UK to Enshrine Mandatory Climate Disclosures (Newsletter 10/29)

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Companies Feeling the Heat

McKinsey Employees Write Letter Calling Out the Firms’ Impact on Carbon Emissions

Global consulting giant McKinsey & Company is under fire for its support of major world polluters. Over 1,100 employees signed an open letter to the top partners of McKinsey, requesting the firm disclose the carbon emissions of its clients. The letter was first issued in March of 2021. Since then, several employees who authored the letter resigned but stated failure to share total clients’ emissions would risk the firm’s reputation, relationships, and ability to attract and retain great talent. Publicly, McKinsey says it is committed to protecting the planet and set a goal to achieve net zero emissions by 2030. According to the New York Times, McKinsey has worked with 43 of the world’s 100 biggest polluters.

Citi Shareholder Proposal Prompts Action

Following a shareholder proposal that gained support, although not a majority, Citi announced it will conduct a racial equity audit. The bank said it is taking this course of action to further its commitment to address the racial wealth gap within the U.S. and to improve transparency.

Investor Updates

Fidelity International to Reduce Portfolio Emissions by 50% by 2030

Days ahead of the COP26 Climate Summit, Fidelity International released a new climate investing policy, which included an announcement that by 2030 it would halve the carbon footprint of its investment portfolio from a 2020 baseline. This represents an important step in achieving net zero emissions by 2050 and the firm plans to achieve this target by:

  • Further incorporating climate change analysis in its portfolio construction, utilizing Fidelity’s Climate Rating, and investing in climate solutions and issuers that are net zero
  • Including minimum climate standards as a topic for engagement and proxy voting
  • Targeting the highest emitters for engagement around transitioning, which includes phasing out thermal coal exposure by 2040 globally and by 2030 for OECD countries

Based on the Climate Ratings, Fidelity sorts companies into one of five buckets, which are outlined below.

BlackRock Upgrades Climate-Aligned ETFs
BlackRock announced climate-focused updates, which will make the iShares ESG Enhanced UCITS ETF range the largest climate-aligned ETF range, at $9 billion AUM. Specifically, BlackRock explained that the MSCI indexes underlying BlackRock’s iShares ESG Enhanced UCITS ETF range are now set to follow the European Union’s Climate Transition Benchmark (CTB), which was designed to facilitate capping global warming at 1.5°C over pre-industrial temperatures. As well, the benchmarks have more rigorous ESG screens for issues such as unconventional oil and gas and environmental harm.
Invesco Launches Two New ESG ETFs
Invesco has announced two new ESG ETFs, the Invesco ESG NASDAQ 100 ETF (QQMG) and Invesco ESG NASDAQ Next Gen 100 ETF (QQJG). Particularly notable, the Invesco ESG NASDAQ 100 ETF is an ESG version of the QQQ ETF, one of the largest ETFs globally and the second most actively traded ETF. Both of the new ESG ETFs have Sustainalytics ESG Risk rating requirements, require that issuers be compliant with the UN Global Compact principles, and have screens for certain activities, including gambling, tobacco, and controversial weapons.
Less than 1% of Global Fund Assets Align with Paris
In a study of over 16,500 investment funds worth $27 trillion, CDP found that only 158 funds, representing just .5% of assets, are currently aligning to the Paris Agreement target of well below 2°C. Further, over 8,000 funds, 62% of assets, were found to be aligning with pathways above 2.75°C, meaning the vast majority of assets are out of alignment with Paris.
Source: CDP

ESG Ratings & Reporting

SBTi Launches Net-Zero Standard for Companies

The Science Based Targets initiative (SBTi) launched the world’s first net zero corporate standard, which provides an independent assessment of corporate net zero targets to align with the Paris Agreement. The standards are broken into short- and long-term goals. The short-term goal (5 to 10 years out) focuses on scope 1 and 2 emissions and requires about a 67% reduction in emissions. It also requires commitments to 1.5°C for scope 1 and 2 and well below 2°C for scope 3. The long-term goal is to achieve net zero by 2050, including a 90% reduction in emissions and a commitment to 1.5°C for all scopes. Only the last 5% to 10% of emissions are eligible to be offset through carbon removals. The framework creates standardization across companies, allowing for comparable progress towards net zero targets.

Company Spotlight

Strong ESG Performance Can Equate to Favorable Insurance Plans

Under Marsh McLennan, companies with strong ESG practices will be eligible for better terms on directors-and-officers liability insurance policies, which protects companies if they are sued by shareholders. Marsh McLennan has partnered with AIG, Berkshire Hathaway, Sompo International, Zurich International, and global law firms on the initiative to support companies with strong climate change disclosures. The participating law firms will review and enhance ESG policies of Marsh McLennan clients, while the carriers will consider lower deductibles and higher limits.

IBD’s 100 Best ESG Companies

Investor’s Business Daily (IBD) published a list of the top stocks based on ESG values. Notably, the top players combine profitability with ESG. To create the standings, IBD started by screening Dow Jones ESG data, looked for the top 15% of 2,360 companies whose stock was priced at $10 or above and traded in the U.S. The list incorporates dividend yield, earnings and sales growth rates, return on equity, and a combination of sales, profit margin, and ROE performance. Additionally, IBD broke down the top companies by sector. A few interesting names that were at the top of their industry list included Gilden Activewear (Consumer Goods), Five Below (Retail), and Metropolitan Bank (Financials).

Regulatory Updates

COP26 Climate Summit Next Week

Beginning next week, leaders from countries worldwide will come together in Glasgow, Scotland for a round of climate discussions, known as the 26th Conference of the Parties (COP26). With the U.S. back in the Paris Agreement, one key takeaway will be how the rest of the world views the U.S.’ commitments. For what to expect from the climate summit, read more here.

UK TCFD Requirements to Take Effect in April 2022

Ahead of COP26, the UK Government has formally declared plans to create legislation which would mandate reporting aligned to the Task Force on Climate-Related Financial Disclosures (TCFD) for more than 1,300 of the UK’s largest registered companies, including banks and insurers, in addition to private companies with £500 million in turnover and more than 500 employees. The legislation is expected to pass into law in April 2022 and would go into force for accounting periods beginning on or after April 6, 2022.

Climate Change Recognized as a Rising Threat to U.S. Financial Stability

The U.S. Financial Stability Oversight Council (FSOC) published a report classifying climate change as a rising threat to the U.S.’ financial stability. As part of this report, the FSOC asked federal agencies to take action to confront the threat and its key recommendations for federal agencies include:

  • Utilize scenario analysis to evaluate climate-related risks to financial stability
  • Assess the necessity of new regulations, which would account for such risks
  • Enhance existing climate-related disclosures
  • Develop capacity for identifying and managing climate-related financial risks

Featured Article: ESG Investing Comes in More Flavors than Chocolate and Vanilla

Unlike the ice cream waiting in my freezer, ESG investing is here, and it is here to stay. But like the ice cream, ESG investing comes in several flavors. According to SASB, there are five key ESG investment strategies, which more than three-quarters of institutional investors are keen to employ. And, they’re clearly hard to resist, as global markets ended 2020 with $37.8 trillion in ESG assets under management, with projections to reach $53 trillion by 2025. Investment clients are asking for more ESG investing, and portfolio managers are serving it up.

To continue reading about the 5 ESG investment strategies, click here.

News Bites