Improved biodiversity data, standards needed as investment ops grow

Read the full story at Environment + Energy Leader.

Biodiversity is increasingly becoming a priority for investors as they study the impacts of a company’s nature-related impacts, even as standards on such information are lacking, according to a report from Moody’s.

Is it time to rethink what ESG investing means?

Read the full story in Fast Company.

With Tesla off of one ESG index but still on others—and Exxon listed on an index that excludes companies that extract oil sands—what does ESG investing overall actually prioritize?

How a sustainability index can keep Exxon but drop Tesla – and 3 ways to fix ESG ratings to meet investors’ expectations

Tesla CEO Elon Musk, shown at an electric vehicle factory, called ESG ratings ‘a scam’ after an index dropped Tesla. Maja Hitij/Getty Images

by Tom Lyon, University of Michigan

A major stock index that tracks sustainable investments dropped electric vehicle-maker Tesla from its list in May 2022 – but it kept oil giant ExxonMobil. That move by the S&P 500 ESG Index has set off a roiling debate over the value of ESG ratings.

ESG stands for environmental, social and governance, and ESG ratings are meant to gauge companies’ performance in those areas. About one-third of all investments under management use ESG criteria, yet many environmental problems continue to worsen. Tesla CEO Elon Musk called the ratings “a scam,” and the U.S. Securities and Exchange Commission is discussing whether to propose new ESG disclosure rules.

The Conversation asked Tom Lyon, a business economics professor at the University of Michigan who studies sustainable investing, to explain what happened and how ESG ratings could be improved to better reflect investors’ expectations.

How does a company like Tesla, which makes electric vehicles, get dropped from the S&P 500 ESG index while Exxon is still there?

ESG ratings agencies typically rate companies against others within their industry, so oil and gas companies are rated separately from automotive companies or technology companies. Exxon stacks up fairly well relative to others in the oil and gas category on many measures. But if you compared Exxon to, say, Apple, Exxon would look terrible on its total greenhouse gas emissions.

Tesla may rate well on many environmental factors, but social and governance factors have been dragging the company down. S&P listed allegations of racial discrimination, poor working conditions at a Tesla factory and the company’s response to a federal safety investigation as reasons for dropping the company.

The way ESG criteria are measured also carries some biases. For example, the ratings consider a company’s direct greenhouse gas emissions but not its Scope 3 emissions – emissions from the use of its products. So Tesla doesn’t get as much credit as it might, and Exxon doesn’t get penalized as much as it might.

What can be done to make ESG investments better reflect investors’ expectations?

One strategy is for investment firms to invest in a small number of carefully vetted companies and then use their influence within those companies to monitor behavior and drive change.

Another is for raters to stop trying to aggregate all of the different measures into a single rating.

Investors concerned about ESG often value different objectives – one investor may really care about human rights in South America while another is focused on climate change. When ESG ratings try to force all of those objectives into a single number, they obscure the fact that there are trade-offs.

ESG could be broken up so ratings instead focused on each piece individually.

Environmental issues tend to have a lot of available data, which make E the easiest category to rate in a consistent way. For example, scientific data is available on the increased health risks a person faces when exposed to benzene. The EPA’s Toxic Release Inventory shows how much benzene various manufacturing facilities release. It’s then possible to create a toxicity-weighted exposure measure for benzene and other toxic chemicals. A similar measure can be created for air pollution.

Social issues and governance issues are much harder to aggregate up into single ratings. Within the G category, for example, how do you aggregate diversity in the board room with whether the CEO personally appointed all the board members? They are capturing fundamentally different things.

The SEC is considering a third strategy: enhancing disclosure requirements so investors have access to better information about what is in their ESG portfolios. It plans to take up the issue at its meeting on May 25, 2022.

What else do ESG ratings overlook?

ESG ratings often omit important behaviors and choices. One that’s particularly important is corporate political activity.

A lot of companies like to talk a green game, but investors rarely know what these companies are doing behind the scenes politically. Anecdotally, there is evidence that many are actually playing a fairly dirty game politically. For example, a company might say it supports a carbon tax while donating to members of Congress and lobbying groups that oppose climate policies.

To me, that’s the most egregious failure in the ESG domain. But we don’t have the data to track this behavior adequately, since Congress has not required disclosure of all types of political spending, especially so-called “dark money” from super PACs.

A few organizations are gathering more detailed information on specific issues. InfluenceMap, for example, invests an enormous amount of time looking at companies’ annual reports, tax filings, press releases, advertisements and any information about lobbying and campaign spending to rate them. It gave ExxonMobil a grade of D- for its political action on climate.

What can investors looking for positive impact do if ESG ratings aren’t the answer?

Investors can always take a more targeted approach and invest in specific categories that they believe will provide essential solutions for the future. For example, if climate change is their leading concern, that may mean investing in wind and solar power or electric vehicles.

ESG funds often claim that they outperform the market because companies with strong management in environment, social and governance areas tend to be better managed overall. And on average, firms with higher social performance do have a somewhat higher financial performance. However, some insiders, like former Blackrock sustainable investment head Tariq Fancy, argue that ESG portfolios today aren’t very different from non-ESG portfolios, and often hold almost all the same stocks.

There’s also a larger question in the background of all of this: Is investment pressure really what’s going to drive us toward a more sustainable future?

If you want to make a difference, consider spending time working with activist groups or groups that support democracy, because without public pressure and democracy, countries aren’t likely to make good environmental decisions.

Tom Lyon, Professor of Sustainable Science, Technology and Commerce and Business Economics, University of Michigan

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Want your company to offer a green 401(k) option? This startup can help

Read the full story at Fast Company.

Only 4.7% of 401(k) plans offer the choice of an environmental, social, and governance fund, according to the Plan Sponsor Council of America.

UNEP launching new sustainable land use finance impact directory

Read the full story from UNEP.

Financial institutions around the world can now measure the positive impact of their investments into biodiversity conservation, adaptation, mitigation, forest protection and sustainable livelihoods with the help of a new indicator directory and resources platform, launched today.

The Land Use Finance Impact Hub and its Positive Impact Indicators Directory – launched today by UN Environment Programme (UNEP) Climate Finance Unit and the UNEP World Conservation Monitoring Centre (UNEP-WCMC) – has been developed with and for impact funds and sustainably focused financial institutions, and aims to support the rollout of effective industry frameworks to track the environmental and social impacts of land-use investments.

Are ESG ratings actually measuring how responsible a company is?

Read the full story in Fast Company.

More than $35 trillion dollars are invested in ESG funds—but do those funds reward the best corporate behavior?

Aviva Investors launches funds targeting companies tackling social inequality, biodiversity loss

Read the full story at ESG Today.

Aviva Investors, the global asset management business of Aviva plc, announced today the launch of two new equity funds in its Aviva Investors Sustainable Transition range, aiming to invest in companies that are managing their social and environmental impacts and providing solutions to support the transition to a sustainable future. Key areas of focus of the new funds include addressing social inequality and biodiversity loss, and the funds align with several of the UN Sustainable Development Goals (SDGs).

Opportunities for sustainability in the built environment

Read the full story from Racounteur.

Infrastructure and real estate present varying ESG risks to institutional investors, but there are still opportunities to fund environmentally and socially responsible construction projects that offer acceptable returns.

CFA Institute publishes ESG disclosure standards for investment products

Read the full story at ESG Today.

Global investment professional association CFA Institute announced today the publication of Global ESG Disclosure Standards for Investment Products, the first voluntary set of reporting standards for the investment industry, aimed at providing transparency and comparability of investment products with ESG-related features.

Goldman Sachs, Microsoft back Al Gore’s new climate solutions investment fund

Read the full story at ESG Today.

Generation Investment Management, a sustainability-focused investment firm chaired by former U.S. Vice President Al Gore, announced the launch of Just Climate, a new climate solutions-focused investment business.