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Jackie and Peter provide an update on ESG this week on the podcast. Has the anti-ESG movement started to change companies’ reporting and actions? To answer this question, they reviewed some articles and research that point to the recent loss of momentum and profile for the ESG movement. There have also been examples of companies exiting sustainability-focused organizations. While sustainability may have peaked in these regards, it is not going away. Companies continue to report on their sustainability performance and set goals for improvement. Mitigating and monitoring the risk associated with ESG-related issues is also important.
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Episode 239 transcript
Speaker 1:
The information and opinions presented in this Arc Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Speaker 3:
This is the Arc Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the Arc Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Welcome back. So, Jackie, I think spring is definitively in the air, and we’ve been having some of our friends over and talking, and inevitably somebody asks me about energies as I’m sure they do, energy matters. But a question that has been coming up, and I know we’ve discussed it on our podcast, is has the ESG movement peaked? And so, I think we should talk about it.
Jackie Forrest:
Yeah, no, it is a question that I got. In fact, I actually recently spoke at an Avatar event with Kevin Krausert, and Brian Trudel, and all those people that are signed up and really engaged in the program, and they asked me that same question. So, I thought it’d be fun to go through. We have talked about ESG a number of times. Most recently we had the Yale professor, Kelly Shue, in November of 2023 on the podcast, talking about the counterproductive sustainable investing, and that many of the actions being taken by investors trying to improve the climate situation are actually not helping, they’re counterproductive. But we haven’t talked about it since then. And I thought it would be interesting to look at some ESG indicators. I’m taking this from some work that Nat Bullard has put out, and if you don’t know him, he’s an energy analyst. He was formerly a senior contributor to Bloomberg New Energy Finance, and he has his own website called Nat Bullard, and I’ll put a link to it in the show notes where he has 200 slides. Some of them are ESG related. And I also caught him speaking with the Catalyst, a podcast called the Catalyst with Shayle Kann. And that’s a great podcast too. So, I thought we would highlight a few of his data points, as well as some other work we did around this.
Peter Tertzakian:
I would like to come to that, but can we just back up and just tackle the question at the highest level, has ESG peaked? And I would say ESG has peaked certainly from the perspective as a label for a movement, but has the movement itself, the underlying factors that affect how investors invest in energy, for example, the criteria they use, these metrics you were talking about in this presentation, has that peaked? I definitely believe the label has peaked. In fact, it’s gone beyond peak. It’s actually got a negative connotation to it, especially in certain jurisdictions like even the United States, and actually that the label has morphed over time. In the 1990s, I remember there was a movement that was called Sustainability. There was something called the Sustainability index. Then it morphed into CSR, which is Corporate social responsibility. And then I would say just ballpark, I don’t know, seven or eight years ago, the term ESG, Environment, Social, Governance, started to take root and really got a lot of momentum. But now it’s waning. It just seems to be part of a progression of labeling. But has the movement itself, the actual fundamentals of the movement affected the way people think about investing and energy at large?
Jackie Forrest:
Well, I would argue that ESG… and now you’re right, people like to call it sustainability now.
Peter Tertzakian:
Yeah, it’s a full circle moment actually.
Jackie Forrest:
And it’s more focused on the E, than the S and G now. I think a little bit more on the environmental, but I still think that it’s really just a way to reduce business risk, and investors need to have some data to understand that. So, if you’re using a lot of water and you’re in a drought region, if your assets are prone to damage from a change in climate, if you have really high greenhouse gas emissions, these are things that increase your risk and need to be mitigated. So, I don’t think it ever goes away, but certainly I think as a label, or something that people have a flag, and they make a big deal about it to differentiate their companies, this data, which we’ll go through, would show that it’s declining from that respect.
Peter Tertzakian:
Just for background, for our audience, ESG, so E is environment, not just emissions and climate related issues, but issues related, as you pointed out, with water, and toxic substances, and that whole biodiversity dimension. The S and the G?
Jackie Forrest:
I think that the governance, in North American companies, it kind of goes without saying. I’m sure if you go invest in some countries of the world, that’s still very important governance, but I think that’s maybe less of a focus and it’s really more on the E. And some of the social as it relates to diversity, I think is still pretty prominent.
So, let’s go through some of them. One is just looking at the reporting. First of all, commitments like greenhouse gas emissions reductions, two thirds of Fortune 500 companies now have climate commitments. However, new commitments peaked in 2021 at 104 companies, and only 18 new companies made commitments last year. So, I don’t think that means that this is less important, it’s just they’ve already made commitments. But I will put a link, as I said, to the show notes, so you can see the charts, but that’s one data point. Another data point is, how big are these sustainability reports? And this is data that came from a Harvard Law School report. In 2021, there were 70 pages on average, and in 2023, 82 pages, but there’s a wide range to that. How wide do you think the range is?
Peter Tertzakian:
Five pages to 160 pages?
Jackie Forrest:
This one, it says 11 to 262, according to the Harvard.
Peter Tertzakian:
Oh, I was pretty close.
Jackie Forrest:
Hey, I was curious though. I didn’t think 262 was the highest, so I checked out Suncor’s report, and they have two separate reports that total 149 pages. So, I’m like, okay, well maybe Suncor isn’t the most pages. But how many do you think Suncor had 10 years ago? How many pages in their sustainability, or ESG or whatever they called it at the time?
Peter Tertzakian:
20?
Jackie Forrest:
40. Yeah, so there’s been three times increase, so that you can actually see that in the data that’s in that presentation, there was a real steep increase, and it’s sort of been flattening out a littlebit, but it’s still going up. But I guess when it comes to commitments or number of pages, it would not seem like it’s peaked. However, there is a trend of decreasing external communications. So, in 2021, 76% of reporting companies issued a press release when they had their new sustainability report, and that’s down to 50% in 2023. And there’s overall less information. ESG tables included, dropped from 76% of the reports had tables with ESG data, down to 54%. And less companies have a summary than they used to have, slightly down from 26% to 23%.
Peter Tertzakian:
So, what are the conclusions that we draw from this? One is that the reporting burden has gotten to such a high level, that companies are saying, “Okay, we can’t do any, we’re actually going to pull back.” Or the interpretation is nobody’s reading 149 pages. We don’t need to do it. And that the demand for these sorts of reports is starting to wane.
Jackie Forrest:
Well, I think one thing is that they’re not something, like I was saying, you want to have the flag out, and wave it, and really draw a lot of attention to, because you’re doing it, and I think a lot of institutional investors expect it. And if you don’t have it, that’s a big problem. But you’re not necessarily highlighting it and making it high profile as you used to, as seen by less press releases. Also, the fact that less people are putting more detailed information in, that’s implied by not having as many ESG data tables as before. So, I think this would imply ESG has peaked this data, because we’re seeing just a little less prominence in terms of you may still be doing it, but you’re not making it high profile.
Peter Tertzakian:
Well, and I think that investors are not necessarily demanding it as much as they used to, say two, three years ago.
Jackie Forrest:
They are, but at the same time, you still need to have it. I think especially if you’re…
Peter Tertzakian:
You need to have it to say you’re on it, and…
Jackie Forrest:
There’s a box to be checked.
Peter Tertzakian:
Box to be checked, but it is not the first item of conversation like it used to be.
Jackie Forrest:
I think you’re right that way, and I think it would depend on the industry you’re in. If you’re a high emitting industry, I think it probably still is pretty important for investors, to show that you have a way to mitigate your risk. So, it probably depends on the sector.
Peter Tertzakian:
It does depend on the sector.
Jackie Forrest:
Yeah. Okay. Well, let’s go to the next one, which is how much are investors interested in this space? And this is using Morningstar data that was also in Nat’s presentation, and it shows that there is a decrease in new funds coming into US sustainable funds. So, these are funds that say that they’re sustainable. The fund flow peaked in 2021 at over $20 billion per quarter of new money coming in, and it’s been slightly negative in 2022, and into 2023 at about negative $5 billion in the last quarter of 2023. So, I just want to put in context, these are small numbers. The total assets of US sustainability funds is still over $300 billion. So, you’re losing one or 2% a quarter, but you’re seeing negative fund flow overall.
Peter Tertzakian:
And this does not surprise me at all, because the companies that have been labeled ESG and put into funds that people could buy, in other words, a basket of companies that were labeled as being sustainable and green, those baskets, the stock performance has been dismal.
Jackie Forrest:
That’s true.
Peter Tertzakian:
So, when stock prices go down, the value of the entire basket labeled sustainable, or ESG fund, or whatever label they use goes down. Then is it any surprise that people sell out of the basket? And this then, I think translates back into the broader question, has ESG peaked? Because ESG has been very closely related to green energy finance, and if you look at the ETFs, and the fund performances for that group over the course of the last two years, it’s been really quite devastating.
Jackie Forrest:
Yeah, no, so go check out that index. We like to look at, WilderHill. It is at a really low level.
Peter Tertzakian:
It’s at a seven-year low.
Jackie Forrest:
Yeah, so that’s probably part of it. It may not all be the sentiment towards ESG. I do want to point out that in Europe, it’s actually slightly positive funds flow in Q4 of 2023, and the EU is a much bigger market for sustainable funds. It’s something like seven or eight times larger than the US, and so in Europe, it’s definitely down in terms of the funds coming in, but it’s not negative. But for sure, the poor returns could be not as much as the messaging.
Peter Tertzakian:
We have to be careful when we analyze this data, because when we talk about funds flow US versus Europe, we also have to discuss what is labeled as being ESG eligible into fund, and what isn’t. There’s different definitions, so I am not sure we’re comparing apples to apples when we compare European funds to North American funds.
Jackie Forrest:
Yeah. They have very strict requirements around maybe what constitutes a green fund, for sure. So that could be part of it too, as the definition in the US is less clear. But it could also be, and we’ll get into it, some of these states that are saying, “Don’t put your money into green funds.” Maybe that’s affecting fund flows to some extent too.
So, let’s talk a little bit about, this is from a different source from the Wall Street Journal article, and it was just recently in April 21st of this year, it said that diversity goals are disappearing from company’s annual reports. So that’s another sign that we may be past peak ESG. The driver for this, according to the article, was this 2023 Supreme Court decision, overturning affirmative action in college admissions. And basically, companies since then are maybe a little more cautious about what they write.
And so, the Wall Street Journal did an analysis of 10K filings, so filings that you make to the securities regulator. And it said that they saw a lot of things like shortening the description, or removal of the entire section on diversity, removed mentions of race or specific hiring practices around race. And they had specific companies like Kohl’s, which is a department store, that has taken out of their materials from last year, and it no longer says they’re cultivating diverse leadership for advancements. Or GameStop that cut mention of diversity inclusion as one of their tenants. This is an example of, we talk a lot about the States, the red states, and how they’ve taken on this anti-ESG movement, and telling their pension funds not to invest, but this is actually coming from the Supreme Court.
Peter Tertzakian:
And that’s likely a reflection too, of the political winds that are out there. I’m really not comfortable personally talking about social diversity and inclusion, not to diminish its importance at all, but it’s just so emotional and I don’t know a lot about it. So, I think that S part of ESG for me, is something that we should just leave aside, and just continue to talk more about the E and the implications, particularly as it relates to the financial sector.
Jackie Forrest:
Yeah, no, I think I agree. We probably need an expert on this one, but I think it’s just noteworthy as we talk about some of these trends in reporting, that this is another one that’s also declining.
All right, another fun metric that was in Nat’s slide deck, is the Larry Fink letter. So, I’m sure many of you know that Larry Fink is the CEO and chairman of BlackRock, and one of the world’s largest investment management firms, and he always writes letters. In the past, he published a letter for his CEOs and one for his investors. In 2023, he only did a letter for his investors. And what this chart does that Nat’s put together, is it looks at how many times he says the word climate, sustainability, or ESG over time in his letters. And in 2021, it really peaked with over 40 mentions almost in both of those years. And this year it was like, something like six mentions.
Peter Tertzakian:
Six mentions.
Jackie Forrest:
So that would be a sign that things have peaked. Now, BlackRock has been under pressure by a lot of the states in the US that said, “We’re going to divest of BlackRock because you guys are too into the ESG and sustainability.” A lot of those red states. So that might’ve been part of the driver there, the pressure that BlackRock was under. So, this might be an extreme example.
Peter Tertzakian:
Well, the pendulum swings back and forth. As I said in the earlier part of the podcast, in the 1990s, there was a big movement on creating sustainability indices, and then it turned into CSR, and then into ESG, and then these things sort of come and go, especially as these can be emotional subjects. And the state’s backlash, especially Republican states against all of this, has been quite significant. And so, I think we’re headed into an era of less mentions, especially given that affordability, and energy security, and the current state of the worlds geopolitics takes more of a center stage, but it will likely come back and maybe it’ll be labeled something differently. And behind the scenes, I would call it, infrastructure for reporting that has been put into place on these matters, is not going away. That there will still be reporting. It’s just that the top line letters that Larry Fink and others are going to write, is not going to necessarily put these issues front and center. They will put other issues front and center, reflecting the economic times that we’re in.
Jackie Forrest:
And people always kind of focus on what they see as the largest risk. So that may not be the largest risk at this moment and that could change again. Okay. Well, let’s go to the next part, which is just looking at the exiting of some of these climate pacts. So back in 2020, 2021, in the depths of COVID, everyone working from home offices, we had a whole bunch of companies make very significant commitments to reducing their emissions to helping with climate. And many of them joining these groups, these different packs, I’ll call them climate pacts. So, I wanted to give an update on some of those. Overall, the trend is, people are exiting some of these groups for various reasons. So, I thought we’d go through some of the more high-profile ones and talk a little bit about what’s going on there.
Peter Tertzakian:
Wand when you say people are exiting, you’re talking about largely investors?
Jackie Forrest:
No, the corporations, or in the case, some of these are actually investor groups that signed these pacts. Some of them like GFANZ, which we’ll talk about, some of them are corporations. We’ll talk about a corporation one first, which is a science-based targets initiative. And what is it? Well, it helps companies set a GHG reduction target that’s below 1.5C or 2C, and it kind of gives them a stamp of approval that they’re actually got a plan that meets that goal.
Peter Tertzakian:
So, this organization gives a corporate scorecard, and determines yay or nay, whether the company is following a 1.5 degrees C climate plan?
Jackie Forrest:
Yeah. So, it helps an investor say, “Okay, some third party has validated this plan.”
Peter Tertzakian:
Right
Jackie Forrest:
Now, there’s been a number of groups exiting it, and the BMO capital markets wrote a detailed note on this. But the main takeaway is, while the science-based targets are important, they put in some new rules which have resulted in some companies exiting these pacts. And the reason is, there’s been a very controversial decision around Scope 3 emissions and committing to reduce those, and those are not really in your remit. So that’s resulted in a number of companies leaving. So, for example, in March there was an article which I can put a link to, in Green Business, that reported 239 companies have changed their status to commitment removed from science-based targets, including Microsoft, Wal-Mart, Unilever, big companies with big commitments. And there was also a recent Globe and Mail article in Canada, that the board and CEO released some information that they were going to do something about these Scope 3 targets, like allow people to get offsets and not actually reduce, but there was a revolt by staff, and now they’ve issued a clarification that they need to get consultation. So, I think the biggest issue is, some of the rules that have come out are very difficult to achieve, and these companies are saying, “Well, I don’t want to commit to this science-based initiative if I actually can’t meet its requirements.”
Peter Tertzakian:
Yeah. This is the psychology of targets that things like that are really classified as say, stretch goals. Okay, we need to achieve this goal or this target by such and such a date, say by 2030, ’35, 2040, that if it’s a goal that is seen to be achievable, but with a lot of effort, and a lot of teamwork and so on, that organizations will rally, especially if they have a compelling leader. However, if you go beyond a stretch goal into the realm of like, “Oh my gosh, this is almost impossible to attain.” Then you get into the behavioral characteristics of almost giving up, or I’m out of here. And I think this is what’s happening, is that the stringency of the targets became more and more progressively difficult to achieve in the minds of organizations, all sorts of companies and organizations, to the point where they’re saying, “Okay, I can’t do this. We’re out of here.” And so, when we think about, what did you call it? The science targets, right? The science-based targets, I come back to, there’s the behavioral science targets, and then there’s the science-based targets. And the behavioral science targets have been exceeded, which is why I think you are seeing this.
Jackie Forrest:
And the BMO, I’ll come back to that detailed note they wrote, but they basically said that these new targets are very difficult, and basically, it’s causing companies that have high emissions to say, “Well, this is completely unsustainable in terms of the financial cost of this for my company.” But meanwhile, those companies that are low emissions can easily make it. They stay signed in. So actually, they drew a parallel to Kelly Shue’s research at Yale University, that this is a case where the green groups that can easily have done it anyway, sign up, and then the ones that really should be changing, they don’t sign up. So, it’s a bit of a counterproductive exercise potentially, in that it’s kind of not resulting in any change.
Peter Tertzakian:
Right.
Jackie Forrest:
Let’s talk about GFANZ. Remember Mark Carney’s, high-profile, Glasgow Financial Alliance for Net Zero?
Peter Tertzakian:
Yes.
Jackie Forrest:
We talked about that. At least two pension funds have quit GFANZ, and Bank of America just reneged on a commitment to stop financing new coal mines and coal power plants. Maybe it comes back to still 80% of primary energy comes from hydrocarbons. And so, if you say you’re not going to finance any of those, that takes a big chunk of your potential business away, and maybe there’s more realization to the cost of some of these commitments. I did want to bring up one other interesting thing. The US Securities and Exchange Commission, they let public corporations off the hook for reporting on Scope 3 emissions. If you remember in 2023, they put out a draft document that said, “If you’re going to be a public company, you have to report on your Scope 1, 2, and 3 emissions.”
Most people accepted Scope 1 and 2, but there was a bit of a backlash about the Scope 3, because it’s very difficult to actually come up with that number to know all the way up your supply chain, and all in your downstream systems, how many emissions there are. And so, this is another example maybe of some softening of rules and looking at more realistic things. The reality is, if everyone were to reduce their Scope 1 and 2, there would be no Scope 3. So, I think there’s some logic to saying that that isn’t the company’s responsibility, but that’s another example of softening.
Peter Tertzakian:
Well, I think it has to, it’s unrealistic to think that if a company sells a cubic meter of natural gas, well, how does that company know who’s going to consume it? Is it going to be an inefficient user of that natural gas, or an efficient user? Is it going to be put through devices, and machinery, and infrastructure that’s going to create a lot of emissions or low emissions?
Jackie Forrest:
Yeah. And on the upstream Scope 3, let’s say you’re using a polymer, well, you don’t know exactly the source of that polymer. It could be like that it came from a number of plants, and it was mixed together, and it’s hard to trace the supply chain today. We don’t have the sophistication to actually get an accurate number on many of the inputs that arrive at a manufacturing site. So I think that is a reasonable thing. I think Scope 1 and 2, like I said, if everybody actually just reduced theirs, there would
be no Scope 3. Everyone would be reducing their emissions, including consumers. But to wrap this up, back to your point, Peter, I actually think a lot of these pacts, a lot of these goals were made back in 2020 and 2021, right in the depths of COVID, people were isolated from the office.
There wasn’t a lot of debate. I don’t think as much debate maybe as there is now around the do ability of some of these goals, climate was such a high priority for a lot of people then compared to, it’s still important for a lot of people, but it’s kind of gone down the list for some people in terms of affordability and other issues. And so, I think that also over the last many years, people have become more sophisticated on what it’s going to take to achieve these reductions, and what it’s going to cost and where the technology is. So, there’s much more, I think, knowledge about how to track, and report, and what your numbers are, and where they’re coming from and how difficult it is to reduce. So, I think we’re getting some more realism. I don’t think that people are not concerned by reducing emissions, or not concerned by measuring their emissions, or trying to achieve their climate goals. It’s just there’s more realism about what’s doable and what’s defendable.
Peter Tertzakian:
To your point, talking about 2020, 2021, the pandemic, times have changed dramatically. We now have two really serious wars on the planet. We’ve got trade hostilities ratcheting up with China, inflation, affordability, all those sorts of things. So, it’s just times change and priorities change. And that’s not to say that the issue of climate change and ESG should be diminished, but it’s just, again, I come back to, okay, understand the science, but understand the behavioral science and how people prioritize the issues. And I think that we’re in a new era of prioritization.
Jackie Forrest:
That’s right. So, is peak ESG behind us? Probably. But it’s not going away. And it may come back again, maybe not with the same magnitude as before, but it is still there. And it’s still important to a lot of investors. That’s why companies are still reporting. They may be not making it the most high-profile thing they do anymore, but it’s still there, and they’re still dedicating a lot of resources to reporting, reducing and showing improvement.
Peter Tertzakian:
Right. Right. Well, I think that’s a wrap.
Jackie Forrest:
That’s a wrap. If you enjoyed this podcast, please rate us on the app that you listened to and tell someone else about us.
Speaker 3:
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