Discover more from ESG on a Sunday
Week 25: Welcome to the ESG theatre (PS: it's a tragicomedy)
In this issue: ▸ The ESG theatre is a tragicomedy 🎭 ▸ The worst is yet to come… ▸ Less gloomy, please! ▸ UK to approve oilfield before COP26 ▸ Tighter oversight of ESG ratings ▸ And much more...
I hope everyone is well and ready for a new edition of ‘ESG on a Sunday’!
Last week we took a deep dive into the word and topic of possible in relation to the climate emergency. We looked at divisions as well as challenges and opportunities.
This week, we will take a step back and try to see what is really going on behind the scenes of the political and corporate theatre.
As we all know by now, time is scarce, bets are high and commitments (at least on paper) have never been so firm. So far, so good.
The ESG theatre is a tragicomedy 🎭
The theatre that is playing out in front of us, the theatre of ESG, in the political and corporate spheres, looks more and more like a tragical low budget comedy show.
Most of it has nothing to do with any kind of hidden agenda. But strange things are happening right in front of us and they are actually crystal clear.
We are still struggling to grasp, act on and manage systemic issues in our world related to climate emergency and social inequality. Why? Yes, they are complex, but it’s also because we don’t treat them as systemic.
But we all like drama, good and bad, heroes and villains.
The worst is yet to come…
Let’s start this week’s theatre edition with 4,000 leaked draft pages for IPCC’s Sixth Assessment Report scheduled for next year.
I don’t know about you, but when I read some of the things below I once again get that spooky chill along my spine.
"The worst is yet to come, affecting our children’s and grandchildren’s lives much more than our own," the report says.
Last month, the World Meteorological Organization projected a 40 percent chance that Earth will cross the 1.5-degree threshold for at least one year by 2026. This means, well, it means more trouble. Even if it’s half as bad as they say, it is not good for anyone. 40% is significant and 2026 is just 5 years away.
Tens of millions more people are likely to face chronic hunger by 2050, and 130 million more could experience extreme poverty within a decade if inequality is allowed to deepen.
In 2050, coastal cities on the “frontline” of the climate crisis will see hundreds of millions of people at risk from floods and increasingly frequent storm surges made more deadly by rising seas. Some 350 million more people living in urban areas will be exposed to water scarcity from severe droughts at 1.5 degrees Celsius of warming – 410 million at two degrees Celsius.
That extra half-a-degree will also mean 420 million more people exposed to extreme and potentially lethal heat waves.
In the more immediate future, some regions – eastern Brazil, Southeast Asia, the Mediterranean, central China – and coastlines almost everywhere could be battered by multiple climate calamities at once: drought, heat waves, cyclones, wildfires, flooding.
Read more here in one of the media articles about the content in the leaked draft report.
Can it be a little bit less gloomy, please?
It sounds very, very bad and it is. It’s a scientific report. I can’t stop asking myself: What have we done? Or rather, what are we doing?
Okay, a more sober approach could be to minimize the immediate shock and say let’s assume 50 % likelihood in relation to the above. So “only” 65 million people will experience extreme poverty, “only” some 175 million people living in urban areas will be exposed to water scarcity from severe droughts at 1.5 degrees Celsius of warming.
You get the picture, it doesn’t really make it less gloomy.
In all likelihood, this is what will happen: The extinction of species will accelerate, we will see more widespread diseases, we will experience unliveable heat, our ecosystem will collapse, and our cities will be menaced by rising seas.
These and other devastating climate impacts are accelerating and are bound to become painfully obvious before a child born today turns 30.
UK to approve oilfield before COP26
We take a step forward to the political and corporate theatre now.
Let’s start with this: UK Ministers are set to approve a new North Sea oil and gas project just months before Britain hosts the COP26 in Glasgow.
Under proposals submitted to the government, developers behind the Cambo heavy crude field off the coast of the Shetland Islands expect to extract 150 million barrels of oil – roughly equivalent to operating 16 coal-fired power stations for a year!
Do we really want this? Norway has recently done the same thing, handing out new drilling licences to number of oil companies.
It is becoming a theatre. The Emperor is naked, but no one seems to care anymore. We live in a time where nothing is true and everything is true.
Big Tech against ESG disclosure rules
We move on to theatre of large tech companies and ESG – and a rather interesting development.
Microsoft and Alphabet have pushed back against calls to include disclosures on environmental, social and governance (you know, ESG) issues in key US regulatory filings, setting them on course for a tussle with major asset managers.
The tech companies told the top US securities watchdog that ESG information should not be included in a type of filing known as a 10k, which most public groups must submit each year.
Microsoft and Alphabet said including ESG information in these filings would open them up to potential legal risks since such data are subject to more uncertainty than the detailed financials and risk disclosures that are currently required in 10ks.
We need tighter oversight of ESG ratings
This piece is especially relevant to the theatre of ESG ratings, and it is indeed a very comic one. We have addressed ESG ratings in some previous newsletters, and now it becomes more and more clear that these ratings need much more oversight since they determine the future of so many investments.
Investors are increasingly demanding that asset managers put their cash into companies that meet “green” or ESG criteria, with references to ESG ratings embedded into their investment processes, Britain's Financial Conduct Authority said on Tuesday. But the ESG ratings business, a market that could be worth $1 billion this year, has no firm definition of data provision that applies globally.
Therefore, ESG ratings need tighter oversight to avoid risks to the smooth functioning of financial markets, the FCA concluded.
This has and will have significant implications on the future of ESG. If we don’t get this one right, we may end up in a very relative world of ESG where some companies will be seriously hurt and others will be seriously promoted on the basis of judgments made on very shaky grounds.
The trouble with ESG index funds
Let’s move from the theatre to the opera, loud and dynamic, yet still beautiful and simple all the same.
Corporate governance and voting is a bit like that. ESG index funds are very loud, even if in reality they are are just a roar from the corner of the opera hall.
As you know, the idea of investing with an environmental or social purpose has gained significant traction in recent years, especially among those who wish to invest in accordance with their values.
So people who put their money in vehicles like ESG index funds and expect that their money will be invested in alignment with values such as a commitment to renewable energy or equal pay for women.
But new research finds that even though these funds have an explicit ESG mandate, their proxy voting records often contradict their stated objectives.
Not exactly what you paid for, is it?
Asset managers fail to communicate ESG expertise
Now, the opera has many subtle dimensions. It might appear straightforward, but it is not always what you see. And it is not always about what you think it is.
Asset managers are pulling record amounts of money into funds with environmental and social goals, but they’re falling short on developing behind-the-scenes’ expertise and communicating their work to investors and other stakeholders.
According to Peregrine Communications’ 2021 ESG Report, these efforts are crucial to gain investors’ trust and in advancing real-world initiatives related to complex ESG goals. Although content like this often falls under marketing and communications, asset managers need high-quality scientific content on areas like deforestation and biodiversity, according to the report, called How the World's Most Impactful ESG Asset Managers Communicate Their Contribution to a More Sustainable Future.
“Much of asset management marketing today fails to match scientific reality,” wrote the authors of the report. “Years of progress in changing attitudes about sustainable finance will be undone if obvious greenwashing continues to rear its ugly head among some high-profile managers. Damaging headlines shine a spotlight on the discrepancy between rhetoric and reality. An entire industry can’t change overnight, but that journey is made more difficult by some players who seem to be wilfully ignoring the huge gaps between what they say and what they do on ESG.”
The future is not bright for passive providers
This fits nicely with the assessment by some analysts that passive providers will struggle to gain traction in some strategies focused on good ESG outcomes. Active managers have an edge in the area of stewardship.
Despite record inflows into passive ESG products, some see challenges ahead as the demand for sustainable investment strategies shifts from avoiding harm to actively doing good.
So-called negative or exclusionary screening, which excludes certain companies, was the best-selling passive ESG strategy until 2018, according to Mark McFee, director at Broadridge Analytics Solutions.
Investors have a duty to investigate links to modern slavery
We don’t want to end on melodramatic note. This one is thus more like a punch in the face, and we in the investment community need this punch because we do so little to address this.
While slavery might sound like an egregious crime of the past it is still commonplace in modern society. It is a crime that exploits and dehumanises individuals and sees them as property to be bought, sold or traded.
While it is prevalent, it is not public, and across the world acts of modern slavery take place without recognition, understanding or assistance. Estimates suggest there are 40.3 million people across the globe in slavery.
Of the twenty-five million that are victims of forced labour, sixteen million are exploited in the private sector and five million are victims of forced sexual exploitation.
Seventy percent of those in slavery are women and girls.
This is not a problem of some far off distant land but one that occurs across the western world, including in the United Kingdom.
Recent figures suggest that in the UK alone, 136,000 people are victims of modern slavery. These figures, yet to be revised to take into account the pandemic, are likely to be underestimating the true number.
To put this into context, an independent review of Boohoo found that the firm’s major investors had significantly underestimated its modern slavery links and even ranked and recommended the company in their dedicated sustainable investment funds.
Of the 795 financial organisations that publish modern slavery statements, only 30-40 percent of them meet the minimum reporting requirements and many do not look beyond their own firm’s in-house operations.
That’s it for now. Have a great week everyone!
Best regards, Sasja