Capital Monitor provides you with data-guided insights into the themes, controversies and impact of sustainable capital globally. Having launched in 2021, we have delivered a host of deeply researched analysis, rich case studies and inspiring interviews all aligned to share best industry practice across disparate financial and investment disciplines.
Starting a new title is tough at the best of times, but managing it through a pandemic is testament to the work of the journalists who have made it the success it has so far proved to be. To earmark that effort and to refresh your memories of the 2021’s most memorable ESG moments, we have listed the stories that have stood out as far as readership figures go.
Below are the ten most visited articles – on a monthly basis, in chronological order – published by Capital Monitor in 2021. Click on each heading to read the full story.
Back in April, Capital Monitor caught wind of big plans by the European Commission to replace non-financial reporting rules with mandatory requirements to publish detailed information concerning environmental, social and corporate governance issues.
A leaked draft proposal handed to our policy editor, Elizabeth Meager, revealed that the ageing Non-financial Reporting Directive would be retired to pave way for the Sustainability Reporting Directive (SRD), effectively bringing sustainability reporting on a par with financial disclosure.
The SRD’s scope is wide. All EU-based companies, including those with subsidiaries within the union, are potentially obliged to work to it. Few exemptions exist, notably for smaller listed companies with either low turnover or fewer than ten employees. Many private companies considered of public interest are also within its sights.
Update: The SRD is expected to adopt these reporting standards by November this year and become effective in January 2023. This would mean companies are required to start reporting by 2024.
It’s all about regulation. It always is. Readers in May were understandably anxious to learn how new US president Joe Biden would treat corporate climate disclosure. They should have a clearer idea now.
The US had been a notable laggard in this area, but environment-related regulation is now a top priority for its most influential regulators. The Securities and Exchange Commission (SEC) is working on proposals for how to compel domestic companies to report on their ESG activity.
The plans have backing from some of corporate America’s most influential names, ranging from asset managers such as BlackRock and Blackstone to tech giants like Apple and ride-sharing company Uber. Yet many are resistant to change, and lobbying on this front has been rife.
Update: Despite promises from SEC chief Gary Gensler that disclosure rules would be open for comment before the close of 2021, no such publication materialised. Capital Monitor understands that the regulator could press the send button as late as February.
When we laid out our vision for Capital Monitor, a top editorial priority was to ensure we both held asset owners and managers to account with regards to their commitments to sustainability but also got them to share their experience and rationale behind such pledges.
Joe Marsh’s reporting from an invite-only session featuring the deputy CEO of Norges Bank Investment Management (NBIM), which oversees Norway’s $1.3trn Government Pension Fund Global (GPFG), provided a notable early example. And was a hit with our readers.
A key takeaway was the focus on transparency, not only for itself but the 9,000-odd companies it invests in. Publishing an annual report on responsible investment, NBIM provides very detailed analysis on its engagement with its top 50 stock holdings. Despite its size, NBIM does not outsource this to third-party service providers such as ISS.
The fund is also very clear on when and why it divests from investments, explaining how it believes the company in question has violated its guiding investment principles. In 2020, for instance, it waved goodbye to Brazilian power company Eletrobras and Taiwan-based Formosa Chemicals & Fibre Corp for human rights violations, and to AGL Energy, Anglo American, Glencore and RWE because of their coal mining or coal power-generation activities.
Update: In December, GPFG announced it had barred nine companies from entering its portfolio despite being added to the index it follows, under a new ‘pre-screening’ system it has adopted. It hopes this approach will take out any “rotten apples” from its basket.
Private equity firms are not necessarily known for their concern much beyond the internal rate of return of an investment, but Capital Monitor’s economics editor, Chris Papadopoullos, looked into how sustainability is permeating this industry.
ESG factors historically merely formed part of private equity managers’ compliance processes, yet many such firms now view them as a driver of value
ESG factors historically merely formed part of the compliance process, yet many private equity managers now view them as a driver of value. Indeed the proportion of general partners – private equity firms – with sustainability officers in place has doubled in two years to almost one in three, shows internal research from Ardian, a private equity fund of funds manager.
Pressure from limited partners – investors in private equity funds – is also pushing ESG up the agenda; 41% of private equity manager respondents to a PwC 2021 survey cited this as a factor. Impact on exit value was notably a less important (20%) factor in influencing ESG behaviour.
Update: It seems momentum has not abated since we published this story in July. According to an annual survey of limited partners published by Coller Capital, more than half of European investors said they had decided against putting money into a fund on ESG grounds. Many also expect to see increased regulation over the next few years.
The road to hell is paved with good intentions, as they say. And while Europe’s new Sustainable Finance Disclosure Regulation (SFDR) is not a dystopian nightmare of epic proportions, its implementation has revealed some worrying flaws and created much confusion. This has become clear from a series of articles published by Capital Monitor, culminating in this one.
As Capital Monitor reported in August, asset managers have been labelling more funds as sustainable amid accusations of regulator-mandated greenwashing, despite attempts by the European Commission (EC) to revise SFDR.
The lack of clarity around such products has led asset managers to make their own, potentially flawed, interpretations. The range of approaches companies have adopted in order to classify the ‘greenness’ of their portfolios has stretched the credibility of the system. Capital Monitor analysis in June last year suggested that more than 80% of Article 8 – or supposedly ‘light green’ – funds contain exposure to fossil fuels.
Update: In the EC’s defence, it is well aware of the issues and has planned to review SFDR by the end of 2022. The European Securities and Markets Authority also proposed in November updating its disclosure requirements in an attempt to incorporate an environmental objective into the reporting of funds. But confusion still remains.
A fund with a high tracking error – the level of deviation from a benchmark – is traditionally looked upon unfavourably by such investors. However, a huge concern for ESG-conscious passive investors is having to hold your nose when investing in a fund set up to track an index: you’re almost inevitably going to be exposed to stocks you do not like.
Investment experts are questioning whether a puritanical approach to tracking error is all that necessary for asset owners targeting net-zero portfolio emissions
However, as Capital Monitor covered in September, investment experts are starting to question whether a puritanical approach to tracking error is all that necessary, especially if asset owners are set on achieving net-zero portfolio emissions. Cursory research indicates that ESG indices with comparably high tracking errors are capable of returning promising numbers.
“If we truly as a financial community want to achieve net zero, as laid out by various pathways and scientific reports, we need to change our thinking on how we approach things on so many levels,” noted Carlo Funk, head of ESG investment strategy for Europe, the Middle East and Africa at State Street Global Advisors.
Update: The debate looks set to become more intense in 2022. Recent academic research indicates that sovereign wealth funds are not hitting their tracking error limits, begging the question of why they are not showing some flexibility in order to invest in environmentally conscious index funds.
Given sustainability experts’ increasingly big sway over the flow of capital, are financial institutions paying enough attention to the backgrounds of individuals with ESG responsibility and oversight?
Exclusive analysis by Capital Monitor’s Polly Bindman of some 1,500 ESG roles at the world’s largest banks revealed that while the “ESG jobs market” was booming, the level of expertise of those filling the vacancies was patchy, to put it mildly.
Only around 15% of senior-level ESG staff across said banks had previously held positions requiring similar skill sets, showed publicly available data collated by Global Data, a sister company to Capital Monitor. And, from what we could gather, most individuals in senior roles with relevant backgrounds had spent less than five years doing something similar, usually within a bank.
That said, there was evidence that financial institutions were looking outside the banking sector for expertise. The second most popular route into a senior ESG job role was from a broad range of real economy sectors, such as retail, aviation or real estate.
Update: Capital Monitor will be revisiting this research shortly, looking at fresh data to see what trends are forming and where banks are acquiring their ESG skills from.
Among the slew of press releases and statements made during the Cop26 summit in November, former Bank of England governor Mark Carney’s announcement that $130trn of private capital was aligned with net zero was among the most significant.
The Glasgow Financial Alliance for Net Zero (Gfanz), an umbrella group of six financial alliances chaired by Carney and convened by the United Nations, committed to reaching net-zero emissions by 2050.
In what was a notably mixed public response to Gfanz’s big reveal, Capital Monitor decided to look under the hood to assess the credibility of the $130trn number.
Poring over the public commitments of all the banks aligned to the 2050 deadline revealed a remarkable disparity between the headline and the reality. Looking at coal policies of banks (as a barometer of credibility), for example, only one in five came close to aligning with International Energy Agency net-zero scenarios – holding temperature rises to 1.5°C.
Update: Based on Reclaim Finance’s coal policy scoring methodology, the only bank to receive full marks for its commitment to reaching net zero was La Banque Postale. As a result, we interviewed the French bank’s CEO about how it achieved that distinction.
How ING aligned 45% of its lending book to net zero
As you will now have gathered, Capital Monitor takes its research very seriously. And while it is vital to look at the big picture, it is equally important to cover the more focused stories as well. Certain financial institutions are making notable headway in ensuring they are operating sustainable businesses – and helping their clients do the same – and it is important that such experience is widely shared.
Virginia Furness spoke to the top brass at Dutch bank ING to understand how it has implemented carbon emission reduction targets that cover almost half (45%) of its €600bn lending portfolio, including 70% of its mortgage book, and how it is one of the few major banking institutions on track to align its global lending portfolio with net zero by 2050 or before.
For one thing, it takes a double materiality approach to its balance sheet, explained Anne-Sophie Castelnau, ING’s global head of sustainability. “On one side we look at climate action and alignment of our portfolio of loans, and on the other we look at climate risk and the way it impacts our clients and our balance sheet.”
Much of the bank’s success is linked to the implementation of Terra, its proprietary climate alignment project. In short, it is a toolbox with open-source methodologies that ING uses to evaluate its lending portfolio against the goals of the Paris Agreement.
Update: ING is bullish about the commercial opportunity that sustainability presents. It predicts that in 2022, the green, social and sustainable bond market will surpass the €1trn mark.
It is a generally accepted principle that if you want to get the best out of people you need to set clear goals and incentives. A crude – but effective – way to establish if this is in force is by looking at how leaders are remunerated.
As such Capital Monitor decided to look into how the world’s most influential banks pay their CEOs. Sadly, despite growing stakeholder pressure to link chief executive pay to ESG factors, we discovered that only one in four of the world’s 100 largest banks have publicly created a direct link between the two.
The research also shows that most environmental bonus targets do not account for financed emissions – those generated by the companies the banks lend to and raise capital for. Instead, many lenders have adopted narrower operational targets relating to the emissions produced by their offices and business travel.
Nonetheless, we understand that embedding ESG and sustainability into corporate culture is in its relative infancy.
We also decided to rank each of the 100 banks analysed on their transparency around CEO remuneration, taking the view that openness is a sign of good governance. The most transparent banks tend to be based in the UK. Barclays, HSBC and NatWest were three of the six that achieved the highest available score (100). To find out how every firm was ranked, please download our white paper for full details.
Update: Capital Monitor is also applying such analysis to other sectors. We will soon reveal our findings on the asset management industry, and later also asset owners and large corporations.