Companies must adapt as investors' increased emphasis on ESG proves these new standards are here to stay
As a 2020 article in Forbes magazine explains, environmental, social and governance (ESG) issues were first mentioned in the 2006 United Nation’s Principles for Responsible Investment report consisting of the Freshfield Report and “Who Cares Wins.” ESG criteria was, for the first time, required to be incorporated in the financial evaluations of companies. At that time, 63 investment companies (with $6.5 trillion in assets under management) pledged to incorporate ESG issues. 13 years later, there were 2,450 signatories representing over $80 trillion in assets.
The ESG effort took another giant step forward at Davos 2020, the World Economic Forum’s annual meeting.
The World Economic Forum and the International Business Council, under the chairmanship of Brian Moynihan (CEO of Bank of America), alongside the Big Four accounting firms (Deloitte, PwC , KPMG, and Ernst & Young) worked to accelerate the ESG transformation through the establishment of a “Big Four” ESG metric system. This set of standardized measurements of 22 specific metrics was adapted by 120 large multinational firms in the Business Council who committed to demonstrate to stakeholders their forward looking approach in establishing long-term value.
The Davos Manifesto, a set of ethical principles to guide companies launched to coincide with the 50th anniversary of the World Economic Forum, highlighted this set of 22 quantitative core metrics consisting of information that was already being reported on in exciting frameworks or information that can be easily obtained. These 22 metrics from the Davos 2020 focus on objectives that are within a company’s own capabilities.
Data from the first half of 2021 shows that that the for-profit sector is once again prioritizing ESG as concerns over the pandemic eased.
Driven by demands from internal and external stakeholders, as well as the desire to compete for top employees in a competitive market where job seekers increasingly want to work for organizations who take on ESG issues, ESG-themed funds in the U.S. added $8 billion in the first two months of 2021, nearly matching all of 2019, according to Michael Wursthorn in his March 16 Wall Street Journal Piece, Tidal Wave of ESG Funds Brings Profit to Wall Street.
Solar energy has been one of the beneficiaries of the refocus on ESG issues. In a July article for UtilityDive, Robert Walton quotes Mercon Capital Group data showing a record 24.7 GW of solar projects were acquired globally in the second quarter of 2021. He writes that “total corporate funding for solar projects, including venture capital funding, public market and debt financing, reached $13.5 billion in the first half of 2021, compared with 4.6 billion in the same period last year.”
While Wursthorn writes that “sustainability has been good for Wall Street’s bottom line,” his WSJ colleague Shane Shifflett pointed out that ESG rankings very widely, writing in his June 11 piece How ESG stocks Perform Depends on Who Ranks Them, “A close look at the ratings and performance of stocks ranked by the three major providers of data on environmental, social and governance criteria shows that companies can have widely different ratings.
Since company rankings vary widely depending on the provider, which groups win and which lose is inconsistent. ESG scores measure multiple factors including financial situations, the risks posed by climate change and a company’s effort to mitigate them. Data providers say ESG works over the long term and investors can use scores from multiple raters to create their own strategies.
Ratings are getting new attention now because the Securities and Exchange Commission is weighing regulations around disclosure on areas like exposure to climate change and carbon emissions.
On March 4, McDonald Hopkins attorneys Amy Wojnarwsky and Sarah Mancuso wrote about the SEC’s launch of a climate and ESG Task Force. From their blog, the creation of the Task Force arrived at a time when consumers are prioritizing, and expecting companies to demonstrate, a focus on key social issues that align with their values including ESG-related priorities. As such, many public companies, financial institutions, broker dealers, municipal securities issuers, and private companies elect to include ESG-related disclosures on their websites, investor documents, and/or SEC filings even when these disclosures are not required
Many experts believe corporate priorities in ESG will continue to grow. In a July 22 interview with Yahoo Finance, Investopedia Editor in Chief Caleb Silver said “Money going into ESG-related products in 2020 was up 140%. I think we had $203 billion going into the sector, whether it was ETFs, where about a third of that money went, individual stocks or index funds, money poured in. And the returns are there.” “It used to be that everybody was a little bit scared about ESG because they weren't sure they'd see returns. Returns are there in a big way,” he continued. “And ESG assets are only set to grow.
McDonald Hopkins has had a dynamic nationwide solar practice for many years. Two of our projects were honored as Projects of the Year by Solar Builders. This year, MH complimented the solar practice by launching an ESG Practice Area. Both these practices are busy and growing in 2021 and we are available to consult with your organizations about the opportunities in these spaces.
