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Green Finance Briefing: SEC cracking down on ESG, and the HSBC mishap

  • The SEC wants to start regulating ESG funds, requiring them to disclose additional information regarding the greenhouse gas emissions associated with their investments.
  • Elsewhere, we look at the commitment gap between banks' current pledges and others' net zero strategies... also highlighted by the recent provocative speech by HSBC's head of responsible investment.
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Green Finance Briefing: SEC cracking down on ESG, and the HSBC mishap

SEC steps in to regulate ESG

US regulators are starting to hone in on greenwashing, proposing a new set of disclosure requirements on ESG funds. And truth be told, there’s a lot of cleaning up to do.

ESG funds would be required to disclose additional information regarding the greenhouse gas emissions associated with their investments, such as the carbon footprint and the weighted average carbon intensity of their portfolio, according to the SEC

This comes on the backdrop of mounting concerns over a lack of consistent standards for “sustainable” investments, with all kinds of financial instruments ranging from ETFs to derivatives being awarded the ESG stamp without much clarity behind the scenes. 

The lack of disclosure requirements and a common framework tailored to ESG investing makes it hard to understand which investments or investment policies are associated with a particular ESG strategy, the commission noted. 

“In the absence of informative disclosures, a fund’s or adviser’s disclosure could exaggerate its actual consideration of ESG factors,” the SEC said.

It’s true – ESG is a space where there are little rules, and the ones that exist are made up by the players themselves. 

Just look at ratings agency S&P Global, which just decided to boot Tesla from its S&P 500 ESG list, while leaving companies like Exxon and Coca-Cola in the index. The S&P 500 ESG index actually includes virtually everyone in the S&P 500, with few exceptions. 

The worst of the worst can’t make it on the list, like tobacco and weapons, for example, but if you have some social initiatives and stack up better than most competitors, you get the ESG stamp.

This is how McDonald’s, or JPMorgan Chase, or PepsiCo get to be on market-leading ESG indices. But not Tesla! If you’re Tesla, the company we should all thank for the EV revolution, maybe try again at some other index – maybe one with methodologies that actually make sense. 

This is obviously fueling Musk’s anti-ESG crusade, calling it a “scam”. And, to be honest, he’s kind of right. 

“ESG is good, but ESG as practiced is often fake. The theory here is that people who call themselves investment managers do not really care about ESG factors, and ESG is a marketing term rather than a real commitment,” wrote Matt Levine

Let’s recall Bloomberg’s investigation last year into MSCI, another ESG ratings company, which found that it didn’t even measure the environmental impact of a corporation.

“The most striking feature of the system is how rarely a company’s record on climate change seems to get in the way of its climb up the ESG ladder—or even to factor at all,” it said. 

Of course not. In my opinion, it’s not about the climate or society – this ESG ratings market was created to be a capitalist greenwashing tool, helpful against future regulation. 

MSCI CEO Henry Fernandez told Bloomberg his firm rankings are “100% a defense of the free-enterprise, capitalistic system and have nothing to do with, you know, socialism or zealousness or any of that.”

But this also means there is ample room for the SEC to intervene. Just this week, BNY Mellon was charged by the agency for misstating ESG considerations – certain investments didn’t have an ESG quality review score as the bank had claimed. The bank agreed to pay $1.5 million to settle the claims. 

The SEC’s proposal also aimed to regulate the naming of these so-called ESG funds – a fund would need at least 80% of its assets to be aligned with an ESG investment policy in order to use ESG in the fund’s name.

However, there needs to be additional clarity on how to define a lot of the moving parts of this ESG infrastructure. For example, the SEC references “ESG factors” in determining investment funds’ selection process, but hasn’t really defined what those factors are. 

In the future, companies will be required to disclose their greenhouse gas emissions, including those from their suppliers and customers, as well as their vulnerability to climate risks like extreme weather events, but it’s important to have clear definitions all along these steps. 

The ESG market might be a mess at the moment, but it’ll get cleaned up in time. Regulation is meant to comb out the bad actors, and this will be an important step in the ESG market’s maturity. 

Chart of the week

New research shows that the more cash and investments a company has, the larger its unaddressed financial footprint will be. And as companies in the US are accruing some of the deepest cash reserves in history, this could have major implications over where they choose to direct them. 

Take Apple – in 2021, the emissions Apple’s $191 billion in cash and investments generated were 14.9 million metric tons — 64% of Apple’s current reported emissions, researchers found. This means that the emissions generated by Apple’s cash were nearly three times larger than the total emissions generated by the use of every Apple product in the world in 2021.

But, at the very least, most of these companies made climate pledges – highlighting the commitment gap that exists between the United States’ most cash-rich companies and its largest banks. Just take a quick look at the state of their net zero accomplishments and commitments.

Quote of the week 

I know this was all over the news, but I couldn’t not mention it, so here it is. 

HSBC Asset Management’s Global Head of Responsible Investment Stuart Kirk managed to send shockwaves throughout the green finance industry after delivering his presentation titled, “Why Investors Need Not Worry About Climate Risk” at the Financial Times Moral Money Europe Summit.

Kirk said “climate risk is not a financial risk that we need to worry about,” and that in his “25 years in the financial industry, there’s always some nut job telling me about the end of the world.” He also noted that HSBC’s average loan length is 6 years, and therefore “what happens to the planet in year 7 is actually irrelevant to our loan book.”

“Who cares if Miami is six meters underwater in 100 years? Amsterdam has been six meters underwater for ages, and that’s a really nice place. We will cope with it,” Kirk said.

Simply embarrassing. I mean, sure, not all bankers are versed in the intricacies of climate change and how it affects finance. But the head of responsible investment? Isn’t this part of the job description? How did he end up in this role? 

HSBC was quick to respond – CEO Noel Quinn said he doesn’t agree at all with the remarks. According to the FT, Kirk has been suspended. And if I were a big bank right now, I’d make sure to double-check who I’m assigning such positions…

What we’re writing

How banking CEOs are focusing on sustainability, in 4 charts

Sustainability has started to enter the corporate agenda, rising towards the top of the priority list for an increasing proportion of banking and finance chief executives.

US banks continue fossil fuel financing

Proposals to stop fossil fuel financing at major US banks were rejected by the majority of shareholders, but the initiatives hope to gain more ground next year.

CarbonPay launches payment card to help businesses automatically offset their carbon footprint

Sustainability-focused fintech CarbonPay has launched its first product, a prepaid corporate card offering, aiming to create products that enable organizations of all sizes to reach their climate goals.

The ESG mirage: More about the hype than values

ESG is growing increasingly popular, but the unregulated world of sustainable investments is not always what it's cracked up to be.

What we’re reading 

The SEC goes after greenwashing (Bloomberg)

Emmanuel Faber on emerging markets, double materiality and the link with financial reporting (ESG Specialist)

Microsoft, Alphabet, BCG announce major carbon removal commitments (ESG Today)

‘Alarming’ climate records in 2021 prompt UN call to triple renewable energy investment to $4 trillion (Forbes)

Cash-rich companies urged to push banks to act on climate (WSJ)

California joins bid to save nuclear power (Bloomberg)

Ohio-based asset manager with powerful backers wants to ignore ESG considerations (WSJ)

BoE climate stress test: climate risk won’t sink banks, but inaction will cost them billions (ESG Today)

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