Gustavo Bernal Torres
Backlash on ESG Ratings, a 3°C World, Private Equity, and Trash
Here are 5 ESG insights you might have missed this week:
The World May Be Better Off Without ESG Investing-
With environmental devastation and social injustices pushing the planet to the breaking point, a stronger environmental, social, and governance (ESG) ratings system is needed to ensure investors get the positive impact they're paying for.
At the core of the problem is how ESG ratings, offered by ratings firms such as MSCI and Sustainalytics, are computed. Contrary to what many investors think, most ratings don't have anything to do with actual corporate responsibility as it relates to ESG factors. Instead, what they measure is the degree to which a company’s economic value is at risk due to ESG factors.
The second problem involves how ratings firms assign weights to each ESG factor. A strong ESG performer might get a triple-A composite score, while an ESG laggard might be assigned a triple-C score. These scores form the basis for how ESG indexes and ESG funds construct their portfolios. This may seem like a legitimate approach, but it’s not. It is subject to human judgment and inconsistent access to ESG information, making for tremendous variability across raters. But more detrimentally, it permits companies to achieve high composite scores even if they cause significant harm to one or more stakeholders but do well on all other parameters.
For “conscious capitalism” enthusiasts, the rapid shift in capital flows is evidence that business can indeed be a force for good. But the system as it stands gives a pass to a large number of harmful actors, driving large fund flows to them and lowering their cost of capital, while CEOs and Wall Street executives celebrate a lucrative movement that they hope will improve their public image.
What Does an ESG Score Really Say About a Company?-
A key gauge in the $30 trillion sustainable investment market provides a murky picture of corporate social responsibility. Research by Anywhere Sikochi and George Serafeim probes the underlying factors.
A recent study shows that the more information a company discloses about its ESG practices, the more rating agencies disagree on how well that company is performing along these dimensions. According to the research, a 10 percent increase in corporate disclosure is associated with a 1.3 to 2 percent increase in ESG score variation among major ratings providers, which all interpret and process disclosures differently.
Sikochi says the research findings point to the need for greater debate about ways to regulate disclosure that would make scoring more predictable for firms and useful for markets. He and his co-authors argue that ESG outcomes are a better way to measure success in environmental protection, social responsibility, and corporate governance than by checking off a company’s written policies.
A 3°C World Has No Safe Place-
Even if greenhouse-gas emissions are slashed, there is still a chance of crashing through the Paris agreement's climate targets. What would that look like?
The caveat is that this estimate includes policies announced but not enacted. A world which follows the policies that are actually in place right now would end up at 2.9°C, according to CAT (the UN Environment Programme, which tracks the gap between actual emissions and those that would deliver Paris, provides a somewhat higher estimate). Almost everyone expects or hopes that policies will tighten up at least somewhat. But any reasonable assessment of the future has to look at what may happen if they do not.
A 3°C world is thus both a pretty likely outcome if nothing more gets done and the worst that might still happen even if things go very well indeed. That makes it worth looking at in some detail, and the result is alarming. Those modelling climate impacts have long argued that they do not increase linearly. The further you go from the pre-industrial, the steeper the rate at which damages climb. And as what was rare becomes common the never-before-seen comes knocking. Judging by the results of specific studies, the differences between 2°C and 3°C are, in most respects, far starker than those between 1.5°C and 2°C.
Sustainable Investment Assets Hit $35 Trillion, 36% Of All Managed Assets-
Global Sustainable Investment Alliance releases Global Sustainable Investment Review 2020.
At the start of 2020, global sustainable investment assets under management (AUM) reached US$ 35.3 trillion, a 15 percent increase since the 2018 report (based on assets reported by the United States, EU, Australia/New Zealand, Canada and Japan).
The most common sustainable investment strategy is ESG integration, followed by negative screening, corporate engagement and shareholder action, norms-based screening and sustainability-themed investment.
How Private Equity Learned To Stop Worrying And Love ESG-
From ImpactAlpha- To know what big private equity funds are up to, look – and listen – to what they tell their largest clients.
Lately, the asset managers are pitching the owners on climate investing and ESG. ESG has finally found its true sales reps in big private equity. Because if there is one thing these men of finance know how to do, it’s sell.
ESG, even in private equity, is not new. But the tone has changed. No longer a reluctant, symbolic, marketing-driven sideline, private-equity strategies are putting environmental, social and governance approaches on center-stage. Private equity firms have become among ESG’s most enthusiastic boosters. And it works! Pension and endowment boards don’t want to hear Greta Thunberg, or other activists, banging on about climate change’s threat to the planet. They want to be sold the future. A future of prosperity and double-digit returns.
Source (Registration required): https://impactalpha.com/the-education-of-jim-coulter-or-how-private-equity-learned-to-stop-worrying-and-love-esg/
One more thing: From CNBC- a 15-minute YouTube video on why trash is worth millions in the US
Find the video here: https://www.youtube.com/watch?v=uUmtJIBibMM
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