Tag: Featured Articles

Six ESG and Climate Trends to Watch for 2023

By Meggin Thwing Eastman, MSCI

Above: Jurisdictions with active and proposed regulations or guidelines for ESG funds – Solid text boxes represent regulations in force, while dashed boxes represent proposed or planned regulations. List of jurisdictions with regulations or guidelines proposed or in force for ESG funds: U.S. (proposed); Canada; EU; U.K. (planned); Singapore; India (proposed); Hong Kong; Australia (including Section 1013DA); Malaysia; New Zealand; Philippines (proposed); Thailand (proposed); Taiwan. Data as of Oct. 12, 2022. Source: MSCI ESG Research.

 

  • A swiftly changing geopolitical and macroeconomic backdrop has shifted the ESG and climate landscape at a rapid pace, making it imperative that investors understand the challenges and opportunities that companies face.
  • Climate remains at the top of the ESG agenda, with regulators increasingly conscious of the role they need to play alongside governments in ensuring companies and countries meet their climate-related obligations.
  • Beyond climate, ESG is increasingly affecting many other areas, including impacts on everyday life. This year, we have drilled down to bring these detailed insights to you and help inspire some fresh thinking.

The last year has seen a seismic shift in the ESG and climate landscape. Regulators are upping the ante on everything from greenwashing to stricter climate target disclosures, while the war in Ukraine, disruptions in the energy market, rising interest rates and soaring inflation have all combined to produce a global cost-of-living crisis and renewed geopolitical and macro uncertainty. Add to the mix a spate of climate-induced disasters and the increased politicization of ESG investing, and it’s easy to see why investors have tended to tread cautiously as they seek to understand companies’ challenges and opportunities.

In MSCI’s ESG and Climate Trends to Watch for 2023 we discuss the key topics investors face, from climate change, the environment and the road to net-zero, through to regulatory requirements, supply chain innovations, biodiversity and new technologies, as well as issues affecting everyday life.

Here, we briefly touch on six of the 32 trends that we have identified.

 

Networks and renewables cominate capex plans of major US and Europe utilities - MSCI
Data for 26 European and U.S.-based power-generating constituents of the MSCI ACWI Index, as of Aug. 5, 2022. Definitions of capital expenditures are based on MSCI’s ESG climate-change metrics. Source: MSCI ESG Research.

1. Energy crisis, Ukraine war driving fossil fuel agenda, but don’t rule out renewables

The ongoing war in Ukraine and high-inflationary environment may limit near-term pressure to reduce global greenhouse-gas emissions as governments prioritize energy security and affordability. But for power companies, swapping coal and oil for natural gas may not be the only practical option.

In 2023, we’ll be watching which companies are keeping their eyes on longer-term decarbonization trends and expanding their deployment of renewables.

 

 

2. Market conditions could test investors’ commitment to say-on-climate voting

According to our analysis, more investors voted against corporate climate strategies in 2022 compared to 2021, especially where a company’s emissions trajectory was misaligned with global temperature targets. However, energy market turmoil and a focus on energy security may change voting behavior.1

In 2023, we’ll be watching whether opposition to corporate climate strategies will continue or whether more investors will give companies the benefit of the doubt on their climate plans in challenging market conditions.

Companies emissions trajectories and 2022 climate votes - MSCI
Analysis covers all 43 constituents of the MSCI ACWI Investable Market Index (IMI) that held management-sponsored say-on-climate votes in 2022 to date. The percentage of votes against accounts for votes in favor and votes withheld/abstained. Data as of Nov. 9, 2022. Source: MSCI ESG Research and company disclosures.

 

3. Regulators turn their gaze to ESG funds

ESG-oriented funds have long operated with limited regulatory guidance.2 But regulatory interest in fund names and funds’ classification and disclosure obligations are ramping up globally. Spearheaded by the EU’s Sustainable Finance Disclosure Regulation, which imposes requirements on more transparent reporting for ESG funds, other major market regulators are following suit.

In 2023, we’ll be watching for changes in ESG fund names and labels as unfolding disclosure regimes hold managers to stricter account.

 

4. Cutting deforestation: Market restrictions get real

Despite commitments to halt forest loss,3 2021 saw tree-cover loss of 25.3 million hectares globally, an area larger than Great Britain.4 In addition, 2022 saw global wildfires burn down millions of hectares more. COP155 addressed such natural losses, while the European Parliament recently introduced legislation requiring products sold in the EU to be deforestation-free.

In 2023, we’ll be watching which companies exposed to deforestation can improve due diligence and supply-chain monitoring as they seek to maintain access to key markets.

Paper and forest products companies lead, but deforestration policies thin - MSCI
Share of companies within selected industries of the MSCI ACWI IMI that have disclosed a deforestation policy; industries included where at least 2% of the peers have disclosed a policy. Data as of Oct. 12, 2022. Source: MSCI ESG Research.

 

5. Mining old electronics to fuel new energy tech

In recent years, China and the EU have strengthened policies and guidelines on the circular treatment of materials and waste, including electronic waste (e-waste). In September 2022, the U.S. followed suit, passing a bill on recycling electric-vehicle batteries. Efficiently extracting metals from e-waste could reduce dependency on mining and emissions.

In 2023, we’ll be watching which companies up their efforts to mine secondary metals from e-waste — both to keep regulators happy and boost access to metals critical for clean-energy technologies.

A long way off from a circular economy for metal - MSCI
Analysis includes 68 technology-hardware and household-durable constituents of the MSCI ACWI Index, as of Sept. 27, 2022. Based on the public disclosure of these companies (e.g., annual reports and 10-Ks), we analyzed the differences in the reporting of e-waste collection and recycling metrics, as well as any targets related to these collection and recycling efforts. Source: MSCI ESG Research.

 

6. Cotton’s crunch point and the future of fiber

Cotton makes over 25% of the clothes we wear, but its harmful impacts, like soil degradation and water consumption, have spurred demand for more environmentally friendly options.6 Apparel retailers have responded by working with third-party certifiers for sustainable cotton and exploring alternatives. However, catastrophic flooding in Pakistan and the withdrawal of some certifications from China have created supply issues.

In 2023, we’ll be watching to see which retailers can navigate these near-term shortages and which ones are prepared to back new, alternative fibers.

Apparel retailers relied on third-party certification for responsible cotton - MSCI
Data is based on apparel-retail constituents of the MSCI ACWI Index, as of Oct. 21, 2022. Source: Refinitiv, MSCI ESG Research.

 

Understanding the impact of ESG and climate

For investors, considering ESG and climate factors is not a new concept, but it is one that is likely to become even more important given increased regulation, demands for transparency and an ongoing quest for standards. The trends identified here, and in our wider publication, are already shaping society and hint at the risks and opportunities that companies and investors may face in the years ahead. Understanding them will be a first step in assessing the potential impact they could have on investment portfolios.

 

Article by Meggin Thwing Eastman, MSCI

Footnotes:
[1] Masters, Brooke. “Shareholders back away from green petitions in US proxy voting season.” Financial Times, July 1, 2022.
[2] ESG funds are defined as any fund that employs any ESG considerations in its security-selection process (values and screening/ranking/exclusions/integration/optimization, etc., and their combinations). In simplest terms, it is the widest possible net under which any and all funds employing any ESG considerations in security selection are captured. All fund characterizations based on data from Broadridge and MSCI ESG Research, as of July 2022.
[3] “Glasgow Leaders’ Declaration on Forests and Land Use.” UN Climate Change Conference UK 2021, Nov. 2, 2021.
[4] University of Maryland and World Resources Institute. “Global Primary Forest Loss.” Accessed Oct. 12, 2022.
[5] The 15th Conference of the Parties to the Convention on Biological Diversity in Montreal, Canada, commonly abbreviated as COP15 (Dec. 7 to 19, 2022.)
[6] In 2021, companies in the apparel-retail sub-industry with combined revenues of over USD 100 billion were sourcing cotton certified to a third-party standard. This reflects revenue from eight out of 12 constituents of the MSCI ACWI Index in the apparel-retail sub-industry that report sourcing third-party certified cotton. Apparel-retail sub-industry defined according to the Global Industry Classification Standard (GICS®). GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.

Energy & Climate, Featured Articles, Food & Farming, Impact Investing, Sustainable Business

How vulnerable is Wall Street to climate change? The Fed wants to find out.

By Jake Bittle, Grist / Salon

The Federal Reserve is putting the country’s biggest banks to a test

Regulators have long known that climate change poses a threat to the U.S. financial system. Major disasters like hurricanes and wildfires can wipe out buildings and crops, causing losses for the banks that make loans against these assets. Even efforts to take on climate change could cause problems: A rapid, widespread shift to renewable power could send shock waves through financial markets as stocks and bonds tied to fossil fuel companies fall, hurting the bottom line of banks, insurers, and other institutions tied to them.

Now the Federal Reserve, which is tasked with overseeing the country’s financial system, is trying to figure out just how vulnerable big banks are to this kind of upheaval. The Fed on Tuesday released new details about a climate risk analysis it is asking six major U.S. banks to conduct, offering a peek at the worst-case climate events that financial regulators are worrying about.

Banks often use stress tests like these to assess risks in their portfolio, and since the financial crisis the Fed has required large banks to ensure that they can withstand sudden financial shocks, but this is the first time that the U.S. government has asked major banks to account for their exposure to climate change. The results of the so-called “pilot climate scenario analysis exercise” will offer new insight into whether these banks could survive major climate shocks, and could also help inform new regulations such as the ones that followed the 2008 financial crisis.

The banks that will participate are some of the largest and most diversified in the country: Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, Goldman Sachs, and Morgan Stanley. This batch controls about half of the banking market in the United States as measured by total deposits, and also manages billions of dollars for investors and pensions. The Fed’s exercise asks these banks to consider two major types of climate danger: the “physical risk” of natural disasters and the “transition risk” of a movement away from fossil fuels.

In the first part of the exercise, banks will assess how their portfolios would fare if one or more major hurricanes struck the Northeast, a “region in which all participants have material commercial and residential real estate exposures.” The Fed wants banks to pay particular attention to their real estate portfolios: how many residential and commercial loans would fall through, and how much money would it cost the banks if that happened?

In the second, the Fed will look at how their investments and loans would perform during a rapid energy transition to net zero emissions by 2050. If the world’s nations did come together and decarbonize on that timeline, it’s likely that major oil companies and other carbon-intensive companies would see severe losses. Rating agencies like Standard & Poor’s might downgrade their credit, making it harder for them to borrow their way out of trouble, which in turn would cause losses for the banks that finance and insure them.

Many large financial institutions still provide large loans and underwriting services for fossil fuel producers. A new report from the advocacy group Reclaim Finance found that even banks that have signed a prominent global net-zero pledge have provided a combined $269 billion in financing for fossil-fuel companies over recent years. Five of the Fed’s six participating banks are named in the report as top fossil-fuel financiers — all except Goldman Sachs.

Yevgeny Shrago, policy director for the climate program at Public Citizen, the consumer advocacy group, said the Fed’s exercise is a welcome start, but it doesn’t go far enough.

“It’s not even a fire drill,” Shrago told Grist. “It’s like looking at the map of a building and being like, do we have enough exits?” The exercise focuses on how climate change could affect banks’ balance sheets, Shrago said, but it doesn’t consider how losses at those banks could lead to broader financial turmoil for small banks, insurers, pensions, and ordinary people.

The Federal Reserve is independent from the Biden administration, but the bank’s announcement comes on the heels of other regulatory actions. The Securities and Exchange Commission is in the middle of finalizing a rule that would require publicly-traded companies to disclose their greenhouse gas emissions, and the Treasury is seeking information from major insurers about how climate change could affect their business.

The Federal Reserve has asked banks to submit their responses by the end of July, and plans to make the results of the study public later this year.

 

Article by Jake Bittle, Salon

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

Wall Street’s New ESG Money-Maker Promises Nature Conservation—With a Catch

By Natasha White, Bloomberg

Big global banks are eyeing some of the world’s most fragile countries for a new experiment in financial engineering: debt relief in exchange for environmental protections.

Called “debt-for-nature swaps,” they present a tempting solution for the rising number of nations in distress, particularly those with ecosystems to protect. A country gets to avoid default and lower its debt burden, as long as it’s willing to earmark some of the savings to salvage a coral reef, preserve a forest or build a wind farm, for example. Global investors get better returns and enhanced green credentials. Wall Street takes a cut.

As much as $2 trillion of developing country debt may be eligible for this kind of restructuring, according to a rough estimate by the Nature Conservancy, a US nonprofit that’s taking a lead role in these deals. Belize inked a $364 million nature swap in 2021; Gabon signaled plans for a $700 million restructuring in October; Ecuador is said to be working on a $800 million transaction, and Sri Lanka is considering a $1 billion deal.

Buoyed by the finance industry’s newfound enthusiasm for biodiversity, backers of this latest flavor of swap are finding eager partners in investment banks and institutional investors. These are “turbocharged swaps,” said Daniel Munevar, economic affairs officer at the United Nations Conference on Trade and Development and former adviser to finance ministries in Greece and Colombia. “The limit in these operations isn’t the money to fund the swaps, it’s how much debt can be swapped.”

Behind the feel-good headlines, it’s unclear whether these kinds of swaps will deliver the promised benefits. The terms can be murky. Transaction costs are high. Experts question whether the complex and costly deals will achieve long-term financial stability. In December, as negotiators gathered at the United Nations’ COP15 biodiversity conference in Montreal, Greenpeace and dozens of other non-profits called for debt-nature swaps to be rejected.

“Debt-for-nature swaps have been popular for the wrong reasons. And the main wrong reason is that they generate the impression that you can kill two birds with one stone, that you can address a debt problem and you can improve nature conservation,” said Jeromin Zettelmeyer, director of Belgian think tank Bruegel and a former sovereign debt expert at the International Monetary Fund.

The first debt-for-nature swaps debuted in the 1980s, small deals limited by what governments and nonprofits could bring to the table. But with emerging market debt rising and the costs of climate change bearing down disproportionately on some of the most-indebted countries, there’s new interest in a supersized version. “There’s tons of demand,” said Ramzi Issa, managing director for credit structuring at Credit Suisse Group AG, who helped arrange Belize’s $364 million deal. “Investors haven’t really seen this before.”

The tiny Caribbean country is the biggest test to date. Better known for Mayan ruins and a nearly 200-mile barrier reef, Belize is also a serial debt defaulter, and by late 2020, it was again on its knees. The pandemic was keeping tourists away, depriving the country of its main revenue source. Its debt level approached 130% of GDP, almost double the International Monetary Fund’s sustainable threshold for the nation.

“The IMF was insisting on a program,” said Mark Espat, a former Belizean politician, now a consultant, who advised the country on its debt-for-nature swap. The IMF acts as a lender of last resort to debt-stricken countries, but its strict conditions make many governments balk. For Belize, that would have meant higher taxes, job losses and lower spending on social and conservation projects, Espat added.

Climate Risk and Crippling Debt - Bloomberg Green

The Nature Conservancy offered an alternative. It had arranged a debt-for-nature swap with Seychelles a few years earlier and was looking for a bigger deal. Together with Credit Suisse, it proposed to finance the buyout of Belize’s $553 million “superbond,” if the government agreed to spend some of the savings to protect its fragile mangroves and coral reefs. After almost a year of negotiations, around 85% of bondholders agreed to take 55 cents on the dollar, in cash, and staked their claims to a role in Belize’s ocean conservation.

The second part of the deal required TNC and Credit Suisse to re-sell the new debt — repackaged as “blue bonds,” a maritime twist on “green bonds” — to investors. That was harder: Belize had defaulted, changed terms on or restructured its dollar bonds at least five times in 14 years. Investors like Swedish pensions manager Alecta only bought in after the US International Development Finance Corporation agreed to provide insurance.

Here’s how it worked:

  • The Nature Conservancy set up a Delaware-based subsidiary, Belize Blue Investment Company, and raised $364 million from Credit Suisse
  • BBIC loaned those funds to Belize so it could buy back $553 million in debt, at a 45% discount from bond holders
  • Credit Suisse, via a special purpose vehicle in the Cayman Islands, issued $364 million in blue bonds to finance the deal
  • Belize will pay back the new, smaller loan from BBIC over 19 years with an interest rate starting at 3% and rising to 6% in 2026. It must set up a $24 million conservation endowment, and commit to spending $84 million on conservation and to protecting 30% of its oceans
  • The US International Development Finance Corporation insured the BBIC loan, essentially putting the US government on the hook if Belize can’t pay

At the time, the deal was hailed as an all-around success. It cut the country’s debt by 12% of GDP, reopened its access to financial markets, and redirected money once destined for foreign creditors into the local economy. Belize promised to funnel almost $180 million over two decades to protect its oceans. Investors were glad to have backed a worthy cause.

It was a textbook case of blended finance: Public funds are used to de-risk private investment and the two money streams combine to finance the otherwise unfinanceable. The strategy is widely viewed as a way to plug the multi-trillion-dollar gap in finance for decarbonization, climate adaptation and nature protection in developing countries.

‘The nirvana we’re trying to reach.’

Debt swaps like this one are “the nirvana we’re trying to reach,” said Oliver Withers, head of biodiversity at Credit Suisse. “Products that are scalable and that can be replicated. That’s the really exciting thing with debt swaps — it ticks both of those boxes.”

Not everyone is so sanguine. A closer look reveals that Belize’s costs were far higher than the initial $10 million price tag, said UNCTAD’s Munevar, who has studied the transaction. Millions more are hidden in Belize’s interest payments. Munevar compared what Belize pays with what Credit Suisse returns to investors in the new blue bonds. Over the life of the deal, the difference adds up to $84 million, Munevar estimated.

That spread, which TNC says is in fact $86 million, covers insurance premiums for DFC and private-sector reinsurers, along with $14 million to repay a $10.5 million loan from TNC to Belize at 3% interest and “standard financing costs (such as audit, accounting, rating agency expenses),” according to an organization spokesperson. TNC will be reimbursed at cost for staff time spent on conservation work.

Still, that’s a much higher cost than the $10 million initially disclosed, and it speaks to how murky and complicated these deals are, Munevar said. “I find this profoundly concerning — first, because it leads to a misleading assessment of the cost-and-benefits of the arrangement and second, because this is an arrangement based on taxpayer money from both Belize and the US.”

These costs make the swap “one of, if not the most, expensive debt restructurings in recent history relative to the size of the transaction,” said Munevar. Sean Newman, an emerging-markets debt consultant and former chief investment officer of Sagicor Group, a financial services conglomerate in the Caribbean, agreed that the deal is “outrageously expensive.”

For Bruegel’s Zettelmeyer, the cost comes as no surprise. These operations are “small, they are complicated to arrange and so you end up in effect paying a lot to arrange this to someone for a very small gain,” he said. “It’s an inefficient type of operation and ultimately then the country pays for it.”

Credit Suisse said any lower borrowing costs were passed on to Belize; the difference was “provisioned to cover ongoing transaction costs,” including insurance premiums and third-party maintenance expenses. The Zurich-based bank declined to specify how much it earned on the deal.

Christopher Coye, minister of state in the Belize finance ministry, said the country’s transaction costs totaled $14 million, including financial and legal expenses related to the Eurobonds buyback, the issuance of the new blue loan and blue bonds, and conservation agreements. The government was “completely transparent with this transaction,” he said. “Every single blue bond related agreement was tabled in Parliament for debate and passage.”

Greenpeace and the group of 30 advocacy groups raise other concerns. In particular, such deals lock public funds into new conservation organizations, possibly giving short shrift to other needs, such as health or education; they also jeopardize wider and lasting reforms to debt management. “The risks and pitfalls of turning to financial markets to fund marine conservation are being ignored,” the organizations said in their December letter.

Belize stands by its transaction, costs and all. “Whatever spread there is in there for Credit Suisse or for any other entity, Belize is far better off than it would have been otherwise,” said Espat, the domestic financial consultant. To the growing number of countries interested in this kind of restructuring, he had the following advice: “Negotiate as hard as possible.”

(Corrects title of emerging- markets debt consultant in 18th paragraph.)

 

Article by Natasha White, Bloomberg,

With assistance from Sydney Maki and Demetrios Pogkas

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

Upcoming Regulations in ESG Ratings: Three Implications for Business

By Ellinor Haggebrink, BSR

Key Points

  • ESG assets may hit US$53 trillion by 2025, a third of global assets under management (AUM).
  • There are increasing concerns over greenwashing, the reliability of these ratings, and how well they reflect a company’s commitment to ESG.
  • Upcoming regulations are a win-win for both rated companies and rating agencies.

The field of ESG ratings is in a phase of rapid growth—as of today, it is estimated that there are 150 different ESG data providers in the market, and these figures are expected to grow with continued consideration from investors. The estimated scale of ESG-related assets under management (AUM) is predicted to reach US$53 trillion by 2025, equivalent to a third of all global investments.

This fast-paced development is due to an increasing regulatory focus on ESG in potential investments with the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR), together with more sophisticated demand from investors for products that shift society to a greener economy and help mitigate climate change. These two drivers are only likely to increase in intensity over the coming years, leading to ESG ratings taking on a key role in the ecosystem of sustainable finance.

However, with increased influence comes increased scrutiny, and the rapid development of this industry has rendered vocal criticism. This often points to the lack of common standards, as there is no unified definition of what “ESG” should be measuring. Instead, different ESG raters provide indicators on different aspects of sustainability, and applied methodologies vary.

ESG raters often find varying conclusions, despite access to the same information, and on average, the correlation between the leading providers’ scoring of the same company can be as low as 0.54. In comparison to the regulated field of credit ratings, where correlation is close to 0.99, this stands out. Consequently, the market receives mixed signals about ESG performance, and business, in turn, gets mixed messages about what steps to take to improve their scores. Plus, there is often limited transparency around underlying methodologies due to confidentiality, which makes it difficult for companies to understand the criteria used to assess them.

All these factors have created legitimate concerns over greenwashing, questioning the reliability of these ratings and how well they reflect a company’s commitment to ESG. Consequently, voices have started to call for regulations in the industry. There is a need for more standardization, to calibrate the market so that actors are more aligned with the help of regulatory initiatives.

In 2022, Japan’s Financial Services Agency released a Code of Conduct for ESG rating and data providers. This is the first of its kind being issued by a national regulator, consisting of six principles covering transparency around methodologies and data sources, with a comply-or-explain approach. Emerging trends are starting to move in other parts of the world—for instance, the UK government has established a working group for a voluntary best practice code for ESG raters, looking to bring them within the scope of the Financial Conduct Authority. Similarly, the European Commission expects to issue regulation to monitor the reliability and transparency of ESG ratings in 2023, as part of the European Green Deal.

Regulations seem to soon be the new reality for ESG rating agencies. But what are the implications for business? Is this good news?

  • Common language: Despite being rolled out in different global jurisdictions, regulatory frameworks in the making all strive for alignment of terms used in ESG ratings to enable common understanding across the industry. A cohesive terminology adopted by policymakers and regulators creates increased consistency for issuers and a chance to streamline sustainability efforts and related public disclosure.
  • Increased transparency: There is an increased demand for an improved understanding of how ESG raters arrive at their scorings, and upcoming regulations all promote more transparency around methodologies, data gathering, and the weight of certain metrics to assess ESG performance. Better insight into the rating criteria enhances issuers’ understanding of what it takes to improve their scores, target selected areas, and come out stronger in the next assessment.
  • Less greenwashing: One of the main objectives of regulating the ESG ratings field is to crack down on greenwashing and avoid (sometimes unintentional) misleading claims on ESG performance. Improved transparency of rating objectives and methodologies makes it more difficult for issuers to inflate their sustainability credentials, especially when overseen by a regulatory body. This puts increased pressure on companies to prevent exaggeration and instead back up their sustainability claims with hard evidence.

While upcoming regulations will serve to make life easier for rated companies, it is a double-edged sword, as it simultaneously raises expectations to deliver on sustainability commitments. But at the end of the day, this is good news for everyone. ESG ratings play an important part in supporting the sustainable investing landscape and are here to stay; seeking a more harmonized and transparent system and eradicating claims for greenwashing will help create trust in this industry.

This is a win-win not only for rated companies and investors subscribing to the ratings, but also for the ESG raters themselves.

 

Article by Ellinor Haggebrink, manager, BSR

Ellinor supports BSR’s sustainability work across industries with a focus on ESG investments, advising financial institutions and their clients on how to integrate sustainability strategies into investment decisions and corporate management. Ellinor brings with her 10 years of experience from the responsible investment field, engaging companies on behalf of institutional investors to improve ESG management on a variety of topics. Prior to joining BSR, Ellinor worked at Sustainalytics, leading engagement projects on sustainable seafood and sustainable agriculture. She also previously worked at GES International ,focusing on strengthening ESG management in emerging markets investments.

Ellinor holds a Master’s in Political Science and a BA in Spanish from Lund University, Sweden. A Swedish native, she also speaks English, Danish, and Spanish.

Energy & Climate, Featured Articles, Food & Farming, Impact Investing, Sustainable Business

Sustainable and ESG Investors Advocacy

From 2020 through the first half of 2022, 154 institutional investors and 70 investment managers collectively controlling nearly $3.0 trillion in assets at the start of 2022 filed or co-filed shareholder resolutions on environmental, social or governance issues.

  • As shown in Figure G below, public funds were the leading category of investors—in asset-weighted terms—that filed shareholder resolutions during this period, accounting for 67 percent of the assets of all institutional investor and money manager filers. However, they represented just 7 percent of the filing institutions. When the number of institutions rather than assets are considered, money managers were the leading segment filing resolutions.

 

Fig G - Types of Investors Filing Shareholder Proposals 2020-22 - US SIF

  • As shown in Figure H at top of page, the leading issue raised in shareholder proposals, based on the number of proposals filed from 2020 through 2022, was on ensuring fair workplace practices, and particularly on ending de facto discrimination based on ethnicity and sex. From 2020 through mid-2022, investors filed a total of 311 proposals on these fair labor issues.
  • Investors also focused on disclosure and management of corporate political spending and lobbying. Shareholders filed 288 proposals on this subject during this period. Continuing a trend of several years, many of the targets were companies that have supported trade associations that oppose regulations to curb greenhouse gas emissions.
  • A surge in shareholder proposals on climate change that began in 2014 has continued, as investors have wrestled with whether US corporations are doing enough to assess their climate risk or to meet the greenhouse gas reduction challenges laid down by the Paris Climate Accord: 265 proposals were filed from 2020 through 2022.
  • The proportion of shareholder proposals on social and environmental issues that receive high levels of support has been trending upward. During the proxy seasons of 2014 through 2016, just 2 percent of shareholder proposals on environmental and social issues received majority support. From 2017 through 2019, that proportion rose to 6 percent. From 2020 through mid-2022, 14 percent of environmental and social proposals, on average, received majority support.

 

US SIF 2022 US Sustainable Investing Trends ReportOrder a copy of the 2022 Report on US Sustainable Investing Trends from the US SIF.

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

ESG Incorporation by Institutional Investors

The US SIF Foundation also researched the ESG incorporation practices of institutional asset owners. Because money managers generally do not disclose confidential information about their institutional clients, the data received from our direct research of institutional investors show how and why they incorporate ESG criteria into their investment analysis and portfolio selection. The group included institutional asset owners and plan sponsors such as public funds, insurance companies, educational institutions, philanthropic foundations, labor funds, hospitals and healthcare plans, faith-based institutions, other nonprofits and family offices.

Using the modified methodology, this Trends Report identified 497 institutional asset owners applying ESG incorporation practices across $6.6 trillion in assets under management.

  • Among the institutional investors, public funds hold the largest share of assets using ESG criteria and represent the greatest number of institutions reporting the incorporation of some form of ESG criteria in their investments. See Figure E.

 

Fig E - Institutional Investor ESG 2022 Assets by Investor Type - US SIF

  • For the first time, institutional investors reported climate change as the leading ESG criterion they addressed in asset-weighted terms, affecting $4.0 trillion. See Figure F at top of page.
  • Another leading environmental issue investors considered is sustainable natural resources and agriculture, reflected in $2.8 trillion in assets.
  • The top social issue in asset-weighted terms is the restriction of investments in companies doing business with conflict risk countries, affecting $3.3 trillion.
  • Other prominent social issues are health and safety criteria, tracked for the first time and addressed across $2.1 trillion, and EEO/diversity, affecting $2.0 trillion.
  • The top governance criterion identified for institutional investors is board issues, which includes the consideration of the directors’ independence, diversity, pay and responsiveness to shareholders, across $2.9 trillion.
  • Tobacco, a sustainable investment issue for decades, affects $2.7 trillion in institutional investor capital.

 

US SIF 2022 US Sustainable Investing Trends ReportOrder a copy of the 2022 Report on US Sustainable Investing Trends from the US SIF.

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

ESG Incorporation by Money Managers

Using the US SIF Foundation’s modified methodology, this report identified 349 money managers and 1,359 community investment institutions incorporating ESG criteria into their investment decision-making processes across a total of $5.6 trillion in assets under management.

Figure C provides a breakdown by investment vehicles1:

  • $1.2 trillion—22 percent— in assets were managed through registered investment companies such as mutual funds, exchange-traded funds, variable annuities and closed-end funds.
  • $762 billion—14 percent— in assets were managed through alternative investment vehicles, such as private equity and venture capital funds, hedge funds and property funds.
  • $458 billion in assets were managed by community investing institutions.
  • $186 billion in assets were managed through other commingled funds.

Fifty-three percent of the total assets reported by 135 money managers using specific ESG criteria could not readily be categorized by investment vehicle type, such as mutual fund or private equity fund, because those managers did not provide adequate disclosures. These “Undisclosed Investment Vehicle Assets” therefore constitute a pool of $3 trillion in reported ESG assets under management, as shown in Figure C.

Figure D, at top of page shows the leading ESG criteria reported by money managers:

  • Climate change is the most important specific ESG issue reported by money managers in asset-weighted terms, addressed across $3.4 trillion in assets.
  • In terms of other environmental criteria, money managers reported applying fossil fuel divestment policies across $1.2 trillion in assets, ranking it as fourth among all specific ESG criteria.
  • Avoidance of military / weapons and tobacco are ranked as second and third, affecting $1.8 trillion and $1.7 trillion in assets under management, respectively.
  • The leading specific governance criterion is anti-corruption, addressed across $1.0 trillion, followed by board issues across $926 billion in assets under management.
  • Human rights are the most prominent social issue in asset-weighted terms, addressed across $987 billion, followed by equal employment opportunity (EEO)/diversity across $765 billion, and health and safety across $701 billion in assets under management.
Footnote:
[1]  This report provides a breakdown of money manager sustainable investment AUM by type of investment vehicle used. “Investment vehicles” refer to pooled investment products organized as registered investment companies (e.g., mutual funds and ETFs) or as private commingled funds (e.g., private equity, venture capital, and hedge funds), separately managed accounts, CDFIs and other community investment institutions.

 

US SIF 2022 US Sustainable Investing Trends ReportOrder a copy of the 2022 Report on US Sustainable Investing Trends from the US SIF.

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

2022 Report on US Sustainable Investing Trends: Executive Summary

This edition of the Trends report, like the 13 previous editions, tallies the assets under management (AUM) of investment professionals who use one or more strategies of ESG incorporation and/or file or co-file shareholder resolutions at publicly traded companies on environmental, social and governance (ESG) issues. ESG incorporation strategies used by investors include: ESG integration, positive/best in-class screening, negative screening, impact investing and sustainability-themed investing.

After the 2020 Trends report, however, the US SIF Foundation decided to modify its methodology for the 2022 report. In a departure from previous editions, this report does not include the AUM of investors who stated that they practice firm-wide ESG integration but did not provide information on any specific ESG criteria they used (such as biodiversity, human rights or tobacco) in their investment decision-making and portfolio construction. The US SIF Foundation committed to this approach after the 2020 Trends report found that ESG integration had become mainstream and was applied across trillions of dollars, but with limited disclosure on specifics. This continued a phenomenon first identified in the 2014 Trends report.

The US SIF Foundation’s new modified methodology includes the following for ESG incorporation:

  • The AUM of investors, investment vehicles (e.g., mutual funds, private equity funds, separate accounts, other commingled funds), and pools of assets with one or more specific ESG criteria incorporated in investment decision-making and portfolio construction.
  • The AUM of specific funds (e.g., mutual funds, exchange-traded funds, closed-end funds) for which money managers identify ESG or sustainability as integral to their investment decision-making and portfolio construction in the fund’s prospectus, even without providing specific ESG criteria.

Fig B - 2022 Sustainable Investing Assets Trends - Fig B - US SIF

This modified methodology distinguishes between a firmwide reference to ESG integration and a fund-level ESG strategy. While the total assets of a money manager that references ESG integration across the firm without the identification of any specific criteria are not counted in this year’s report, a fund that explicitly references ESG integration as part of its investment decision-making and portfolio construction in its prospectus is included in total ESG assets under management. However, the name of a fund with “ESG,” “sustainable” or similar terms was insufficient, in itself, for the fund to be included.

At the same time that respondents were reporting their data to the US SIF Foundation, the Securities and Exchange Commission (SEC) released two proposals that focused on preventing misleading or deceptive fund names and requiring more detailed ESG disclosure by funds and advisors. Trends researchers immediately began to see multiple asset managers reporting a modest to steep decline in ESG AUM as compared to their responses in 2020. The US SIF Foundation believes that these SEC proposals are motivating asset managers to be more circumspect in what they consider to be assets that incorporate ESG criteria. The organization supports the intent of the SEC proposals and submitted comments that it believes will lead to more effective rulemakings.

The modified methodology, as well as the change in asset manager reporting, has resulted in the sustainable investment AUM in this report coming in significantly lower—$8.4 trillion in 2022, compared to $17.1 trillion in 2020 (see Figure A at Top of page). The $8.4 trillion represents 12.6 percent, or one in eight dollars, of the $66.6 trillion in total US assets under professional management.

This phenomenon is similar to what occurred in Europe after the EU’s Sustainable Finance Disclosure Regulation required enhanced disclosure on sustainable investment products. See the Methodology chapter of the report for further details.

Overview

Through surveying and research undertaken in 2022, the US SIF Foundation identified, as shown in Figure B, above:

  • $7.6 trillion in US-domiciled assets at the beginning of 2022 held by 497 institutional investors, 349 money managers and 1,359 community investment institutions that practice ESG incorporation—applying various ESG criteria in their investment decision-making and portfolio selection.
  • $3.0 trillion in US-domiciled assets at the beginning of 2022 held by 224 institutional investors or money managers that filed or co-filed shareholder resolutions on ESG issues at publicly traded companies from 2020 through 2022.

 

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Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

Despite a Tough Year, Women are Still the Future of Sustainable Investing

By Leah Cantor, Longview Asset Management

Above image – ©metamorworks, istockphoto

Leah Cantor Longview Asset MgmtAs a woman who is passionate about gender equity and fighting climate change, the last year has been a roller coaster. Russia’s invasion of Ukraine and the resulting energy crisis in Europe has led to a renewed global emphasis on oil and gas production, and despite the billions of dollars allocated to renewable energy infrastructure in the Inflation Reduction Act passed by congress in August, the transition to a carbon neutral economy seems further out of reach than it did just a year ago. In my opinion, the reversal of Roe v. Wade set women in the United States back decades, and around the world, progress towards equal rights for women has slowed.

As an investor who cares about the social and environmental impacts of my financial decisions and as an employee at LongView Asset Management – an advisory firm that helps clients align their investments with their values – I’ve felt the anxiety of watching the market slide into its worst year since the financial crisis of 2008. ESG investments underperformed the broader market due to many sustainable funds’ heavy reliance on technology stocks and exclusion of fossil fuel stocks, which have soared in value as the world scrambles to secure near-term energy resources.

Over the last year, sustainable investing also weathered attacks from all sides of the ideological spectrum, with environmentalists calling out the financial industry for greenwashing, while right-wing politicians in a growing number of states denounce ESG investing as “woke capitalism” and pursue legislation aimed at boycotting financial institutions accused of undermining the fossil fuel industry.

Despite all the chaos, I feel strongly that now is a critical moment for women to take control of their finances and the direction of ESG investing.

I entered the field after working as an environmental journalist, where I saw how much of a difference it makes to local communities and ecosystems when a company cleans up its act. I decided to pursue a career where I can help make this the norm. LongView is a certified B Corp, which means we’ve made a legally binding commitment to consider people and the planet in addition to profit, and we’ve gone through an exhaustive assessment to prove that our policies and practices are in line with our mission as a sustainable investment firm. The majority of our clients are women, and I know first-hand that women are eager to use their money to drive positive change.

Women are at the forefront of the movement towards a new kind of capitalism – one where companies don’t simply focus on maximizing profits for shareholders, but consider their impacts on all stakeholders, including the environment, their workers, and the communities in which they operate.

This interest is reflected in the workplace and in the way we invest.

Companies where women hold top leadership roles tend to meet higher environmental, social, and governance standards than their industry peers.

When it comes to investing, women have helped fuel the explosion of ESG into the mainstream. In one recent report, 79 percent of women said they want their investments to reflect their values. Another survey found that women are almost twice as likely as men to say it is extremely important that the companies they invest in incorporate environmental, social and governance factors into decisions and policies.

Women have historically been underinvested compared to men, however interest in investing among women has risen by 50 percent since the start of the pandemic.

With women expected to gain control over much of the $30 trillion in baby-boomer wealth over the next decade, the growth potential for the ESG industry is huge.

Given these trends, it’s unlikely that sustainable investing will be a passing fad. Still, the industry is facing some serious growing pains.

While federal and foreign regulators try to pass new rules to raise reporting standards, right-wing lawmakers have thrown sustainable investing into the fray of America’s culture wars.

In the last year, Republican state treasurers collectively pulled more than $1 billion from Blackrock – the world’s largest investment company – and blacklisted other major financial institutions including JP Morgan, Chase and Goldman Sachs due to company policies that allegedly harm the fossil fuel industry.

In 2021, Texas became the first state to pass laws that stop local agencies from doing business with banks that offer ESG funds or policies – a move that caused the five biggest lenders in the US to pull out of the state, ultimately costing local agencies an estimated $303-$532 million in additional interest. Since Texas’ decision, twelve other states have followed suit with legislation that attempts to outlaw aspects of sustainable investing.

On a brighter note, the US Securities and Exchange Commission, European Financial Reporting Advisory Group, and the International Financial Reporting Standards Foundation all proposed new rules in 2022 to standardize reporting on greenhouse gas emissions by companies and reduce confusion and mislabeling in the investment industry through detailed disclosure on ESG strategies and ranking systems used in funds.

The three regulatory bodies expect to finalize their proposals within the next 12 months.

Going forward into 2023, there are still many hurdles for ESG investors to overcome. The potential for continued underperformance of sustainable investments, a general economic slowdown, and new attacks from the right could all dampen the appetite for ESG investing in the short term.

For women, I see the debate around ESG as an opportunity for us to reflect on the outcomes we want to achieve and the investment strategies that would best align with our goals.

In the past, divestment has largely dominated the ESG conversation. This exclusionary approach screens out bad actors while investing more heavily in companies and industries that meet high social and environmental standards. More recently investors have also focused on ESG metrics to manage risk and boost performance.

As we head into 2023, a new generation of investors are pursuing positive change by filing and voting on shareholder resolutions and engaging directly with company management around specific issues. In 2022, shareholders filed a record number of proposals related to social and environmental concerns.

ESG issues are women’s issues – we not only want to protect the environment, but we also want to invest in companies that treat their workers with dignity, that protect women in the workplace at every step in the supply chain, and that adopt policies that increase diversity in leadership. By leveraging our power as shareholders, we can push companies to adopt policies that bring us closer to gender equity and carbon neutrality.

At a time when progress on issues that women care about seems to be backsliding, shareholder engagement is one way forward-and it’s gaining momentum. Despite the trials we are likely to face in 2023, this is a silver lining.

 

Article by Leah Cantor, Sustainability Associate at Longview Asset Management LLC, a registered investment advisor in Santa Fe, New Mexico, that focuses on socially and environmentally responsible investing for individuals and organizations. Leah led the firm in becoming a certified B Corporation in 2018 and is responsible for helping the firm continually improve on its sustainability commitments. Prior to pursuing a sustainable business career, Leah worked as an environmental journalist. She is a passionate believer in money as a tool for positive change.

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

Building Trust Through Authenticity

By Cameron Barsness, KBBS Financial Counsel

Above – Cameron with her kids for Working Mother magazine. Courtesy of Cameron Barsness

Our care, sincerity, reliability, and competence show clients who we are—and achieve results.

Cameron Barsness - KBBS Financial CounselCompared to just two years ago, clients are far more aware of ESG as an investment approach. This includes awareness that ESG is, to some, a controversial topic. For example, many clients are aware of the term “greenwashing” — and are asking questions about how to avoid it.

Part of our role as advisors is to dig into investment opportunities to ensure we understand the mandates and how they match up with clients’ goals for a more sustainable future. Then, we have conversations with clients about how they can be part of a forward-looking push toward a better planet and society in five, 10 and 20 years.

None of this works without trust. Trust enables mutual understanding—between clients and advisors and within couples and families. As I think back on my 17-year career and look forward to 2023 and beyond, I see more than ever that trust is the touchstone.

Trust & Vulnerability

A book that’s made a profound impact on me as an advisor is Charles Feltman’s The Thin Book of Trust.Trust is choosing to risk making something you value vulnerable to another person’s actions,” Feltman writes.

What could be a better definition of the trust we require as advisors? Feltman goes on to say that trust is built — or eroded — in four different categories: care, sincerity, reliability, and competence.

I am struck by how important these four categories are to our work as advisors, leaders and investors. At a time when trust in government, news media, science, elections, police and companies is eroded, people are yearning to experience trust.

I’ve learned to think in terms of Feltman’s four categories as I seek to be my authentic self. That’s how I can best serve clients.

Care

Feltman defines care as “the assessment that you have the other person’s interests in mind as well as your own when you make decisions and take actions.”

One might argue that in our business care is a fiduciary standard. But we have to communicate care on an emotional level.

First of all, we do so by listening. The worst thing we can do as advisors is assume we know what a client is asking by answering the question we hoped they asked, rather than simply answering the question they really asked.

Second, we share ourselves. Early in my career, I watched as clients shared many intimate details about their families, their struggles, and their dreams. This sharing wasn’t reciprocated by advisors, which I interpreted to mean sharing would somehow make me NOT trustworthy.

But what I’ve learned through my career is sharing about my challenges in raising children, marriage and family forms a deeper connection.

For example, I can never hide the fact that I am first and foremost a mother and that experience has shaped me in profound ways. I cannot decouple my business self from my mom self (or my daughter self). These aspects will forever be intertwined and will deeply shape my view of the world.

Sincerity

Feltman calls sincerity “the assessment that you are honest, that you say what you mean and mean what you say; you can be believed and taken seriously.”

Beyond basic honesty, the need here is to “walk the talk.” Clients need to believe that you believe in and do what you tell them to do.

If you recommend certain investments or investment styles, I believe it is important to invest in a similar fashion (of course, there will be variably due to suitability and income/asset level thresholds). As I sit with clients, I always want to be able to say that I, too, own that investment or would invest my own money in the fund. 

Reliability

“The assessment that you meet the commitments you make, that you keep your promises” is how Feltman approaches reliability.

We all know how client meetings go. We feverishly take notes, talk about the follow-up items and then leave that meeting going directly to the next meeting or task at hand. Circling back to follow up items discussed in a meeting can be a challenge — but one that must be met.

Say when and how you can complete something. It is better to commit to a date further in the future than to be quiet and hope that clients aren’t noticing if deadlines are not being met.

Perhaps most importantly (and maybe hardest) is to say when you don’t know how and when you will get back to the client with the information. In fact, what clients will remember longer is the “reliability piece,” not that you didn’t know the answer in the moment.

Competence

Competence, writes Feltman, is “the assessment that you have the ability to do what you are doing or propose to do.”

When you are young in your career, it’s not experience but education that garners clients’ trust in your competence. That is the very reason, at 24 — and just two months into my first job — I dove quickly into the CFP® process. I finished my education component and passed the CFP® exam before my two-year anniversary at my firm — long before I’d fulfilled the three-year experience requirement.

To build competence, I also leaned into my weak spots. When I first started in the field, I hated reading the Wall Street Journal. But my then-boss said it was requirement to be more conversant in meetings and become a better writer.

My family's vacation - Courtesy of Cameron Barsness
Our family vacation; courtesy of Cameron Barsness

So, for Christmas I asked for the Wall Street Journal (paper version) from my dad. For years, I diligently read it on the bus to work. Yes, I was that person trying to fold and unfold a newspaper on a crowded bus (sometimes standing up). But I learned a lot — and I became a better, more confident writer because of it. Over the years, my newspaper of choice has changed, but the one thing that hasn’t is my need to read publications and stories outside of my wheelhouse.

Another key aspect of competence is captured by a comment my business partner often makes: “It’s really important to know what you don’t know.”

I remember clearly one very difficult meeting with a client talking about investment returns and thoughts on future market movements. She asked, pointedly, “Why do you guys always have all the answers?”

In that moment, I realized that in an effort to be confident and inspire trust, we inadvertently eroded trust. I stopped the conversation and said, “You’re right. And we don’t. The honest truth is that our job is to do our best to digest information about trends, economics and future possibilities, and help communicate that to clients. The reality is it’s all our best educated guess. So perhaps the most honest answer is that we don’t know for sure.”

It was uncomfortable, to say that least. But it was also disarming. The conversation became more open and less defensive, just with the admission of vulnerability.

Closing Thought

To serve clients well, we must gain their trust. We then nurture and maintain that trust by delivering outstanding client experiences in pursuit of client objectives, including sustainability and impact. To do so, we need to be our authentic selves.

 

Article by Cameron Barsness, CFP®, principal at Seattle-based financial advisory firm Kutcher Benner Barsness & Stevens, Inc. In her work as a primary financial planner to many clients, Cam is drawn to the financial coaching aspect of the business. She leads conversations around values, goals and the integration of these facets into clients’ investment portfolios and broader financial lives. These conversations often lead to strategies around charitable giving, impact investing and environmental, social and governance (ESG) issues. Cam then develops tax-advantaged giving plans and, together with the firm’s investment committee, identifies suitable investments.

Cam joined the firm in 2006 as an Associate and became a shareholder and Principal in 2015. In addition to her work with clients, she serves as the firm’s Chief Compliance Officer and, with her human resources hat on, its Chief Happiness Officer.

In the local community, Cam is active in the Seattle Philanthropic Advisors Network (SPAN). She is also a regular participant in Seattle Mothers in Finance events. In the national financial advisor community, Cam volunteers with the CFP® WIN (Women’s Initiative) mentor program to help other female CFP® certificants and candidates to gain confidence and navigate their careers in finance.

Cam and her husband Erik live in Renton with their daughter Reece and sons Thymer and Ollie. She is a competitive athlete at her core and is happiest when outside hiking, camping or soaking up the summer sun.

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

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