Only 9% of Executives are Highly Confident in Their ESG Programs (Newsletter 9/17)

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Investor Updates

Harvard Endowment to Fully Divest from Fossil Fuel

In a letter to the Harvard Community, President Lawrence Bacow announced that Harvard’s endowment will be fully exiting from fossil fuel companies. In February 2021, Harvard Management Company, the endowment’s investment manager, explained that it no longer had direct exposure to companies that explore or develop fossil fuel reserves and had decreased its total exposure to fossil fuels, including indirect investments, to under 2% of the portfolio. President Bacow’s latest announcement furthers the university’s divestment process, by explaining that it has not and does not plan to make any additional direct or indirect investments in the fossil fuel industry.

Engine No. 1 Explains Recently Released Total Value Framework

In a recent interview, Engine No. 1 CEO Jennifer Grancio outlines the investor’s recently released Total Value Framework, and offers an opinion on how CEO’s should be thinking about ESG. The Total Value Framework puts a cost value on each company’s ESG-related externalities so the company’s negative and positive impacts are properly accounted for in financial analysis. Grancio explains that adding ESG data as a component of financial analysis facilitates companies’ thinking about how to drive long-term value. The Engine No. 1 CEO mentions that CEOs can improve on their ESG practice and ultimately fit with the Total Value Framework by:

  1. Understanding which ESG topics are material for their business and disclosing accordingly, and
  2. Taking these material impact areas into account when making long-term strategic decisions.

Asset Managers Taking Steps to Increase ESG Integration

survey conducted by BNP Paribas, including responses from 356 institutional investors from 19 countries, with approximately USD 11.3 trillion in assets under management, illustrates just how far ESG has been integrated into institutional portfolios globally. Key findings of the study include:

  • 22% of this year’s respondents said they integrate ESG-oriented investments in at least 75% of their portfolios, but back in 2019 none of the respondents had expected to achieve this by 2021.
  • Investors’ internal ESG capabilities have increased, with integration of ESG capabilities in investors’ organizations rising from 23% in 2019 to 45% in 2021.
  • There are a wide range of commitment levels when looking at investors’ alignment of their portfolios with net zero targets. 19% of respondents say they have a net zero commitment covering all asset classes and funds, 31% are in process of researching the necessary steps for setting a 2050 net zero emissions goal, and 27% have not made a commitment.
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Source: BNP Paribas

Company Spotlight

Executives Lack Confidence in Their ESG Programs

In a survey of over 530 corporate executives, over 78% believe ESG efforts have an affect the company’s brand and reputation, but only 48% think it has an impact on the company’s financial outcomes. Surprisingly, 30% of executives said they have minimal confidence in their company’s ESG programs while only 9% responded they are highly confident in such programs.

Companies Use Investor Days to Share Progress on Sustainability Initiatives

Danaher’s Investor Day presented sustainability as one of the components driving the evolution of the company’s portfolio. The company discussed clean water supply, food and beverage safety, and sustainability as a focus for long-term growth. On slide 14, CEO Rainer Blair described the company’s sustainability program, touching on environmental and social commitments and targets. Later in the presentation, additional business leaders expanded on the talent management programs and environmental protection efforts, highlighting Danaher’s emphasis on ESG.

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Source: Danaher

Similarly, Albemarle’s Investor Day highlighted sustainability as a core area of opportunity, weaving ESG throughout the presentation. The company’s attention is centered on using sustainability in decision-making, product quality, talent, and managing resources. On slide 19, Albemarle also shared the results of its materiality assessment, which laid the foundation for its sustainability framework.

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Source: Albemarle

Lastly, Valaris dedicated a section to ESG and its focus on green solutions. On slide 29, the company touches on board oversight by the ESG Committee and shared its ESG position statement, including both its efforts to contribute to the Paris Agreement and workforce diversity. Additionally, it discussed green solutions implemented and real-time tracking of its greenhouse gas (GHG) emissions.

Valaris 1
Source: Valaris

Logitech To Become Climate Positive

Logitech has amped up its climate strategy with a climate positive approach, where the company will achieve carbon neutrality this year, aim for net zero by 2030, and work towards climate positivity after that. In its approach, Logitech will address its whole value chain (Scope 1, 2, and 3) when managing its carbon footprint. Beyond announcing its goals, Logitech also details its Reduce, Renew, Restore Strategy, providing an outline for how Logitech will achieve its goals. Key points of the strategy are:

  • Reduce: Design for Sustainability looks to reduce products’ carbon footprint through innovations in circularity, production, packaging, etc.
  • Renew: Renewable electricity and renewable energy sources are vital components of the company’s energy strategy.
  • Restore: Supporting low carbon projects and nature-based solutions represents a key aspect of Logitech’s climate positive approach.

Pandora Launching Large Scale Decarbonization Plan

Pandora, a jewelry retailer and manufacturer, committed to halve its GHG emissions by 2030 across its operations and value chain by 2030. This target is aligned with the Paris Agreement’s 1.5⁰ C goal and has been approved by the Science Based Targets initiative (SBTi). Even further, the company has announced a goal of achieving net zero emissions by 2040. These targets align with and further Pandora’s commitments from last year, when the brand announced it would make its own operations carbon neutral by 2025, and would announce a plan for decreasing its value chain emissions with collaboration from the SBTi.

ESG Ratings & Reporting

MSCI Launches Temperature Rise Solution

MSCI announced the launch of its new Implied Temperature Rise solution to help investors align portfolios to climate change goals. The dataset covers over 10,000 companies within the MSCI ACWI Investable Market Index and promotes institutions’ alignment with TCFD and the Paris Agreement. Used with MSCI’s Target Scorecard and Net-Zero Tracker, the tool looks at companies’ current, projected, and targeted emissions and helps investors calculate the estimated rise in global temperature.

Featured Article: Why Your ESG Peer Benchmarking Group Is Different Than Your Competitive Peer Set. And Why You Need Both. 

Many IROs feel their ESG ratings would be higher if they were based on their competitive peer set rather than the benchmarking group used by the ratings agencies. After all, companies are used to picking peers for valuation reasons or as part of the executive compensation table graph. And these lists are often customized to make a specific case, maybe how undervalued the company is, or how its compensation practices fall in the middle of its peers.

While cherry-picking for these purposes is perfectly acceptable, it cannot be done for ESG ratings. The ratings agencies base your company’s benchmarking group on your GICS code. And for better or worse, that code can’t be changed, at least not without making significant alterations to your business.

ESG ratings peer groups – a necessary starting point.

If you are doing internal benchmarking specifically with the goal of improving your ratings, it’s important to look at the peers in your GICS code. However, there are several pitfalls to this approach.

To learn the rest of the steps to take to choose the right ESG peer set for your company, click here to continue reading.

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