In the Industry: Q3 Impact Digest

As impact investing continues to grow, investors are now faced with the challenge of how to hold companies accountable for their promises.

As the popularity of impact investing grows and more and more companies are pushed to make commitments to address financially material issues like environmental sustainability, diversity and good corporate governance, an ongoing question has been how to hold companies and funds accountable to the promises they have made. The Environmental, Social and Governance (ESG) reporting standards released by the Big Four accounting firms of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers are evidence of the desire for measurable performance where it has been promised. Based on what we’ve seen in recent months from some of the signatories of The Business Roundtable’s Statement on the Purpose of a Corporation, these metrics and transparency may be sorely needed.

While corporate commitment to ESG initiatives may need continued work, investors remain stalwart, calling for more transparency on climate risk and showing in a study that they will choose sustainable funds when given the option, even in uncertain times at the height of the pandemic. This commitment may prove more important than ever as ESG investing in retirement plans stands to become more difficult thanks to a Department of Labor rule limiting ESG considerations in 401(k) investments. The measure was adopted even as public comments on the rule showed overwhelming investor support for sustainable and impact investments.

Investors’ and fund managers’ ability to continue to hold companies to account and push impact investing forward may prove critical. Luckily, it seems like they are up to the challenge.

In the News

BLOOMBERG

Wind and Solar Double Global Share of Power in Five Years
Wind and solar increased 14% in the first half of 2020 alone, while demand fell 3% largely due to the COVID-19 pandemic. But even that may not be enough to hit climate goals. Coal use needs to fall 13% each year for the next decade to meet the mark, and new wind installations look to hold steady over the next five years.

FINANCIAL TIMES

Calpers, Schroders Call for Mandatory Inclusion of Climate Risks in Accounts
Major investors, including Calpers who is responsible for California public employees’ retirement accounts, put pressure on companies to factor in climate risks associated with their business in their financial reporting. Investors are increasingly concerned that their investments may be overvalued as a result of underreporting on these risks. Including climate risk in financial reporting would also help investors hold companies accountable for reaching stated goals such as carbon emissions reduction targets.

NEW YORK TIMES

Stakeholder Capitalism Gets a Report Card. It’s Not Good.
The corporate proponents of stakeholder capitalism faced a major test in 2020 — a test many of them did not pass. Amid the economic upheaval due to the pandemic and calls for racial justice, many of the signatories of The Business Roundtable’s Statement on the Purpose of a Corporation seem to have failed to prioritize the needs of their employees and communities over shareholder profits. In just one example, Salesforce laid off 1,000 employees only one day after CEO Marc Benioff declared the company’s performance a victory for stakeholder capitalism.

FINANCIAL TIMES

Big Four Accounting Firms Unveil ESG Reporting Standards
In response to a growing “alphabet soup” of competing metrics, the Big Four have worked together to introduce a new common reporting framework covering issues ranging from carbon emissions to pay and gender equity and corporate governance. The hope is that access to more consistent and transparent reporting will encourage more investors to move money into the ESG sector.

WALL STREET JOURNAL

Labor Department Curbs Sustainable Investing in 401(k)s
The proposed rule limiting ESG considerations in 401(k) investment decisions has been adopted by the Department of Labor. This rule is largely based on the incorrect idea that including ESG considerations in investment decisions necessarily requires a sacrifice in return, something roundly disproven by impact fund performance. While the rule requires that retirement plans use only risk and reward in investment decisions, it does leave the door open for some ESG funds, provided that the fund document the financial benefits of any ESG strategy.

WALL STREET JOURNAL

California Rolls Out Diversity Quotas for Corporate Boards
Publicly traded companies based in California will be required to have at least one racially, ethnically or otherwise diverse director by 2021, thanks to legislation signed by Governor Newsom in October. People who identify as Black, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who identify as gay, lesbian, bisexual or transgender will meet the requirement. The law stands to have a notable impact on the makeup of corporate boards in the state — more than 35% of California’s public-company boards do not yet meet the requirement.

Research & Reports

MORNINGSTAR

Can Interest in ESG Investing Hold Up During a Pandemic?
Even during the worst of the COVID-19 induced market volatility this spring, Morningstar’s experiments showed that investors chose sustainable funds over their more traditional counterparts when given the option. The study also showed that asset allocations shifted towards sustainability independent of returns when investors were given full ESG profiles of each fund.

CITYWIRE

Alpha Female Report 2020
Only 11% of the fund managers in the Citywire database are women, and only 17% of funds are run by a woman, a team of women or a mixed team of women and men. One possible reason? The turnover rate for women managers was 42%, compared to just 27% for men. Clients have pushed for more women to be part of the teams handling their investments, but unless those women feel supported and respected, there remains the risk of a revolving door of shallow diversity.

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