“The coronavirus pandemic has become the defining issue of 2020. But climate change will be the defining issue of this decade, if not this century. It affects us all, and ICAEW is committed to ensuring that chartered accountants are at the forefront of efforts to tackle the severe challenges it presents.
Their role involves helping to ensure that the impact of climate change is accounted for and disclosed appropriately in the audited financial statements. Recent IASB guidance on this topic, discussed below, reflects this challenge.
Boards and audit committees of IFRS reporters should take stock of this guidance when considering the impact of climate-related risks on their financial reporting and the appropriate disclosure of assumptions and other relevant information in the notes to the financial statements.”
“Does the CDS Market Reflect Regulatory Climate Risk Disclosures?” by Julian F. Kolbel, Markus Leippold, Jordy Rillaerts, and Qian Wang. The Abstract:
“Using a forward-looking measure of climate risk exposure based on textual analysis of firms' 10-K reports, we assess whether climate risks — as disclosed to the regulator — are priced in the credit default swap (CDS) market. We construct a novel climate risk measure based on BERT, an advanced context-based language understanding algorithm, and we adapt it for our purposes. Differentiating between physical and transition risks, we find that transition risk increases CDS spreads, especially after the Paris Climate Agreement of 2015. These increases are statistically and economically highly significant. However, we do not find such an effect for physical risk.
“Jeffrey Ubben’s new socially responsible investment firm, Inclusive Capital Partners, officially launches on July 1 — but the veteran activist investor told Institutional Investor it will not be just another ESG fund.
“ESG has hijacked the conversation by selling a data-driven, benchmark-hugging passive product,” Ubben said in an email exchange with II. “We will be deeply analytical about how the core business can accelerate a healthier planet.”
Inclusive’s mission statement goes further, declaring that ESG has been “productized, dangerously adding fuel to fire with regards to the funds flow[ing] into the same few over-owned stocks.”
Ubben left ValueAct Capital, the firm he co-founded 20 years ago, to start the new company. He describes Inclusive as a return-driven environmental and social activist firm.”
“Domini Funds 2019 Impact Report.” The opening paragraphs of the “Dear Fellow Shareholders” letter from Carole Laible, CEO, and Amy Domini, Founder and Chair.
“Domini began with a simple idea—that it’s possible to make money and make a difference. At the beginning of 2020, as we began to reflect on all the work that we accomplished in 2019, the CEO of the world’s largest asset manager highlighted the importance of incorporating the risks and opportunities of climate change into investment assessments. In recognition of the lasting impact climate change will have on the future of the economy, he said, “awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.” This surprised many in the investment community, but not us. It was impact investors—including Domini Funds shareholders—that started this ‘fundamental reshaping of finance’ long ago.
As the Domini Impact Equity Fund approaches its 30th year, we reflect. Since the beginning, we have applied environmental, social, and governance standards to help ensure our investments have positive impact on people and the planet. While our investment objective is to provide our shareholders competitive returns, this report allows us to explain how, by investing in the Domini Funds, your dollars do so much more.
In 2019, we enhanced our Impact Investment Standards, continued to identify how our investments support the United Nations’ Sustainable Development Goals, and collaborated with a wide variety of stakeholders, including companies, civil society organizations, and other investors. In this report, we highlight the work that your investment in the Domini Funds made possible this past year, which included efforts to help preserve forests, promote diversity at the board and executive level, and encourage pharmaceutical companies to broaden access to medicine.”
“Due in part to the growth in sustainable investing, the US Department of Labor announced a proposed rule yesterday that would clarify the application of the fiduciary duties of prudence and exclusive purpose under the Employee Retirement Income Security Act of 1974 (ERISA) to pension plan sustainable investments. ERISA establishes minimum standards that govern the operation of private-sector employee benefit plans: it requires fiduciaries to run plans solely in the interest of participants and beneficiaries; for the exclusive purpose of providing benefits and paying plan expenses; and with care and prudence. The Department of Labor’s proposed rule is designed in part to clarify that ERISA plan fiduciaries may not invest in ESG vehicles if doing so reduces risk-adjusted return for the purpose of non-financial objectives.
Sustainably invested assets in the US have grown 18-fold since 1995, according to US SIF Foundation. Globally, investors with $80 trillion in assets under management signed the UN-supported Principles for Responsible Investment (PRI), committing to factor sustainability into their investment analysis and decisions. The momentum and scale of sustainable investing is due in part of the fact that ESG factors drive outperformance. Earlier this month, Morningstar research on the long-term performance of 745 European sustainable funds reveals that nearly 60% of strategies outpaced traditional funds over one, three, five, and ten years. The Financial Times also reported that sustainable funds outperformed traditional funds by an average excess return of 1.83% during the coronavirus-driven market decline in March.”
“Ending racism in America is a responsibility of corporations, and corporations must recognise that their current efforts to promote their core values, and diversity and inclusion programmes, fall far short of what is needed today. What good is it to live in a prosperous country when our police forces routinely kill black people?
It is time for investors to recognise this issue for what it is, a system-wide failure that our government is complicit in fostering and that violates the Constitutional rights and human rights of black people. And let us call it for what it is, racism.
Let us also be clear: This is an ESG problem. Responsible investors have come to trust ESG research and investment strategies to avoid investing in corporations that are lagging on taking needed action to address human rights violations and to take real action to drive needed change. As a group, we are failing to meet these needs.
Although Calvert has been a leader in dealing with inequality and pushing corporate boards to establish greater diversity, we have not done enough. As CEO of Calvert and a part of the system, I recognise that much more needs to be done. More open and forceful action is required by investors and by corporate leaders and boards.”
“A survey of ESG influencers shows the elusive side of investor responsibility. What to do?
When the Covid-19 crisis exploded in winter 2020, we spelled out four different scenarios for ESG in times of pandemic.
In one scenario, we envisioned that responsible investment could disappear by failing to “show up” in this crucial moment. In another, we thought that on the contrary, it could blow up as the crisis forced a rethink of capital markets and governance. We further considered that the voluntary approaches of business and finance could take an even more dominant role faced with inadequate government response, ushering a new era of hyper-capitalism. We also imagined that a business-as-usual scenario could prevail with ESG continuing to progress on the business side(e.g. asset gathering), but with no marked change in its capacity to alter the course on major systemic issues.
There were many unknowns at time, and many remain, with the pandemic still on the march despite efforts to reopen economies. We have a better sense of the devastating economic impact and of governments’ trillion dollar responses. We’ve seen markets rise and fall, at times clearly disconnected from the real economy – if unemployment is any measure of that (and in the long run, the employment outlook does not look good). We’ve seen social, political and racial tensions explode in various countries amidst volatile political climate compounded by and exacerbated geopolitical tensions.
And we’ve heard calls to build back better, inspired by images of Himalayan summits piercing through after decades shrouded in pollution and responding to a widespread appetite to turn the crisis into opportunity.
On that front, the response is at best mixed so far: even in the progressive European Union, a green tinted Covid-19 EUR 750 billion recovery package, or even the distant hope that a newly minted borrowing capacity could open the door to a carbon tax, stand in contrast to domestic support for aviation and other fossil fuel industries. It looks worryingly like same “old same old.” That battle is not over but the window to effectively turn the crisis into an opportunity won’t be open forever.”
“The most precipitous contraction of the global economy in a century has seen carbon emissions plummet. By the end of this year, emissions are likely to be 8% less than in 20191 — the largest annual percentage drop since the Second World War (see go.nature.com/3gej8th).
To avert a global recession, governments are injecting trillions of dollars into stimulating their economies. The International Monetary Fund anticipates economic recovery by the end of this year, provided there are no further large outbreaks of disease2. If nothing else changes, then emissions will tick upwards once more, as they have after each recession since the first oil shock of the early 1970s. The analysis we present here examines past recoveries to find lessons that help to plot a low-carbon path out of this one.
Breaking the historical iron law that links economic growth to carbon emissions requires energy supplies to be decarbonized, and is essential to stop global warming. But we must be honest. Nothing in history suggests that emissions can drop fast enough to limit warming to 1.5 °C above pre-industrial levels — an aspirational goal of the Paris agreement, which is up for review over the next few years. This would mean cutting emissions by an amount similar to that delivered by the current economic catastrophe every year for the next decade3. We need more pragmatic goals.”
“Environmental, social, and governance investing can be a divisive topic. It is charged with ideological undertones that can split a room in two. Regardless of which corner investors find themselves in, I think there is common ground among them. I believe there are three things about ESG investing that all investors can agree on.
ESG Risks Can Have a Material Financial Impact
I think all investors can agree that ESG risks can have a material financial impact on companies. Climate change can disrupt global agricultural supply chains and have an impact on the bottom lines of firms ranging from Bayer (BAYRY) to Starbucks (SBUX). The Facebook (FB) Cambridge Analytica data breach represented a violation of the social network's social contract with its users. Its share price suffered as a result of the firm's inability to protect its users' information. Failures of governance are the least controversial of ESG risks. When Wells Fargo's (WFC) branch employees opened millions of fake accounts to meet lofty cross-selling goals, there was no doubt that poor governance was to blame. That fiasco cost the firm billions and left a lasting blemish on its brand.”
“Alongside Bono, Richard Branson, and eBay founder Pierre Omidyar, private equity firm TPG launched the Rise Impact fund in 2016. The offering committed “to deliver positive and sustainable impact” while creating a “top-performing fund.” At the time, Bono remarked that “capitalism is going up on trial, and I think that it’s clear that putting profit before people is a nonsustainable business model.” Bain Capital followed suit, launching its own Double Impact fund, and KKR recently closed a $1.3 billion impact fund.
These efforts reflect a growing commitment to environmental, social, and governance practices by private equity firms and their limited partners. Speaking in 2019 at a forum on public aspects of private equity, Emily Mendell, former managing director at the largest association of LPs, noted, “ESG is critical. It’s critical to returns, it’s critical to value creation, it’s critical to our planet. It is also going to be critical to the PE industry and the viability of the PE industry long-term.” The director of sustainable investing at a major PE firm agreed, explaining to us in an April interview, “Today we are seeing [ESG] questionnaires coming from LPs all over the world.”
This all sounds promising. But does the progress match the headlines?”
“As part of a new Global Corporate Affairs partnership, Oxford University and GlobeScan are working together to help senior executives and corporate affairs leaders improve their impact of the corporate affairs function.
On June 24th we hosted a webinar and collaboration forum to share the findings from our inaugural Corporate Affairs Survey 2020.
The forum format comprised a 60-minute livestream webinar moderated by Rupert Younger, Director, Oxford University Centre for Corporate Reputation that included a presentation by Chris Coulter, GlobeScan CEO, on the 2020 Corporate Affairs Survey and featured special guest panelists:
Anik Michaud, Group Director Corporate Relations, Anglo American
Bob Eccles, Visiting Professor of Management Practice, Saïd Business, University of Oxford
In addition to hearing insights from our panelists on the webinar, we were also joined by 221 people, from 42 countries, posting over 200 comments during the 30 minute online, text-based discussion session. The collective contributions and examples shared by all participants helped to make this an insightful and impactful event.
You can find the full webinar recording and highlights report available below. You may also review the archived discussion by visiting the online forum anytime.”
“In recent months, our country has faced profound turmoil – from the devastating toll of global pandemic and economic fallout, we’ve seen over 100,000 lives lost in the U.S. coupled with unprecedented levels of unemployment. And in the past two weeks, following the killing of George Floyd, we careened into a brutal reckoning with systemic and virulent racism, spurring protests and unrest across the country.
The impacts of these events are unfolding moment-by-moment – on streets and in living rooms, in boardrooms and on the factory floor, in hospitals and in supermarkets – across the country, where Americans contend with illness, with inequity, with loss. What future comes of this time of turmoil remains to be seen, but what’s clear is that it has revealed an economic system that propagates inequality and instability – a system that we now have the opportunity to repair and rebuild together.
JUST Capital has been working throughout this time to better understand the impacts of COVID-19 on America’s workers, customers, and communities – tracking the actions of America’s largest employers as part of our COVID-19 Corporate Response Tracker, and surveying members of the public to identify their views of just business during this time and their priorities for corporate action.”
“As we began the UN Decade of Action and approached the 20th anniversary of the UN Global Compact, it was with an acute awareness that we were not on track to meet the 2030 deadline to transform our world. Then came the COVID-19 pandemic, further exposing fundamental weaknesses in our global system and the fragile nature of our progress to date. With less than 4,000 days remaining until the 2030 marker, we need to turn commitment into action. As we set out to recover from the COVID-19 pandemic, now is the time for all companies to raise their ambition for people, planet and prosperity.
For transformation at the level and scale needed, organizations need to focus on making sustainability sustainable. This is more than a matter of strategy, policy and process — it is fundamentally about leadership and people. Leaders on boards and in the C-suite have a huge opportunity to make sustainability central to their organization’s culture and leadership, yet only in 4 per cent of non-executive and senior executive appointments is sustainability experience or mindset a requirement.”
“In the three decades after World War II, workers and stockholders shared equitably in the nation’s growing wealth. But, during the last several decades, this fair gainsharing has diminished as the power of the stock market, in the form of institutional investors, has grown, and the comparative voice and leverage of workers has declined. As a result of these and other factors, a much greater share of the gains from increased corporate profitability and productivity has gone to stockholders and top management, on the one hand, and much less to employees, on the other. Contributing to this divide has been a push to tie top management pay to total stockholder return and to create incentives for management to deliver returns to stockholders, even if that requires decreasing the share that the workers primarily responsible for corporate success get. The resulting economic insecurity and inequality have caused demands for serious change in corporate governance to give greater weight to the interests of workers. In this Essay, we focus on one practical way to move toward that worthy end: reconceiving the compensation committee. That is, a reconceived compensation committee would focus on the company’s entire workforce, not just senior management, and have the responsibility for overseeing management’s implementation of an effective system to compensate workers fairly, ensuring they receive a fair share when corporate productivity and profitability increases, and analyzing what allocation of compensation within the company’s workforce will provide the most motivation to encourage corporate success. To accomplish this, compensation committees would be expected to understand the nation’s, the industry’s, and the company’s traditional gainsharing practices among workers, stockholders, and top management and develop and implement a corporate strategy to ensure that gainsharing is equitable. By doing so, compensation committees will also be able to more rationally set top executive compensation and establish metrics for top management and key personnel involved in gatekeeping functions that are tied to good EESG practices and not just to stock price. And the reconceived compensation committee should also be the committee charged with compliance and EESG responsibilities in the areas most important to workers, including not just worker pay and benefits, but also safety, racial and gender equality, sexual harassment and inclusion, and training and promotion policies. Not only that, the reconceived compensation committee should monitor company practices in its supply chain to ensure that the company’s adopted policies regarding fair treatment of workers extend to those workers who work for company contractors. By this evolutionary means that builds on the existing American corporate governance system, important strides can be taken toward making our capitalist system work better for the people most critical to its success: workers.
“As many businesses discharge, furlough, or drastically reduce pay to large shares of their workforces, some compensation committees are announcing their decision to cut base salaries and annual bonuses for C-suite executives as well as board cash retainers.
The Conference Board, in collaboration with Semler Brossy’s research team and ESGAUGE Analytics, is keeping track of SEC Form 8-K filings by Russell 3000 companies announcing these reductions. For the live database and some helpful visualizations of key trends across business sectors and company size groups, click here.
The following are some key observations from disclosures made since March 1, 2020. (Note: The commentary below refers to disclosure made as of April 24, but the database is updated weekly; please review the database and visualizations for the most current information).”
“Over the last 50 years, globalization has dramatically increased the influence of business in society. Seventy of the top 100 economies in the world are now global companies, with a reach and power that exceeds many nation states. As the influence of business on society has grown, so have public demands and expectations for firms to take greater responsibility for their impact on society and provide resources and leadership, working with governments and other stakeholders to address systemic social challenges.
In response to this environment and in the absence of a clear global regulatory framework for corporate social responsibility, global companies are entering into an increasing number and variety of voluntary “soft law” agreements and social responsibility initiatives to manage stakeholder expectations and safeguard their license to operate. These “private and civil” initiatives engage the private sector with non-government and market-based regulatory organizations to develop codes of conduct and standards for corporate social responsibility, as well as to involve business in helping address systemic social challenges, from climate change to income inequality.
The variety and number of these kind of initiatives has grown rapidly in the last few decades. Today, there are few large global firms that are not engaged at some level in one or more of these kinds of “self-regulatory” and social responsibility initiatives. The range of initiatives currently underway includes:”
“The risk oversight function of the board of directors has never been more critical and challenging than it is today. Rapidly advancing technologies, new business models, dealmaking and interconnected supply chains continue to add to the complexity of corporate operations and the business risks inherent in those operations. The evolving political environment further exacerbates the risks that corporations face. Corporate behavior has been blamed for accelerating environmental degradation and aggravating disparities in income and wealth. In addition, safety scandals and product failures have affected public confidence in the ability of corporations to manage business risk and have given rise to skepticism as to whether companies are sufficiently prioritizing consumer and product safety. Environmental, social, governance and sustainability-related issues have become mainstream business topics, encompassing a wide range of issues including business model resilience, employee wages, healthcare, training and retraining, income inequality, supply chain labor standards and corporate culture, as well as climate change. The reputational damage to companies, boards and management teams that fail to properly manage risk is substantial.
Within this broader context, corporate risk-taking and the monitoring of corporate risk remain top of mind for boards of directors, investors, legislators and the media. Companies should exercise care to address business risks and ESG issues, avoid public relations crises and develop and maintain reputations as responsible economic actors. Major institutional shareholders and proxy advisory firms routinely engage companies on risk-related topics and increasingly focus on risk oversight matters when evaluating corporate performance, including in proxy contests and when considering withhold votes in uncontested director elections.”
“Last week witnessed a critical but largely unremarked advance for plaintiffs seeking to impose liability on major public companies for the social costs of climate change.
The Ninth Circuit’s ruling in City of Oakland v. BP PLC cleared the path for state-court litigation against corporate defendants on the theory that producing, distributing, using, or profiting from fossil fuels constitutes a “public nuisance.” The cities of Oakland and San Francisco sued large energy companies in California state court, seeking an order requiring them “to fund a climate change adaptation program for the cities.” The energy companies removed the case to federal court and moved to dismiss the complaint. The district court agreed with the energy companies that the cities’ state-law nuisance claim was governed by federal law. “If ever a problem cried out for a uniform and comprehensive solution,” wrote the district judge, it is the “geophysical problem” of climate change. “A patchwork of fifty different answers to the same fundamental global issue would be unworkable.” Unpersuaded, the Ninth Circuit concluded that the cities’ claim neither presented a “substantial question of federal law” nor was completely preempted by the federal Clean Air Act.”
“As directors and shareholders become increasingly attuned to ESG considerations and stakeholder-oriented governance, they have sought guidance about how to incorporate these imperatives into the board’s decision-making process—particularly regarding decisions that entail trade-offs or an allocation of resources between and among stakeholders and ESG objectives. Our answer to this question is rooted in the classic bedrock of board functioning: directors must exercise their business judgment. This is not only the practical answer—it is the essential animating principle of Delaware law.
Recently, many who continue to advocate for shareholder primacy, and therefore reject stakeholder governance, have sought to portray stakeholder interests in a zero-sum competition, arguing that it is impossible to properly exercise business judgment to reconcile such diverging interests. In their view, stakeholder governance is not only a radical departure from Delaware corporate law but also corrosive of the very essence of capitalism.”
“Events of recent weeks and months have starkly illuminated the effects of systemic racism and injustice on Black Americans, including threats to physical safety, psychological trauma and economic disparity. CEOs worldwide and across industries have spoken out, expressing their horror and outrage, as well as their resolve to do more. Companies have announced significant financial commitments; others have referred to actions to be taken, and early movers have begun to announce or amplify business-related initiatives. Institutional investors, asset owners, asset managers, private equity fund limited partners and investor groups have also begun speaking out and considering action with respect to companies in their portfolios. The question for all is how to follow through on the sentiments expressed and drive positive change: what tools are available to address systemic racism and injustice and the threats they pose, and how can those tools be used?
ESG metrics, including those of the leading voluntary disclosure frameworks, provide valuable tools and models to help both public and private companies and their investors and other stakeholders (including employees, customers, business partners and communities) understand their progress on these issues. These tools can also support and facilitate constructive engagement and discussion with such internal and external stakeholders on how companies can further foster and integrate inclusion and diversity into their day-to-day business and interactions.”
“Jeff Ubben, founder of ValueAct Capital, together with Lady Lynn Forester de Rothschild, the Founder and CEO of the Coalition for Inclusive Capitalism, and several others, have formed a new activist fund, Inclusive Capital Partners (ICP). Taking note of the endorsement of stakeholder governance by the Business Roundtable last year and the endorsement of sustainability and stakeholder governance articulated in the World Economic Forum’s Davos Manifesto 2020, ICP has been formed to “partner with management and the boards of companies whose core businesses seek to achieve the reversal of corporate harm” in environmental and societal areas:
We will aim to make capitalism part of the solution, rather than the source of some of the world’s biggest problems. We will establish new stakeholder-oriented metrics that are company specific and hold management teams accountable to those, in addition to conventional financial metrics. We will seek to make the markets work in a way that public policy and philanthropy have been unable.
The ICP mission statement is attached here. It identifies the types of businesses that ICP will target in seeking to drive a positively differentiated return by improving environmental and societal performance. It is must reading!”
“A report published by the United States Government Accountability Office (GAO) earlier this month has further highlighted the dearth of comparable, decision-useful ESG disclosures sought by investors. Commissioned by U.S. Senator Mark Warner, the report noted that most institutional investors contacted by the GAO seek ESG information to enhance their understanding of risks and to assess long-term value. The report also noted challenges with understanding and interpreting both quantitative and narrative ESG disclosures, and that the quality and relevance of such disclosures to investors remain highly variable. Following the release of the GAO report, Senator Warner called on the U.S. Securities and Exchange Commission (SEC) to establish a task force to determine a robust set of quantifiable and comparable ESG metrics to be disclosed by all public companies. Senator Warner had previously pushed for more extensive disclosure of human capital-related metrics in light of their materiality to most businesses.
The GAO’s findings echo similar sentiments among the investor community, who, along with other stakeholders, have noted the growing need to establish a standardized ESG disclosure framework to facilitate the disclosure of decision-useful information. Various private-sector initiatives are already in progress—the World Economic Forum’s International Business Council earlier this year released a consultation draft of core and expanded ESG disclosures drawing on metrics from existing ESG reporting frameworks. Likewise, the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) have pledged to work together to align ESG reporting standards.”
“On June 23, 2020, the SEC’s Office of the Chief Accountant (OCA), in anticipation of the upcoming second quarter financial reporting cycle, issued a statement emphasizing the importance of financial reporting during the COVID-19 pandemic, noting that “high-quality, reliable financial statements form the bedrock of our U.S. capital markets.” The statement encourages the financial reporting community to continue providing “a steady flow of timely, decision-useful” financial information that complies with the applicable standards.
The statement recognizes that many public companies will continue to work through complex accounting and financial reporting issues related to the impact of and uncertainties caused by the ongoing COVID-19 pandemic and provides the following guidance:”
“The purpose of this post is to ask for your help on an important project. The World Benchmarking Alliance (WBA) is soliciting input on their “Social transformation Draft methodology” and proposed metrics. Feedback is due by September 7, 2020. More on this after some quick background for those who do not know about—but everyone who cares about a sustainable world should—the WBA.”
