call for market action to drive to a global solution. To this end, we ask you to send your thoughts and opinions on how to achieve interconnected standard setting to jona@accountancyeurope.eu by 31 March 2020.”
“There is a groundswell of interest in metrics that go beyond our traditional financial view of companies. Many organizations have done extensive work on frameworks for ESG metrics, non-financial metrics, or integrated reporting, each targeted at a range of stakeholders including customers, employees, policymakers and investors. The challenge we often hear is that companies work hard to present thoughtful sustainability reports – which investors then ignore.
Why the disconnect? Most equity investing today is quantitatively driven. Rather than the traditional view of investors who read annual reports, meet with management, and make informed judgments about a company’s culture, leadership and strategy based on first-hand experience, the overwhelming amount of money today is managed by an algorithm or at least by a quantitatively driven process. Investors also like to compare companies over time and across sectors—and tend to be skeptical about companies' varying metrics– so there is a real need for consistently calculable and widely applicable metrics. Even the most sophisticated sustainability reports are hard to incorporate into such a process.”
“The 17 UN Sustainable Development Goals (SDGs) sit at the heart of the 2030 Agenda for Sustainable Development. Adopted by all United Nations MemberStates in 2015, the SDGs provide the blueprint for a more sustainable future by tackling some of the biggest and most urgent global challenges we face, such as poverty, inequality, climate change and environmental degradation.
The Association of Chartered Certified Accountants (ACCA), Chartered Accountants ANZ, the Institute of Chartered Accountants of Scotland (ICAS) the International Federation of Accountants (IFAC), the International Integrated Reporting Council (IIRC) and the World Benchmarking Alliance (WBA) are delighted to promote the Sustainable Development Goal Disclosure (SDGD) Recommendations.”
Memos from Watchell Litpon
“Compensation Season 2020” by Jeannemarie O’Brien, Andrea Wahlquist, and Adam Shapiro. The opening paragraphs:
“While the past year witnessed only modest changes to the rules governing compensation arrangements, practices and trends continued to evolve. We note below various developments worthy of consideration in the year ahead.
Limits on Compensation Deductions Clarified. The IRS issued proposed regulations in December with respect to the 2017 statutory change that significantly expanded the scope of the $1 million annual limitation on the deductibility of compensation paid to specified executives under §162(m) of the tax code. The proposed rules clarify, among other things, that the limitation on deductibility will apply to executives of successor entities in M&A transactions if the executives were previously covered by these limits. In addition, the proposed regulations may extend the application of §162(m) to cover executives of private companies with publicly-traded debt and executives of foreign private issuers. For a more detailed discussion of the proposed regulations, see our December 19, 2019 memorandum. Companies should carefully track their covered employees, avoid unnecessary classification of employees as executive officers and take care to preserve arrangements that are grandfathered for §162(m) purposes.”
“Embracing the New Paradigm” by Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles, and Amanda S. Blackett. The opening paragraphs:
‘For the past decade, the debate about the purpose of the corporation and the role of companies and investors in the capital markets has been growing in intensity. What is their role in solving—or contributing to—the problems of short-termism, burgeoning income inequality, environmental degradation and other challenges, and how do governance principles play a role in solving or exacerbating these problems? How can we incentivize them to make the investments that are necessary for sustainable profitability and long-term growth in value? Will a focus on maximizing shareholder value lead to the most efficient allocation of capital, or is a corporation and its stakeholders (including shareholders) best served by articulating a broader sense of the corporation’s purpose?
More recently, there have been a number of actions by or on behalf of companies, asset managers and investors that have embraced the principles of The New Paradigm, which we developed for the World Economic Forum and was issued by it in September 2016. This momentum accelerated last year, with a number of significant developments that suggest the essential thesis and animating purpose of this new paradigm is now being espoused by numerous major companies as well as the most influential asset managers and investors. In 2019 alone, this group included the three major index fund managers—BlackRock, State Street and Vanguard—as well as Hermes Investment Management, the Investor Stewardship Group, the Business Roundtable, the British Academy, the World Economic Forum and the UK Financial Reporting Council. As to economists and other academics, the case for the new paradigm is persuasively made in a Financial Times article by famed economics commentator Martin Wolf, “How to Reform Today’s Rigged Capitalism,” in which Wolf’s suggestions to preserve our capitalist society are yet another validation of the new paradigm.”
“Sustainability is back in the headlines in the corporate world in the wake of BlackRock’s recent communications to CEOs and clients. In founder Lawrence D. Fink’s 2020 letter to chief executives, Mr. Fink predicts that the long-term, structural effects of climate change are likely to transform the financial markets, leading to “a fundamental reshaping of finance” and “a significant reallocation of capital.” And in its 2020 letter to clients, BlackRock announces: “Because sustainable investment options have the potential to offer clients better outcomes, we are making sustainability integral to the way BlackRock manages risk, constructs portfolios, designs products, and engages with companies. We believe that sustainability should be our new standard for investing.”
Accordingly, BlackRock is requesting that companies produce significant ESG disclosures by the end of 2020. Specifically, while acknowledging that no framework is perfect, Mr. Fink calls for sustainability disclosures in conformance with the industry-specific guidelines issued by the Sustainability Accounting Standards Board (SASB) and climate-related risk disclosures that follow the recommendations of the Task Force onClimate-Related Financial Disclosures (TCFD). Mr. Fink’s letter warns—in bold type—that noncompliance may result in BlackRock’s voting against or withholding votes from management and board members.”
“Reflecting the growing push among investors, asset managers, companies and other stakeholders for a standardized ESG disclosure framework, a task force sponsored by the International Business Council (IBC) of the World Economic Forum (WEF), has released a consultation draft proposing a set of common disclosures aligned with the UN Sustainable Development Goals for companies to consider. Entitled “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation” and drawing from several existing standards and disclosure frameworks (notably, the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD)), the draft framework proposes a set of 22 “core” primarily quantitative metrics and disclosures believed to be readily reportable by companies and an additional set of “expanded” metrics and disclosures that serve as “a more advanced way of measuring and communicating sustainable value creation” and which could be made by companies for whom such disclosure is material and appropriate. The task force was chaired by Brian Moynihan, Chairman and CEO of Bank of America and Chairman of the IBC, and included experts from each of the Big Four accounting firms—Deloitte, EY, KPMG and PwC. Roughly 120 multinational companies and their CEOs are represented on the IBC, which launched this initiative to identify a core set of material ESG metrics and recommended disclosures with the objective that companies would begin reporting collectively on an aligned basis.”
