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Week 2: The big new concept of corporate philotimy
In this issue: ▸ The big new concept of corporate philotimy ▸ In 2020, ESG went mainstream ▸ Now it's perform or die for ESG funds ▸ Is carbon capture a fantasy? ▸ Trickle-down economics 😂
I hope you are well and ready for a new edition of ‘ESG on a Sunday’!
The keyword this week is philotimy, more on that shortly.
Green leadership or greenwashing in Denmark?
First, I want to highlight a piece I published on Wednesday, based on an interview with myself in Danish weekly Mandag Morgen a couple of days prior.
In short, we used our ‘climate projection model’ in J. Safra Sarasin (read about it here) to calculate the climate path of Danish large caps. And it was not a pretty sight. Some of the biggest Danish companies are on a 6+ degree Celsius path. On average, Danish companies are on a 3 degree Celsius path, far away from Paris.
The piece created a great deal of noise in Denmark, and a number of the companies mentioned in the ranking wrote me to learn more about the calculations. That kind of response at least is a positive sign.
Other people asked for similar rankings from other countries. However, it takes a lot of time do the granular calculations, so we need more formal requests in order to produce them. However, we did calculate the climate path of 15 countries. See here:
The big new concept of corporate philotimy
Are you familiar with the word “philotimy”? If not, you’re not alone.
Find a Greek friend and ask what philotimo (φιλότιμο) means. He or she will know, but will struggle to do an English translation.
The word carries a universe of rich meanings. It’s decency, dignity, honesty, altruism, and a dozen other ideals encapsulating what it means to live with integrity.
In a corporate context, philotimy is the immutable DNA that determines how a company operates at the cellular level. It is the principle that guides a company’s sustainability behaviour, which can then be quantified with ESG metrics.
Ultimately, a culture of corporate philotimy enables companies to build trusted brands, leading to loyal customers, engaged employees, and supportive shareholders. Furthermore, investors are finding that companies with a strong sense of philotimy consistently outperform less-virtuous companies.
So how do you build a company with a strong sense of corporate philotimy?
It starts with people. The notion that aggressive employees drive success is long dead. Research has definitively shown that productive teams are the direct result of positive work cultures — of deeply held corporate philotimy.
In such environments, individuals feel a moral responsibility not to let their teams down. When they see colleagues struggling, they react with compassion. They give credit for collective achievements and avoid blaming others for failures. As a team, they forge a strong “we are in this together” bond, focused not on the bare minimum they are asked to do but on anything and everything they can do to contribute to the team’s success.
If we want ESG to make a real difference we need scale and shift to corporate philotimy. It might very well be the new big concept (although very old). It all starts with people.
Read more in this very good piece from HBR.
In 2020, ESG went mainstream
Due to global pandemic many developments in the field of ESG have been overshadowed, but 2020 was by all means not at all so bad for ESG industry. 2020 is the year that ESG went mainstream.
In October 2020, the IFRS Foundation (the organization hosting the work of the International Accounting Standards Board, which guides financial reporting in 144 jurisdictions) issued a request for comments on a proposal to create a sustainability standards board. A group of 33 institutional investors, representing a combined $5.1 trillion of assets, have committed to transitioning their investment portfolios to net-zero greenhouse gas emissions by 2050. Things are moving.
All of this is an indication that the attention to ESG investing has never been bigger, and that investors will keep increasing their allocations to ESG funds.
There has thus been a dramatic increase in the quality of human capital attracted by sustainable finance. Professionals with advanced skills and diverse experiences are now entering a realm that had been considered niche. They will be applying those skills to allocating capital in a manner that will finance and support sustainable corporate strategies, as well as purpose-driven organisations helping to address the world’s most pressing issues.
Consequently, the probability of success for ESG fund managers will increase. Active equity funds celebrated their best month in five years in December, as data from funds network Calastone reveals that half of the month’s GBP1.7 billion investment flows in active equity went towards ESG funds.
Read more in this very good article.
The drivers of ESG growth
There is a good explanation for why we’ve seen an increase in the supply of ESG funds: demand.
First, data availability on ESG topics has grown substantially richer over the past years, with data quality also improving. This has allowed asset owners and regulators to ask managers ESG-related questions. It has also enabled more managers to analyse at scale the impact of ESG considerations on a portfolio’s performance and characteristics.
Second, accumulating evidence that ESG issues are financially material has empowered managers to position ESG integration as part of a rigorous investment process and refute the past misconception that ESG is about investing just on the basis of values.
Third, societal pressures have led asset managers to want to better understand how companies behave before including them in their portfolios, to ensure alignment with normative principles (e.g. human rights). Managers have increasingly been scrutinised for holdings that made headlines for the wrong reasons, generating reputational nightmares.
Last, investors have realised that they can utilise the power of capital to alter unsustainable corporate behaviour and help solve the world’s most agonising problems, like climate change.
All of it you can read here. It’s one of the best explanatory pieces I’ve read. Comprehensive and educational at the same time.
ESG funds in 2021: perform or die
This year is critical for ESG funds. It’s perform or die: The demand is there, but we need performance to determine if we really can scale.
Over the years, there’s been a lot of debate about the relationship between ESG and investment performance. Some argue it hurts returns while others say the opposite. Given this, Morningstar has examined how ESG-rated funds performed in 2020.
Their study does not settle the debate once and for all. But it does give some insight and is well worth a read. Read here.
Non-financial threats are indeed very financial
The pandemic has made clearer to investors the financially material impact of non-financial risks. As such, there is an increased focus on managing the material financial risks stemming from ESG factors, particularly climate change.
If anything, 2020 has taught us non-financial threats impacting the economy and society can be managed by concentrating capital to fund solutions, such as funding the development of vaccines in record time.
In this piece, Deutsche Bank exposes some of the challenges ahead.
Investor pressure boosted climate disclosures
If you think investor pressure doesn’t work, you need to think again: According to nonprofit CDP, companies are more than twice as likely to report climate risk data when investors actively pressure them to do so.
More than 1,000 companies were asked by investors to disclose their impact on forests, climate change and water security last year, as part of an annual campaign by the CDP.
The response rate rose to 20% in 2020 after lingering around 15% for the previous three years, CDP said in a report released this week. Read more here.
Is carbon capture and storage just a fantasy?
Will technologies like carbon capture and storage (CSS) really deliver for humanity? Well, based on this piece it looks like it’s just a fantasy.
Capturing and storing carbon is a complex and expensive process, and many of the schemes proposed in the 1990s have been abandoned as too expensive or too technically difficult.
In a new report, the conclusion is clear: “The technology still faces many barriers, would only start to deliver too late, would have to be deployed on a massive scale at a scarcely credible rate and has a history of over-promising and under-delivering.”
Currently there are only 26 CCS plants operating globally, capturing about 0.1% of the annual global emissions from fossil fuels.
Ironically, 81% of the carbon captured to date has been used to extract more oil from existing wells by pumping the captured carbon into the ground to force more oil out. This means that captured carbon is being used to extract oil that would otherwise have had to be left in the ground.
Trickle-down economics 😂
We end this week’s newsletter with a laugh. This video (from a session in QAnon Anonymous…) is nothing short of hilarious. Watch it to the end!
That’s it for now. Have a great week!
Best regards, Sasja