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Exxon’s AGM

…and another record for ESG flows.

Irresistible Force or Immovable Object? Later today (May 26th), Exxon Corporation will hold its annual shareholders’ meeting. Although proxy fights over carbon disclosure and climate change are not new, a hedge fund has launched a campaign to elect four directors not recommended by the board’s governance committee. The accusation: Exxon is underperforming due to an inability to shift to new forms of energy. This may be the year that Exxon finally loses the battle with activist shareholders, as the three largest pension funds (CalPERS, CalSTRS and New York State Common Retirement Fund) have all stated they will support the board members submitted by proxy.

Equity can also be green - Beyond punishing bad performers, investors increasingly seem to seek strong ESG performers. Goldman Sachs recently underwrote equity for a window company that was able to be certified green because of its energy efficiency impacts. As with many ESG trends, this idea started in Scandinavia. Nordic banks were among the first to launch green bonds. It’s not surprising therefore that… 

.. green debt is also innovating - EQT issued a sustainability-linked bond, whose interest rate will increase if EQT does not meet certain ESG targets. The Scandinavian-based PE shop issued €500 million of 10-year maturity debt at 0.875%. However, if the boards of its portfolio companies are not 36% female and EQT's own investment professionals are not 28% female by 2026 (up from 21% today) the interest rate increases by 0.075% for each occurrence (potentially 0.15%). And if EQT does not hit climate change science-based targets by 2023, the interest rate increases by 0.10%.

PWC ESG Value Creation Survey – If the prospect of lower cost of capital isn’t enough, the most recent PWC survey of PE attitudes toward ESG indicates more firms now believe ESG creates value, in addition to “only” satisfying LP requests. 66% of respondents cited value creation as one of the top 3 drivers of responsible investing or ESG activity. And 56% of respondents said they had declined GP agreements (as LPs) or declined investments based upon ESG factors. 

The Facts. The first quarter of 2021 was a(nother) record for net inflows into ESG mutual funds according to Morningstar. After a record year in 2020, with net inflows of ~$50 billion, the first quarter of 2021 saw inflows of $21 billion, more than double that of Q1 2020, and ~5x that of Q1 2019. Roughly 90% of the flows were into equity funds. Total assets in ESG mutual funds are now over $250 billion, with 60% of that in active strategies, down from 83% three years ago.

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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.

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