We recently created a post on LinkedIn explaining how regulators in the EU, UK and US are investigating ESG funds as there have been growing concerns that asset managers are promising more than they can deliver in an effort to sell their products.
There are fears that to meet the growing demand for ESG products many asset managers have simply rebranded their existing products rather than trying to create new ones, which has created concerns around greenwashing.
A recent analysis by PwC showed that of 1,061 Article 9 funds -- whereby a product needs to have sustainability as its “objective” -- showed that only 286 were new. The rest were reclassifications of existing funds.
A probe of Article 9 products by Swedish authorities last month found “many cases” in which managers failed to provide necessary information, and as a result the Stockholm based regulator has warned that it will act to stamp out false ESG claims.
Furthermore - the EC has recently announced guidelines suggesting that the hurdle for an Art 9 fund should be 100% which has prompted firms like Amundi and Blackrock to remove Article 9 labels from some of its funds.
This has prompted the team here at Integrum ESG to use our 'Screener Tool' to create an Article 9 fund where every company meets the 12 specific sustainability objectives that a company must support if it is to be compatible with an Article 9.
We are happy to have been recognised as the "Best Global AI-Powered ESG Data Provider" by Corporate Vision Magazine in their annual Artificial Intelligence Awards.
This recognises the incredible work done by the Integrum ESG Machine Learning team.
Their contribution cannot be understated - creating and refining our cutting edge models so that they are able to capture, verify and display granular and relevant ESG data with unrivalled rapidity.
NOTE: This table has been updated as of 29 September 2022, following the news of easyJet switching from a strategy of carbon offsetting to emission reductions.
Below is a list of the top 9 airline companies with the biggest difference between their Awareness Score and their Performance Score - i.e, they have policies and targets in place but they are still the worst performing airlines relative to their peers in the airline industry in terms of CO2e emissions.
The below table shows the countries which are worst at managing risks from climate change.
The Climate Change Risk metric includes two sub-metrics:
1. Vulnerability vs readiness for a changing climate whichlooks at a country's propensity to be impacted by climate change hazards vs its ability to make effective use of investments for adaptation.
2. Demographic Pressures which considers pressures upon the state deriving from the population itself or the environment around (including pressures stemming from extreme weather events).
This metric is scored from 0-4 with 4 being the highest score awarded.
The below table shows the companies within the Chemical sector that do not have a policy in place to protect the environment.
The table below shows, from highest to lowest, the top 10 companies which have seen the largest year on year increase of CO2 emissions.
Question related to Regulation (EU) 2019/2088 of the European Parliament (Sustainable Finance Disclosure Regulation 2019/2088)
Published by the European Commission 14/07/2021:
The “comply or explain mechanism”
The underlying objective of Article 4 of Regulation 2019/2088 is to encourage financial market participants to pursue more sustainable investment strategies in terms of reducing negative externalities on sustainability caused by their investments. The compliance with disclosure requirements under Article 4 should incentivise the interest in investing in activities that do not harm environment or social justice, curb greenhouse gas emissions of their investments, stimulate investee companies to transition away from unsustainable activities and improve their environmental impacts or and even induce portfolio adjustments and divest from investments in activities that are harmful to sustainability. Article 4 also encourages financial advisers to pay more attention to how the consideration of negative externalities is integrated in their investment or insurance advice.
This is why the “comply or explain mechanism” under Article 4(1) of Regulation 2019/2088 distinguishes between ‘principal adverse impacts’ and ‘adverse impacts’.
Whilst the “comply mechanism” under point (a) of paragraph 1 encompasses the consideration of principal adverse impacts of investment decisions, financial market participants that decide not to apply the “comply mechanism”, must under point (b) of that paragraph that establishes “explain mechanism”, provide clear reasons for why they do not consider ‘adverse impacts’ of investment decisions on sustainability factors. Under point (b), by way of example, financial market participants must provide clear reasons for why they do not consider degradation of the environment or social injustice caused by their investments.
The aim of Article 4(3) and (4) of Regulation 2019/2088 is to introduce a more stringent “disclosure mechanism” and reduce a hypothetical incidence of application of “explain mechanism”.
New regulation comes into force in January 2023, called “SFDR” (Sustainable Finance Disclosure Requirement) - setting out rules for asset managers to classify and report on sustainability and ESG factors in investments.
This regulation applies to all investment managers and advisors (a) in the EU, (b) should they have EU-based shareholders, and/or (c) if they are marketing within the EU.
Moreover, the FCA regulator in the UK opened a consultation on its own version, called “SDR”, in November 2021. So even if you plan to market your fund in the UK, and not the EU, you are going to have to meet the requirements.
We have summarised how these new rules could apply to YOU and what steps you should take to best prepare yourself - in an comprehensive but digestible guide below.
Below is a list of the top 10 companies (with remuneration reports) with the largest 'limit on long-term bonuses as a percentage of base salary (%) ' - i.e. the potential size of a CEO bonus ~~can be~~ in comparison to their salary.
The universe is companies that disclose salary and bonus % AND have a remuneration report showing the numbers
The companies not on this list may have larger bonus sizes in absolute values, this table focuses on potential bonus as % of salary
Of the 314 companies we have under full coverage in the sub-sectors of: Commercial Banks, Asset Management & Custody Activities, Insurance, Investment Banking & Brokerage - i.e. the financial subsectors where "Integrating social & environmental concerns into planning & design" is material we have found that the below 9 companies do not clearly disclose sufficient policies for the metric "Integrating social & environmental concerns into planning & design". In the case of these sub-sectors, this could refer to integrating ESG or sustainable finance strategies into their products, for example.
The below list shows the ESG scores of the top 10 and worst 10 extractives & minerals processing companies.
The below table shows the companies within the processed food sub-sector and their awareness scores for auditing their suppliers' labour code of conduct. Most score a 3 out of a possible highest score of 4 as our scoring logic gives a score of 3 for companies with a policy in place for conducting labour audits of suppliers and for disclosing numbers, but does not give detailed percentages or set itself a target.
Only one company has scored a maximum score of 4 as they have also set themselves a target for conducting labour audits of suppliers.
The table below ranks each sub-sector from highest to lowest on how they manage labour relations.
Chile have issued a new USD$2bn 20-year sustainability-linked bond (SLB), the first Sovereign to do so. Unlike green bonds, the proceeds of SLBs are not segregated for use towards specific green or sustainable projects, but instead the payout to investors depends on whether the issuer meets agreed-upon KPIs. The KPIs attached to Chile's SLB are related to their annual greenhouse gas emissions and renewable energy generation.
On the Integrum ESG Sovereign Dashboard, compared to its Latin America & Caribbean peers, Chile ranks no1 on overall ESG and sits within the top 3 on Social and Governance. However, the country is 7th on Environmental issues, due to factors such as water stress, waste and % of power coming from renewable sources
Last week the influential ratings firm Morningstar stripped its 'Sustainable' label off c1,600 funds (1 in 4), and said there will be more downgrades to come.
A huge number of these funds had already declared themselves to be Article 8 (an SFDR categorisation that means ESG has been integrated into the investment process). Morningstar however has criticised these funds that “place themselves into Article 8…say they consider ESG factors in the investment process…but don’t integrate them in a determinative way for their investment selection”.
To qualify as Article 8, a fund must not just establish and declare certain ESG policies, it must assess each holding in the fund according to 14 ‘Principal Adverse Indicators’. It's a detailed process, and the vast majority of self-declared Article 8 funds are not doing this at all.
Morningstar is just a ratings firm - but there are 2 far more concerning developments:
Regulators have had enough of these exaggerated claims.
The EU markets watchdog, ESMA, said it will create a legal definition of “greenwashing” and classify it as a type of mis-selling. When a financial regulator creates a new definition, it is invariably because they intend to weaponize it.
The FCA said back in July that many ESG funds “often contain claims that do not bear scrutiny”. This was perhaps an early warning, and penalties will follow.
The SEC is investigating DWS for possible false ESG claims on some of its funds. This shows that even in markets where sustainability is not being promoted, nor is it clearly defined, regulators are already willing to pursue unsubstantiated ESG claims as a form of mis-selling.
Investors may start to sue.
- Consider this warning from the partnership at Baker McKenzie in Los Angeles, that if people have lost money, “you’ll see plaintiffs step in. You’re hearing the rumblings. It’s not happened that much yet. But it will.”
- Simmons & Simmons in London cites cases brought by shareholders against operating companies, on ESG grounds, and the FT quotes its partner Robert Allen’s warning “you can definitely see how (a case against fund managers) can follow on”.
- North Wall Capital, which funds legal class actions, offers the alarming quote “it is certainly coming”.
What might this mean? It means that a $10bn fund, that has underperformed its benchmark by 2%, and whose advertised claims that it is ‘sustainable’ are later deemed to be misleading, could face a $200m class action claim from its investors.
Might a clear legal standard of ‘sustainable’ emerge? The law firm Bates Wells believes that the 2015 Paris Climate Accord will be the legal standard – and the recent court ruling against Shell in The Hague set this as a legal precedent. How many investment funds are using a tool like THIS to evidence that their investments are consistent with a global warming scenario ‘well below 2 degrees’ (which is the objective of the Paris Climate Accord)?
So, ESG regulatory risks and legal liabilities may be mounting for fund management firms. The easiest way for any fund management firm to mitigate these risks is to state clearly that environmental and social objectives are not promoted by the fund, nor is ESG analysis systematically integrated into the investment process. Then all these mis-selling risks fall away.
It just seems that, fearful of losing investors, very few fund management firms want to do this.
The alternative is for these firms to build, or subscribe to, data tools that will map their funds to the Paris Accord, assess them against the 14 SFDR Adverse Indicators, and enable them to explain the key ESG risks in every existing investment.
How can Integrum ESG help meet these challenges?
- Fund managers are often relying on ESG ratings they cannot understand. When a regulator or investor asks "why are you comfortable with the ESG performance of this company?" they will struggle to answer, because the ESG score that has reassured them is a set of black boxes. The Integrum ESG dashboard presents glass boxes, with the reason for every score, for every metric, and the underlying data that explains and supports the ESG rating.
- Applying a Cambridge University model, the Integrum ESG dashboard calculates the extent to which your fund is aligned to the Paris Climate Accord - and surfaces the data that supports this calculation, company by company.
- The latest Integrum ESG dashboard feature, soon to be deployed, will provide the evidence of why, or why not, your fund can be classified as Article 8. It will map and assess the alignment of every uploaded fund to the SFDR Principal Adverse Indicators, and the EU Taxonomy Objectives.
Do you want to learn more about how Integrum ESG can help you meet these challenges? If so, CLICK HERE.
Recently we posted a poll on LinkedIn (which you can see HERE) which discussed how the plant-based meat market will develop and the main reasons why there has been a drop in the sales of plant-based meat in 2021.
One of the main reasons for this drop in sales is that consumers have now started to realise that many plant-based meats are highly processed, additive-laden and not very healthy.
This has prompted the team here at Integrum ESG to take a look at Processed Food companies that are best at managing health risks to customers.
See below for a list of the 14 companies that rank highest out of the highest possible score of 4.
Below is a list of countries that are best at managing the risks associated with climate change. Each scores 3.75 out of a maximum score of 4
The Climate change risk metric has 2 sub-metrics. The qualitative "Vulnerability vs readiness for a changing climate", and the quantitative "Demographic pressures".
The first sub-metric in particular (vulnerability vs readiness) assesses how the country is managing the risk from climate change, so for example, seeing the small island state of Mauritius on this list might be surprising, but they are deemed to have a high readiness to adapt to risks they are facing from climate change.
Last week The World Economic Forum released 'The Global Risks Report 2022', and of their 10 most severe risks on a global scale over the next 10 years, 5 were environmental risks.
These 5 risks are climate action failure, extreme weather, biodiversity loss, human environmental damage and natural resource crises.
The list below is the top 20 companies who score highest on managing business risk from climate change.
The below tables shows which 14 automobile companies score highest on the governance metric 'Risk Management'.
The list below shows the 12 companies with the highest Governance score. Integrum ESG licences the Minerva framework to assess corporate governance. Minerva are stewardship experts and their framework assesses corporate governance using 9 metrics and 39 sub-metrics.
In the table below, we show the 5 countries which rank highest and lowest on the Freedom of the Press Index. This 2021 data is an annual ranking of countries (the greater the index score, the worse the situation is regarding press freedom) published by Reporters Without Borders and is one of the 31 datapoints we track for every Sovereign in our ESG database.
In the table below, we show the 5 countries where unemployment is lowest and highest. This 2020 data is sourced from the International Labour Organization, and is one of the 31 datapoints we track for every Sovereign in our ESG database.
Below is a list of the companies with the sharpest deterioration in ESG sentiment from the past seven days. Our A.I. powered sentiment tracker trawls through ~850,000 global news sources, in 92 languages, and assigns a neutral, negative or positive sentiment score to ESG relevant comments.
The companies below are experiencing an acute deterioration in ESG sentiment for different specific reasons, such as ransomware attacks, undisclosed CEO perks and even a US Senator calling for an investigation into price fixing in their sector.
With the recent 'rise in child obesity' article published by the BBC (data taken from the NHS), we have highlighted the UK Food & Beverage companies that are most focused on managing health risks to customers. You might be surprised by some of the names below.
The UK companies below (with a score of 3) state that their procedures related to managing customer health risks either align with a third-party standard, or are audited. The companies with a score of 4 also have a target in place, for supporting customer health.
How do companies improve their ESG rating? It might be by reducing carbon emissions, it might be by adopting new employee policies. But it is very often achieved by better disclosure on ESG issues.
Below is a list of the top improvers when it comes to (uncustomised) ESG score improvements.
We are now seeing a clear trend of improving ESG disclosure in the US – and thus it is no surprise that all but 2 of this list are US companies.
Using the SASB framework, we assess certain sectors for employee turnover - as an indicator of how good a company's labour practices are.
Rather than focus on the negative, we thought we would list below the 10 companies with the lowest staff turnover:
The list below shows the 10 companies who pay their accountants the most, relative to the cost of auditing from the accountants.
For example, Volkswagen paid EY €19m in audit fees, but it paid EY €33m in non-audit fees (€21m for tax advisory, €7m for advice on new legal standards, and €5m for 'other assurance services').
The Top 10 companies with the biggest YoY GHG Emission reductions
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