© Reuters

Breaking news: The UK on Friday threw down the gauntlet to other countries ahead of a climate summit next week by becoming one of the first leading economies to upgrade its carbon emissions reduction target for 2030, our FT colleagues have reported. Prime minister Boris Johnson set a target for the UK to slash its emissions by 68 per cent by the end of the decade, relative to 1990 levels, in a move that will require restructuring a significant portion of the economy.

The announcement comes on the heels of former Bank of England governor Mark Carney’s statements on Wednesday in support of a global carbon offset market, calling it an “imperative” to help reduce emissions.

Welcome to Moral Money. Today we have:

  • An “awakening in the investment management community”

  • Possible manipulation of companies’ pay ratio figures

  • BlackRock’s Brian Deese picked for top White House role

BlackRock survey points to huge growth for ESG

We know there are still plenty of ESG sceptics out there. But the number of non-believers is shrinking by the day, and it is starting to look like anyone betting against sustainability is taking the opposite side of a huge momentum trade.

BlackRock, the world’s largest asset manager, recently asked 425 of its institutional clients about their plans for the future and found that they intended to double their exposure to environmental, social and governance (ESG) investing over the next five years. Yes, really.

This is important for numerous reasons. First and foremost is the sheer amount of money involved. The survey respondents themselves come from all over the globe and oversee a collective $25tn in assets. While it is notoriously hard to pin down an exact figure on the total size of the ESG market, it is clear that the growth potential is huge.

This response is also a sign that the idea that ESG harms performance is dying out. The survey shows an “awakening in the investment management community” that ESG delivers enhanced returns, said Mark McCombe, chief client officer at BlackRock.

Another striking detail: an overwhelming number of respondents said climate change was their top priority. This is important, given that the survey was completed in September 2020, which meant that even the economic stress of the pandemic was not damping investors’ interest in addressing climate change.

It is unclear whether this is the cause of BlackRock’s own new-found emphasis on climate risk or a reaction to it, but it is an encouraging sign that investors are coming around to the problem.

As famed investor Jeremy Grantham pointed out at the FT Moral Money Investing for Good Summit yesterday, climate risk is still wildly mispriced, and the sooner that investors reposition for that, the better. The scale of money that needs to move is startling: a new paper from the Global Financial Markets Association suggests that investors need to pump an additional $3tn-$5tn per year into decarbonising the economy to achieve the Paris climate goals.

Can this happen? Moral Money readers will not be shocked to learn that the BlackRock survey also found that the lack of clarity around ESG definitions, data and ratings was the top complaint for investors.

Another problem is the lack of sustainable investing products, which was cited by 31 per cent of the survey respondents. That might seem more surprising considering the boatload of PR emails we receive every day announcing new sustainable fund launches. But it probably reflects a sense of frustration with the fact that if you ask 100 different people what sustainable investing means, you are likely to get 100 different answers.

© UBS

However, one development that may soon address this is customisation, as Suni Harford, (pictured above) the president of UBS Asset Management, told the FT’s Investing for Good summit this week. While separately managed accounts — where investors can have granular control over the securities in their portfolio — have traditionally been available only to the largest investors, new technology is making it much easier and cheaper to roll these products out downmarket.

Technology also makes it much easier to implement automated ESG strategies within these accounts, which can be tailored to an individual investor’s preferences. BlackRock’s recent acquisition of Aperio and Morgan Stanley’s purchase of Eaton Vance (and its subsidiaries Parametric and Calvert) suggest they agree that customisation is important — and are jumping in too.

As momentum builds, it will be harder for naysayers to stand aloof. Or as Ms Harford said in her keynote, when investors tell her they don’t believe in climate change, her answer is: “I don’t care.” The direction of travel is clear. (Billy Nauman)

Accuracy of pay ratios receives increasing attention

© Ed Sweetman/Dreamstime

For decades, the UK has required companies to compare executives’ earnings with the pay of ordinary employees — a ratio designed to help scrutinise increasing inequality. But the real pay gap is actually much bigger than reported because companies do not have to include outsourced low-paid work, according to a new paper from the London School of Economics and Political Science.

In fact, companies with high pay ratios outsourcing non-core has become standard operational practice, the paper found.

For the 94 companies in the FTSE 100 that are not investment firms, average pay in 2015 was £52,233 — more than twice the UK average earnings for the year, the paper said.

Companies are starting to publish their annual ratios, “but the emerging data show that the current regulations are deeply flawed”, said the paper’s authors, professors Paul Willman and Alex Pepper.

The disclosure requirements “should really include all workers, including agency and other casual workers, as well as non-UK employees. Only then might these new disclosure requirements begin to have an effect,” they added.

Meanwhile, UK company pay ratios are probably not skewed as badly as their US counterparts — with huge supply chains originating from Asia, the professors said. The accuracy of pay ratios has recently received increasing attention, at least in liberal-leaning parts of the country. San Francisco voters last month approved a “CEO tax” on businesses that have a 100-to-1 pay ratio. Will New York be next? (Patrick Temple-West)

Biden’s BlackRock White House pick gets mixed response

© REUTERS

After seemingly endless speculation, the incoming Joe Biden administration has finally made it official: Brian Deese (pictured, left) will be the new head of the National Economic Council.

Given his prior role as BlackRock’s head of sustainable investing, Mr Deese’s appointment has been applauded by many in the ESG world. The BlueGreen Alliance, a consortium of some of the US’s largest labour unions and environmental organisations, said there was “no better choice” for the job. And Republican Hank Paulson, the former Treasury secretary and head of Goldman Sachs, sang his praises, saying: “His energy and skills will be invaluable in dealing with the enormous economic challenges posed by the Covid crisis and climate change.”

Many in the climate activist community are not happy. Last week, when it was reported that Mr Deese was being considered for the role, progressive organisations including the Rainforest Action Network, Greenpeace USA and the Sunrise Movement staged an impromptu protest outside BlackRock’s headquarters. They say Mr Deese’s tenure at BlackRock should disqualify him from joining the Biden administration, because they believe the firm has not done enough to back up its rhetoric on climate change.

However, Mr Deese did win a vote of support from Bill McKibben, co-founder of 350.org. Mr McKibben has a long personal history with Mr Deese as he outlined in a thread on Twitter. Some of the criticism he has seen from climate activists has not been “remotely correct”, Mr McKibben wrote. “I know he cares a lot, and works hard on the issue.” (Billy Nauman)

Billionaires’ bet

In recent years Iconiq, the secretive family office that manages the gazillion-dollar wealth of many of the most successful Silicon Valley stars (think Mark Zuckerberg, Sheryl Sandberg, Jack Dorsey, Reid Hoffman, to name but a few) has tried to stay under the radar.

But this week it briefly poked its nose above the parapet to announce that it has chosen finalists for a $12m competition that its clients are funding to create innovative refugee support programmes. The key backer for this is Chris Larsen, founder of Ripple, and his wife Lyna Lam, herself a former refugee following the Vietnam war and Cambodian genocide.

Of course $12m is not even chump change for Iconiq (or Larsen) — and this is just one of numerous philanthropic ventures tumbling out of Silicon Valley right now. However, there are two reasons why this move is an interesting sign of the times. One is that it shows the degree to which family offices of all stripes face demands from their clients to demonstrate commitment to humanitarian causes.

Second, the refugee competition is just the tip of the iceberg of some intense, furtive brainstorming under way inside Iconiq’s network around how to leverage its powerful stable of entrepreneurs — and “entrepreneurial capital” — to scale up philanthropy and affect investment in some innovative ways.

The fruits of this have yet to be seen. But, if nothing else, it should remind us all that the ESG wave is not just sparking a shift in behaviour in the public markets — or the highly visible ETF space — but the deeply secretive private family offices too. (Gillian Tett)

Chart of the day

Proxy votes on 2020 key climate resolutions, matched 2019 resolutions

Morningstar this week published a report on the support for climate change shareholder proposals during 2020. BlackRock and Vanguard supported 12 and 15 per cent of climate change resolutions respectively, Morningstar said. But there was a significant range in funds’ willingness to back climate change proposals. Smaller fund firms with a history of supporting climate initiatives were more likely to increase their willingness to vote in favour of these resolutions this year.

Grit in the oyster

After announcing its “Cocoa for Good” sustainability programme in 2018, US chocolate maker Hershey’s has come under fire (along with other confectionery companies) for allegedly dodging a levy to help impoverished small farmers in Ghana and Ivory Coast.

Hershey’s, which is reported to have bought a large quantity of cocoa from an exchange that allowed it to avoid a $400 per tonne living wage surcharge, was also banned from operating chocolate sustainability programmes in the two countries, our FT colleagues wrote this week.

Hershey’s said the “misleading” statement from the two countries was “unfortunate” and they had jeopardised critical programmes that helped farmers. The confectioner said it was participating in the levy for the current crop year and would continue to do so.

Seeking your input

As trailed this week, the Moral Money Forum is launching a series of in-depth reports, and we’re keen to inform them with your insights. Our first report will ask how investors and the companies they invest in can encourage long-term behaviour in a world of short-term pressures. Please share your thoughts, case studies and data with us here.

In honour of the fifth anniversary of the Paris climate agreement, a team of filmmakers created a documentary titled The Decade of Action that looks at how companies are reinventing themselves to make their business, and our world, sustainable. On December 10 at 11am CET the film will premiere followed by a panel discussion moderated by Gillian Tett. Register for the live event and film release here.

Further reading

  • Biden’s climate agenda goes global (FT)

  • For female economists, Janet Yellen’s Treasury secretary nomination marks another inspiring first (WashPost)

  • BlackRock’s Aladdin to Provide Security-Level Climate Risk Tool (FundFire)

  • The Future of ESG Is . . . Accounting? (HBR)

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