Hello from Impact Delta.
 
Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the growing body of evidence that ESG correlates with better operational performance and better returns, and Vanguard’s exit from the Net Zero Asset Manager alliance, apparently to avoid confrontation with Republicans now controlling the House. Also, the UN Biodiversity COP 15 conference is underway, beginning a month after the COP 27 for climate.

The data indicating good ESG choices are neutral-to-positive to returns is not entirely new - We'd start by saying that the historical data has tended toward ESG being positive, to at worst neutral. The real benchmark for this was a 2015 meta-study that sought to evaluate the impact good ESG choices had on returns. The paper looked at over 2,200 studies over a 30-year period, and found that 8% of the articles found that ESG was negatively related to performance, while 63% had positive findings and the balance found no conclusive evidence. This was updated in a paper that looked at the period 2015-2020 by NYU Stern, where the authors found:
1 - Improved financial performance due to ESG becomes more marked over longer time horizons.
2 - ESG integration, broadly speaking as an investment strategy, seems to perform better than negative screening approaches. A Rockefeller Asset Management study finds that ESG integration will increasingly be demarcated between 'Leaders' and 'Improvers' with the latter showing uncorrelated alpha-enhancing potential over the long term. 
3 - ESG investing appears to provide downside protection, especially during a social or economic crisis.
4 - Sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation. 
5 - Studies indicate that managing for a low carbon future improves financial performance
6 - ESG disclosure on its own does not drive financial performance

LBS study slightly differs - This last point that ESG disclosure on its own does not drive financial performance is not a controversial statement. However, a group of LBS professors recently released research looking at ESG disclosure in private equity with a slightly different conclusion. They examined whether PE firms’ ESG disclosures match their investment activities, finding, for example, that PE firms with high environmental disclosures target portfolio companies with lower environmental toxic releases. Further, the funds of PE firms with highest quality ESG disclosures appear to be related to better returns, even if the causation is not watertight. To quote directly: “We refrain from making causal claims given the potential selection issues around voluntary ESG disclosures. However, we note that our results are robust to controlling for the performance of peer funds, time-varying market-wide PE firm ESG disclosures, fund ages, PE firms’ macroeconomic exposures and a host of fixed effects that hold constant country-trends as well as time-invariant PE firm and fund strategy characteristics. Thus, while suggestive, our findings are consistent with the interpretation that a stronger focus on ESG issues in PE firms’ investment strategies, as proxied by website-based ESG disclosures, pays off for PE firms and their investors in the form of successful exits and, thus, superior fund performance.” 

Gender matters – Recent research from Investment Metrics finds that diverse teams, specifically those led by or co-managed by women, have outperformed male-led or -comanaged portfolios. Investment Metrics’ initial research on this was published in August 2021, which looked over multi-year time periods at teams that had female portfolio managers or co-managers. Despite the small number of firms with senior female portfolio leadership (13% of the active equity peer groups had a woman in the lead position or the co-lead portfolio manager position and only 7% had a woman CEO), the performance was no different than that of male only firms on a proportional basis. This seems to underscore that talent is equally distributed, while opportunity is not. Research published last month found that female led or co-led portfolios outperformed their male only counterparts over the last year. Further backing this up, Fidelity looked at the performance by gender of their retail clients and found that women routinely were outperforming the men.

The big institutional investors get it - With the recent backlash against ESG from more conservative politicians, billions of dollars are being pulled from asset managers that are deemed 'woke'. However, the most sophisticated institutional investors have found that ESG (when applied well) can help with risk management and returns. This was recently highlighted by Marcie Frost, the CEO of CalPERS, the largest US pension plan at roughly $500 billion. "Applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology," she said. "Those who say otherwise are actually advocating for investors like CalPERS to put on blinders ... to ignore information and data that might otherwise help build on the retirement security of our 2 million members.”

Vanguard left the Net Zero Alliance??? - Fund management firm Vanguard announced last week it was leaving the Net Zero Asset Manager Initiative(NZAM). This is material: Vanguard represents $7 trillion of the $66 trillion of capital associated with NZAM. However, the motivation may be more political than giving up on the benefits of net zero to the long-term investment performance of their clients. With Republicans now in control of the House, several Representatives have indicated they will investigate companies that have joined associations for ESG reasons as potentially violating anti-trust legislation. Vanguard stated that it remains committed to addressing climate change but feels it will have more independence outside the NZAM. We will be watching to see if their actions match prior climate commitments. If so, this seems to be a way to avoid political risk, and other firms may be following this model. 

UN Biodiversity COP 15 started on Wednesday December 7th - In our last newsletter, we highlighted the challenges that the Climate Change COP 27 was facing with geopolitical tension making cooperation less likely. Claims of loss and damage by the majority of countries against the US and Europe for their emissions did indeed get more focus. We now shift to how the world will focus on biodiversity. Although climate change dominates dystopian projections, biodiversity deserves growing attention, as a growing body of research has identified that biodiversity loss is directly correlated with the depredation of ecosystem services needed for humanity.  What we have found interesting is that the most sophisticated institutional investors that were focusing on carbon and climate risk 10 years ago are now focusing on biodiversity in their portfolios. Linking this back to the articles on ESG performance correlating with investment performance (including our own, in September), Paul Polman and Andrew Winston highlighted one of the challenges investors face is looking at individual investments over the short term, versus investing in systems over a longer time horizon. This is where some of the most sophisticated institutional investors seem to be focusing.  

As this is our last newsletter of the year, we wish you a wonderful holiday season and Happy New Year!
 
The Impact Delta Team
contact@impactdelta.com
 
About Impact Delta
A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital

Hello from Impact Delta.
 
Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the upcoming COP 27 climate change summit from November 6-16 in Egypt. Last year participating countries made commitments to greenhouse gas reductions. This year, accountability will begin by checking in on progress. The other theme likely to be discussed is the damage and reparations for lesser developed countries bearing the brunt of climate change, despite not materially contributing to it.  
 
The world remains off track for climate change mitigation targets - Last year's COP 26 in Glasgow was notable for getting more commitments from both private actors as well as government commitments. However, despite this promise, the increase in greenhouse gases in 2021 and 2022 relative to 2019 is the clearest indication that the action is not matching the pledges. The chart below from The Carbon Tracker highlights how the pledges and policies in place aren't likely to hit the 1.5 degree target that will be easiest for human adaptation, with increasingly severe consequences above this level.

However there has been some progress, especially in power generation - Although it is disheartening to see the gap between what is needed and what has been pledged, there has been some progress over the last decade. The original range of outcomes from 2012 UN IPCC analysis considered an upper range of 5.4 degrees centigrade higher by 2100.  As shown by the graph above, the latest thinking is that current approaches will lead to less than a 4 degree increase by the end of the century at the high end. The biggest driver of the improvement in this modeling is the shift to zero carbon energy through wind, solar and other clean power technologies. 

Complacency will be a challenge - Public complacency is perhaps the biggest risk of having made progress over the past decade. The climate naysayers point to this progress as an example of how our technological prowess will solve the issue, therefore committing significant resources to address the long-term risk of climate change is unwise when those resources could be more productively deployed for near term economic development and well-being. Put another way, the debate seems to be shifting from investing in research and technology to having the political will to adopt the policies and existing solutions that will make a difference. Although concern about climate change remains high across most counties, some countries are showing signs that concern has peaked and is starting to decline, making future complacency risk real. 

It's the economy stupid (or inflation or geopolitical tension - take your pick) - If the political will to implement policies remains the key challenge to matching commitments with targets, the current geopolitical backdrop certainly doesn't help. With an election year in the US, President Biden has highlighted the need for oil and gas companies to stop returning capital to shareholders and start to invest in production to increase supply and reduce energy prices. It will be interesting if this emphasis persists after the election, which occurs the day after COP 27 starts. Beyond US elections, the tension between Russia and much of the rest of the world has created havoc in the European energy markets. These increased energy costs have contributed to high inflation, all of which puts politicians on the back foot in convincing the public to shoulder costs of building new infrastructure and systems to address climate change. Perhaps most distressingly, the US and China have stopped working together on climate change after a squabble over Taiwan when speaker Pelosi visited the island over the summer. Having the two largest emitters engaged in a standoff certainly won't help the COP 27 agenda. The current political leadership looks likely to come from the EU, which has already indicated it will seek an increase in the commitments made last year, in order to prevent temperature increases from exceeding 1.5 degrees.

Loss and Damage is likely to get more attention - The final topic we expect to get increased attention in Egypt is the idea of compensating developing countries that have nominal emissions on a global scale. There has been a long standing agreement that the rich countries that have benefitted from over a century of fossil-fuel driven growth are overwhelmingly responsible for the climate changes that are causing enormous costs for poor countries. Indeed, in 2016 this was formalized with the objective of developed countries providing $100 billion annually by 2020. It was reaffirmed at COP 26 last year, with an extension to 2025. However, the OECD tracks funding and the graph below illustrates how the amounts have fallen short, reaching only $83 billion in 2020. Given most of the recipient countries generate only a few percent of total greenhouse gasses, yet are currently suffering the most with increased flooding (Pakistan), drought (East Africa) and other climate catastrophes, the issue of following through on the agreed upon funding will get more attention than at prior meetings.

These are some of our thoughts of what we expect to see from COP 27 later this month. Success would be a recommitment and strengthening of targets, ideally with 'teeth' for implementing the solutions. The biggest disappointment would be the largest emitters (US, China, India, EU) failing to reengage for joint action and solutions to improve the current climate trajectory. 

With that we wish you a wonderful start to November.

The Impact Delta Team
contact@impactdelta.com

About Impact Delta
A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

Flows data suggest ESG assets are stickier.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at how the Biden administration is forced to balance short term inflation with long term climate impacts, how investors are valuing fast fashion and alternative proteins despite their opposite environmental profiles, and does the data indicate ESG investors are more patient than others?

US SPR activity might encourage oil industry to develop more capacity - The US is in the process of selling 200 million barrels of oil from the Strategic Petroleum Reserve (SPR) in an attempt to reduce the inflationary pressures of higher oil and gasoline prices. A proposal to replenish these barrels by purchasing them in 2023 and 2024, but at current prices, is what's counter to the climate objectives of the Biden administration. The motivation for this is to encourage more production that isn't happening as producers are concerned the price will decline over the next year. This illustrates the political reality that fighting near term inflation is more compelling than addressing climate change by reducing fossil fuel production. The average cost of oil in the SPR is $29.70/barrel against a July 26th WTI price of 94.98. So, if prices do fall, the cost of replenishing the reserves will be a bigger cost to the government under this plan, effectively providing a multi-billion dollar subsidy to the industry.

Fast Fashion - The recent fund raise of the Chinese fast fashion company Shein at a $100 billion valuation illustrates investor appetite for the industry. However, it's environmental footprint  is equally as sizable as its valuation. A World Bank report identifies that the fashion industry is responsible for 20% of wastewater worldwide, and it contributes to 10% of greenhouse gas emissions, which is more than air and maritime transit combined. Shein's valuation implies that investors are not anticipating any carbon tax or other environmental constraint to the fast fashion industry, to which we would reply, caveat emptor.

Alternative Protein - Unlike the continued enthusiasm for fast fashion, The VC funding for alternative proteins has slowed dramatically compared to the past few years. This is despite increased uptake of alternative proteins across both dairy and meat products. A recent research report from Global Markets Insights predicts 17% compound growth from $60 billion in 2021 to over $190 billion in 2028. It will be interesting to watch if the perceived economic slowdown affects the adoption of these new protein solutions, and if the VCs pullback will look wise in retrospect.

Are ESG investors 'sticky'? - As we noted in the last new letter, oil ETFs have outperformed clean energy ETFs by roughly 35% in 1H 2022. Surprisingly, the most recent data from Morningstar indicates that sustainable funds have continued to have net inflows in 1H 2022, while the main fund market saw slight outflows. The more notable shift is from active sustainable funds to passive sustainable funds, largely reflecting the recent outperformance of the passive strategies. With the underperformance of the sustainable funds due to exclusion of oil and gas, it's surprising that the outflows haven't shifted the other way, implying sustainable fund investors may be more long-term oriented and therefore 'sticky' than other investors.  

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About Impact Delta

A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

Sourcing key metals directly can help with traceability.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, the temporal impact of oil and gas vs renewable investment performance, continued momentum in electrification of transit, and earth day pictures from Google that underscore climate change.

The tradeoffs of divest vs invest - The growth of investment in renewables over the past few years has led some investors to consider divesting from oil and gas, while others have chosen to remain invested, but engage with the companies through proxy voting. The divestment argument had gained momentum, as investors that were underweight oil and gas were outperforming with oil and gas lagging the broader market for much of the last 5 years. However, year to date, that has switched, as evidenced by the performance of one of the leading clean energy ETFs against a leading oil and gas ETFs.

It will be interesting to watch how this evolves over the next few quarters as raising interest rates, the Ukraine war and other factors cause volatility in the market short term. 

But the long-term trend toward renewables is still clear - Shell recently announced a partnership with ABB to develop electric vehicle charging infrastructure. The objective is to have 500,000 chargers by 2025 and 2.5 million chargers globally by 2030. This is similar to a move BP made last year in partnering with Volkswagen to develop charging infrastructure, often at company owned retail stations. So even if the companies are currently minting money in oil and gas, these investments indicate they understand where the world is headed in the long-term. 

Mining and minerals are likely the next frontier -  Inflation has grabbed the headlines of late, with Tesla as no exception. The base price of a Tesla model 3 has jumped 30% over the last year, trending with the increased prices of lithium, cobalt and nickel. Despite this, Tesla has outlined in its impact report details on which mines deliver these materials to its battery manufacturing partners. More importantly, the company has outlined how it is able to source a majority of its battery supplies directly from mines, enabling greater control and traceability. As EV adoption accelerates, this focus on supplies may become a key differentiation. 

Speaking of Tesla, they are now more profitable than GM or Ford -  In the first quarter of Q1, Tesla earned $3.31 Billion, compared to $2.93 Billion and $2.3 Billion for Ford. This is despite selling far fewer vehicles (310k vs. 980k for Ford and 1,427k for GM). Regulatory credit revenue was a significant contribution ($679 Million of revenue), helping make the company more profitable, although Tesla remains more profitable per vehicle than either legacy automaker.   

Images of Climate Change in Action - Around Earth Day (April 22), Google released this series of contrasting images from Greenland, Mt Kilimanjaro, the Great Barrier Reef, and the decimation of a forest in Germany.  

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About Impact Delta

A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

…and be cut by 45% by 2030 to stay sub-1.5 degrees.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the link between E and S, more reports on ESG and investment performance, as well as the latest SEC and IPCC activity.

IPCC Working Group II: Distinctions between 'E' and 'S' can be a false dichotomy - The IPCC released the Working Group II contribution to its Sixth Assessment Report on February 27. This looks at the impacts of climate change, and capacity of the natural and human world to adapt. In its summary for policy makers, it placed climate change in the context of a complex global system, highlighting the "interdependence of climate, ecosystems and biodiversity, and human societies” and its goal of integrating “knowledge more strongly across the natural, ecological, social and economic sciences than earlier IPCC assessments."  Put another way, E and S are almost always linked, and best addressed in combination rather than isolation.

IPCC Working Group III: “It’s now or never” On April 4, The IPCC released the Working Group III contribution to its Sixth Assessment Report. This provides an update on climate change mitigation progress. The punchline? The window to stay under 1.5 degrees is closing. GHG emissions must peak by 2025, and need to be reduced by 45% by 2030, while current stated commitments will only reduce emissions by 14%. But the authors note “we have options in all sectors to at least halve emissions by 2030.”

The debate about ESG and investment performance tradeoffs continues – HBR published an article (An inconvenient truth about ESG investing) that contradicts other recent studies that claim a strong commitment to ESG is associated with investment outperformance. The HBR piece pointed to work from the University of Chicago, which found that high-ESG-rated mutual funds did not deliver superior investment returns relative to poor ESG performers (based on Morningstar ESG ratings) – although they did attract more capital. The idea that investors would be willing to trade off return (e.g., superior performance) for better ESG outcomes could explain this. However, a recent survey of investments in ESG-branded funds and non-ESG funds “found that the companies in the ESG portfolios had worse compliance record for both labor and environmental rules” and that “companies added to ESG portfolios did not subsequently improve compliance.” ESG done poorly, in other words, may be the worst of all worlds. And greenwashing continues.  

The SEC has set in motion revised ESG reporting requirements - The SEC released its report on "The Enhancement and Standardization of Climate-Related Disclosures for Investors” in March. If adopted, the proposed reporting would be integrated into public filing (10-K annual reports and 10-Q quarterly reports). This would apply to all classes of securities, meaning all publicly traded companies. What's particularly notable is that the integration of the reporting in formal filing documents puts this non-financial data on the same footing as financial reporting. This implies that unlike current voluntary climate disclosures, any misinformation in climate data in filings will carry the same liability as financial data misrepresentations.  

Asian debt is decidedly exposed to ESG risks – In an article in Environmental Finance, the authors identify $4 trillion of Asian debt that is exposed to ESG risks. For comparison, this represents roughly 80% of Japan's GDP in 2020. Among the risks identified, roughly 2/3 of the exposure is related to environmental factors, with increasing sea level being a substantial driver given the percentage of the population living near shorelines. 

Feedback is always encouraged and welcome. If this was shared with you, you can subscribe here.

About Impact Delta

A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

ESG factors can help explain downgrades.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the latest research on how ESG factors are affecting pricing and returns of bonds, ratings and real estate.

ESG is getting material -The adoption of ESG factors by investors has increasingly been influenced by the material impact it can have on financial performance. Adding further credence to this movement, a recent study found that bonds earmarked for a 'potential credit rating downgrade' because of environmental, social or governance (ESG) concerns were more than twice as likely to be downgraded during 2021 than bonds red-flagged for other reasons. 

But positive ESG ratings do not mean carbon free – With ESG factors increasingly affecting ratings more broadly, the exposure to carbon and fossil fuels is becoming one of the negative factors that can depress a rating. And yet, several of the largest banks received ESG upgrades, despite tens of billions of loans to oil and gas companies. JP Morgan was upgraded for ESG reasons, having underwritten the largest volume of 'green bonds' compared to their peers. And yet, the bank is also the largest lender to oil and gas companies since the Paris Accord was signed in 2015. The justification is that oil and gas lending as a percentage of the total loan portfolio determines the 'green' score, which basically means smaller banks can't lend to fossil fuel companies and keep their rating, while larger banks can.  

ESG factors affect sustainability bond performance – A Morgan Stanley study of ESG bond pricing found that bonds with more rigorous sustainability targets and substantive penalties for non-attainment typically had superior price performance for the first 30 days after an offering. Conversely, less stringent criteria typically underperformed.  After 30 days, gains were less correlated with rigorously assessed sustainability features of the bond, suggesting primary issuance investors are increasingly taking ESG seriously. 

Green real estate also starts to see a 'green premium' – Over the last several years, opinion has been divided as to whether ESG factors affect the pricing of real estate. Perhaps putting this debate to rest, Cushman and Wakefield evaluated the premium that LEED buildings commanded, holding other factors constant (urban/suburban, asset age, size, etc.). The data indicated that these buildings commanded a 25% premium per square foot on average. 

Feedback is always encouraged and welcome. If this was shared with you, you can subscribe here.

About Impact Delta

A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

How much we have to remove to hit 1.5 degrees.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, a nod to carbon capture and the growth in electric transit.

Look to the air and water - The US Department of Energy has transitioned the department of Fossil Energy to include Fossil Energy and Carbon Management, with the core focus now on climate change. A recent emphasis of this work is to support R+D for carbon capture and storage from the air. This shift from solely focusing on reducing carbon from fossil fuels is in recognition that even with carbon emissions reductions, the planet will still require a removal of 5-15GT/year of carbon by 2050 to avoid overshooting temperature increases above 1.5 degrees.

 Electric Vehicles (EV) continue to go mainstream – Despite Tesla's success in scaling EV sales, most legacy automakers have cautiously introduced low volume EV models relative to their core internal combustion products. Ford may have finally found religion, as the Mustang-E has continuously exceeded production targets, with the company now investing to triple current production capacity for this car by 2023. This is on top of getting over 200,000 advance reservations for the F-150 Lightning EV pickup. 

Impact EV SPAC – In a similar theme of electric transit going mainstream, impact investing has not been left out of the latest trends of electric transit and Special Purpose Acquisition Companies (SPAC). Bridges Fund Management and AEA private equity firms jointly raised $400 million for a SPAC in September 2021. The SPAC recently completed a merger with Livewire, the electric motorcycle division of Harley Davidson. Having also come around to the value of electric transit, Harley Davidson will retain a 74% stake in the company.  

But is it equitably allocated? – With most EVs starting well north of $40,000, and even the Livewire motorcycles having premium pricing, it's often wealthy individuals who have been able to switch to electric transit. Despite this, recent research from several Nobel laureates published at the Paris School of Economics has found that the world's 'top 10%' are responsible for 50% of carbon emissions. By contrast the bottom 50% are responsible for 12% of carbon emissions. No doubt, billionaire space joy flights aren't offset by the fact you have a new Tesla......

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About Impact DeltaA secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here

Solutions for 50% of emissions are getting 10% of the capital

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the focus (or lack thereof) of capital to address climate after COP 26.

Taking the long view -  Building on the massive increase in investing in artificial intelligence (AI) and machine learning (ML), Stanford University recently launched a Research Initiative on Long-term Investing. The concept behind this center is to help capital allocators better understand ESG metrics in financial risk terms. Traditionally investors have relied on backward-looking trends to identify and model risk; however, with no historical data on climate change, the traditional approach cannot work. By combining the latest in technological tools (sensors, AI and ML, large-scale scenario planning, etc.), the initiative will generate new value-at-risk tools to better align large, long-term infrastructure investing with ESG risk.  

But not investing in the right areas – On the back of the COP 26 meeting in Glasgow, Generation Investment Management released a research report that quantified where capital is flowing relative to its climate impact. It seems that progress is underway as roughly $130 trillion of investment capital has committed to net zero under the Glasgow Financial Alliance for Net Zero. This should be sufficient for the estimated $3 trillion of annual investment necessary to keep temperature rise below 1.5C. However, only $0.5tn is currently spent annually on clean energy, and the solutions for 50% of global emissions are only getting 10% of the capital. 

The kids won’t be alright – Distance learning for an entire year has many analysts concerned about lost academic performance for school children. The National Center for Educational Statistics recently released the latest data that is even more disturbing. From 2012 to 2020, test scores for 13-year-olds in both math and reading went down on average for the first time in 50 years. Equally concerning is the widening gap in performance between the lowest and highest performers. It will be interesting to watch if this trend can be reversed by the growth in education technology investments and innovative school solutions.

How green are your bonds? – With the green bond market reaching an estimated $750 billion in 2021, it’s not surprising that almost every company is seeking to tap into this financing. However, NN Investment Partners released a report that 15% of issuers are involved in controversial practices. Among the issuers this year are Saudi Aramco ($1.36B), Qatar Energy (~$2B) and the largest UAE bank (government owned), despite the UAE government owned oil company announcing it will invest to increase oil output by 25% by 2030. As green bonds have outperformed the broader bond index in 5 of the last 6 years, it will be interesting to see if these more controversial green bonds will perform similarly or diverge from other green bonds. 

Carbon Credits: A New Farm Product? As this recent New York Times article  discusses, global cropland has the potential to sequester up to 570 million metric tons of carbon dioxide per year. But there are many challenges to overcome, including the accuracy of today’s estimates of soil-based carbon removals, permanence, additionality, and regulation. Our partner Jim Bunch is quoted.

Feedback is always encouraged and welcome. If this was shared with you, you can subscribe here.

About Impact Delta A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

The US defense establishment publishes ahead of COP.

Hello from Impact Delta. 

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we prepare for COP26 in Glasgow next week, and look at who is driving progress in diversity, equity and inclusion.

COP-ing a ride to Glasgow -  The annual climate conference starts in early November, after taking a pandemic-related break in 2020. In advance of that, the UN has been releasing its latest research on the climate. It is dismal reading.  Despite the rash of net zero commitments recently, "updated NDCs [nationally determined contribution] and announced pledges for 2030 have only limited impact on global emissions and the emissions gap in 2030, reducing projected 2030 emissions by only 7.5 per cent.... whereas 30 per cent is needed to limit warming to 2°C and 55 percent reduction is needed for 1.5°C." And more immediately, "the COVID-19 pandemic led to a drop in global CO2 emissions of 5.4% in 2020. However, CO2 and non-CO2 emissions in 2021 are expected to rise again to a level only slightly lower than the record high in 2019. Fingers crossed for progress in Glasgow.

The U.S. Defense establishment publishes a flurry of reports – Not coincidentally, last week the Biden administration published several reports about climate changes risks to national security. They came from the director of national intelligence, the National Security Council, as well as departments of Homeland Security and Defense. Here’s and excerpt from the introduction to the Department of Defense Climate Risk Analysis: “The risks of climate change to Department of Defense (DoD) strategies, plans, capabilities, missions, and equipment, as well as those of U.S. allies and partners, are growing. Global efforts to address climate change – including actions to address the causes as well as the effects – will influence DoD strategic interests, relationships, competition, and priorities. To train, fight, and win in this increasingly complex environment, DoD will consider the effects of climate change at every level of the DoD enterprise.”

The lack of diversity of investors driving diversity - Morgan Stanley has surveyed dozens of institutional investors regarding their attitudes to diversity, equity and inclusion. "Somewhat unsurprisingly, and despite acknowledging the importance of incorporating diversity into their investment decisions, a majority of asset owners (56%) say that doing so comes at the expense of returns." This was especially pronounced among white male investors. The silver lining to this study was with public pension plans. "Three-quarters of public pension fund asset owners (75%) say that investment teams with sufficient women representation significantly improve the performance of their investments, compared to 15% of other asset owners. Similarly, 63% of public pension fund asset owners say the same of investment teams with sufficient multicultural representation, compared to 13% of other asset owners." It will be telling to watch the performance of public pension funds relative to other institutional investors in the coming years.

No divisions on ESG – In common with almost no other topics, a consensus view on ESG (of which diversity is a subset) is becoming well established across political ideologies. A Penn State/ROKK survey of Americans across the political spectrum found that there was a majority of support for ESG. 76% of respondents felt that companies should be held accountable for making a positive impact on the communities in which they operate (79% Democrats and 71% Republicans). Even more encouragingly, climate change was listed as a top priority by 79% of Democrats and 54% of Republicans. Let's hope our legislators and delegation to COP 26 in Glasgow got this message.... 

DeFi-ing comprehension:  With VC fundraising approaching $100 billion in 2021, the dispersion of investments has shifted from past years. Financial technology (fintech) is taking nearly one-fourth of the capital invested to date, with 94 funding rounds exceeding $100mm (out of 409 such megarounds across all global venture). The breadth of opportunities to alter how finance works in society has captured the imagination of investors, with Decentralized Finance (DeFi) showing particularly strong growth in the past few quarters. These investments often score extremely highly on an ESG or impact measurement framework. Core VC recently released their impact report that looks at the positive impact of their portfolio of fintech investments over the past decade. Who knew a cryptocurrency could be such a threat to Western Union?

Feedback is always encouraged and welcome. If this was shared with you, you can subscribe here.

About Impact Delta

A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

Is an ESG label worse than nothing?

How do you Fancy ESG? - Tariq Fancy, the former CIO of sustainability investing for Blackrock, has penned a lengthy essay with his perspective on the shortcomings of ESG investing.  His conclusion is that investing in ESG is almost worse than if it didn't occur, as investors and asset owners feel like they are making progress, when they really aren't. His principal concern is that incentive alignment will always put profit over social or environmental needs, and policy is the most important requirement to change this, not capital markets.  

Et tu DWS? - In a similar vein, Desiree Fixler provides an in-depth look at her journey at DWS, where she was hired to be head of ESG. After reviewing DWS’s products and processes, she informed senior management that they weren't actually doing what they were telling investors they were doing. She was fired the day before DWS produced its annual report, further claiming they were a leading ESG investor. No doubt Tariq Fancy would point to this as exhibit A in his criticism. And now the SEC is investigating DWS.

Even some academics agree - NYU professor Aswath Damodaran has updated his criticisms of ESG, with the view that it is subjective (therefore difficult to measure), limited proof it will lead 'good' companies to outperform, is marketed with inconsistent logic, and also serves as the 'outsourcing' of moral responsibility. His conclusion: "more than ever, I believe that ESG is not just a mistake that will cost companies and investors money, while making the world worse off, but that it creates more harm than good for society."

A rebuttal to the ESG naysayers:  With so many critical comments coming from the proverbial 'choir' of ESG believers, Morningstar penned an article acknowledging ESG is not a cure-all silver bullet, but highlighting that the criticisms aren't entirely valid, as they are often backward-looking. Furthermore, the role of ESG to help identify and manage risk (or opportunity) is an investment factor that isn't well appreciated or always priced in. This may help explain why highly-rated ESG companies continue to outperform. 

ESG’s critics aren't all wrong. ESG-oriented investing is still relatively nascent and it is evolving quickly. Metrics and targets remain heterogeneous across companies and are often difficult to measure. But earlier today, Carlyle, CalPERS and other GPs and LPs collectively representing $4tn in assets, have announced a plan to standardize ESG reporting. 

Regulation continues to gain momentum:  SFDR has been in place for 6 months with EU managers having to declare their products “dark green”, “light green”, or “grey” (not-ESG focused). Starting in July next year, they will have to back this up with quantifiable data. With the UK leaving the EU, managers in London without EU investors have a different requirement. However, the FCA has provided guidance that analogous reporting for environmental issues will be required (largely mirroring TCFD). The US isn't far behind, with the SEC reviewing ESG guidance under Gary Gensler, and the regulator anticipates having updated recommendations ready in October or November this year. 2022 is shaping up to be the year of ESG data across the globe.

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About Impact Delta

A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.