ESG+ Newsletter – 6th May 2021

Your guide to impending EU Regulation

Before getting into the most pressing issues of the week, we wanted to share a practical and insightful guide on upcoming regulation from the EU, which includes timelines for implementation as well as a host of insights as to its impact. Put together by our team in Brussels, any stakeholder trying to evaluate developments in this space should take a look:

https://trends.getready4.eu/sustainablefinance/

The ESG inflow boom continues but not everyone is convinced

As far as inflows to ESG funds are concerned, 2021 has picked up where 2020 left off, with global demand for sustainable investment options continuing to grow. Inflows into ESG funds hit $185.3 billion in the first quarter of this year, according to a report from Morningstar, representing a 17% increase on Q4 2020. While other regions continue to close the gap, Europe still accounted for over 79% of total fund flows. US-based sustainability-focused funds attracted nearly $21.5 billion in net inflows, more than double the $10.4 billion year-on-year recorded during Q1 2020.

According to CNBC Pro, investing in ESG was already gaining momentum before COVID-19 hit. But it has since accelerated due to a number of factors, including the disproportionate toll of the pandemic on minorities, social unrest and the increased frequency of adverse weather events due to climate change. Not everyone is convinced of the ‘overperformance’ narrative around ESG however, with the Financial Times detailing the full analysis by Scientific Beta, a “smart beta” report initially covered last week by ESG+. The now published report, titled ‘Honey, I Shrunk the ESG Alpha’, argues that there is no solid evidence supporting claims that ESG strategies generate outperformance. It posits that investors who look for value-added through outperformance are looking in the wrong place and that ESG strategies should be weighed up for the unique benefits that they can provide, such as hedging climate or litigation risk, aligning investments with norms, and making a positive impact for society.

Research links materiality and the S in ESG to companies standing

The link between news, communications, social media and ESG credentials remains an area companies continue to grapple with. This week, research from multiple sources appears to be shining a greater light on the area. Firstly, a detailed paper entitled ‘Which Corporate ESG News does the Market React to?’ reaffirms the importance of materiality to ESG credentials in the outside world.  George Serafeim from Harvard Business School and Aaron Yoon from Northwestern find that “stock prices only react to the news on ESG issues that is classified as financially material for a given industry by the SASB, suggesting that investors respond selectively to news. This price reaction is larger for ESG news that is positive, receives more attention, and relates to social capital issues relative to natural or human capital issues.”

Reaffirming the growing importance of S issues to companies’ reputation and standing, and in a tip of the hat to World Day for Safety and Health at Work (28 April), MarketPsych, partnering with Refinitiv, conducted research on the relationship between workplace safety and corporate performance. The findings were extrapolated from AI-based scoring of millions of news and social media articles (rather than scoring sustainability from a company’s own reports and press releases), with MarketPsych claiming that the data reveals that companies with safe and happy employees outperform their peers in the public markets. Refinitiv has been refining its use of natural language processing in recent years as the demand from fund managers for ESG data continues to grow.

Berkshire’s AGM a microcosm of growing activism in proxy voting

Each year, the focus on Berkshire Hathaway’s annual shareholder meeting is high as investors seek guidance from the ‘oracle of Ohama’ on emerging trends. This year, however, the trend may be emerging from the floor of the meeting as opposed to the top table. On May 1 the company faced two ESG-focused shareholder proposals to release annual reports on how its vast network of companies are responding to climate change and to diversity, equity, and inclusion in the workplace. Warren Buffet and his Board were steadfast in their dismissal of the proposals, insisting that the company’s decentralised business model makes it unreasonable for its operating units to report on such topics. Shareholders followed the Board’s recommendation with a 75% vote aligned with management, although 25% of shareholders, including top investors like BlackRock and the California Public Employees’ Retirement System, voted in favour of the proposals, against the Board’s recommendation. These numbers, up from 10% the previous year, reflect a broader trend on ESG-related proposals. Indeed, the pressure placed on mainstream institutions by media and more ‘active’ capital market participants appears to be working, with the world’s largest asset manager becoming increasingly active in voting against management and with shareholder proposals, a factor we are likely to see across the board when reviewing the AGM season in its totality.

The Challenges of Sustainability Reporting

The merger of the Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC), expected to be finalised in June 2021, will aim to reduce the complexity of the current ESG reporting framework while increasing the transparency of communication between investors and issuers over ESG risks and opportunities. However, as discussed in ’Overselling Sustainability Reporting’ published by Harvard Business Review this week, while the number of companies adopting ESG reporting standards has grown rapidly in the past two decades, environmental issues and social inequity did not decline. Instead, the greater focus on ESG disclosure highlighted that measurements provided by issuers can be incomplete, imprecise, and misleading. Efforts to streamline reporting standards supported by a transparent application of rigorous science-based targets are advocated as the key improvements needed to effectively address the climate challenges and other growing environmental and social issues. The merger of the two reporting frameworks, and the creation of the unified organisation, the Value Reporting Foundation, is a positive move in this direction which can potentially be more impactful if other global standard setters and framework providers co-operate or integrate.

E&S performance and female leadership

Recent research from Université Paris-Dauphiné suggests that gender diversity on boards may improve E&S performance. The authors of the study, Edith Ginglinger and Caroline Raskopf, compared a sample of French companies before and after the introduction of gender quotas in 2011 to companies listed in US as well as companies listed in Paris but with headquarters abroad, and found that companies with female directors perform better on E&S criteria. For example, following the introduction of the gender quota, the number of boards with separate E&S committees increased. The research also found those companies tended to have a female director as the chair of the E&S committee, a higher focus on E&S policies and better performance on E&S measures. However, even in boards with no E&S specialised committee, the female leadership on key board committees, such as the nomination and audit committees, made a positive difference and enhanced E&S scores. As the focus on ESG grows, it appears that increasing research will find links between specific areas (diversity) and overall performance (ESG generally).

New initiative launched to help drive diversity in bond trading

Earlier this week, electronic trading platform, MarketAxess, launched its Diversity Dealer Initiative which aims at partnering large investment firms with trading firms that are owned by minorities, women, and veterans, allowing the two to trade with each other more easily. Large asset managers and fixed income investors, who invest on behalf of socially-conscious institutions such as pensions funds, foundations, or insurers, are all typically required to allocate a portion of their trades with diversity and minority owned trading firms. However, these firms are typically small and often cannot sell the quantity needed, so it is hoped that this new initiative will help raise the visibility of these firms and connect them more easily, allowing them to transact more with minority-owned dealers. Rick McVey, Chairman and CEO of MarketAxess, believes that Diversity Dealer Initiative will help in “eliminating barriers to opportunity” and build “connectivity in global fixed income trading.” Pilot participants for the new initiative include Loop Capital Markets, R. Seelaus & Co., BlackRock, Inc. and AllianceBernstein L.P.

Is a Premier League football club out-performing the FTSE 100 in engaging stakeholders?

Champions League finallists Chelsea Football Club announced on Tuesday that, from the start of July, there will be supporters present at the Club’s Board meetings. Three supporter advisors, picked through an election and selection process, will attend to ensure that the “general supporter sentiment is considered as part of the Club’s decision-making process.” This decision would appear to be a direct response to Chelsea’s disastrous involvement in the European Super League, which saw 12 of the top clubs from various European domestic leagues looking to splinter and create a new, independent league – and  was met with widespread disapproval and anger from fans. The club quickly withdrew their support for the Super League; now Chelsea’s decision appears to recognise the importance of stakeholders to an entity’s license to operate, something which was evidently missing from the club’s earlier misjudgement.  As outlined in last week’s newsletter, this is in stark contrast to the entire FTSE 100, with recent research revealing that not a single FTSE 100 company has opted to appoint an employee representative to their respective boards as part of their compliance with the 2018 guidelines. Whether the Chelsea Board will take on the feedback and suggestions of its supporter advisors will only become apparent in time; however, for at least perceptions, they appear to have gone beyond Britain’s largest companies in putting their stakeholders where their mouth is.

In Case You Missed It

• This week, Glass Lewis issued a wide-ranging report analysis the continued discrepancy between employment in the labour market and the “dearth of female directors on the boards of public companies around the world.”
• Reaffirming that ESG’s reach is permeating all parts of society, Morgan Sindall carried out a survey of its pension members and found that: “More than 61% said that it was either ‘very important’ or ‘important’ that the people managing their money actively consider ESG issues when choosing stocks, while 56% said that if they knew their retirement savings were making a positive environmental or social impact, they would view the organisation more favourably.”

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