Author: Christopher K. Merker, Ph.D., CFA

Christopher K. Merker, PhD, CFA, is a director with Private Asset Management at Robert W. Baird & Co. He holds a PhD in investment governance and fiduciary effectiveness from Marquette University, where he has taught the course “Sustainable Finance” since 2009. Executive director of Fund Governance Analytics (FGA), an ESG research partnership with Marquette University, he is a member of the CFA Institute ESG Working Group, an international committee currently exploring ESG standards, publishes the blog, Sustainable Finance, which covers current topics around governance and sustainability in investing, and is co-author of the book, The Trustee Governance Guide: The Five Imperatives of 21st Century Investing.
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Larry Fink rules on the best global standards for climate risk reporting (FT)

https://www.ft.com/content/fc51227b-9d64-4e5a-b1e2-f6c07f4caa58

BlackRock chief Larry Fink has warned that the world’s largest asset manager will take a “harsh view” of companies that fail to provide hard data on the risks they face from climate change.

In the letter, Mr Fink said that by the end of the year he wanted all companies to “disclose in line with industry-specific” guidelines set out by the SASB — the Sustainability Accounting Standards Board, a non-profit organisation that sets voluntary financial reporting standards.  He also called for businesses to report under the TCFD, or the Task Force on Climate-related Disclosures, a voluntary framework that was spearheaded by Mark Carney, the outgoing governor of the Bank of England

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BlackRock shakes up business to focus on sustainable investing (FT)

Fund manager to double number of sustainability-focused exchange traded funds it offers

https://www.ft.com/content/57db9dc2-3690-11ea-a6d3-9a26f8c3cba4

BlackRock has unveiled sweeping changes in an effort to position itself as a leader in sustainable investing after criticism that the company has failed to use its clout to combat climate change. The world’s largest fund manager, with $7tn in assets, will double the number of sustainability-focused exchange traded funds it offers to 150. It will also cut companies that derive a quarter or more of their revenues from thermal coal from its actively managed portfolios, as it aims to increase its sustainable assets 10-fold from $90bn today to $1tn within a decade.

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Ignoring climate risk is more costly than grappling with it (Huw van Steenis-FT)

Regulators and activists are driving global warming concerns into the mainstream

https://www.ft.com/content/dc2bdac0-316c-11ea-9703-eea0cae3f0de

A trio of recent deals tells us something important about capital markets: that 2020 may be the year when climate-risk analysis of portfolios moves out of a niche into the mainstream. Investors and boards have begun to realise that it can be more costly to ignore these issues, than to try to grapple with them. Last September MSCI, the global index company, bought Carbon Delta, a boutique focusing on climate risk analysis. A few months earlier Moody’s acquired Four Twenty Seven, a similar boutique. Last year ended with S&P making a move for sustainable index player RobecoSAM.

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Part 1 of Ethics, ESG, and ERISA: Ethical-Factor Investing of Savings and Retirement Benefits (Albert Feuer)

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3501203

Abstract

Ethical-factor investing is investment decision-making that takes into account ethical factors. It includes faith-based investing, Environmental, Social or Governance (ESG) investing, and sustainable investing. It is becoming more and more widespread. This has occurred despite a lack of widely accepted definitions, performance metrics, or ethical preferences. There is increasing broad agreement that some ethical factors highlight business risks and opportunities in a predictable fashion, such as the effects of climate change, human capital needs, or corporate governance. Thus, more and more investors and enterprises are seeking to profit (including mitigating risks) from these factors in the same way they do from all business risks and opportunities. There are three prudent approaches to ethical-factor investing. The most widely used is the Incorporation approach. Such investing uses the value of doing the right thing to decide how to improve financial returns. Also, quite common is the Tie-Breaker approach. Such investing does the right thing if there no financial cost to doing so. Least common is the concessionary approach. Such investing does the right thing if it does not cost too much. Each of these approaches can be socially beneficial, i.e., improve the norms and behavior of enterprises in a cost effective manner. Investors can generate such benefits by funding enterprises with thinly traded securities whose preferred ethical-factor activities would not otherwise occur, or by participating in engagement campaigns to change the policies of widely traded securities in which they invest.

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ESG and the Commons: From Tragedy to Governance? (Financial Times and CFA Institute)

https://www.ft.com/paidpost/cfa-institute/esg-and-the-commons-from-tragedy-to-governance.html

“A resource arrangement that works in practice can work in theory.” — Elinor Ostrom

Sustainable investing will become the rule and no longer the exception. But this transition comes amid a disquieting change in how we must view capital, production, and their attendant effects.

Promoting the Common Good or Promoting Destruction?

In Adam Smith’s The Wealth of Nations, the pursuit of individual goals brings about — on balance — the right outcomes on a broad community scale. Think of the baker baking bread for profit: The act itself — the supplying of bread — clearly promotes the common good, even if the common good wasn’t the original intent. This, of course, underestimates the role of “externalities” in economics, or how self-interest can lead to the eventual and total destruction of certain resources. As Garrett Hardin wrote in his seminal “The Tragedy of the Commons”:

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Liebreich: Peak Emissions Are Closer Than You Think – and Here’s Why (Bloomberg NEF)

So here we are, standing on the threshold of a new decade. It will be, to paraphrase Winston Churchill, a decade of consequences. Play it right, and we have a chance of avoiding the worst impacts of climate change. Waste it, and we are in uncharted territory.

I am confident that we will end the next decade in a far better place than we are today, just as we are ending this decade in a far better place than we ended the previous one (as described by Angus McCrone in his October article Clean Energy’s Decade Nearly Gone, And Its Decade Ahead).

https://about.bnef.com/blog/peak-emissions-are-closer-than-you-think-and-heres-why/

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Sustainable Investment Skeptics are Becoming Believers (Chief Investment Officer)

Study finds number of  cynics about ESG  cut in half since 2017.

The doubters of sustainable investing are rapidly dwindling in numbers, according to a study by asset manager Schroders, which found that cynics of the sector have fallen by nearly 50% in just three years.

According to Schroders’ Institutional Investor Study 2019, the proportion of investors worldwide who do not believe in environmental, social, and governance investing has fallen to 11% this year from 20% in 2017. It also said that the decline was most notable in Latin America, where the percentage of skeptics fell to 12% from 29% in 2017.

https://www.ai-cio.com/news/sustainable-investment-skeptics-becoming-believers/

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Where ESG Fails (Institutional Investor)

This article recommends that a shift in focus is needed on the ESG drivers of value creation (i.e. materiality).

Despite countless studies, there has never been conclusive evidence that socially responsible screens deliver alpha. A better model exists, argue Harvard Business School luminaries MichaelPorter, George Serafeim, and Mark Kramer.

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Biggest US index funds oppose most climate proposals in shareholder votes (CNBC)

https://www.cnbc.com/2019/10/08/biggest-us-index-funds-oppose-most-climate-proposals-in-shareholder-votes.html

  • Votes on climate-related shareholder resolutions often take center stage at corporate annual meetings, though seldom draw support from the two top U.S. index fund firms, BlackRock and Vanguard Group.
  • BlackRock and its top rivals have not put forward any proposals of their own since at least 2001, according to research firm FactSet.
  • The top index fund firms say they prefer to address issues they have with portfolio companies, including those related to climate change, in private talks with executives rather than through shareholder votes.