All hail the corporate reporting singularity?

April 16, 2021 by  
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All hail the corporate reporting singularity? Elsa Wenzel Fri, 04/16/2021 – 02:00 As corporate sustainability goes mainstream, ESG reporting is being embraced beyond early adopters exuding good citizenship. Investors, markets and regulators are picking up on the value of environmental, social and governance data, which is being integrated more often into financial disclosures. “People have realized that sustainability disclosure and sustainability information has significant value,” said Janine Guillot, CEO of the standards-setter SASB (Sustainability Accounting Standards Board). Soon, more companies will be forced to divulge environmental and social data, whether due to new laws and regulations, investor demands or simply to remain relevant and competitive, experts shared at the GreenFin 21 virtual event Tuesday. What’s more, the momentum behind harmonized visions of corporate reporting is offering hopes of streamlining workflows for sustainability professionals, while improving the quality of data available to the public. 1. One singular sensation? Those whose jobs involve toiling over the clichéd “alphabet soup” of reporting frameworks — from CDP to CDSB and beyond — probably would like to see a reporting “singularity” realized. However, consolidating the various standards down to one uber-acronym isn’t realistic.  What’s happening instead, Guillot noted, is a rapid move toward a more coherent way to describe an end-to-end process that includes management and board decision-making; external reporting; investor and multi-stakeholder use and policymakers. The takeaway for companies? Allocate resources toward participating in disclosure standards, she said, similar to the way that setting financial accounting standards works among companies, accountants and investors involved with the International Financial Reporting Standards Foundation (IFRS) . Because corporate managers understand the standard bearers, credit agencies and external reporting requirements in financial accounting, she presented that as an analogy to follow. “I think that’s what we need to aim to achieve about sustainability disclosure,” she said. It’s not a tick the box sort of beauty contest anymore. Rather than getting sucked into confusion around all the sustainability reporting acronyms, focus on what financial standard-setters are trying to do in terms of offering material information to investors, advised Tim Mohin. He’s the CSO and executive vice president of Persefoni , which makes carbon reporting software, and a former chief executive of reporting giant GRI. “The trend line is clear that we will see financial standards for climate disclosure in the very near future, and regulations to require that information,” Mohin said, and that should coexist with longtime standard-bearers such as GRI. “Because after all, if we hadn’t had the previous 20 years of ESG disclosure, voluntarily, we wouldn’t be at this place.” 2. The mandates are coming Watch for mandates emerging from the European Union, followed by the United States. Europe is updating its non-financial reporting directive , and the U.S. Securities and Exchange Commission is starting to take action to require companies to disclose material ESG information.  “These are just the tip of the iceberg,” Mohin added. “There is just a lot happening in this space.” Meanwhile, President Joe Biden has assembled a “dream team” elevating climate diplomacy, with John Kerry as special presidential climate envoy and Gina McCarthy as White House national climate advisor. So sustainability professionals and investors alike should expect more action around the “G” for governance in ESG. 3. If not unification, collaboration? Even if one framework to rule them all is unrealistic, there is momentum toward collaboration among the standards bodies. Five of the leading reporting groups — CDP, CDSB, GRI, IIRC and SASB — in September issued a “statement of intent to work together towards comprehensive corporate reporting.” Control your story, control your story, control your story. As for big business, in January, 60 leaders from Accenture to Zurich Insurance Group signed on to the notion of “Common Metrics and Consistent Reporting of Sustainable Value Creation,” as advocated by the World Economic Forum’s International Business Council. Also at the start of 2021, BlackRock CEO Larry Fink urged in his closely watched annual public letter for businesses to disclose climate risks in line with the Taskforce on Climate-related Financial Disclosures’ (TCFD) recommendations. Weeks later, the Goliath asset manager warned of voting against companies that resist disclosing their climate risks or decarbonization plans. Meanwhile, big banks have been launching voluntary climate disclosure initiatives. 4. High stakes, high finance “When you’re talking about setting standards for global capital markets that are endorsed by regulators, it’s an entirely different ballgame,” Guillot said. Massive strides in that direction over the past year include the nonprofit IFRS moving to establish a sustainability standards board that would sit alongside the International Accounting Standards Board . And an IFRS working group involves many members of the “alphabet soup” and is supported by the International Organization of Securities Commissions (IOSCO ). “There’s a path towards convergence around what we call foundational disclosure, external disclosure from companies to providers of financial capital,” she added. At the same time, even more acronyms are cropping up. “There’s a new kid in town, if we didn’t have enough confusion with the alphabet soup,” Mohin said, referring to the Partnership for Carbon Accounting Financials (PCAF) . It offers financial services companies a way to allocate their investments against the amount of carbon that investment produces. “So you can basically keep track of your ‘financed carbon’, which is rapidly becoming a very big issue in the investment community.” 5. Embrace your story When ESG standards become mandatory and ubiquitous, how should companies merge the hard data with storytelling? “I say to companies all the time, ‘Control your story, control your story, control your story.'” Guillot said. “That’s why you should disclose and not let other people define you.” When you’re talking about setting standards for global capital markets that are endorsed by regulators, it’s an entirely different ballgame. Know your target audience and work backward from there, she advised: Investors, for example, want to hear about strategy, governance, risk management and performance, which makes the TCFD framework useful for broader sustainability disclosures. Although some audiences are more story-oriented, in some cases you should assume it’s a technology and not a human reading your information, Guillot added. 6. Beyond checking the boxes Mark Gough, CEO of the Capitals Coalition, said the digitization of ESG data is exciting because it moves away from the old rhythms of pushing out reports once a year, which he compared to water flowing through a pipe with holes in it. “Actually, we’re moving more to a lake where you’d go and dip in, and you get it out … That’s something where we’re going to see a significant step forward, when we start getting the technical companies and others involved in this process.” Along those lines, Mohin described a need for tools offering real-time, forecastable information for company leaders. “It’s not a tick-the-box sort of beauty contest anymore,” he said. 7. The social factor It’s critical to look at an organization’s direct and indirect environmental impacts on the well-being of stakeholders, Gough said. (Paying attention to people is one reason the Capitals Coalition renamed itself from the Natural Capital Coalition.) “This is the key thing here — who is actually being impacted by it, and are they involved in the process of understanding it?” he said. In addition, interest in corporate disclosures via frameworks such as GRI and SASB appears to be spreading internationally, especially beyond developed nations. “Something around the COVID outbreak has actually inspired a lot of people to start thinking about this in a slightly different way, particularly in emerging markets,” said Gough, who described a massive interest by African nations, including Madagascar and Uganda, which have often previously been left out of the picture. Pull Quote It’s not a tick the box sort of beauty contest anymore. Control your story, control your story, control your story. When you’re talking about setting standards for global capital markets that are endorsed by regulators, it’s an entirely different ballgame. Topics Reporting GreenFin 21 Featured in featured block (1 article with image touted on the front page or elsewhere) Off Duration 0 Sponsored Article Off There are many threads to tie together. Shutterstock Daisy Daisy Close Authorship

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All hail the corporate reporting singularity?

Why carbon tracking and reporting is necessary to hold corporations accountable

January 7, 2021 by  
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Why carbon tracking and reporting is necessary to hold corporations accountable Daniel Goldman Thu, 01/07/2021 – 01:30 The world is changing, and it’s changing fast. More companies are committing to emissions reductions but still struggle to measure and verify the impact from corporate headquarters to global operations to supply chains. Now, new breakthrough climate accounting technologies are emerging as solutions to track and verify energy and carbon emissions, and report energy purchases and consumption. As more of these services hit the market, corporations making ambitious climate pledges will need to adopt energy and carbon tracking and reporting technologies. In an interview with Bloomberg earlier this year, Cornerstone Capital Group CEO Erika Karp said the biggest challenges of ESG investment are data and measurement. As more companies make “carbon net-zero” commitments, how will stakeholders — investors, employees, customers and regulators — hold these companies accountable? Everything hinges on measurement KPMG’s 2020 Study on Climate Accounting estimates that $90 trillion of investment is needed to finance sustainable infrastructure and cities in the U.S., and that after 2024, fines totaling as much as $1 trillion to $1.5 trillion will be paid to meet enforcement of climate standards for emissions reduction. In order to get to enforcement, we need a standardized methodology for measurement of carbon reductions and zero-emission energy that uses internet of things (IoT) sensing, blockchain and artificial intelligence to verifiably track and account for all emissions. It can be extremely complex to match up carbon emissions reductions purchased through carbon offsets, renewable energy certificates or direct purchases of zero-carbon energy under contract or on the spot market with your use of such energy. Courtesy of worldculturenetwork Let’s consider a relatively simple market, such as commercial real estate. To assess their carbon footprint, companies need to accurately monitor each building’s energy use, including both energy efficiency measures and onsite energy systems (cogeneration, solar and/or back-up power systems and fuels used), be able to measure and report where the energy is coming from to supply those buildings, and determine the carbon footprint of every kilowatt-hour or Btu of that energy. Evaluating energy use and the associated carbon impact needs to take place in real time, given that the mix of power generation on the grid changes frequently, and transmission and other constraints may limit the availability of renewable energy that a building is deemed to have purchased. Gathering data from different vendors — from energy use and embodied carbon — and using it to determine emission that fall under Scope 1 (under a company’s control), Scope 2 (indirect from energy purchases still under a company’s control) and Scope 3 (from activities not under the company’s control) has been challenging due to the lack of comprehensive standards for carbon accounting or a single set of guidelines on how to audit, verify and report.  What is available now? Most technologies on offer focus on energy and carbon and consider Scope 1 and Scope 2 emissions. A range of solutions that address the challenge are being offered by startups including ClearTrace, Flexidao, The Energy Origin and Allinfra. (My firm, Clean Energy Ventures, is an investor in ClearTrace.) Flexidao offers a blockchain platform to track renewable energy generation. The Energy Origin tracks renewable energy generation and end-use consumption using real-time sensors and a blockchain-based platform. Allinfra uses digital renewable energy certificates to record and track renewable energy production. ClearTrace has built an immutable ledger to measure energy supplies at their source, overlay it with “metadata” such as the grid emissions profile of the energy and carbon impact calculations, and use this information to generate a verifiable and auditable report for clients in real time. This provides a transparent and indisputable record — a digital climate asset — of customers such as JP Morgan Chase and Brookfield Renewable Partners’ energy use and carbon footprint.  This sector is growing rapidly with strong interest from energy generators and wholesalers including Brookfield, NRG Energy and NextEra Energy. Likewise, real-estate firms such as CBRE, Rudin and Hines, alongside industry organizations such as the Real Estate Board of New York, are pursuing carbon tracking measures driven primarily by legislation requiring massive reductions in energy use and related carbon emissions. To ensure the carbon offsets you are purchasing are not already being purchased by someone else, a frequent occurrence, a trustworthy end-to-end solution to provide all the data is needed. To ensure the carbon offsets you are purchasing are not already being purchased by someone else, a frequent occurrence, a trustworthy end-to-end solution to provide all the data is needed. It’s important to keep in mind that not all carbon offsets are created equal. Additionality, permanence or durability, buffers or insurance, and leakage define the ultimate quality (and price) of an offset. Stripe, the payment processing software company, recently announced its purchase of carbon offsets — which ranged in quality and in price from $75 to $775 per ton of carbon dioxide equivalent, with some offsets being highly speculative technology development projects. For Stripe, JP Morgan Chase or Shell, carbon offsets will be essential to the market but should be considered a secondary action after energy efficiency solutions that are key elements in any carbon tracking platform. Roughly 23 percent of the companies in the Fortune Global 500 have made some form of commitment to reach carbon neutrality between now and 2050. While companies may need tracking and reporting software to measure their climate footprint and avoid heavy fines, stakeholders also need data to trust how Fortune 500 companies are reporting their carbon footprint. While Amazon, Microsoft and others are leading the way, I foresee more companies beginning to adopt these technologies and addressing carbon emissions in their business models. We will see strong growth in climate accounting-as-a-service technologies surge in what promises to be a billion-dollar data management opportunity in the next decade. Pull Quote To ensure the carbon offsets you are purchasing are not already being purchased by someone else, a frequent occurrence, a trustworthy end-to-end solution to provide all the data is needed. Topics Carbon Removal Reporting Accounting Featured in featured block (1 article with image touted on the front page or elsewhere) Off Duration 0 Sponsored Article Off

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Rethinking the role of sustainability reports

October 20, 2020 by  
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Rethinking the role of sustainability reports Mike Hower Tue, 10/20/2020 – 01:00 Corporate sustainability has a reporting problem — it always has. Companies typically don’t enjoy creating them and investors, customers, employees and most other stakeholders don’t revel in reading them. Yet, with investors more interested in environmental, social and governance (ESG) issues than ever before, this long-standing problem has become an immediate liability for companies looking to maximize shared value. Today, some 90 percent of companies in the S&P 500 produc e corporate sustainability reports, and the practice has become so ingrained in corporate sustainability culture that few question its purpose or efficacy. Reporting has risen to prominence for good reason — there never has been a more critical time for companies to communicate their strategies and actions for corporate sustainability. Many investors evaluate nonfinancial performance based on corporate disclosures, with most finding value in assurance of the strength of an organization’s planning for climate and other ESG risks. Meanwhile, consumers increasingly are demanding responsible products, and attention to sustainability issues has become an employee expectation. But something isn’t right with the status quo of reporting. “By trying to meet the demands of multiple stakeholders, sustainability reports have become bloated, overly complex and expensive to produce,” said Nathan Sanfacon, an ESG expert at thinkPARALLAX , a sustainability strategy and communication agency. “This results in companies spending scarce resources on a report that doesn’t quite satisfy the needs of any stakeholder group.” To be more effective at engaging investors and other critical audiences on ESG, companies ought to shift towards communicating relevant data in a more agile and real-time format. This is particularly problematic for large, publicly traded companies seeking to attract and retain institutional investors. “To be more effective at engaging investors and other critical audiences on ESG, companies ought to shift towards communicating relevant data in a more agile and real-time format,” Sanfacon said. Addressing this disconnect is at the core of the new thinkPARALLAX white paper, ” The New Era of Reporting: How to Engage Investors on ESG ,” which examines the pitfalls of sustainability reporting in the past and present and offers a better way forward for corporate sustainability practitioners. A short history of sustainability reporting While reporting might seem a recent phenomenon, its origins go back nearly half a century — emerging first in Europe in the 1960s and later in the United States in the 1970s after the first Earth Day launched the modern environmental movement. Many of the earliest reports were strictly environmental and more about addressing public image problems than communicating anything that might resemble a proactive sustainability strategy. What we might call the modern era of sustainability reporting began in 1997 when public outcry over the environmental damage of the Exxon Valdez oil spill compelled Ceres and the Tellus Institute to create the Global Reporting Initiative (GRI) . The aim was to create the first accountability mechanism to ensure companies adhere to responsible environmental conduct principles, which was then broadened to include social, economic and governance issues, GRI says on its website. “Prior to GRI, there was no framework to ensure that reporting was consistent or reflective of stakeholder needs,” said Eric Hespenheide, chairman of GRI, in an email. “First through versions of the GRI Guidelines and since 2016, the GRI Standards, we have been furthering our mission to use the power of transparency, as envisaged by effective disclosure, to bring about change.” Since then, multiple other reporting frameworks have emerged to cater to the ever-growing list of corporate sustainability stakeholders, such as the investor-focused Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD) . “While sustainability reporting has come a long way, a lack of standardization means that there is a disconnect between what investors are looking for and what companies are communicating,” Sanfacon said. Giving investors what they want Here’s a billion-dollar question: What do investors look for when evaluating companies on ESG? The simple answer: data; data; and more data. “Investors tell us they’re looking for raw ESG data that is consistent, comparable and reliable — data that is focused on the subset of ESG issues most closely linked to a company’s ability to create long-term value,” Katie Schmitz Eulitt, director of investor outreach at SASB, wrote in an email. Schmitz Eulitt regularly engages with the investment community on disclosure quality, including with members of SASB’s 50-plus member Investor Advisory Group, who collectively manage more than $40 trillion in assets. “When companies more explicitly connect the dots between how they manage sustainability-related risks and opportunities and their financial outcomes, it’s both an opportunity to enhance transparency and strengthen performance,” Schmitz Eulitt added. When companies more explicitly connect the dots between how they manage sustainability-related risks and opportunities and their financial outcomes, it’s both an opportunity to enhance transparency and strengthen performance. But this is easier said than done because corporate leaders, investors and other stakeholders must work with two separate and disjointed reporting systems: one for financial and the other for ESG performance. “Companies can be screened in or out using various criteria, but there is no way to integrate the data into earnings projections or valuation analysis,” wrote Mark Kramer et al. in a recent piece in Institutional Investor. “The result is two separate narratives, one telling how profitable a company is, the other highlighting whether it is good for people and the planet.” The new era of reporting Investors, of course, aren’t the end all, be all of corporate sustainability communication — companies also want to reach customers, consumers, regulators and employees, among others. But limited time and money often results in corporate sustainability practitioners attempting to use annual or bi-annual reports as a one-size-fits all solution. More often than not, these reports are heavy on human-centric stories and light on quantitative information. While non-investor stakeholders tend to appreciate the human stories, they also typically aren’t taking the time to download and devour a portly PDF. Meanwhile, while investors are people too and can enjoy a good human story, they ultimately aren’t getting enough of the hard data they desire. In the new whitepaper, thinkPARALLAX proposes addressing this problem by dividing sustainability communication into two drivers — demonstrating performance and building reputation — so that companies can better invest time and resources to better engage investors and other stakeholders. Demonstrating performance involves conveying the effectiveness of a company’s sustainability strategy and management of material ESG issues, such as disclosing data around carbon emissions or diversity and inclusion through a digital reporting hub. Building reputation focuses on showing that a company is acting responsibly, limiting its environmental impact and delivering societal benefits. This could take the form of communications activities such as social media campaigns, microsites, videos, speaking or op-eds, among others.  “Companies most interested in engaging investors should focus more on demonstrating performance by communicating the hard ESG data they are looking for, as opposed to human interest stories,” Sanfacon said. “But if non-investor stakeholders like consumers, employees or customers are a primary audience, the company should invest more in building reputation by bringing the data to life through inspiring stories.” While this won’t single-handedly solve corporate sustainability’s reporting problem, it’s a start. As companies shift away from massive PDF reports and toward more targeted, real-time investor communication, they’ll free up time and resources to better engage consumers, employees and other key stakeholders on corporate sustainability. Pull Quote To be more effective at engaging investors and other critical audiences on ESG, companies ought to shift towards communicating relevant data in a more agile and real-time format. When companies more explicitly connect the dots between how they manage sustainability-related risks and opportunities and their financial outcomes, it’s both an opportunity to enhance transparency and strengthen performance. Topics Reporting ESG Featured in featured block (1 article with image touted on the front page or elsewhere) On Duration 0 Sponsored Article Off Shutterstock Kan Chana Close Authorship

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Rethinking the role of sustainability reports

ESG investments: Exponential potential or surfing one wave?

September 21, 2020 by  
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ESG investments: Exponential potential or surfing one wave? Terry F. Yosie Mon, 09/21/2020 – 00:30 Amidst four concurrent crises — health, economic, race relations and climate — one stand-out 2020 development has been the rebound of major stock markets and, particularly, the growing performance and prominence of environment, social and governance (ESG) traded funds. ESG portfolios not only have outperformed traditional financial assets this year, but also a data analysis prepared by Morningstar, a financial advisory research firm, concluded that almost 60 percent of sustainable investments delivered higher returns than comparable funds over the past decade. Morningstar also found that ESG funds have greater longevity than non-ESG portfolios. About 77 percent of ESG funds that existed 10 years ago are presently available, whereas only 46 percent of traditional investment vehicles maintain that survivorship. These developments raise two overriding questions: what factors have converged to catapult ESG portfolios into the front rows of investment strategy, and what challenges can transform (for better or worse) ESG fund performance in the future? ESG investing has made important strides in the past decade and possesses significant momentum to expand its reach into the broader economy. ESG’s arrival at the Big Dance Since the rebound from the 2007-08 financial crisis, it would have taken a singularly motivated unwise investor to lose money in U.S. equity markets. ESG investors were not unwise. Several sets of factors converged to make these funds an even better bet than the S&P 500, Dow Jones or NASDAQ exchanges that covered a broad array of individual equities, mutual funds or indexed portfolios. These factors include: Less risk and volatility. ESG asset managers and their customers generally prefer a longer-term planning horizon than many of their traditional competitors whose reliance upon program trading or other methods result in more frequent turnover in holdings. In retrospect, it also turned out that ESG portfolios contained less financial risk because they had more accurately identified risks from climate change and considered other variables — such as resilience — for which no accepted risk methodology exists. The response to the international COVID-19 pandemic has become a de facto surrogate to measure corporate resilience and has previewed the economic and societal chaos that is increasingly expected to arrive from accelerating climate change. For investors, ESG portfolios have provided a welcome shelter in the storm and a more profitable one at that.   A declining investment rationale for fossil fuels. What was once a trend is now a rout. ESG asset managers, closely attuned to climate-related risks, recognized the receding value of first coal, and now, petroleum investments that are in the midst of an historic decline. Prior to the 2007-08 financial crash, ExxonMobil enjoyed a market capitalization in excess of $500 billion. By 2016 (and accounting for the rebound from that crash), it stood at about $400 billion. Today, it is $159 billion even as overall equity valuations reach historic highs. Asset write-offs from the oil sector continue to mount and include BP’s write-down of $17.5 billion and Total’s cancellation of $9.3 billion in Canadian oil sands assets. By virtually any established financial metric — net income, capital expenditures, earnings per share — petroleum companies are shrinking. As an industry group, energy is one of the smallest sectors in the S&P 500.   Convergence of transparency and governance. While there are frequent complaints about the lack of robust financial metrics to evaluate ESG investment opportunities, the fact is one of growing convergence around some critical reporting measures. For climate change, these include the information obtained from companies adhering to the Task Force on Climate-related Financial Disclosures (TCFD) that provide for voluntary and more consistent financial risk reporting. CDP is widely respected among asset managers, and there is growing interest in the efforts of the Global Reporting Initiative-Sustainability Accounting Standards Board to arrive at a simpler, sector-specific, financially relevant set of performance metrics. Governance expectations also have accelerated as more financial firms seek not only fuller disclosure but understanding of actual plans to achieve an impact through, as one example, Scopes 1, 2 and 3 reductions within specific time frames.   Collaboration among financial asset management firms. No longer is it necessary for nuns organized through the Sisters of St. Francis or the Interfaith Center on Corporate Responsibility to maintain their lonely vigil to persuade management of their social and environmental concerns. In recent years, their cause has been transformed by the world’s largest asset management firms that have the added advantage of being very large investors in the companies whose practices they wish to change. These organizations — including BlackRock, BNP Paribas Asset Management, CalPERS and UBS Asset Management — generally have no difficulty in meeting with CEOs or, more recently, obtaining increasingly large support for the shareholder resolutions they support. Most significant, in the aftermath of the 2015 Paris Climate Accord, these firms increasingly collaborate through organizations such as Climate Action 100+, known as CA100+ (which presently has more than 450 investor members with over $40 trillion in assets), Ceres and the Asia Investor Group on Climate Change. Their climate change action agenda includes setting an emissions reduction target, disclosing climate-related financial risks through the TCFD reporting framework and ensuring that corporate boards are appropriately constituted to focus upon and deliver climate results. In reflecting on this evolution, long-time sustainability investor John Streur of Calvert Research & Management wrote, “We need to spend more of our engagement time pressing for change, as opposed to asking for disclosure.” Disrupting and being disrupted — the road ahead The ESG investment movement has every reason to be optimistic in the short term. There is growing investor and stakeholder momentum for the goals of expanded disclosure, improved corporate governance and measurable plans and impacts, especially for climate change. There is significant expansion in the staff sizes and expertise that better enable firms with ESG portfolios to evaluate financial risks. And their financial performance continues to impress. What could go wrong, come up short or require adaptation? Several factors bear a closer scrutiny. ESG’s value proposition is principally based on de-risking assets. This is too limited a value proposition to meet future needs . For example, ESG data does not reveal much insight for identifying research and development priorities, product innovation opportunities or effective branding and marketing strategies. As Brown University professor Cary Krosinsky has commented, “ESG data doesn’t tell you the most important thing: who will win the race” in future business competition and success for the long-term. In short, is ESG investment too disconnected from the very purpose of an enterprise — to innovate new products, gain customers and make money over time through business development?   As ESG investment goes mainstream, it will face new challenges and risks. A current advantage that ESG managers possess is that their decisions focus more on pure-play outcomes such as de-risking companies from climate change or other sustainability challenges. As more traditional investment firms acquire or expand ESG capabilities, more complexity will enter into investment decisions to reconcile clients’ needs or manage the trade-offs between ESG performance measures and those applied through shareholder value driven outcomes (earnings per share, quarterly financial reporting). Aligning expectations concerning executive compensation, independence of directors and future investment opportunities are major unresolved issues between ESG and traditional investment practitioners.   To be more impactful, the composition of ESG portfolios will need to change. Currently, ESG funds are dominated by equities, but significant capital is invested in other sectors such as bonds, exchange traded funds (ETFs) and real estate. The methodology for evaluating these asset classes will need to be modified from that applied to the assessment of equities. At the same time, ESG funds are heavily weighted in ownership of technology stocks, particularly the so-called FAANG companies — Facebook, Amazon, Apple, Netflix and Google — in addition to Microsoft. A number of these firms have inadequate data security and privacy protections, weak corporate governance and poor business ethics. The long-term wisdom of piling so many investment eggs into a single sector basket, combined with the multiple ESG problems of current technology portfolios, challenges ESG asset firms to become more transparent about their own evaluation criteria and decision making about portfolio diversity.   ESG assessments should assign a higher priority to social issues. The “S” in ESG is the least understood of the three factors, and it will be the most challenging to apply. As diversity, inclusion and equity become a greater focus of corporate sustainability policies and programs, the methodology for their evaluation is the least advanced. In part, this reflects the cultural and racial filter of a largely white and wealthy investor class lagging in its comprehension that race and social justice are material investment criteria. Simultaneously, data on social indicators will be more difficult to collect. Large numbers of companies are reluctant to disclose such information because it will expose gender and racial gaps in pay and promotion and general under-representation of minorities. Again, the technology sector is a major laggard on such issues. More broadly, the collection of social data, especially for racial diversity, is made more difficult as a matter of policy by many governments outside the United States, including in Europe where it is illegal in some countries to collect ethic and racial information. Some ESG investors are beginning to expand their dialogue around these issues, but they are much further behind when compared to their assessments and investment policies on environmental and governance issues. ESG investing has made important strides in the past decade and possesses significant momentum to expand its reach into the broader economy. Karina Funk, portfolio manager and chair of Sustainable investing at Brown Advisory, sees an approaching convergence between ESG and traditional investment philosophies. “ESG is a value-add,” she noted in a recent conversation. “It provides an expanding array of tools — financial screening, data analysis, issue-specific consultations with companies, proxy voting and an emerging focus on social risks — so that, in five years, ESG will be a standard expectation in asset evaluations. The key will be to focus on all risks facing a company, quantifiable or not, the exposure of business models and identifying what factors are within a company’s control.” Will management listen to ESG investors? Voices as varied as the U.S. Department of Labor and Harvard economics professor Gregory Mankiw are urging company executives and fund managers to tip the scales against what they consider to be economically risky and materially irrelevant ESG factors. In re-asserting the primacy of shareholder value, they remind us that voice of Milton Friedman still echoes from the crypt even as it grows fainter within the rapid humming of today’s marketplace and changing society. Pull Quote ESG investing has made important strides in the past decade and possesses significant momentum to expand its reach into the broader economy. Topics Finance & Investing ESG GreenFin Featured Column Values Proposition Featured in featured block (1 article with image touted on the front page or elsewhere) Off Duration 0 Sponsored Article Off Shutterstock

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ESG investments: Exponential potential or surfing one wave?

How the climate crisis will crash the economy

September 14, 2020 by  
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How the climate crisis will crash the economy Joel Makower Mon, 09/14/2020 – 02:11 The chickens are coming home to roost. Even before the western United States became a regional inferno, even before the Midwest U.S. became a summertime flood zone, even before an annual hurricane season so bad that the government is running out of names to attach to them, even before Colorado saw a 100°F heatwave swan dive into a 12? snowstorm within 48 hours. Even before all that, we’d been watching the real-world risks of climate change looming and growing across the United States and around the world. And the costs, financially and otherwise, are quickly becoming untenable. Lately, a steady march of searing heat, ruinous floods, horrific wildfires, unbreathable air, devastating hurricanes and other climate-related calamities has been traversing our screens and wreaking havoc to national and local budgets. And we’re only at 1°C of increased global temperature rise. Just imagine what 2° or 3° or 4° will look like, and how much it will cost. We may not have to wait terribly long to find out. It’s natural to follow the people impacted by all this: the local residents, usually in poorer neighborhoods, whose homes and livelihoods are being lost; the farmers and ranchers whose crops and livestock are withering and dying; the stranded travelers and the evacuees seeking shelter amid the chaos. And, of course the heroic responders to all these events, not to mention an entire generation of youth who fear their future is being stolen before their eyes, marching in the streets. So many people and stories. But lately, I’ve been following the money. The financial climate, it seems, has been as unforgiving as the atmospheric one. Some of it has been masked by the pandemic and ensuing recession, but for those who are paying attention, the indicators are hiding in plain sight. And what we’re seeing now are merely the opening acts of what could be a long-running global financial drama. The economic impact on companies is, to date, uncertain and likely incalculable. The financial climate, it seems, has been as unforgiving as the atmospheric one. Last week, a subcommittee of the U.S. Commodity Futures Trading Commission (CFTC) issued a report addressing climate risks to the U.S. financial system. That it did so is, in itself, remarkable, given the political climes. But the report didn’t pussyfoot around the issues: “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy,” it stated, adding: Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity. Over time, if significant action is not taken to check rising global average temperatures, climate change impacts could impair the productive capacity of the economy and undermine its ability to generate employment, income and opportunity. Among the “complex risks for the U.S. financial system,” the authors said, are “disorderly price adjustments in various asset classes, with possible spillovers into different parts of the financial system, as well as potential disruption of the proper functioning of financial markets.” In other words: We’re heading into uncharted economic territory. Climate change, said the report’s authors, is expected to affect “multiple sectors, geographies and assets in the United States, sometimes simultaneously and within a relatively short timeframe.” Those impacts could “disrupt multiple parts of the financial system simultaneously.” For example: “A sudden revision of market perceptions about climate risk could lead to a disorderly repricing of assets, which could in turn have cascading effects on portfolios and balance sheets and therefore systemic implications for financial stability.” Sub-systemic shocks And then there are “sub-systemic” shocks, more localized climate-related impacts that “can undermine the financial health of community banks, agricultural banks or local insurance markets, leaving small businesses, farmers and households without access to critical financial services.” This, said the authors, is particularly damaging in areas that are already underserved by the financial system, which includes low-to-moderate income communities and historically marginalized communities. As always, those least able to least afford the impacts may get hit the hardest. This was hardly the first expression of concern about the potentially devastating economic impacts of climate change on companies, markets, nations and the global economy. For example: Two years ago, the Fourth National Climate Assessment noted that continued warming “is expected to cause substantial net damage to the U.S. economy throughout this century, especially in the absence of increased adaptation efforts.” It placed the price tag at up to 10.5 percent of GDP by 2100. Last month, scientists at the Potsdam Institute for Climate Impact Research said that while previous research suggested that a 1°C hotter year reduces economic output by about 1 percent, “the new analysis points to output losses of up to three times that much in warm regions.”’ Another report last month, by the Environmental Defense Fund, detailed how the financial impacts of fires, tropical storms, floods, droughts and crop freezes have quadrupled since 1980. “Researchers are only now beginning to anticipate the indirect impacts in the form of lower asset values, weakened future economic growth and uncertainty-induced instability in financial markets,” it said. And if you really want a sleepless night or two, read this story about  “The Biblical Flood That Will Drown California,” published recently in Mother Jones magazine. Even if you don’t have a home, business or operations in the Golden State, your suppliers and customers likely do, not to mention the provenance of the food on your dinner plate. Down to business The CTFC report did not overlook the role of companies in all this. It noted that “disclosure by corporations of information on material, climate-related financial risks is an essential building block to ensure that climate risks are measured and managed effectively,” enabling enables financial regulators and market participants to better understand climate change’s impacts on financial markets and institutions. However, it warned, “The existing disclosure regime has not resulted in disclosures of a scope, breadth and quality to be sufficiently useful to market participants and regulators.” An analysis by the Task Force on Climate-related Financial Disclosure found that large companies are increasingly disclosing some climate-related information, but significant variations remain in the information disclosed by each company, making it difficult for investors and others to fully understand exposure and manage climate risks . The macroeconomic forecasts, however gloomy, likely seem academic inside boardrooms. And while that may be myopic — after all, the nature of the economy could begin to shift dramatically before the current decade is out, roiling customers and markets — it likely has little to do with profits and productivity over the short time frames within which most companies operate. Nonetheless, companies with a slightly longer view are already be considering the viability of their products and services in a warming world. Consider the recommendations of the aforementioned CFTC report, of which there are 20. Among them: “The United States should establish a price on carbon.” “All relevant federal financial regulatory agencies should incorporate climate-related risks into their mandates and develop a strategy for integrating these risks in their work.” “Regulators should require listed companies to disclose Scope 1 and 2 emissions. As reliable transition risk metrics and consistent methodologies for Scope 3 emissions are developed, financial regulators should require their disclosure, to the extent they are material.” The Financial Stability Oversight Council “should incorporate climate-related financial risks into its existing oversight function, including its annual reports and other reporting to Congress.” “Financial supervisors should require bank and nonbank financial firms to address climate-related financial risks through their existing risk management frameworks in a way that is appropriately governed by corporate management.” None of these things is likely to happen until there’s a new legislature and presidential administration in Washington, D.C., but history has shown that many of these can become de facto regulations if enough private-sector and nongovernmental players can adapt and pressure (or incentivize) companies to adopt and hew to the appropriate frameworks. Finally, there is collaboration among the leading nongovernmental organizations focusing on sustainability reporting and accountability. And there’s some news on that front: Last week, five NGOs whose frameworks, standards and platforms guide the majority of sustainability and integrated reporting, announced “a shared vision of what is needed for progress towards comprehensive corporate reporting — and the intent to work together to achieve it.” CDP , the Climate Disclosure Standards Board , the Global Reporting Initiative , the International Integrated Reporting Council and the Sustainability Accounting Standards Board have co-published a shared vision of the elements necessary for more comprehensive corporate reporting, and a joint statement of intent to drive towards this goal. They say they will work collaboratively with one another and with the International Organization of Securities Commissions, the International Financial Reporting Standards Foundation, the European Commission and the World Economic Forum’s International Business Council. Lots of names and acronyms in the above paragraph, but you get the idea: Finally, there is collaboration among the leading nongovernmental organizations focusing on sustainability reporting and accountability. To the extent they manage to harmonize their respective standards and frameworks, and should a future U.S. administration adopt those standards the way previous ones did the Generally Accepted Accounting Principles, we could see a rapid scale-up of corporate reporting on these matters. Increased reporting won’t by itself mitigate the anticipated macroeconomic challenges, but to the extent it puts climate risks on an equal footing with other corporate risks — along with a meaningful price on carbon that will help companies attach dollar signs to those risks — it will help advance a decarbonized economy. Slowly — much too slowly — but amid an unstable climate and economy we’ll take whatever progress we can get. I invite you to  follow me on Twitter , subscribe to my Monday morning newsletter,  GreenBuzz , and listen to  GreenBiz 350 , my weekly podcast, co-hosted with Heather Clancy. Pull Quote The financial climate, it seems, has been as unforgiving as the atmospheric one. Finally, there is collaboration among the leading nongovernmental organizations focusing on sustainability reporting and accountability. Topics Finance & Investing Risk & Resilience Policy & Politics Climate Change Featured Column Two Steps Forward Featured in featured block (1 article with image touted on the front page or elsewhere) Off Duration 0 Sponsored Article Off Shutterstock

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How the climate crisis will crash the economy

It’s just numbers: A ROSI view of corporate sustainability

March 24, 2020 by  
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How do you justify a company’s sustainability investments? There’s an app for that.

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It’s just numbers: A ROSI view of corporate sustainability

Planning a successful TCFD project: Climate disclosure

December 3, 2018 by  
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Key policy choices for climate disclosure include the substance, form and location of disclosures.

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Planning a successful TCFD project: Climate disclosure

A new carbon economy: a dream or a reality?

December 3, 2018 by  
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The best of live interviews from GreenBiz events. This episode: Academics and energy execs discuss what a mandatory carbon market could look like.

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A new carbon economy: a dream or a reality?

Designing sustainability’s first product recall

September 5, 2018 by  
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We know what to do with a defective product. What about an idea that needs fixing?

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Designing sustainability’s first product recall

Circularity in our solar energy system

September 5, 2018 by  
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As the renewables market accelerates, can we find a way to make PV cells sustainable?

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Circularity in our solar energy system

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