Hello from New York, where I am hoping you are looking forward to some rest and relaxation this month. While it might be fun-and-games time for some of us, Deloitte’s employees are headed to school — climate school.
Deloitte has started to roll out a new climate learning programme for all 330,000 of its employees worldwide. The new programme, developed in collaboration with the World Wildlife Fund, is designed to help Deloitte advise clients. Remember, in June rival Big Four firm PwC said it would add a whopping 100,000 staffers to capture the booming environmental, social and governance (ESG) market.
Clearly, people are eager for ESG information, and we hope we can help fill the void with this newsletter. Read on. — Patrick Temple-West
DWS re-engineers European ETF to lure ESG investors
Corporate name changes are often the focus of public snickering. Standard Life Aberdeen’s switch to Abrdn in April, for example, was widely mocked on the Financial Times website. The FT’s Pilita Clark has even argued that corporate rebranding is a waste of time.
Last week, DWS, Deutsche Bank’s asset management arm, announced the renaming of nine of its ETFs to incorporate the ESG label and track a new index. The new index provided by MSCI, which includes ESG screens, replaces Stoxx indices.
The move is part of a larger trend to appeal to ESG investors. JPMorgan and Amundi were among the companies that overhauled more than 250 conventional funds to add sustainability language and investment criteria in 2020, according to Morningstar.
Companies that have failed to capture investor interest are now adding “a coat of green paint” on funds, says Ben Johnson, director of ETF research at Morningstar. The changes are “an attempt to revitalise this particular product,” Johnson said.
DWS is also adding securities lending activities to the ETFs, the company said. Funds will often lend shares to short sellers to liven up returns, but the practice could raise concerns from ESG investors. In 2019, Hiro Mizuno (pictured), the former head of the world’s largest pension fund, stopped lending out securities from the Japanese scheme because he believed shorting was antithetical to his mission of long-term value creation.
Refurbishing existing funds to give them an ESG-friendly look has limitations, Johnson said.
“There are ESG-like exclusionary screens that are hardly what we would think of as best in class ESG intentional index strategies,” Johnson said.
And renaming a fund to hoover up ESG money has caught the eye of regulators. Last week, Securities and Exchange Commission chair Gary Gensler said he wanted the agency to revisit its “names rule”, which prohibits funds from using materially deceptive or misleading names.
“Labels like ‘green’ or ‘sustainable’ say a lot to investors,” Gensler said. “Which data and criteria are asset managers using to ensure they’re meeting investors’ targets — the people to whom they’ve marketed themselves as ‘green’ or ‘sustainable’?” (Mariana Lemann)
Climate campaigners allege central banks aren’t doing enough to avoid a ‘hothouse world’
When the Federal Reserve in December finally joined the Network for Greening the Financial System (NGFS), all systemically important banks worldwide fell under the organisation’s climate risk oversight. With the US onboard, the NGFS can command significant influence over the financial industry’s role in climate change mitigation.
NGFS research is already being used by central banks around the world. To build their stress tests, the Banque de France, European Central Bank and Bank of England have used NGFS forecasts, including the frightening “hothouse world” scenario in which global warming imposes extreme costs on everyone.
And companies are taking the financial implications seriously. For example, Global Partners, a US petrol company, has warned shareholders that bank financing could get more difficult as NGFS’s climate stress tests are implemented.
But the NGFS has flaws, according to Reclaim Finance, a Paris-based activist group founded in 2020 by Lucie Pinson. In a report provided exclusively to Moral Money, Reclaim Finance argued that NGFS climate risk forecasts rely too heavily on carbon capture and storage, which would not sufficiently reduce fossil fuels investment enough to limit global warming to 1.5°C.
In July, NGFS updated its climate risk scenarios to limit global warming to 1.5°C. However, Reclaim Finance takes issue with NFGS’s assumptions about how banks would reduce their carbon footprint to get there. A false sense of security could prompt companies to decelerate efforts to reduce their fossil fuel assets.
NGFS scenarios could allow for significantly more fossil fuel extraction investments in the 2030s, Reclaim Finance said. The International Energy Agency said in May that energy companies must stop all new oil and gas exploration projects from this year to halt global warming.
“These scenarios rely too heavily on carbon capture and storage and permit ongoing investments in fossil fuels, a recipe for climate chaos and stranded assets,” said Paul Schreiber, a campaigner at Reclaim Finance. (Patrick Temple-West)
Inside the fight to eliminate microplastics
Polymateria, a London-based company, has published findings this month identifying a new type of plastic that can decompose into harmless wax.
Imperial College London scientists proved the technology worked in the Mediterranean, home to the world’s highest global microplastic concentration, according to Niall Dunne, chief executive of Polymateria.
Microplastic, a traditional plastic, is harmful to the environment because over time it fragments into tiny particles less than 5mm in size. These particles are easily digested by aquatic animals and can travel through the food chain.
While there is significant interest and demand for an alternative to plastics, innovation has lagged, Dunne told Moral Money.
Convenience store chain 7-Eleven has begun implementing the sustainable plastic into its packaging, as has Pour Les Femmes, a clothing brand created by House of Cards actress Robin Wright.
“Our awareness on the issue is thankfully rising but sadly robust research and innovation is still lagging behind,” said David de Rothchild, the British environmentalist known for building a plastic boat and sailing it around the Pacific Ocean.
Tips from Tamami
Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.
To attract more foreign investors, the Tokyo Stock Exchange is instituting the biggest reform of Japan’s stock markets in a decade.
From next April the exchange will require companies to be more aligned with global corporate governance and financial standards. As part of the overhaul, the Tokyo bourse will split into three sections — prime, standard, and growth. To list in the prestigious “prime” section, companies must meet tighter criteria, such as liquidity standards.
Companies in the prime group are also recommended to fill a third or more of their boards with external directors and to disclose climate risk.
Approximately 30 per cent of the companies that are listed on the top-tier group in the exchange fall short of the requirements for staying in the prime section, Nikkei said.
To stay in the top group, some companies are scrambling to unwind long-criticised practices such as cross-shareholdings and cash-hoarding. The new requirement triggered harsh competition among companies to find qualified candidates for their boards. Weekly Toyo Keizai magazine estimates that Japan Inc will face a shortfall of 3,000 outside directors next year.
The companies that failed to qualify for the prime section this time around can apply again with new information by December.
The reshuffle in the exchange is creating new investment opportunities as well as risks. If you are an investor in the Japanese stock markets, it is a good time to take a look with fresh eyes.
Chart of the day
With TPG and Brookfield launching $12bn for new climate funds, the impact investing space has never been hotter. Globally there are 675 impact funds representing about $200bn in commitments so far in 2021, according to a July 27 report from PitchBook, a data provider.
These funds include private equity, and early-state venture capital. “We estimate that there is about $73bn in dry powder targeting impact investments,” PitchBook said.
Grit in the oyster
DWS has struggled to implement an ESG strategy and allegedly exaggerated ESG claims to investors, according to the company’s former sustainability chief, Desiree Fixler. Fixler, who provided internal emails and presentations to the Wall Street Journal, said she believed DWS misrepresented its ESG capabilities. The former sustainability chief was fired on March 11, one day before DWS’s annual report was released.
Hundreds of Activision Blizzard workers walked out in protest last week at the company’s handling of a California state lawsuit alleging sex discrimination, harassment and retaliation. The case alleged a “pervasive ‘frat boy’ workplace culture” at the Santa Monica-based company. On Tuesday, J Allen Brack, a top executive at Activision Blizzard left the company in a management shake-up that promised to bolster “integrity and inclusivity”. Read the FT’s story here.
As the SEC drafts unprecedented regulations to require ESG disclosures, the oil and gas industry is ramping up an effort to dilute the climate reporting rules, Myles McCormick and Patrick Temple-West wrote this week. Some fossil fuel companies are lobbying the SEC for the first time.
John Browne, a point person on General Atlantic’s new $3bn climate solutions fund, has written in the FT that one of its key goals is to avoid greenwashing.
“Business has a reputation for clinging to the past and greenwashing its way through the climate debate,” Browne said. “Now is the time for businesses, and the investors who back them, to play a decisive role in the greatest challenge humanity is likely to face this century.”
Electric cars are celebrated by investors and customers alike as causing less environmental damage than their combustion engine counterparts. But, their supply chain is muddled with a mining and manufacturing process that could be become an “environmental disaster”, FT’s Patrick McGee and Henry Sanderson write. Advocates for a circular economy are hopeful that an increase in urban mining, or breaking down and repurposing batteries, “can close the emissions gap and ease supply chain concerns”.
ESG Returns Emerge as Key Focal Point for US Institutional Investors (Fund Fire)
Inequality Has Soared During the Pandemic — and So Has CEO Compensation (New Yorker)
US forest fires threaten carbon offsets as company-linked trees burn (FT)
Beyond Meat boss backs tax on meat consumption (BBC)
Does Positive ESG News Help a Company’s Stock Price? (Northwestern School of Management, Kellog)
Olympic sponsors need to ‘walk the talk’ on values (FT)