Welcome back! In case you missed my last post, I took the time to explore the acceleration of remote work and what that means for the future demand of office space and lease accounting.
In this next post I want to discuss the continuously increasing interest surrounding sustainable investments and the demand for additional nonfinancial disclosures as regulators, investors, and companies work together to bridge the information gap in ESG disclosure.
Environment, Social, & Governance
ESG standards have set the criteria for companies worldwide to develop frameworks and initiatives related to the (i) environment, (ii) community, and (iii) overall system in which companies govern themselves.
Now, although the term had first been coined in the early 2000’s study “Who Cares Wins,” ESG investing is no new phenomena; but rather a continuation in the global modernization of socially responsible investing, tracing back as far as the 18th century.
Well then… Why do we care?
Well, my short answer is to go look at Manhattan’s Climate Clock and tell me you aren’t a tad bit concerned with the nifty artwork counting down our final days to irreversible damage!
But in reality, this is just one of many critical components provoking the re-surged craze surrounding thematic investments built on ESG principles. If we look at the events that have taken place in the past year, we are able to note the following catalysts:
COVID-19 and it’s disproportionate effect on lower income households, minorities, and women alone.
The demand for climate change initiatives as 2020 becomes one of the world’s warmest years on record.
Historical protests putting a spotlight on what remains an unjust system in the fight for racial equality.
Future Too Bright 🚀
As we all know, the past year has spotlighted numerous societal issues; however, there is strong sentiment, that with the corroboration of younger cohorts of investors and changing political climate, the advancement for sustainable investment is prosperous in the United States.
In Morningstar’s “Sustainable Funds U.S. Landscape Report,” we are able to see that there were approximately 400 sustainable funds available to U.S. investors as we closed out 2020, an increase of roughly 30% from 2019. From a fund inflow perspective, this resulted in a total of $51.1 billion for 2020 as sustainable funds have continued to gain the attention of U.S. investors, with the strongest growth taking place in just the past five years.
“Sustainable fund flows constituted nearly one fourth of overall net flows into stock and bond mutual funds in the U.S. in 2020. It was not so long ago that sustainable fund flows failed to register above 1% of overall fund flows.” - Morningstar
However, as more investors build an appetite for sustainable funds, there is a need for companies to realize the importance of including comparable, nonfinancial disclosures related to ESG matters for shareholders. The sad truth is that, unfortunately, a large portion of companies continually fail to do so.
The Disconnect.
In December, Bloomberg had put out the following piece: “Time’s Up on Corporate America’s 2020 Climate Goals. Here’s the Results,” in which the media company provided a summarization on where 187 different companies stood on the end results of their five-year goals stemming from the Obama Administration’s American Business Act on Climate Pledge. Although the report identifies promising news of majority of companies succeeding in their efforts to complete related five-year goals, one issue still remains: a lack of comparable data.
“Uneven disclosure remains widespread. More than a hundred of America’s largest public companies on the S&P 500 didn’t report data on their environmental impact to CDP this year, including Facebook, Twitter, Netflix, and Chevron. Some do put out sustainability reports and set goals, but companies are largely left to their own devices to define how well they’re doing on those targets.” - Bloomberg, L.P.
EY’s Global Leader for Climate Change and Sustainability Services, Mathew Nelson, dives deeper into the disconnect between investors and companies regarding ESG disclosures in EY’s “How will ESG performance shape your future.”
As investor interest hits record highs (with an emphasis on “E” in ESG), companies must recognize that the continuity in failing to include nonfinancial disclosures related to ESG (risks, milestones, etc.) put them in a disadvantaged position for capital inflow. The following illustration from Nelson’s report further substantiates that of Bloomberg’s in illustrating that companies are only falling further behind when it comes to reporting on ESG-related matters.
2021 Tag Team: Regulators & Investors
For U.S. companies, I understand how it can become increasingly difficult to commit to the investment of long-term initiatives (i.e. net-zero) and dedication to comparable reporting on ESG-related matters when the political climate has landed us playing Simon Says.
However, this time is different. In the onset of 2021 we are not only faced with a continual shift in investor capital from high-polluting companies to sustainable investments, but we once again have the added help of an administration demanding public companies to take accountability in the stride for net-zero by 2050.
The combination of the two has led to the involvement of the Securities & Exchange Commission to develop the newly implemented Climate and ESG Task Force, led by the Acting Deputy Director of Enforcement, Kelly L. Gibson.
“Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct. The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.” - U.S. Securities & Exchange Commission
Response Time Is 🔑
With pressing demand coming from all angles, it is time for market leaders to get ahead of the ball in their response to climate change and their ability to provide comparable data to shareholders.
In addition to the SEC’s implementation of a task force focused on ESG-related matters, the SEC will be updating it’s guidance from 2010 and it falls on management to begin thinking about what may be material in its disclosures related to climate change matters.
Harvard Business Review’s Maria Mendiluce advises that companies can begin to get ahead on assessing, managing, and reducing their climate-related risks by properly disclosing information to the Carbon Disclosure Project (CBD) and following the recommendations of the SEC’s task force.
The timely response of companies to both regulators and investors will play an advantage for those ready to partake in a green future and a potential threat for those who wait until the SEC comes knocking.
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