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ESG is a-changin’, water disclosure demands, greenwashers beware CA100+

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One thing to start: we’re launching a series of in-depth reports under the banner of the Moral Money Forum, and we’re keen for your insights. Our first report, to be published early next year, will ask how investors and the companies they invest in can encourage long-term behaviour in a world of short-term pressures. Are quarterly earnings getting in the way of building sustainable businesses? How can boards best navigate the trade-offs? And what’s the most compelling research and data that would inform our reporting. Share your thoughts here.

Deluge of ESG announcements show shift in zeitgeist

There have been so many announcements this year about the corporate world embracing ESG principles that it is temptingly easy to roll your eyes whenever a new survey drops. But sometimes, Moral Money remembers to stop being (almost) blasé and marvel about a crucial point: today’s corporate zeitgeist looks notably different versus two years ago, never mind a decade back.

A recent HSBC survey of 10,000 of its global clients found that 78 per cent of companies have environmental targets, and 72 per cent have social ones. That marks a jump of 10 and 12 percentage points compared with last year. The increase underscores a key point we keep hearing: Covid-19 has not derailed ESG talk, or not among companies that seem able to survive.

Even more startling is that 86 per cent of HSBC clients expect sustainability to boost their profits next year. They view doing good as a revenue-enhancing strategy to a degree that might make Milton Friedman, the economist who promoted the shareholder-first mantra, spin in his grave.

Maybe that is overly optimistic. Some consumer behaviour these days is contradictory (HSBC officials say that while consumers are increasingly picking companies according to their sustainability image, they are not always choosing sustainable products.) But the survey suggests “consumers are the strongest driver for automotive and construction firms to enhance sustainability, whereas government action influences natural resource-intensive businesses in the agricultural, oil and mining sectors”.

Companies are also responding to the mood shift from banks. An FT Moral Money panel at a banking conference on Tuesday showed that entities such as NatWest and UniCredit were increasingly imposing tougher ESG criteria on loans, echoing a wider shift in the industry.

Jean Pierre Mustier, the head of UniCredit, argued that the embrace of sustainability was so marked that Covid-19 was turning into the “redemption moment” for financiers. Cynics might scoff. But the key point remains: this is not language that bankers used during the past decade’s crisis. Sometimes the biggest zeitgeist shifts are the ones that keep stealthily swelling so they become the “new normal” that we almost take for granted — until we stop to look, afresh. (Gillian Tett)

The new frontier for disclosures

© Springdt/Dreamstime

Shareholder resolutions calling for better disclosures of climate change risks and carbon emissions scored successes in 2020, but a lurking problem with equally dangerous risks remains: the scarcity of disclosures around clean, accessible water.

In a report published this week, DWS, Deutsche Bank’s asset management arm, said investors do not have basic information to assess companies’ water risks. Perhaps more troubling, investors lack an understanding of water risks, DWS said.

The debate about water is in its early stages, but will eventually become as important as air and CO2 concerns, DWS said. The group urged other asset managers and companies to adopt a water charter that details guidelines for businesses.

Michael Lewis, head of DWS’s ESG thematic research, said water was viewed as a free resource, but “this idea that it is plentiful and cheap is just wrong”. He called for a water-themed version of the Climate Action 100+, the influential group of nearly 600 investors agitating for global warming prevention. 

“What we have done with climate we could replicate with water,” he told Moral Money. For example, the Task Force on Climate-related Financial Disclosures could be expanded to include water risks, he said.

Companies can expect more pressure from shareholders in 2021 to disclose water risks. This year, As You Sow, a pressure group, filed shareholder proposals at Baker Hughes, Diamondback Energy, Entergy and other energy companies demanding reports on water usage. Several of these petitions were withdrawn after companies agreed to make the requested disclosures.

With CDP, the nonprofit formerly known as the Carbon Disclosure Project, now looking to expand its sustainability questionnaire to include water security, we should expect more companies and asset managers to take DWS’s warnings seriously. (Patrick Temple-West)

Shareholder engagement group plans to tighten screws on greenwashers

When investment managers want to signal they are getting serious about climate change, one of the first things they tend to do is to sign up with groups such as the Climate Action 100+ group we mentioned above.

But there’s just one problem: the act of joining the CA100+ (or many of the other similar groups out there) doesn’t always mean much in practice, a new report from ShareAction has found.

Some notable laggards include BlackRock, which joined the CA100+ this year, but only supported 11 per cent of the climate resolutions that crossed its desk, and Lyxor Asset Management, which joined in 2018 and supported just 2 per cent.

To be sure, the goal of the CA100+ is to cast a wide net and get as many investors involved as it can. Many members do support climate propositions, and the group has made some important progress on getting companies to disclose better climate data and commit to go net zero.

But the potential for greenwashing is clear. And there is little to prevent bad faith actors from joining simply to bolster their ESG branding.

Mindy Lubber, chief executive of Ceres, the sustainability non-profit that founded the CA100+, recognises the problem. “We don’t like it any more than you, if they’re using it for cover,” she said. “They were invited in to help move companies, and they should be doing that. If they’re not doing that, they shouldn’t get away with having the imprimatur.”

Ceres publishes a yearly report on the CA100+ that calls out investors that don’t vote their proxies. And Ms Lubber says the next phase of the CA100+ will be getting asset owners and managers to make their own net zero commitments. Those that don’t comply may be “invited to leave”.

But until that happens it is hard to put much stock into investors touting CA100+ commitments. Without doing your homework, it is impossible to know if they have done anything beyond signing their name to a piece of paper. (Billy Nauman)

Nasdaq to require women, minorities on corporate boards

In one of the biggest corporate governance developments of 2021, the Nasdaq stock exchange on Tuesday proposed a new rule that requires its US listed companies to have at least one woman and one person who self-identifies as an under-represented minority or lesbian, gay, bisexual, transgender or queer.

Companies will have four to five years to find qualified board candidates, Nasdaq said. How significant do you think this will be in driving change throughout corporate culture? Please email us your thoughts at moralmoneyreply@ft.com.

Grit in the oyster

In an example of the challenges countries face to become carbon neutral by 2050, Sony has warned the Japanese government it may have to shift manufacturing out of the country unless rules on renewable energy are relaxed.

The comments from chief executive Kenichiro Yoshida underscore the pressures Japanese businesses are under to erase the carbon footprint of their manufacturing facilities as Apple, Facebook and other technology groups seek to shift their global supply chains to 100 per cent renewable power.

Chart of the day

October marked the highest ESG monthly flows on record at $36bn (+45% vs $25 Sep flows); 64% passive, 36% active

Despite efforts by the Trump administration to chill ESG investing, investors in October poured a record $36bn into sustainability funds, according to Morgan Stanley. ESG exchange traded funds saw $9.6bn of inflows (compared with a 12-month average of $5.2bn).

This haul accounted for 35 per cent of flows into ETFs broadly. And the whopping amounts came as ESG indices underperformed. The broader market has beaten MSCI’s socially responsible investing indices since mid-October, Morgan Stanley said.

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

In its first China Stewardship Report, Fidelity International found that investors have focused more on stewardship — both through voting and engagement — than ever before and have started to influence corporate behaviour for the better in China.

Voting participation has been steadily rising, even though the speed of progress may look slow to western investors. The average voting participation rate at companies without a controlling shareholder jumped to 36.5 per cent in 2019 — from 33.1 per cent in 2017. Shareholders have also started to use their votes to voice their opposition more openly. The number of resolutions receiving more than 10 per cent “against” votes increased to 385 last year, an increase of approximately 20 per cent over two years.

The report also provided a few examples of Chinese companies — both state-owned and privately owned — that have responded to engagement constructively. For example, a large oil and gas producer in China has addressed its aspirations to cut carbon emissions to near zero by 2050, after a series of informal conversations and engagement calls.

Hurdles remain for overseas ESG investors. But the progress thus far is astonishing for a country where there is no widely accepted Chinese translation for the words “stewardship” or “engagement” yet.

Smart reads

  • Republican SEC commissioner Hester Peirce on Tuesday renewed her concerns with ESG investing. “[F]or all its hype, ESG investing does not require us to turn our rules inside out to accommodate it any more than any other broad genre of investing, like value investing, requires us to do,” she said at an agency meeting. Companies should treat ESG topics with the same materiality filter they apply to everything else, she said.

  • Cargill and Nestlé USA faced the US Supreme Court on Tuesday in a case concerning when companies can be sued for allegedly violating international human rights. Check out the Reuters report on the oral arguments here.

Further reading

  • Amazon to roll out tools to monitor factory workers and machines (FT)

  • Managers Point to Diversity Efforts to Justify CEO Pay (FundFire)

  • Biden’s renewable energy deadline too ambitious says power boss (FT)

  • Reinventing Workers for the Post-Covid Economy (NYT)

  • Activist Shareholders Press Pfizer, J&J, and Other Pharma Companies on Covid Vaccine Price and Access (Barron’s)

  • Bank of America Says It Won’t Finance Oil and Gas Exploration in the Arctic (Bloomberg)



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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