John Streur

Calvert, a leader in responsible investing, and part of Morgan Stanley Investment Management, believes long-term responsible investors focused on risk management and opportunities must consider material changes impacting four key areas.

John Streur, Chairman Calvert Research and Management says: “The four key areas include changes to the global energy system, demographic changes, increasing costs, and new costs impacting the global economy.”

Mr Streur notes: “We believe changes to the global energy system, both in the existing fossil fuel system and in the development of a distributed, lower carbon system, are accelerating and revealing challenges for companies globally.

“Calvert has historically noted two major risks to the fossil fuel based global primary energy system: geopolitical risk and product safety related to carbon emissions. These create the potential for innovative competitive products to disrupt fossil fuel as the world’s primary energy source. Businesses dependent on fossil fuels face risks, but also could take advantage of many areas of potential opportunity across the energy system and related industries.

“Demographic changes continue to impact the workforce and the ultimate size of consumer markets globally; the vast majority of companies have yet to fully adapt to these massive changes. Higher levels of labour force participation and educational attainment by women and ethnic minorities have led to changes in overall employee makeup and boardroom diversity. However, we have yet to see this lead to higher levels of women and ethnic minorities in executive and senior management roles. As numerous studies have now linked diverse workforces and corporate performance, long-term oriented responsible investors should be demanding greater disclosure and transparency from companies on how they are attracting, retaining and promoting diverse talent.

“Increasing costs, including interest rates, wages and raw materials, present unique challenges to every industry; the result will be greater differentiation between companies that are able to manage their cost structure and improve productivity and those that are less efficient or stranded in high fixed cost models.

“Russia’s invasion of Ukraine in 2022 and the supply chain disruptions that followed led to an interest rate regime change that altered the cost of capital for companies across all industries and depressed valuations everywhere, except energy. While higher costs create challenges for corporations, they also create greater opportunities for differentiation. Long-term oriented responsible investors will need to study not only the companies that are managing their costs, but also those that are innovating to continue to grow and expand in this high-cost environment.

“New costs in the form of priced externalities, implemented by governments or through market action, are taking effect serving to raise costs, influence corporate and consumer behavior.

“Governments around the world are signaling that they are willing to step in to force businesses to address externalities, like carbon emissions and waste, by putting a price on these negative effects. For example, the U.S. Inflation Reduction Act places an explicit price on methane emissions, which are a significant cause of climate change.

“In the EU, recent notable actions to price in externalities include a deal to phase out new fossil fuel car sales by 2035 and a border tax imposed on ‘high-carbon’ products. The UK has also launched a consultation on the introduction of its own carbon border tax as part of a broader net zero strategy,” says Mr Streur.

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John Streur

The ESG and Responsible Investing markets have grown rapidly over the past decade because investors recognise that the world faces substantial environmental and social challenges, and that companies successfully addressing these challenges stand to benefit.

Looking at 2023, John Streur, Chief Executive Officer of Calvert Research and Management, a global leader in responsible investing notes: “Major events of 2022 have caused a shakeout in the industry and imply meaningful change today and into 2023.

“To stay relevant as capital market participants in 2023 and beyond, we believe responsible investors must intensify research into how well companies are managing their specific exposures to financially material environmental and social factors, analysing their near- and long-term financial impacts. Multidimensional research with clear connections between corporate behaviour and corporate financial outcomes must inform both security selection and corporate engagement efforts, including ESG activism.”

Mr Streur further adds:

Greater disclosure required of ESG Asset Managers

For years, responsible investors have propelled companies to increase transparency and disclosure of their ESG performance across factors ranging from carbon emissions to workplace diversity. Now it is critical that responsible investment asset managers provide transparency into their own research methodology. Investors need clarity around the linkages between corporate ESG performance, financial outcomes, security selection and the results of corporate engagement and activism.

Understanding corporate governance will continue to be relevant for all types of investors, but the need for depth and granularity in responsible investment research and corporate engagement will dominate the ESG and responsible investing business in 2023 and beyond.

The responsible investing teams and firms that can succeed in doing this will continue to thrive and gain investor market share, becoming increasingly relevant participants in global capital markets.

New responsible investing framework

We believe the events of 2022 will prove to have been seminal for responsible investing and ESG research, helping shape the framework for a rapidly changing investment landscape. The combination of powerful geopolitical events, along with ambitious government regulations aimed directly at responsible investing, are together creating a new reality for market participants.

The sum of geopolitics largely shows that individual entities — people, companies, countries — predominantly act in their own self-interests, as opposed to the long-term needs of global society. This makes solving issues that impact the global commons, such as climate change or COVID, very difficult for society to solve. Multiple situations today serve as proof points: the war in Ukraine, numerous conflicts between China and the West, divergent outcomes between rich and poor countries in the response to COVID, and inadequate progress among the world’s large and rich countries to effectively deal with climate change.

Understanding this reality is critical to grasping the need for voluntary, market-led solutions to these massive challenges, and the need for stronger, deeper ESG research and engagement. We need corporations that can advance viable solutions do so while producing competitive financial returns for investors. Finding those winners and differentiating the rest requires exhaustive ESG research.

Government actions in 2022 — in terms of setting standards for ESG and responsible investing, as well as intervention in trade and industrial policy — underscore how a shift to deeper research and voluntary, market-led solutions are under way and will likely dominate in 2023. The United States Department of Labor new ESG rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” makes clear the need for in-depth ESG research focused on financially material factors. This rule will set the entry-level standard for responsible investing going forward. In the EU, the Sustainable Finance Disclosure Regulation (SFDR) rules make clear the need for investment firms to define their approach to responsible investing. These rules, combined with ongoing enforcement actions in the UK, EU and U.S., make crystal clear that responsible investment firms and products must provide realistic expectations and real transparency into research and investment processes.

Stronger capital markets

The impact of deeper ESG investment research, clarity on ESG linkages to financial outcomes, and greater transparency into responsible investment processes has already created a narrower and more competitive field. Firms are adjusting their marketing claims and investors are conducting intensified due diligence. At the same time, corporations that are the subject of this research are adjusting their public-facing statements and strengthening the financial discipline of their sustainability-related capital investments.

We believe the outcome will be to strengthen capital deployment, create measurable differentials between corporations that can manage well and those that cannot, and enhance how capital markets function. Greater transparency, greater disclosure, greater focus on financial outcomes — these are the required underpinnings of successful, market-led solutions, consistent with the realities of the world we experienced in 2022.

We have seen how individual entities behave in promoting their own self-interest, with minimal ability of governments to exert control, despite their efforts. Strong capital market function can counter this, advancing the needs of society while providing competitive returns to investors.

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Rest is one of Australia’s largest profit-to-member industry super funds, with around 1.9 million members and around $68 billion of funds under management^[1].

In February this year, it awarded Calvert Research and Management and Parametric Portfolio Associates LLC, which are both part of Morgan Stanley Investment Management, a mandate to implement ethical and sustainable screens and tilts across its listed real assets portfolio. That portfolio included global listed infrastructure, and global and Australian listed REITs.

Under the expanded Australia equity mandate, lowering the portfolio exposures to greenhouse gas emissions was considered under a risk control framework.

Leilani Weier, Rest’s Head of Responsible Investment & Sustainability, said: “By tilting towards stocks that contribute to the realisation of a low-carbon economy we can aim to reduce our equity portfolio’s carbon emissions targetting net-zero emissions for our equity exposures by 2050. We are confident with Calvert’s capability in ESG integration, and this ongoing relationship will assist Rest in creating sustainable portfolios for the future.”

Anthony Eames, Calvert’s Managing Director of Responsible Investment Strategy, said: “We have always been keen to ensure that we tailor portfolios to our clients’ unique ESG-related priorities. For Rest, this can mean a lower carbon tilt which aims to reduce the greenhouse gases emissions in portfolios with low risk. This follows Rest’s goal, and in the context of a Your Future, Your Super benchmark.”

Daniel Vanden Boom, Managing Director of Morgan Stanley Investment Management Australia, said: “At Morgan Stanley Investment Management, we view ESG-related tilts as a logical extension of risk control. We’ve spent many years conducting research on events that could trigger volatility across global markets including the potential impact of climate related risks. “

“The necessity of tackling climate change for environmental reasons is evident and the need to consider ESG factors in investment decisions has also become increasingly clear.”

———

[1] Source: Rest, as of March 31, 2022

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Chris Briant

Rest, one of Australia’s largest profit-to-member industry super funds, has awarded an enhanced Environmental, Social and Governance (ESG) mandate to Parametric Portfolio Associates LLC (Parametric) and Calvert Research and Management (Calvert) to provide further diversification to its Sustainable Growth ethical investment option.

Parametric and Calvert are part of Morgan Stanley Investment Management, the asset management division of Morgan Stanley.

Rest’s mandate to Parametric and Calvert will see it implement ethical and sustainable screens and tilts across its listed real assets portfolio, which includes global listed infrastructure, and global and Australian-listed REITs.

Andrew Lill, Rest’s Chief Investment Officer, said: “These additional sector mandates allow for further diversification for Rest members invested in Sustainable Growth, and also adhere to the option’s strict ethical and sustainability requirements. Adding listed real assets to the option’s existing unlisted property and infrastructure assets at this time is expected to provide further resilience in an inflationary environment.”

“Rest’s purpose is to help our members achieve their personal best retirement outcome. With Sustainable Growth, our aim is to provide our younger cohort of members with more choice in how their money is invested, while also delivering a high-performing growth option that outperforms both peers and the benchmark over the long run.”

“Rest supports actions for a better, fairer and more sustainable future, and we have a long-term objective and roadmap to achieve net zero emissions by 2050. Sustainable Growth is just one example of the actions we are taking, and provides an option for Rest members who regard ethical investment as a vital means to achieving their personal best.”

Anthony Eames, Calvert’s Director of Responsible Investment Strategy, said: “As a pioneer in Responsible Investing, we recognised decades ago that strong Environmental, Social and Governance practices can have positive implications for corporate performance. We look forward to working with Rest to deliver a highly customised investment solution reflecting Rest’s ESG priorities while leveraging Calvert’s proprietary insights.”

Chris Briant, Head of Australia and New Zealand, Parametric, added: “We are delighted that Rest has appointed Calvert to work towards enhancing its ESG investing credentials and Parametric as its implementation partner. This is due to our expertise in providing custom indexing solutions and reducing frictions like transaction costs, taxes, brokerage, foreign exchange costs and unintended exposures for super funds.”

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Diversity, equality and inclusion are a driver of performance over the long term.

Calvert Research and Management, a global leader in responsible investing and part of Morgan Stanley Investment Management, has released new research which aims to explore recent trends in ethnic diversity at corporate boards as well as its relationship to equity performance.

Yijia Chen, ESG Quantitative Research Analyst at Calvert Research and Management notes: “Over the last 50 years, we have seen the key driver of the global economy shift from natural resources to human talent, ushering in the era of the “Talent Economy.” This megatrend now impacts all major economies as companies place greater focus on intellectual capital and a diverse workforce as material, competitive factors for business success.

“Focused on four developed-market countries in the MSCI All Country World Index – Australia, Canada, the United Kingdom (UK) and the United States – our research aims to explore recent trends in ethnic diversity at corporate boards as well as its relationship to equity performance.

Not surprisingly, the ethnic diversity of developed-market countries most affected by globalization has increased — most visibly in the United States (Exhibit 1). As the populations of traditionally marginalized and underrepresented groups have grown, the socioeconomic differences and cultural diversity among different ethnic groups have become more visible. Today, many companies are actively promoting more diverse and inclusive cultures to attract and retain talent and drive innovation. They recognise the importance of intellectual capital in creating long-term value in terms of profitability, brand and market competitiveness.

Does the fact that more diverse teams drive better results for companies extend to the teams that oversee companies — their corporate boards? Academics and private industry have recently focused great attention on the relationship between board diversity and company performance — establishing a firm link between the two.

However, most of the research focus has been on gender diversity. Studies on the relationship between the ethnic diversity of corporate boards and company performance are fairly limited.

One often cited study was conducted by McKinsey in 2015.^[1]

Here, McKinsey looked at the 2014 board composition data of 366 public Canadian, Latin American, UK and American companies and found that those in the top quartile for racial and ethnic diversity were 35% more likely to have returns above their national industry medians than less-diverse peers, based on earnings before interest and tax data from 2010-2013. While groundbreaking, the study’s sample size was small, and its test period was short. There have been calls to examine the relationship more deeply between financial performance and the ethnic diversity.

An expanded research framework

Focused on four developed-market countries in the MSCI All Country World Index – Australia, Canada, the United Kingdom (UK) and the United States – our research aims to explore recent trends in ethnic diversity at corporate boards as well as its relationship to equity performance. Building on existing research, we used a larger data set, looked back further and took a more nuanced approach to evaluating ethnic diversity. Our sample focused on the period from December 2012 to December 2020, and included 845 large-cap companies (as of 12/31/2020): 65 Australian, 83 Canadian, 87 UK and 610 American firms.

Notably, our research introduces a new, multicategorical framework for assessing ethnic diversity. Based on the latest data from each country’s national census, we set up a framework of seven ethnic groups to differentiate among underrepresented groups and compare across countries – a metric we refer to as “ethnic fractionalisation.”

Our key takeaways are:

• on average, large-cap Australian, Canadian, UK and American corporate boards have become more ethnically diverse, with American boards being the standouts
• we found a significant relationship between the degree of corporate board ethnic diversity relative to country demographics and monthly equity performance
• our research suggests that using ethnic diversity factors can improve U.S. large-cap equity stock selection. There may be additional benefit in tilting toward more ethnically diverse companies across all four developed markets
• we believe “ethnic fractionalisation,” which measures the likelihood that two randomly chosen people have different ethnicities, is more nuanced than a binary metric, such as “White versus non-White.”

Ethnic composition of a company’s board matters

We found no evidence of a significant relationship between the monthly equity returns and absolute levels of board ethnic diversity factors. However, we did find a significant link between monthly equity returns and the level of board ethnic diversity factors relative to the company’s home country demographics. In particular, two factors showed statistically significant positive correlation with monthly equity returns and meaningful differences in return between top and bottom quintiles:

1. Percentage of people of colour on corporate board relative to the country demographic.
2. Ethnic fractionalisation of the corporate board relative to the country demographic.

“ As investors, we recognise the value of diversity, equality and inclusion as a driver of performance over the long term. Through rigorous corporate engagement aimed at improving corporate behaviours on diversity, equity and inclusion, we can encourage a change in corporate behavior that can lead to a more sustainable and equitable world and stronger long term performance.”

———

[1] Hunt, V., Layton, D., & Prince, S. (2015). Diversity Matters. McKinsey & Company. February 2, 2015.

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Electricity production and networks are the winners in a decarbonized energy system.

Zeroing out carbon dioxide (CO2) emissions from the global energy sector is not only possible – it now has a clearly articulated road map as provided by the International Energy Agency (IEA).

John Miller and Cheryl Wilson, both ESG Senior Research Analysts at Calvert Research and Management, say: “ The recent IEA report highlights the growing investable opportunity inherent in the dichotomy between our current energy system and that system needed to achieve global climate change ambitions.”

“For Calvert, this approach confirms decades of ESG investment research,” they add.

“Calvert believes that security valuations across the global energy sector remain skewed by greenhouse gas externalities. It remains core to our ESG-centered investment outlook that the energy transition is happening, both along a faster overall timeline and at a faster velocity than currently reflected by the market. We believe that the regulatory and policy framework necessary to properly incentivise a road map similar to that presented by the IEA is likely – sooner or later – with the UN’s COP26 this November serving as a near-term catalyst.”

Calvert’s perspective on key takeaways from the IEA road map:

The needed technology already exists

According to the IEA, current technologies (in addition to limited behavioral changes) achieve more than 80% of annual emissions savings needed to achieve interim 2030 objectives and nearly 50% of the total 2050 pathway target.^[1] What’s more, where innovation is required, it is focused on known platforms – such as advanced batteries, hydrogen, bioenergy, and carbon capture.

However, Calvert’s ESG research has identified that continued collaboration between companies and stakeholders is required to rapidly scale available zero emissions technologies. At present, Calvert remains underweight heavy industries such as steel, chemicals, and cement – which together account for more than 20% of global greenhouse gas emissions – owing to the unfavorable economics of zero emission feedstocks. For example, while green hydrogen has for decades been a known technology capable of decarbonizing the heavy industries, current economics would result in negative unit costs in comparison to traditional energy sources. The rapid expansion of solar and wind-powered generation sets an achievable precedent where all stakeholders – including shareholders and communities – appropriately shoulder costs to achieve the scale needed to reach net zero.

The future is electric

Electricity production and networks are the winners in a decarbonized energy system. According to the IEA, solar and wind capacity in 2030 will need to be four times greater than reported in 2020.^[2]  From a base of less than 10% in 2020, solar and wind will generate more than 60% of total electricity by 2050.^[3] Increased electricity supply will power an electrified (and decarbonized) transportation, industrial, and building environment.

For example, the IEA’s road map indicates that almost all new passenger vehicle sales should be electric^[4]  globally by the mid-2030s, a significant increase from the approximately 4.5% of unit sales in 2020.^[5] Yet we estimate that only about one-third of the largest global automakers have stated EV sales targets throughout this decade (2020s), which may result in a widening gap between automakers’ product decarbonization trajectories.^[6]

Fossil fuel is out

The IEA’s road map calls for no new oil, gas, or coal field development beyond those already committed.^[7] This should come as little surprise, as it adheres to prior supply and demand iterations within the IEA’s Sustainable Development Scenario (SDS), but the message remains stark. The current fossil-powered energy system, and the companies that make up the value chain, are operating in a market defined by long-term structural decline.

A misaligned capital allocation strategy drives Calvert’s research and strategic underweight of oil, gas, and coal value chain companies. Despite the IEA’s call that additional investments in fossil capacity are unaligned with a net zero 2050 target (and should be oriented toward other activities), the sector reports continued annual investments of more than $800B.^[8] Conversely, energy sector investments in renewable or alternatives represent less than 1% of sector spend.^[9]

Green investment vehicles have guidance

Regulatory taxonomies, scenario analysis aligned with specific decarbonization goals (such as the IEA road map), and supportive government policies are likely to provide the impetus for additional growth in green, sustainable, and sustainability-linked debt by improving clarity and credibility in the market on what constitutes necessary and sustainable actions for companies seeking to sell debt. The establishment of short-, medium-, and long-term climate goals provide critical guidance for potential sellers of sustainable debt as to the nature and scale of projects necessary to address pressing environmental concerns, as well as related timelines. Particularly in markets that lack a defined taxonomy for classifying green activities, a shared understanding among market participants on these factors will enable investors to most effectively allocate capital to the entities that must make this transition.

Despite robust growth in the green bond market, Calvert’s research indicates significant gaps still exist between the global economy’s climate aspirations and its current financing activities.

In 2020, investment bankers earned $4.6 billion from underwriting fossil fuel clients compared to just $1.3 billion from green bond customers.^[10] In 2020 and 2021 YTD, industrial companies accounted for 9% and 7% of green corporate issuance respectively^[11] despite being responsible for more than 20% of global greenhouse gas emissions.^[12] Companies that are able to leverage an expanding sustainable debt market to finance these transitions in line with guidance such as that provided by the IEA will be well-positioned to play a larger role in a Paris-aligned economy.

———

Notes:
[1] International Energy Agency, “A Roadmap to the Global Energy Sector,” May 2021, p. 15-16.
[2] Ibid p. 15.
[3] Ibid p. 24.
[4] Mostly battery-electric vehicles, but also including plug-in hybrids and fuel-cell vehicles.
[5] Bloomberg data.
[6] Calvert Research and Management estimate using data from Bloomberg and company statements, as of end-2020.
[7] IEA roadmap, p. 21.
[8] IEA, World Energy Investment 2020 and Calvert Research.
[9] IEA, The Oil and Gas Industry in Energy Transition and Calvert Research.
[10] Bloomberg Green, “Banks Earn Big on Green Bonds But Really Clean Up With Fossil Fuel,” May 2021.
[11] Calvert research utilizing Bloomberg data.
[12] IEA roadmap, p 26.

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Increasingly, this market represents a growing opportunity for financial advisors and institutional investors, note Brian S. Ellis, Fixed Income Portfolio Manager and Henry Mason, ESG Research Associate at Calvert Research and Management, one of leading global Responsible Investing Investment firms.

“The pandemic has heightened the awareness of environmental, social and governance (ESG) factors as drivers of social responsibility and impact as well as financial performance — turning 2020 into a pivotal year for responsible investing, especially in fixed income.

“Green bonds generally refer to how the proceeds will be used, and identify specific eligible categories of assets that address environmental challenges,” they say.

Ellis says: “Curbing climate change is the top reason that national governments issue green, social and sustainability (GSS) bonds, according to the Climate Bonds Initiative (CBI). Those sovereign issuers have also served as catalysts for corporate and institutional issuers, according to green bond analysts. From public pension plans to banks to endowment funds, we are seeing ever-greater institutional interest and mandates for sustainable and green investment.

“The asset growth in green bonds is a factor in their attraction. With overall green issuance now approaching the size of high-yield offerings, green bonds are recently offering greater liquidity and diversification opportunities — a major concern for institutional investors.

“We also see institutional investors looking for deep, proprietary work behind green bond offerings as well as measurement and reporting of impact metrics. That is particularly true for consultants and banks who now have dedicated sustainability teams to help evaluate the ESG profiles of issuers and securities.”

Calvert is one of the largest green bond managers in the U.S. and a pioneer in applying financial materiality and impact metrics to investments. As green bonds are newer to the industry, developing metrics is a younger work in progress, and Calvert has led in applying deep ESG research to both the issuers of green bonds as well as the securities themselves.

Ellis notes: “We believe proprietary research — like Calvert’s — is especially vital with so many new issuers and projects that need specialized analysis.

“During the quarter, we invested in a U.S. electric power producer whose parent company is the first U.S. utility to commit to being carbon neutral by 2050. The company plans to use proceeds of the issue to develop wind power capacity, which, along with other expanded renewable capacity, will replace the coal facilities it is retiring.

“We also initiated a position in a leading memory semiconductor producer whose parent company last year became the first South Korean company to commit to transitioning to 100% renewable energy. Proceeds of the issue will be used for the development of projects related to sustainable water and wastewater management, energy efficiency, pollution prevention and biodiversity conservation.

“We continue to be selective in independently evaluating the structure of green bonds and the overall issuer profile across sectors, industries and countries to identify the most attractive securities for our portfolios. Importantly, across our green bond strategies, we seek issuers with strategic environmental goals that are aligned with the green debt they are issuing.”

——-

[1] Source: BofA Global Research. Notably, these figures are not comparable to data provided by Climate Bonds Initiative (CBI), frequently cited here. CBI data was not yet available for this quarter.

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Brian S. Ellis, Calvert Fixed Income Portfolio Manager says: “Although the impact of COVID can be seen in the growth of social debt versus other sustainable debt categories in 2020 (Figure 1), green bond issuance (debt issued by governments, banks, local governments and corporations to finance climate change and other environmental solutions) also experienced a steady recovery as 2020 progressed.^{[2] “}

According to data from ING, the third quarter (Q3) of 2020 marked the highest recorded level of green bond issuance for any previous Q3, and continued growth led to cumulative global issuance of $1 trillion by mid-December. Use-of-proceeds remains the most common form of green bonds issued, comprising 87% of all issuance since first offered by the World Bank in 2008. In 2020, use-of-proceeds bonds, which finance projects related to energy, transport, building and water, among others, accounted for 84% of total green bond issuance.

Ellis says: “The green bond market has grown to levels not many would have imagined at the beginning of this decade. In our view, this trend will likely continue as global demand grows for debt that supports environmental and other sustainability-focused projects.

“Despite early concerns about a potential shortfall in 2020 issuance, $223 billion of green bonds was brought to market by mid-December, with the yearly total set to fall just shy of the market’s 2019 high-water mark of $255 billion. Looking ahead in 2021, many analysts project the strong recovery in green bond issuance to continue — estimates range from $300 billion to nearly $500 billion.^[3]

So, what are the catalysts behind this growth and recovery?

Ellis notes: “Early in 2020, the growth story revolved around corporate issuers, both financial and nonfinancial, which had replaced early green finance leaders, such as development banks. As corporate issuance of green bonds slowed, in part due to COVID, other issuers such as government-backed entities grew their market share.

“Later in 2020, sovereign issuers that had previously concentrated their efforts on pandemic recovery began to shift their attention back toward environmental impact. Germany and Sweden alone issued a combined $9.4 billion USD of green bonds over the span of a single week in September. By the end of 2020, the list of sovereign green issuers grew to 17.

“State-level and other international support for the green market is expected to grow further in the coming months, with the UK, Canada, Spain — and potentially up to 11 other sovereigns — set to issue inaugural green bonds in 2021.

“Most significantly, the European Union (EU) announced in September that it will sell 225 billion euros ($267 billion) of green bonds as part of its pandemic recovery fund, making up about 30% of the EU’s €750 billion rescue package.^[4]”

———

[1] Climate Bonds Initiative (CBI) Green Bond Market Summary H1 2020, August 2020. To be classified as “green” by the CBI, 100% of a bond’s net proceeds must be dedicated to financing or refinancing “green” assets including renewable energy, low-carbon transport, low-carbon buildings, sustainable water and waste management, sustainable land use and climate change adaptation measures such as flood defenses.
[2] RBC Capital Markets Sustainable Debt Newsletter, November 2020.
[3] Bloomberg, “Sustainable finance debt to top $1 trillion in 2021, SEB says” by Frances Schwartzkopff, December 10, 2020.
[4]Bloomberg, “EU plans to sell $225 billion euros of green bonds for stimulus” by John Ainger and Lyubov Pronina, September 16, 2020.

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Corporate governance factors can influence financial performance: Report.

The Calvert Institute recently published a research paper on how corporate governance factors can influence financial performance.

The paper examined how 10 governance factors, ranging from accounting risk to shareholder rights, materially affected financial performance of more than 8,500 companies in 72 countries.

The paper was co-authored by Daniel Rourke, ESG Senior Research Analyst and Hellen Mbugua, ESG Senior Research Analyst at Calvert Research and Management.

They said: “We established that corporate governance factors can be positively linked to financial performance. The impact of those corporate factors on performance differed depending on the relative strength of governance practices and rules in its country of domicile.

“We assessed the impact of governance factors in four country “clusters:” Strong practices/strong rules; strong practices/weak rules; weak practices/strong rules; weak practices/weak rules.”

Broadly material factors

Accounting risk and ownership structure were both found to be material in three of four of our country clusters. As such, we consider these “gateway factors” for investors in almost any country, with a few notable exceptions.

In some ways, the finding that accounting risk and ownership structure are broadly material is intuitive. Weak performance on either measure would be a red flag for most investors. For example, our measure of accounting risk identifies companies for anomalies in financial reporting, which can signal problems with how a business is run or indicate if there are potential problems with internal controls. Similarly, weak performance on the ownership structure composite can be an indication of imbalances between share ownership and decision-making power.

Basic governance factors

Board independence, pay figures and shareholder rights are basic measures of governance performance that emerge as material factors in both “weak practices” clusters. Not having an independent board majority is much more common in jurisdictions where practices are weak (62% of companies in “weak practices” countries do not have an independent board majority).

In “weak practices/strong rules” jurisdictions, the governance basics of board independence and shareholder rights are material to corporate performance, in addition to the gateway factors of accounting risk and ownership structure. In these markets, getting the basics right can make a difference in corporate performance.

In “weak practices/weak rules” jurisdictions, the basic issue of pay figures is material to corporate performance, in addition to the gateway factor of ownership structure. In these markets, policymakers have not yet responded to weak practices by strengthening rules. Consequently, without adequate rules, enforcement can become a moot point.

Quality governance factors

“Strong practices” markets allow for further investor differentiation by quality governance. In “strong practices/strong rules” jurisdictions, the advanced governance quality factors of board effectiveness and pay performance alignment are material, in addition to the gateway factor of accounting risk. These are highly professional markets, where board and pay basics are largely ironed out and quality separates the leaders from the laggards.

“Strong practices/weak rules” jurisdictions are highly professional markets with strong customs, but the absence of adequate enforcement creates challenges in and around executive pay. From a performance perspective, investors should consider how pay decisions are governed, whether a company is transparent about internal pay equity, and whether the CEO pay makes sense for the size and performance of the business.

They concluded: “The country-level cluster classifications outlined in this research serve as a foundation for further research that investigates the relationship between corporate governance and financial performance. Given the amount of publicly available information on the governance topic, this research guides company-level assessments toward those factors that are financially material depending upon where a company is domiciled.

“We think these findings can empower the broader investment community to more meaningfully integrate corporate governance assessments into investment and engagement decisions.”

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John Streur

Ending racism in America is a responsibility of corporations, and corporations must recognize that their current efforts to promote their core values, and diversity and inclusion programs, fall far short of what is needed today, according to Calvert Research and Management, part of Eaton Vance.

“What good is it to live in a prosperous country when police forces routinely kill black people?” says John Streur, President and CEO, Calvert Research and Management.

Mr Streur notes: “It is time for investors to recognise this issue for what it is: a system-wide failure that the US government is complicit in fostering and that violates the Constitutional rights and human rights of black people. And let us call it what it is: racism.

“Let us also be clear: This is an ESG problem. Responsible Investors have come to trust environmental, social and governance (ESG) research and investment strategies to avoid investing in corporations that are lagging on taking needed action to address human rights violations and to take real action to drive needed change. As a group, we are failing to meet these needs.

“Although Calvert has been a leader in dealing with inequality and pushing corporate boards to establish greater diversity, we have not done enough. As CEO of Calvert and a part of the system, I recognise that much more needs to be done. More open and forceful action is required by investors and by corporate leaders and boards.

“The reality is that black people do not have the same educational and employment opportunities that white people have in America, and, therefore, do not have the same income opportunities. The cultural impact of this level of inequality holds our entire system back, economic and otherwise, and is a contributor to racism that creates the risk of civil unrest and instability.

“As a first and immediate step, Calvert will call on companies to provide the information required to accurately assess their racial diversity. Although companies are not required by law or regulation to disclose publicly the racial makeup of their board and management, they generally have this information to the extent employees have self-identified, and should make this public so investors and everyone knows where they stand on diversity. Additionally, Calvert will call on companies to provide pay equity disclosure across race and gender. This is long overdue.

“Companies must also speak out and make clear to local, state and federal governments that they must address police brutality against black people; companies enjoy the benefits of law enforcement and must act to assure that police forces behave responsibly. Obviously, failures are occurring and must be addressed. Companies have power and must use it to address this problem. Doing nothing adds to the problem. Companies should publicly state what they are doing to combat racism and police brutality.

“Companies must also take action to address systemic failures in our education system; we all know that our system fails to provide an equal education for all and that in order for equal employment to become a reality, equal education must also be a reality.

“As investors, we need to do a better job differentiating companies based on where they stand on these critical issues, and push hard for positive change. We need the information to actually see what companies are accomplishing through their diversity and inclusion efforts. We need information from companies about the outcomes they are achieving, not only the values they espouse, and it is our duty as shareholders to hold them accountable for inaction.

“We are failing to change the system and address racism in America. Responsible Investors like Calvert, who took action to help fight the apartheid regime in South Africa decades ago, have a special role to play. I recognize that we have not done enough.

“Calvert will take more action to push for the changes needed to eliminate racism and police brutality in America,” says Mr Streur.

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