Zeroing in on sustainable finance

Risks associated with environmental, social, and governance (ESG) criteria have entered the calculus of investors and financial asset managers. This week, Fidelity International joined BlackRock and a chorus of others in calling for companies to start addressing their impact on climate change, gender diversity on their boards, and other ESG concerns.1

Fidelity, which manages almost $790 billion in assets, said it would start voting against re-electing board members in 2022. Currently, 300-400 companies in its portfolio don't meet minimum expectations for managing environmental footprint, reducing greenhouse gas emissions, and providing emissions disclosures. The asset manager also estimates that over 1,000 portfolio companies do not meet new gender diversity targets. Boards at companies will need at least 30% female representation in developed markets and 15% in areas where it says "gender standards are still developing."

Investors and asset managers concerned with ESG-related issues can serve as active owners of companies by directly engaging management and voting on board members and shareholder resolutions. While Fidelity won't start enforcing its new policy until 2022, some investors and asset managers are already taking an active role.

BlackRock, the world's largest asset manager, said it supported 18% more ESG-related shareholder proposals than the previous year.2 It also voted against 255 directors compared to 55 the prior year for climate-related reasons and 1,862 directors at 975 companies due to a lack of diversity on the board. One of those companies was ExxonMobil, where shareholders elected three new board members nominated by activist investors to push the company to change environmental policies and invest in cleaner energy.3

Shareholder resolutions are considered advisory, but they still influence companies, even if they don't receive a majority vote. Resolutions are a signal to management about shareholder sentiment on a particular issue. That signal can spread to peer companies that may take proactive steps to address the issue.

Adding to the pressure on oil companies this year, 61% of Chevron shareholders backed a resolution that asks the company to cut Scope 3 emissions.4 According to research on proxy voting at U.S. companies by Morningstar,5 there were 186 ESG-related shareholder resolutions on proxy ballots in 2020. ESG funds supported those measures at a higher rate than other funds, with 20 receiving majority support, breaking the record of 14 set in 2019. As seen in Table 1, over a quarter of the 67 "key votes" in 2020 were focused on human rights, civil rights, and worker treatment, but resolutions focused on diversity, equity, and inclusion received the most support.

After sluggish growth following the 2008-09 financial crisis, sustainable investing — investment strategies that consider ESG considerations — vaulted to mainstream finance in 2020. Starting in 2015, new sustainable funds proliferated and last year almost doubled the previous high with the launch of 71 new exchange-traded and open-end ESG funds. There was also a record inflow of $50 billion into U.S. ESG funds in 2020. This inflow was more than double the year prior and ten times the annual inflow the prior five years.6

This growing interest in sustainable investing and adjustment for ESG-related risks is increasing the demand from investors for companies to disclose emissions and other sustainability-related information. Almost 600 investors with over $110 trillion in assets request environmental data from companies through CDP, one of the largest disclosure platforms.7 Enhanced corporate disclosures are a central demand of the Net Zero Asset Managers initiative — a group that includes Fidelity and BlackRock with a total of $43 trillion of assets under management (AUM) — and the Climate Action 100+ with $54 trillion in AUM.8

What remains to be seen is how these pressures translate into tangible action. The 2021 State of Supply Chain Sustainability survey9 found that the number of companies providing disclosures did not change from the prior year. The most common disclosure methods are company websites, press releases, and CSR/sustainability reports. Only a minority of companies report to external organizations like CDP and the Science Based Targets initiative, which use standardized questionnaires.

However, both company-controlled channels and most external reporting platforms primarily rely on unaudited, unverified, and self-reported data. According to a recent paper10 by Soh Young In and Kim Schumacher, this compounds a growing risk of a new, more specific form of greenwashing called "carbonwashing," with companies shifting from reporting current emissions against a baseline to future reduction and net zero ambitions.

The Oxford Net Zero initiative11 reviewed targets for all nations, states and regions in the 25 highest-emitting countries, cities with a population above 500,000, and companies in the Forbes Global 2000 list. They found that only 20% of these targets met "basic robustness criteria." Moreover, the Climate Action 100+ found that out of the 160 companies they are focused on — the world's largest corporate greenhouse gas emitters — only 6 (six) "explicitly commit to aligning their future capital expenditures with their long-term emissions reduction target(s), and none of these companies has committed to aligning future capital expenditure with the goal of limiting temperature rise to 1.5 degrees Celsius."12

Temperature is rising. Pressure is mounting. Let's see if we can match our ambition with action.


Have thoughts or feedback? Did I miss anything? Email me at kellen.betts@gmail.com. You also can reach me on LinkedIn and Twitter.

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Bonus Reading

Circular Supply Chains Are More Sustainable. Why Are They So Rare? by Khaled Soufani and Christoph Loch in Harvard Business Review

China’s Sputnik Moment? How Washington Boosted Beijing’s Quest for Tech Dominance by Dan Wang in Foreign Affairs

The bottlenecks which could constrain emission cuts in The Economist

‘Industrial Policy’ Is Back: The West Dusts Off Old Idea to Counter China by Greg Ip in The Wall Street Journal


1

Mooney, A. (2021, July 25). Fidelity International threatens tough stance on climate and gender. Financial Times. https://www.ft.com/content/bef5cf2f-cee3-4380-b14c-47a06a621b6e

2

Kishan, S. (2021, July 20). BlackRock Voted Against 255 Directors for Climate Issues. Bloomberg. https://www.bloomberg.com/news/articles/2021-07-20/blackrock-voted-against-255-directors-for-climate-related-issues

3

Aguirre, J. C. (2021, June 23). The Little Hedge Fund Taking Down Big Oil. The New York Times. https://www.nytimes.com/2021/06/23/magazine/exxon-mobil-engine-no-1-board.html

5

Cook, J., & Hale, J. (2020). Sustainable Fund Proxy Votes Show a Range of Support for ESG Measures. Morningstar Research. https://www.morningstar.com/lp/proxy-voting-report

6

Morningstar (2021). Sustainable Funds U.S. Landscape Report: More funds, more flows, and impressive returns in 2020. https://www.morningstar.com/lp/sustainable-funds-landscape-report

7

CDP (Accessed July 30, 2021). Why disclose as a company. https://www.cdp.net/en/companies-discloser

8

Climate Action 100+ (Accessed July 30, 2021). https://www.climateaction100.org/

9

Bateman, A., Betts, K., Cottrill, K., Pang, J., & Deshpande, A. S. (2021). State of Supply Chain Sustainability 2021. MIT Center for Transportation & Logistics and Council of Supply Chain Management Professionals. http://sscs.mit.edu/

10

In, S. Y., & Schumacher, K. (2021). Carbonwashing: A New Type of Carbon Data-related ESG Greenwashing. Working Paper, Sustainable Finance Initiative, Stanford University. https://energy.stanford.edu/sustainable-finance-initiative/publications/working-paper-carbonwashing-new-type-carbon-data-related-esg-greenwashing

11

Black, R., Cullen, K., Fay, B., Hale, T., Lang, J., Mahmood, S., & Smith, S. (2021). Taking Stock: A global assessment of net zero targets. Energy & Climate Intelligence Unit and Oxford Net Zero. https://www.socsci.ox.ac.uk/article/net-zero-pledges-go-global-now-action-needs-to-follow-words-oxford-eciu-report

12

Climate Action 100+. (2021). Climate Action 100+ issues its first-ever net zero company benchmark of the world’s largest corporate emitters. https://www.climateaction100.org/news/climate-action-100-issues-its-first-ever-net-zero-company-benchmark-of-the-worlds-largest-corporate-emitters/

In, S. Y., & Schumacher, K. (2021).