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Keeping you in-the-know on environmental, social and governance developments

Happy Saint Patrick’s Day! Let’s have a day with “green” – or at least ESG.

Asset owners. ESG Investor reported that a recent survey of

“200 asset owners with US$50.7 trillion AUM in total found that only a quarter currently integrate ESG scoring into their selection processes for asset managers, with barely more (29%) having asked all their existing managers to present their ESG strategies and plans.”

Apparently this isn’t for lack of desire:

“When asked about desired ESG capabilities, 59% of asset owners said they wanted ‘to be able to screen and monitor portfolios of investments and flag companies with high ESG risk exposure’, while almost as many (57%) wanted to be able to weight and customise their ESG scoring systems to pre-agreed investment strategy and priorities. More than half (54%) said they also wanted to be able to drill down to see ‘raw’ scores within each of the E, S and G pillars.

Survey participants also registered dissatisfaction with ESG index providers, with only 23% saying they were happy with their ESG index providers; 28% said ESG index providers’ methodologies were unclear and/or not robust.”

Our take: The survey indicates a meaningful gap exists between ESG ratings, available data and asset owners, as well as what may be a communications gap between managers and owners on ESG strategies and their importance. If improvements aren’t made in at least communications between owner and managers, I wouldn’t be surprised to see asset owners become far more proactive with regard to ESG strategy development, mandates, data and assessment frameworks. The next item in this article offers more evidence of why doing that might make sense.

Russia’s impact on ESG (part 2). Last week, I wrote about some impacts of the Russian invasion of Ukraine on ESG. This note from UBS Wealth Management offers a good summary of key issues as well. Yesterday, a group of university professors published a study in the Harvard Law School Forum on Corporate Governance that indicates an apparent – and significant – disparity between ESG ratings and social responsibility (the “S”) concerns linked to holding Russian-based assets.

“…the average ESG scores of firms with substantial activities in Russia, a country that is well-known for its corruption and significant human rights abuses, is 78 out of 100. By comparison, the average ESG score of all other similar-sized non-financial European companies (i.e., those with sales in excess of US$2B) in the Refinitiv database is just 64. The average score of the Russia-invested group on the ‘S’ (i.e., social) pillar dimension is 81 versus a comparable European peer group average of just 68. In terms of their human rights performance (i.e., a subcomponent of the social pillar), the firms profiting from Russian activities earn a whopping average score of 84 versus a much more modest 67 for their European peer firms. Remember, higher ESG scores are supposed to be indicative of more socially responsible corporate behavior, so according to Refinitiv, European companies with substantial subsidiary operations in Russia are, on average, significantly more ‘responsible,’ both overall (i.e., on the basis of ESG) and on the ‘social’ and ‘human rights’ sub-dimensions, than comparable European firms with zero or more limited Russian operations in the periods leading up to the recent invasion.

A full 12 days after the invasion, a surprisingly high 28% of European firms had not taken even the most modest form of public action, such as the condemnation of Russia’s invasion or even the expression of a soft voice of support for the Ukrainian people. Even after intensified public pressure, as of today (March 15th) only 53% of the 75 firms have publicly announced significant action in the form of ceasing their subsidiary’s operations in Russia.”

Our take: This is undoubtedly a difficult topic for several reasons. In my opinion there has been a clear emphasis on climate in ESG, with “S” matters not receiving the attention (or weighting) in rankings they should. But it isn’t totally fair to lay everything at the feet of ESG ratings organizations as investors themselves should be making their own determinations and assessments of investment ESG risks and contexts. And none of this should be seen as relieving companies themselves of meeting ESG commitments and standards they established for themselves. As I said last week:

Corporate governance needs to remain strong and firm. Temptations may arise to take advantage of the situation in a way that – while perhaps not illegal – is both unpalatable and inconsistent with company human rights commitments. Each company will evaluate their own circumstances in this regard, but it would not be prudent to discount the myriad risks associated with straying from your human rights and other established ESG policies.

Congress pens letters to oil companies. Congressman Frank Pallone Jr., Chair of the House Committee on Energy and Commerce, sent letters yesterday to the CEOs of BP, Chevron, Devon Energy, ExxonMobil, Pioneer Natural Resources and Royal Dutch Shell accusing the companies of profiteering from the global energy situation.

“As American families confront high gasoline prices caused by the volatility of global energy markets and Vladimir Putin’s unprovoked invasion of Ukraine, I am deeply concerned that the oil industry has not taken all actions within its power to lower domestic gasoline prices and alleviate Americans’ pain at the pump. Instead, the industry appears to be taking advantage of the crisis for its own benefit.

By keeping domestic oil production low and funneling revenue back to investors and executives, the oil industry is keeping energy prices – and profits – artificially high. And this is all happening at the same time the industry is taking advantage of generous production tax incentives provided by American taxpayers… In order to assist the Committee in evaluating this situation and its impact on American consumers, I invite you to testify on these matters before the Committee on Wednesday, April 6, 2022.” 

Our take: Yes, this may simply be Washington saber-rattling and showmanship. However, it muddies the water with regard to the importance of climate to U.S. policymakers. Perhaps not “importance,” but “commitment”. Industry analysts point out that years of climate-based regulatory pressure on fossil fuels have played a key role in limiting the industry’s ability to do much more than maintain status quo in those businesses, while pushing them to build out non-fossil capabilities. Investors and creditors have accordingly been very cautious about providing capital to fossil fuel companies for fear of not being able to recover their investment.

Yet now, in what looks like a case of situational ethics, some in Washington are waving a “drill, baby, drill” flag in stark contrast to environmental concerns voiced only weeks ago. It is no surprise that the industry is cautious, concerned that policy winds could rapidly change again before new investments generate returns, causing write downs and stranded assets. I have become a broken record about the importance of fossil fuels in a transition economy – and this is a perfect illustration of how policy has a direct and surprisingly short term impact on that. It also highlights that companies across all sectors may need to reassess some of the assumptions about policy development/direction embedded within their current climate strategies.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile