Good morning from New York. If you are anything like me, it has been hard to tear your eyes away from the “meme stonks” story all week.
Markets editor Katie Martin had a really smart take on the issue. She makes an especially good point here:
“In theory this should be the sort of thing that the wholesale financial industry applauds. Many a World Economic Forum session in Davos has agonised over how to enhance financial inclusion, to help those less fortunate through the gifts of the financial markets.”
As Katie notes, it would be misguided to laugh this story off or assume it is a weird anomaly. Nor should we assume this has nothing to do with ESG.
The saga is not (just) about GameStop, equity bubbles or short squeezes; the real story is that this should be a wake-up call for elites about people who are really angry about inequality (and rightfully so).
Think about it. For huge portions of the American population, especially young people with mountains of student debt and dismal career prospects, the wounds of 2008 never healed. The unwillingness of their elders to take climate change seriously has not helped matters, and few trust Wall Street (no matter what financiers say about ESG). Go watch the Joker video linked in Katie’s column to see what I mean.
So the best way to make sense of Redditors pumping GameStop is to recall the online supporters who backed Donald Trump “for the lulz” in the early days of his campaign. People left behind by capitalism are lashing out because they feel they have been screwed over by a rigged system.
As they see it: If this ends up being their big break and they get rich, great. If they stick it to some of the elites (and maybe even burn down the whole system in the process), even better. The fact that trading platforms such as Robinhood cut them off for doing what they see Wall Street traders do all the time, while big investors still reap the gains, will only add fuel to this fire.
We won’t pretend to know how this ends. But the issue for anyone thinking about “S” in ESG is this: how do we address the undercurrent of rage on display? It isn’t going away. (Billy Nauman)
One on one with the IMF’s Kristalina Georgieva
The mighty IMF is not renowned for brainstorming (much) with company auditors; it mostly deals with economists. But as the battle to find innovative ways to fight climate change heats up — and puts pressure on company auditors — these worlds are colliding in some unusual ways. Kristalina Georgieva, IMF managing director, sat down with Moral Money to explain how and why, pitching some of the questions that MM readers submitted in advance (thank you).
Moral Money: What exactly is the IMF doing about the issue of how to measure climate change? Are you getting involved with the audit profession?
Georgieva: The most important role the IMF plays, as an institution, is making sure that data is accurate and measurements are compatible [around the world]. We believe the best way to advance green accounting is to make it an integral part of mainstream measurement. So we are working on taxonomies, standardised reporting, and integrating this reporting into our financial sector assessments process (FSAP, the IMF’s regular review of financial stability). We are also building a new data initiative, so that you can overlay growth and climate emissions and then see how policies are impacted.
We think it is hugely important to integrate climate-related risks in our FSAP and we will provide these systems to auditing authorities among our members, so that rather than creating a parallel universe of auditing, this is actually integrated into the work of auditing institutions. We will be moving our engagement with auditing institutions as we build up that. There has been a lot of progress in creating compatible [global] standards, but they are still all over the place — we don’t yet have a global system of [green] accounts that is entirely credible. This is why a mainstream institution like the IMF is so important.
MM: Will you work with audit companies to do that?
Yes. We already have interactions with the auditing community because they are an important foundation in securing financial stability, macroeconomic stability, and [expanding] engagements is a logical step and a very significant step — and one we are [now] undertaking. We want to put this work on a very sound foundation of data standards, disclosure, compatibility and then verification.
MM: Will you be pushing for carbon price to be embedded in national accounts and company audits? And if so, what kind of carbon price will you be looking at?
Yes. When [our last] report was written it basically said at that time [in 2018] that the carbon price is at $2 a tonne, but it has to get to $75 if we are to have a chance to meet our Paris agreement aspirations. We are now expanding this work to 150 countries, so going from a global overview down to country level. Fortunately, we are seeing a pick-up on the issue of carbon price. The World Bank has this database that shows that we now have over 22 per cent of CO2 emissions being covered [with carbon] prices. And if you’re an optimist, it’s a good thing because it has gone up quite significantly over a short period of time. But we still have another 78 per cent [to go] and without carbon pricing we cannot reach zero-carbon emissions by 2050. It just cannot happen. We need this signal. We intend to update [this research] next month.
There is also the issue of implicit harmful energy subsidies. Our team did an assessment [of those subsidies] and for 2017 it is a staggering number of $5.2tn, of which only $300bn is the direct subsidy. Buying fuel from source and selling it cheaper is [just] $300bn! I was shocked when I saw this. Shocked. So if we want to eliminate harmful subsidies, through carbon price, we need to see [and address] the implicit problem.
MM: When do you expect financial markets to start properly pricing in the issues of transition?
MM: It is clearly not priced in yet. The fact that we are only pricing for 22 per cent shows that. But we cannot [have] the massive shock of a jump in the global price of carbon suddenly, because then we might create a very significant problem for the economy that suppresses growth to a point that [undermines] the chance of transition. Providing forward guidance on carbon price over the next decade is critically important, and by the end of this decade, we should have a carbon price coming to the level [we need]. Many climate economists say we don’t have this time, we have to move much faster. But we believe that we should never think of carbon prices as one single instrument, but instead think of the carbon price combined with green investment [as the policy]. We need just transition as a win-win-win for people and jobs and the planet.
MM: Do you support what the Biden administration is doing?
We support it wholeheartedly. It is very impressive that among the very first actions of the new administration was to return to the Paris agreement. We are seeing a very clear policy direction, in terms of greening the recovery, shifting gear towards low carbon, and the return of the concept of the forward guidance on the carbon price. That is very welcome, [particularly] with Janet Yellen [the new Treasury secretary] having co-authored a paper on carbon prices.
MM: Should SEC join forces with the European Commission on a green taxonomy?
It would be highly desirable. The commission’s taxonomy is very sophisticated [and] it may be difficult for less sophisticated policy to catch up, so we have to think about ways in which we build bridges. We aim for a high standard, but we recognise that there are different paths towards this high standard in different countries. The commission may be a little too green for some. But I personally believe it is great to have a high standard — for some countries this is the direction to travel, but not the end destination.
Boards put more money where their CEO’s mouth is
We told you in 2019 that a Conference Board study had found that just 71 US companies in the Russell 3000 tied any part of their executives’ 2019 pay to whether they hit various environmental, social or governance targets.
That raised obvious questions about whether business leaders were as focused on ESG as most claim to be, but an update of the study suggests that boards are increasingly factoring ESG into compensation.
When the Conference Board and its data-mining partner ESGAUGE looked at the 2020 figures, they found 604 companies using such metrics. Some of that jump can be attributed to improved disclosure, ESGAUGE’s Paul Hodgson said, but he estimated that the underlying increase was still about 675 per cent.
There is still huge variation in what counts as an ESG metric, with targets cropping up for everything from disclosing political donations to reducing workforce injury rates. In most cases, too, just a fraction of executives’ total pay is at risk if they miss those goals.
But there is reason to expect more companies to make ESG part of their bonus schemes: governance software group Diligent Institute this week reported that 40 per cent of directors said their board was either already tying pay to diversity, equity and inclusion targets or planned to do so.
Just 25 per cent said the same about environmental metrics, though. That’s worth remembering as more CEOs tout their net-zero plans. (Andrew Edgecliffe-Johnson)
Why gender diversity is good for corporate climate accountability
Companies are increasingly being pushed by regulators and asset managers to disclose more information about their global warming contributions. Now, new research suggests that companies dominated by old, white men have more catching up to do than their peers.
Arabesque S-Ray, a sustainable research and financial metrics firm, found that companies with higher gender parity were substantially more likely to disclose greenhouse gas emissions data. Of the world’s top 2,800 global public corporations, 22 per cent of those in the least-diverse category did not release their emissions data to the public, compared with just 15 per cent for the most diverse firms.
The research provides further evidence supporting the need for gender diversity at companies.
With Nasdaq’s latest diversity proposal, which calls on companies to have at least two diverse board members, up for approval by the US Securities and Exchange Commission, evidence like this will certainly help its chances of passing. (Kristen Talman)
How did a fishing trip in Alaska spark BlackRock’s newfound love of ESG? Gillian Tett goes deep on Larry Fink’s climate epiphany in her newest piece for FT Weekend.
UK pension schemes face new climate risk reporting rules (FT)
Carney task force confronts concerns over carbon credits market (FT)
An Iron Man goes Green: Robert Downey Jr. launches ESG-focused venture capital funds (Fortune)
Trump Rule Starts to Strip ESG From Plans (Ignites)
ESG Impact Is Hard to Measure — But It’s Not Impossible (HBR)
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