ESG archives - Transcendent

ESG RATINGS: WHAT THEY MEASURE AND THE CHALLENGE OF STANDARDISATION

9 March 202321 April 2022 by Ignacio Fernández Morales

ESG investing, which incorporates environmental, social and governance criteria into quantitative analysis, has been one of the most successful international trends in recent years. According to a report by the Global Sustainable Investment Alliance. In the early 2020s, a total of 35.3 trillion assets under management or, in other words, the same thing, more than one third of total investment globally, corresponded to sustainable investment.

As ESG investment grows, so do the mantras about its transformative potential (which cannot seem to be refuted) and the number of critics who do not seem to buy into its seemingly well-intentioned purpose. Thus, the ESG investment industry still has some controversy behind it, and more than a few are sceptical about its true capacity to have a positive impact on the society in which we live.

So, do youwhat is the right way to integrate What are the considerations of environmental protection or employee welfare in investment strategies? And how is it possible to differentiate between companies that are more responsible in their operations and those that are not?

Translating sustainability into financial terms

Just as credit risk ratings assess the creditworthiness and future outlook of companies from a purely financial point of view, ESG ratings are intended to analyse its performance against environmental, social and governance criteria.

However, in the face of the controversies in which the sector is frequently involved, such as the accusations of greenwashing or the lack of consideration of certain negative externalities of the companies assessed, it is necessary to define in depth the objective and scope of these ratings.

According to the definition of MSCI, one of the world's leading international rating agencies, ESG ratings measure the a company's long-term resilience to sectoral risks in the environmental, social and governance fields.

Following the methodology of Sustainalytics, another leading agency in the sector, these assessments are based on the premise that the world is in transition towards an increasingly sustainable economy, and that , companies with more effective ESG risk management will have greater long-term value..

Thus, the main ESG ratings do not focus on the impact that a company has on its environment, but rather evaluate the risk in financial terms derived from the management of the most relevant social, environmental and governance aspects (or materials) for each company.

Causes and controversies associated with the lack of correlation

With the proliferation of ESG ratings, the lack of standardisation around a common assessment framework has led to growing scepticism about the validity and practical application of ESG ratings. In fact, according to studies by the prestigious MIT Sloan School of Business, the correlation coefficient between the ESG ratings of 6 of the leading global rating agencies is 0.61 (on a scale of -1 to 1); while the correlation between the credit ratings of agencies such as Moody's and Standard & Poor's rises to 0.99.

Following the results of MIT Sloan, this divergence is mainly due to two issues:

Firstly, the use of different metrics to assess the same aspect environmental, social or governance issues is the main cause of divergence between different assessments. Thus, the same attribute (e.g. gender diversity) can be assessed by quantitative metrics (such as the percentage of women in the workforce, in management positions or in relation to total new hires), by qualitative metrics (such as policies and initiatives in place on equality) or by a combination of both.
On the other hand, the scope of evaluations also plays an important role in explaining the lack of correlation. This is mainly because different methodologies may entail the analysis of different ESG aspects, with the result that certain issues (e.g. participation in ESG activities) are not correlated. lobby) may affect one particular qualification and not others.

To a much lesser extent, these mismatches are due to differences in the assessment of the materiality of ESG criteria within the same company or sector; in other words, different rating agencies do not follow the same criteria regarding the relevance of a given ESG aspect in the overall assessment.

It is therefore essential for both investors and the companies analysed to be aware of the methodologies of the various ESG ratings and indices providers and not to make decisions based on a single source of information. In this way, the existing divergence will not be a barrier to the management of their investments and transparency vis-à-vis their external stakeholders.

Is there scepticism among large asset managers?

The analysis of different ESG rating agencies can lead to useful conclusions as part of a responsible investment strategy. However, the divergence between the leading evaluators also leads to a loss of credibility for certain asset managers.

Recently, the head of risk monitoring at Norges Bank, the world's largest sovereign wealth fund, said in an interview that Bloomberg interview that its analysis incorporated ESG ratings "very rarely", if at all. Instead, the Norwegian fund has developed a sustainable investment methodology, disaggregating the information provided by ESG ratings and then treating it on the basis of its own criteria.

This perspective, which is becoming increasingly widespread among asset managers, is being followed in Spain by institutions such as Santander AM o BBVA AM. The European Commission and the European Commission have their own tools to evaluate the information provided by external suppliers and incorporate it into their investments.

Potential scepticism among investors therefore appears to be a further consequence of the controversies arising from the lack of standardisation.

It is not so much that the divergences between the ESG scores awarded by different rating agencies make their analyses less relevant, but rather that they put on the table the need to know the details of the different methodologies employed in order to make the most of the information analysed.

The road to standardisation and other future opportunities

Against the backdrop of the current complex landscape, there is a need to two main tools for the consolidation of ESG ratings as a foundation for responsible investment: advancing regulation and supporting ongoing initiatives around the standardisation of ESG assessments.

Firstly, the regulation on reporting of non-financial information and classification of investment products will serve to reduce the controversies associated with ESG ratings. In this regard, at European level there are high hopes for the consolidation of the environmental and social taxonomies and the EU Sustainable Finance Disclosure Regulation (SFDR) as a framework for assessing the non-financial impact of investments.

On the other hand, as far as ESG ratings are concerned, the most relevant initiative at present is the definition of sustainability reporting standards at international level, which is being carried out by the International Sustainability Standards Board (International Sustainability Standards Board or ISSB(see also the report of the European Commission's European Commission).

Created in the framework of COP 26 and led by the former CEO of Danone, Emmanuel Faber, the ISSB reports directly to the International Financial Reporting Standards Foundation (IFRS).

Responding to the demands of industry stakeholders, it is hoped that the ISSB's standard setting will put an end once and for all to the lack of transparency and bring clarity to ESG investing.

In addition, the Foundation is currently consolidating two of the sustainability reporting standards The company has signed a partnership agreement by mid-March 2022 with the Sustainability Accounting Standards Board (SASB) and the Carbon Disclosure Standards Board (CDSB), and has signed a collaboration agreement by mid-March 2022 with the Global Reporting Initiative (GRI). Therefore, the ISSB brings together the financial perspective of ESG risks with the vision of the impact that companies have on the environment and society.

Thus, it is expected that the current complex landscape of ESG ratings and indices, which currently requires an in-depth analysis of methodologies and providers, will begin to take steps towards homogenisation in the medium term. In this way, companies and asset managers will be able to focus their efforts and strategies on what really matters: building a fair and responsible society for all.

The 60% for companies does not specify environmental objectives.

8 September 202315 March 2022 by Cristina García del Valle

Despite progress in sustainability and the fact that all companies demonstrate their commitment to people and the planet, only 40% of the companies surveyed report concrete and measurable environmental objectives. This percentage drops to 13% for social objectives.

This is one of the main conclusions of the study "Managing ESG issues in listed companies".The report, which we have carried out at Transcendent, analyses a sample of 85 companies listed on the continuous market, including all the companies in the Ibex 35.

While all companies make their commitments clear at a high level, few yet communicate their ESG objectives.

In the case of companies listed on the Ibex 35, 60% communicate specific, measurable and quantifiable environmental objectives. However, this figure drops to 26% for the rest of the listed companies.

As Ana Ruiz, partner at Transcendent, explains, in this article of El Economista "We are detecting an unprecedented acceleration, but the speed at which companies are advancing is not the same, and the difference between Ibex 35 companies and the rest of the listed companies is very palpable"..

The study shows that companies are putting more focus on environmental aspects compared to social aspects. Only 29% of the Ibex 35 companies communicate concrete, measurable and quantifiable social objectives, which, in most cases, are linked to diversity and inclusion.

In the rest of the listed companies this figure decreases to 2%. "Today, the environmental factor is much more integrated in companies than the social aspects".says Ana Ruiz, "and highlights the difficulty companies have in defining and measuring the social contribution they make"..

Ibex ESG performance

The report shows that there is a significant difference between Ibex companies and other listed companies with respect to the use of incentives linked to ESG performance, according to the report's findings. The Economist.

More than half of the Ibex 35 companies (54%) have a variable remuneration system linked to ESG performance. Most of the remuneration is linked to the achievement of sustainability objectives, especially environmental ones, such as the reduction of Scope 1 and 2 CO2 emissions or the reduction of water consumption.

The rest of the listed companies show a still incipient incorporation of this type of incentives, with only 18% declaring to have a bonus linked to ESG performance.

"Senior management remuneration packages linked to social and environmental objectives will accelerate their implementation as part of remuneration policy, both in the short and long term, because there is a trend among all stakeholders (consumers, companies, employees, investors, regulators and public institutions) to measure and value the impact of companies".explains Ángel Pérez Agenjo, managing partner of Transcendent.

Sustainability Commissions

In barely two years, the number of companies that have incorporated governance bodies dedicated to sustainability management has increased considerably, especially in the case of Ibex 35 companies.

The great progress made by Ibex 35 companies in terms of sustainability governance has not yet materialised in the rest of the companies listed on the continuous market.

The average across all the companies in the sample shows that 53% of them have a governance body responsible for dealing with sustainability issues either exclusively or in conjunction with other issues and reporting to the Board of Directors.

According to the report, in 14% of cases this function is integrated into other existing committees or bodies, generally the Appointments and Remuneration Committee.

68% of Ibex 35 companies have a Sustainability Committee (either specific or shared with other functions), which reports directly to the Board of Directors, while in 2018 this figure was three times lower (20%).

"This evolution over the last two years is largely due to the growing demand from investors and the increase in regulation in these areas, including the reform of the CNMV's Corporate Governance Code".explains Ana Ruiz.

If you want to know more you can read this post.

Setting social and environmental targets, an unfinished business

8 September 202310 March 2022 by Ana Ruiz

The report "Managing ESG issues in listed companies". The Transcendent study, which analyses 85 companies listed on the continuous market, including all IBEX35 companies, found that only 13% has measurable social commitments.

The urgency to incorporate Environmental, Social and Governance (ESG) issues is setting the agenda of the main corporate governance bodies and has become part of their strategic priorities.

The business transformation towards sustainability implies a change of mentality, a real challenge from an organisational and operational point of view. Its transversality requires aligning all areas of the company.

To find out about the degree of progress in this transformation in leading Spanish companiesIn addition, we have decided to carry out a report, which focuses mainly on three aspects:

Developments in the structure of sustainability governance.
How the commitment to environmental and social issues translates into concrete and measurable objectives.
Linking the achievement of these sustainability objectives with the remuneration of managers.

Following our analysis, we have found that the speed at which companies are advancing is not the same, and the difference between IBEX 35 companies and the rest of the listed companies is very palpable.

We have also identified that companies have a strong focus on environmental factors, while social aspects are much less present and, when they are, they focus mainly on gender issues and the pay gap.

Data from the report *"Managing ESG issues in listed companies",* Transcendent

Materiality as a focal point for prioritisation

Beyond its commitment to the environment and society in general, a key element that influences the sustainability strategy and should drive the strategy when setting targets is materiality. These sustainability priorities will vary significantly depending on the sector, the company's strategy and also the expectations of its stakeholders.

In defining both strategy and objectives, companies can decide to reduce its impact negative and/or generate benefits for their stakeholders. They can also plan their contribution to solving existing social and environmental problems. Those objectives aimed at benefiting stakeholders or contributing to solutions are the ones that will have the greatest impact and competitive advantage for the company and, therefore, are where the company should focus.

Although, due to regulation and tacticality, companies are now focusing on setting environmental targets, it should not be forgotten that the following should not be forgotten social aspects which will undoubtedly involve the next big milestone in sustainability In some sectors, it has become a truly differentiating factor.

The great difficulty in setting social objectives lies in their measurement, which must be based on international standards, many of them still under development, such as the EU's Social Taxonomy.

Dashboards for sound decision making

For proper decision-making, directors and executive directors should be able to rely on tools that allow them to monitor and "operationalise" sustainability. within the company, providing a balance between strategic and tactical vision. A key tool is a dashboard that defines the objectives set by the company's management and makes it possible to determine the degree to which these objectives are being achieved.

Due to its nature transversal and to its marked strategic nature, sustainability requires a governance structure that supports decision-making and is accountable for its management. This is why it is the establishment of multidisciplinary governing bodies is necessary.This implies, at a strategic level, ensuring the company's ESG purpose and performance and, at a more operational level, facilitating coordination to achieve common objectives.

However, the level of reporting, the functions and the dedication (exclusive or not) of such governance bodies will largely depend on the size of the company, the sector in which it operates and what its relevant sustainability issues are.

ESG Remuneration and sustainability integration in the company

Another key element is the integrating sustainability into the company's culture. To this end, it will be important to equip both the board and the other employees with the knowledge and skills needed to capacities necessary for its implementation, which will entail the organisation of activities of training y internal communication.

Last but not least, there is the ESG performance-related remuneration that is a strategic lever which encourages the involvement of employees in decision-making and their active participation in the achievement of common goals.

According to the report, in IBEX companies, 54% of companies already have variable remuneration linked to ESG aspects. However, of the non-IBEX companies analysed, only 181 PT3T have incorporated specific remuneration packages linked to ESG performance.

ESG management in listed companies — Data from the report *"Managing ESG issues in listed companies",* Transcendent

Top management remuneration packages linked to social and environmental objectives will accelerate their implementation as part of companies' remuneration policy, both in the short and long term because there is a trend among all stakeholders (consumers, companies, employees, investors, regulators and public institutions) to measure and value the impact of companies.

Main findings of the report

In terms of sustainability, although all companies demonstrate their commitment to people and the planet, only 40% of the analysed companies communicate concrete and measurable environmental objectives.. This percentage drops to 13% for social objectives.
In terms of ESG performance-related pay, there has been notable progress in the companies in the IBEX y 54% of companies already have variable remuneration linked to ESG aspects.
The 68% of IBEX 35 companies have a Sustainability Committee (either specific or shared with other functions), which reports directly to the Board of Directors, while in 2018 this figure was three times lower (20%). This evolution over the last 2 years is largely due to the growing demand from investors and increased regulation in these areas, including the reform of the CNMV's Corporate Governance Code.

Ultimately, companies that do not incorporate the sustainability at the heart of its activity are going to compete at a disadvantage with those that do. Declarations of intent and commitments are of little use if there are no strategic plans with clear objectives and monitoring indicators to back them up.

The new business paradigm requires courageous and bold leadership that knows how to manage this challenge as an immense opportunity, challenging existing models and evolving their businesses from sustainability to impact generation.

Business purpose drives value generation

17 October 20222 February 2022 by Cristina García del Valle

The purpose is a strategic lever The value creation potential and profitability is well established. Companies with a defined and integrated purpose, whose approach is to focus on improving their financial performance and the common good, achieve a better performancea highest market valuation and create more shareholder value compared to the rest.

This need to incorporate ESG (social, environmental and governance) aspects is a trend that has no way back and will force companies to transform themselves by making impact a management tool.

"Purpose increasingly demands the professionalisation of business leaders".

A new committed leadership

The activation of purpose and the management of social, environmental and governance impacts is becoming an element that demands a further professionalisation to business leaders.

To address this issue, José Antonio LabarraCEO of ROADISa leading company in the development, operation and management of transport infrastructure assets, recently met with Ángel Pérez AgenjoTranscendent's managing partner, at a meeting organised by APD on the Business Purpose.

Purpose as a management tool and a lever for value creation

The five benefits of purpose in business

There are a number of competitive advantages that differentiate a company that works and activates the Purpose from others. These include:

Increases profitability and market value. Purposeful companies improve their market value faster than others. However, purpose has a positive impact that goes far beyond a company's bottom line as it generates many other benefits as well.
Improves reputation and legitimacy to operate: By publicly stating its purpose, a company demonstrates its commitment and the benefits it brings to its stakeholders and society as a whole, and this clearly enhances its reputation. Companies that define and activate their purpose therefore significantly reduce the risk of corporate scandal eroding their licence to operate.
It allows you to manage and retain talent: Business purpose is a differentiating element that can be beneficial for all three aspects since, from a Human Resources management point of view, it constitutes a real strategy for the management of human resources. employer branding.
Customer loyalty: It emphasises the unique and distinctive contribution that the company makes to the big issues we face. For that reason, it has the potential to generate stronger relationships with its customers, who tend to be more attracted to companies that convey authenticity and that they consider to be worthy of their trust. when a company sets and activates its Purpose it arouses interest and attraction from its customers.
Investor interest is increasing: Investors are increasingly integrating ESG criteria into their decisions and are interested in the social and environmental performance of companies.

In the case of ROADIS, its Purpose is in the value creation in the communities in which it operates through profitable investments in major infrastructure projects. To do this, it relies on 4 main attributes: ethics, prosperity, innovation and security".

The transformation process towards sustainability

In 2019, the company headed by Labarra decided to take a step forward and adopt the sustainability as part of its business model and, above all, as a lever for value creation in order to become an active part of the transition towards a more responsible and sustainable economic model.

According to its CEO "we defined a Cross-cutting Master Sustainability Plan to all areas of the company by offering a framework for action that would allow us to have a solid position in the business context, as well as to become an active part of the transition to a more responsible and sustainable economic model".

For his part, Pérez Agenjo emphasises that "the market rewards the purpose-driven companies and punishes those that do not. That is already part of the new business paradigm. And therefore, for the 43% of the companies sustainability policies and management of ESG parameters have become a urgent issue".

Measuring impact, a key tool to avoid the "Impactwashing

Pérez Agenjo assures that establish an impact measurement system In the company, setting indicators and putting them at the heart of corporate strategy is one of the first steps to combat the already well-known Impactwashing.

For the CEO of ROADIS quantifying and measuring impacts is essential to understand and analyse the impact generated on both society and the environment. Quantification is not easy, but it is necessary because what cannot be measured cannot be improved.

"Quantifying and measuring impacts is essential to understand and analyse the impact generated".

To this end, they have set up a system to measure the company's impact, and they have set indicators with the aim of putting them at the heart of corporate strategy.

"At ROADIS we have developed a methodology for measuring economic, social and environmental impact of our assets in order to identify the medium and long-term effects of our assets on users, employees, communities, the environment, suppliers, institutions and any other relevant stakeholders in the environments in which we operate. It is a valuable tool we use to identify and quantify impacts from a broader perspective. A methodology based on the best practices of the Impact Management Project (IMP)," Labarra concludes.

Impact investment consolidates in Spain with Spain NAB

28 June 202225 January 2022 by Cristina García del Valle

After two and a half years of work, SpainNAB, the Impact Investment Advisory Board, has been formed as an Association with the incorporation of 28 organisations and independents, including the sustainability and business impact consultancy Transcendent..

SpainNABThe Advisory Council for Impact Investment in Spain has been formed as an Association with the incorporation of 28 independent organisations and individuals to continue to drive the impact investment market in our country.

Among the organisations that have joined are Transcendentrepresented by Ana Ruizsaid the consultancy's partner. "We are very happy to become part of SpainNAB to build an ecosystem committed to impact investment in our country along with 28 other companies, organisations and leaders in the Impact Economy. At Transcendent we want to contribute to promoting and consolidating an economy that generates positive social and environmental impact", says Ana Ruiz.

These additions join a strategic project for the country that emerged in June 2019 with the accession of Spain to the Global Steering Group for Impact Investment (GSG). Thus, in the current context of recovery and transition towards a fairer, more sustainable and equitable economy,

SpainNAB is consolidating its position as the leading organisation in Spain for the promotion of impact investment, a necessary tool to achieve a capitalism in which positive and measurable social and environmental impact is integrated into all economic and financial decisions.

Important developments since 2019

SpainNAB was born as a 16-person advisory board in June 2019 with the accession of Spain to the GSG. This council is today constituted as the SpainNAB Association and incorporates 12 new individuals and organisations, bringing the total to 28.

The GSG is an initiative that emerged in 2013 in the framework of the British presidency of the G8. It is chaired by the father of impact investing, Sir Ronald Cohenis the main global platform to promote this type of investment, of which 34 countries and the European Union are already members.

The achievements of more than two years of work can be measured in figures. Spain's accession to the GSG was a catalyst for the growth of impact investment in our country, reaching a figure of 2,378 million euros of managed capital in 2020, which represents a growth of 26% compared to the previous year.

The market has not only grown in numbers, but also in the number and nature of actors. An ambitious Action Plan, networking and the generation of cutting-edge knowledge have been fundamental parts of SpainNAB's success to date.

A new era for impact investment

The formation of SpainNAB comes at a pivotal moment for impact investing. In the midst of an unprecedented climate and social crisis, the G7 once again tasked the GSG with coordinating a working group, the Impact Taskforce, to draw up a roadmap to accelerate the volume and effectiveness of private capital seeking to have a positive social and environmental impact.

SpainNAB has participated in the work of this group and has been recognised with the inclusion of two pioneer Spanish cases in the recommendations report of the G7.

"We must take advantage of the momentum The current situation is a great opportunity to take impact investment to the next level, hand in hand with the entire ecosystem and with a clear role for the public sector as a catalyst for the market, as has happened in European countries such as France, Portugal, Italy and Germany," explains Juan Bernal, president of SpainNAB.

The remaining challenges after the Climate Summit

30 November 202130 November 2021 by Francesca Mondello

Although more was expected from this climate summit, as Melissa Fleming, Under-Secretary-General for Communication for the United Nations, has said, "...the climate summit was a success.there is still hope".

The latest report of the Intergovernmental Panel on Climate Change (IPCC) states that, unless greenhouse gas emissions are reduced immediately, rapidly and on a large scale, limiting warming to 1.5°C above pre-industrial levels as set out in the Paris Agreement six years ago, will be an unattainable goal. That is what this summit sought to achieve, and despite the lukewarmness or total lack of commitment on the part of some states, progress has been made.

Agreements adopted at the Climate Summit

The Glasgow Climate Summit has brought with it some agreements that reflect a growing awareness of the urgent need to take a step forward to avoid environmental disaster.

These are some of the compromises that have been reached in the Climate Summit:

US-China bilateral agreement to help reduce CO2 and methane emissions and combat illegal deforestation.
More than 100 countries, including the US and the European Union, agree to reduce methane emissions by 30% by 2030. China has refused to go along because it says it has its own plan.
Agreement between more than 20 countries, including the United States, Canada, Spain and Italy, to end public funding and subsidies for fossil fuels before the end of 2022. China, Japan and South Korea have not signed.
110-country agreement to stop deforestation by 2030.
The International Sustainability Standards Boardwhich will enable companies to adopt harmonised and comprehensive environmental, social and governance reporting criteria.
Countries accounting for 90% of global GDP have committed to the carbon neutrality in 2050. China postpones the target to 2060 and India to 2070.
The Beyond Oil and Gas Partnership (BOGA), which proposes phasing out the production of both fuels, although it currently has only 12 members.

The issue of the price of emissions

However, this progress contrasts with the lack of concreteness on some key issues. This is particularly the case for so-called double counting in the carbon market.

Today there are around 60 different initiatives to put a price on CO2. The problem is that they only cover about 20% of the world's total emissions and their average price is too low (about $3 per tonne).

The International Monetary Fund recently estimated that the price should be around 75 dollars per tonne, that in the regulated European market it is around 60 euros and that the US government estimated the social cost of carbon at around 50 dollars per tonne.

Pricing of CO2 emissions is an efficient way forward in reducing emissions because it discourages CO2 intensive activities and encourages companies to move towards decarbonisation.

Some companies - just over 20% of the world's largest - have set internal carbon prices, allowing them to take carbon into account in assessing the suitability of their projects and the impact of emissions on their accounts. The problem is that companies generally also set an excessively low price per tonne, well behind their foreseeable evolution. This means that the information provided by the internal price is not sufficiently clear.

Although in the Conference of the Parties 26 (COP) has not been much talked about, a global price on carbon will eventually be imposed. In the meantime, Spanish companies should start asking themselves what would happen to their accounts and the profitability of their projects if they had to pay for carbon. Sooner rather than later they will end up doing so.

Along these lines, the Secretary General of the United Nations, António Guterres, has announced that beyond the mechanisms established in the Paris Agreement, he will create a Group of Experts to propose clear standards for measuring and analysing net zero commitments for any organisation that is not a State.

China takes a step forward

One of the most important events to come out of this climate summit was undoubtedly the signing of the climate peace agreement between China and the United States. The heads of the delegations of both nations presented a joint declaration in which they commit themselves to work to accelerate during this decade the fight against climate change.

Among the most important points of the pact reached by both powers is the commitment of the Asian country to present a comprehensive plan for the reduction of greenhouse gas emissions within the next year a comprehensive plan for the reduction of its methane emissions, a powerful greenhouse gas responsible for about 25% of current warming.

The agreement is relevant because both countries account for about 40% of global emissions: China 27% and the US 11%. And their commitments for this decade are very different. The US, with the arrival of Joe Biden in the White House, has committed to practically halving its emissions by 2030. China, however, so far only maintains the commitment to reach its peak emissions by 2030 and thereafter to reduce them.

Iran and Brazil look the other way

On the geopolitical front, the positioning - or lack thereof - of some countries is noteworthy.. This is the case of Brazil, whose president has decided not to stop deforestation in the Amazon and rejects climate change from a scientific point of view; Iran, which is the sixth largest emitter in the world and has not even ratified the Paris Agreement yet. Or Australia, Mexico and Turkey are also in a grey zone that would not belong to them.

Climate Summit stocktaking

In short, the Glasgow climate summit fell short in its ambitions to revitalise the fight against climate change. In any case, it is just as important to accelerate and intensify environmental policies as it is to respect the commitments already made by the various countries.

Sir David Attenborough, in his speech to COP26 in Glasgow

According to the organisation's projections Climate Action Tracker, if each and every one of the announced targets (mandatory and voluntary, long-term and NDCs) is met, the temperature rise by the end of the century could be limited to 1.8°C, not far from the 1.5°C target set in the Paris Agreement. But that is surely too optimistic. The road ahead is long and difficult, and it remains to be seen whether the target will eventually be met.

We tell you more in our Stay Curious section!

The ESG bubble

19 November 202120 October 2021 by Ana Ruiz

Sustainable investment is undoubtedly a key lever to drive the business paradigm shift. However, it is increasingly important to have transparency to ensure that these investment flows are truly directed towards sustainable assets. In this regard, we believe that the European taxonomy will bring clarity and allow investors to focus their efforts on investments that truly address social and environmental issues.

We share with you the article written by Kenneth P. Tucker where he talks very graphically about this ESG bubble and the importance of alignment between investment flows, corporate engagement, along with citizen action and more urgent and aggressive government policy to change the mindset and rules of the system.

Article "A trillion-dollar fantasy" by Kenneth P. Tucker

The National Oceanic and Atmospheric Administration Observatory on Mauna Loa, Hawaii, reported that carbon dioxide levels in the atmosphere had reached 419 parts per million, the highest levels recorded in more than 4 million years.

On the same day, BlackRock, the world's largest asset manager, announced another milestone: it had raised $1.25 billion for its US carbon transition investment fund. The largest exchange traded fund in history. The fund is a reflection of what BlackRock CEO Larry Fink communicates to his clients: "we don't see business as a passive observer" when it comes to combating climate change.

Seeing the world's largest asset manager act as a social and environmental agent should be cause for optimism. Instead, it represents a kind of Kabuki play in five acts, according to Kenneth P. Pucker.

- Act I: Companies realise their responsibility to address growing social and environmental challenges.

- Act II: The academic class begins to do research on the subject.

- Act III: Rating agencies, consultants and other financial institutions are rushing to create environmental, social and governance (ESG) products, highlighting the opportunity for companies and investors to achieve superior financial performance and social and environmental impact. It's a win-win circle.

- Act IV: Investors are slow to recognise that ESG investing, as currently practised, is unlikely to lead to higher financial returns and, for the most part, do not care about the impact on the planet.

- Act V: Awakening to the opportunities and limits of investment to address growing social and environmental challenges.

Where are we right now? We are at the intermission after the third act. As ESG investing has accelerated, the planet has experienced the two warmest decades on record, Antarctica has melted, income inequality in the US has soared and species have been disappearing at a rate not seen for millennia. The Dow Jones Industrials are hitting new highs and asset managers are charging high fees to monitor an increasingly popular new investment category: ESG investing.

This is what is wrong. Investors are finally getting serious about ESG investing. But, as currently practised, most ESG investments have little or no social or environmental impact.

Companies wake up

Timberland, a shoe and apparel company then worth billions of dollars, was at the forefront of a cohort of companies committed to society and the environment. The company expanded one of the first corporate social responsibility (CSR) reports in 2002, paid employees for 40 hours of community service and installed renewable energy at its distribution centre and corporate headquarters. Timberland believed that business had a role to play in addressing growing social and environmental challenges.

Despite Timberland's incipient efforts, the prevailing mood in business, academia and Wall Street at the time was that Corporate Social Responsibility was, at best, a distraction.

Undeterred, early practitioners of Corporate Sustainability were supported by a growing group of NGOs and consultants eager to help companies define and report on their social and environmental impact.

In 1997, the Global Reporting Initiative (GRI) with the support of the United Nations Environment Programme to create the first comprehensive sustainability reporting framework. "In the early 2000s, there was a belief that sustainability disclosure was the missing ingredient," says Ralph Thurm, former chief operating officer of GRI. "Data would allow consumers and investors to put pressure on companies to become more sustainable, delivering benefits to people and the planet."

Over time, Wall Street's view of social and environmental issues shifted from enmity to indifference.

Investigations begin

A 2012 study began to change investor sentiment. This collaborative study between academics at Harvard and London business schools examined 90 "twin" companies, each in the same industry (e.g. Walmart and Kmart Corp.), one classified as "high sustainability" and the other as "low sustainability".

During the first six years, the share price movements of high and low sustainability companies were almost identical. However, when compared over an 18-year period, the authors found that high sustainability companies outperformed low sustainability companies by an average of 480 basis points.

How research fuelled a marketing blitz

Armed with these studies, Wall Street's sales engine kicked into gear. Goldman Sachs and BlackRock made acquisitions and new hires to support the launch of new ESG investment products, and research by Morgan Stanley and others "helped dispel concerns that investors have to sacrifice returns to do good", as The Wall Street Journal wrote in 2016. Investment firms collectively went from denying sustainability to becoming fierce advocates of it.

It is hard to overstate the change in fund flows that this win-win narrative has generated. Just five years ago, the term ESG investing was still fairly new. Now, according to the Global Sustainable Investment Alliance (GSIA), in the last two years, contributions to ESG funds have almost doubled those to other equities. Over the past two years, ESG fund inflows have almost doubled over the past two years compared to all other equities.

Unknown market size is a warning sign

There is no common definition or legal framework for ESG assets. According to the Financial Times, "ESG is, in many ways, a bank's marketing dream, precisely because it is so vaguely defined".

With no security barriers, asset managers can construct ESG-branded portfolios in any way they wish.

Regulators, particularly in Europe where ESG has a longer history, understand that this cannot continue unchecked. In Brussels, the European Union is working towards a taxonomy governing what can be marketed as a sustainable or ESG asset.

In the US, the Securities and Exchange Commission has created a task force on climate and ESG, and the CFA Institute is drafting a new set of standards for asset managers. Meanwhile, greenwashing in the asset management industry continues unabated.

ESG ratings and investment are not designed to promote environmental and social impact.

Sustainability reporting did not present systemic challenges. ESG investment, as currently practised, will not either.

Waking up: there is evidence that finance can be a source of positive environmental change

Beyond the ESG game, there is good news. Pressure from investors and citizens has led more than 1,000 companies to commit to science-based targets to deliver environmental outcomes to protect the planet. Both companies and countries have recently accelerated their commitments to net zero carbon emissions targets. Japan and the EU have committed to becoming net zero by 2050 and China by 2060.

At the same time, drastic reductions in renewable energy and battery prices make it uneconomical to add new fossil fuel capacity in most parts of the world. Government support for technologies such as hydrogen energy, regenerative agriculture and plastics recycling, and a more widely shared urgency to address environmental disruption, is driving the flow of capital into climate technology solutions such as batteries and clean cement and steel. This is producing exciting and transformative solutions in fields including renewable energy, bio-based materials and transport.

Investors and shareholders are also demonstrating that finance can be a source of positive social and environmental impact.

Three questions ESG investors should ask themselves

Until these tools are widely adopted, investors seeking ESG impact should ask asset managers three simple questions to determine the likelihood that a fund is designed to generate positive environmental and social outcomes:

1. What percentage of your fund is dedicated to environmental or social solutions?

2. How do you measure environmental and social impact?

3. How do you assess the fund manager's performance?

The answers to these questions will help to distinguish the wheat from the chaff and to distinguish ESG-marketed funds from ESG-committed funds.

The private sector will need to be an increasingly active and authentic partner in addressing social and environmental challenges. However, governments and policies must lead these challenges.

To do so requires new rules, including carbon and water pricing that reflects social costs, clean electricity mandates, commitments to take internal combustion engine vehicles off the road, fair and enforceable taxes on corporations and individuals, and incentives for new solutions for sectors that are difficult to decarbonise.

The EU's Green New Deal financing linked to each country's environmental progress is a model to emulate, while the United States' re-entry into the global community by making aggressive commitments to electrify and decarbonise is good news. This is how the ESG bubble burst.

So is the increased investor preference for ESG assets and efforts to standardise sustainability reporting and regulate ESG investing. That said, do not expect these changes to adequately address social and environmental issues. That work must also come from citizen action and a more urgent and aggressive coordinated government policy to change the mindset and rules of the system.

Source: Kenneth P. Pucker, Institutional Investor "The trillion dollar fantasy

Find out more on the Transcendent blog!

THE ESG AND SUSTAINABILITY COTTON WOOL TEST

22 June 202117 June 2021 by Ángel Pérez Agenjo

To break the ice in a talk a couple of weeks ago, I asked an audience, mostly made up of executives from large and medium-sized companies, how many had heard of ESG before 2019. The answer was less than 30%.
Angel Pérez Agenjo, Managing Partner of Transcendent

The progress made by Spanish companies in their journey towards business impact in the last two or three years is undeniable, but it is no less true that many companies still see it more as an annual mandatory reporting exercise than as an opportunity or a competitive advantage for their business.

An ESG control panel is required…

A good test to validate the importance of ESG aspects in a company is to check whether management committees and boards of directors have an integrated sustainability or ESG scorecard and what the criteria are for its configuration.

A good ESG scorecard must be based on a rigorous materiality analysis and cannot focus solely on energy transition aspects, nor only on environmental aspects, even if they are the easiest to measure. Today, we already have tools at our disposal that allow us to go deeper into material aspects by sector, by ODS relevant, with an appropriate focus on social aspects, and by priority stakeholder groups.

... to manage sustainability objectives

Only an integrated scorecard can incorporate sustainability objectives for the management committee, monitor them as a team and be able to link them to their variable remuneration in a coherent way. If this is not the case, we are making a show to cover our tracks, and with today's transparency it is extremely easy and quick to distinguish who is taking this seriously and who is doing it more to make themselves look good.

Without a scorecard it is very difficult to have strong and rigorous sustainability governance. The work of the sustainability commissions reporting to steering committees or boards needs such a tool to move forward.

One of the people who may be most interested in having an ESG scorecard integrated into a steering committee is the CFO. Financing linked to sustainability objectives is already a reality and goes far beyond green bonds. Sustainble Linked Loans are advancing rapidly and there is little time left before even working capital loans will have advantageous conditions based on ESG objectives.

The scorecard can help mitigate unexpected negative ratings by ratings and benchmarking agencies from eroding not only the company's reputation but also its market valuation and cost of funding.

Building a culture of sustainability and business impact requires a useful scorecard that is updated as the business moves forward and forms part of the core of the company's decision-making.

In some respects ESG and sustainability a good dashboard doesn't cheat - find out more in the Transcendent blog!

Do you use non-financial information to improve your business?

31 January 202425 February 2021 by Ángel Pérez Agenjo and Ana Ruiz

ESG reporting? Yes, but also...

Manage your ESG assets to generate impact and improve your company's profitability. The mere ESG reporting is no longer sufficient or differentiating. The active management of material ESG reporting aspects is today becoming a competitive advantage. World leaders such as SASB o GRI have already been working on this dynamic for some time.

What is ESG active management?

The concern for an active management of ESG (Environmental, Social and Governance) aspects is becoming more and more present in the world's business world. Boards of Directors of companies.

This term, which comes from the investment world and reflects the non-financial criteria that many already use when valuing their potential investments, highlights the need for companies to incorporate the social and environmental impact at the heart of their activity in order to be profitable in the medium and long term.

Why ESG reporting?

Many companies are already looking for ways to actively manage their ESG aspects as a way to improve their ESG ratings score and, therefore, to facilitate the access to capital, adapting to the regulation constantly evolving, not to lose its market share competitors and take advantage of all the opportunities that this type of practice offers them.

Competitive transformation

93% of CEOs* consider it important to put sustainability at the heart of their companies and are focusing their efforts in this direction. This movement is leading to the day-to-day transformation of entire sectors and the repositioning of many companies, which requires moving forward in order not to be left behind.

UNCG "CEO Study on Sustainability", 2019

New opportunities

Proactive management of ESG issues can translate into:

Innovation opportunities with impact (new business models, products/services, customer segments).
Increased efficiency, rethinking the way you operate your business
("doing more with less").
Reducing risks and improving positioning.

ESG reporting regulation

Regulation is moving rapidly in this direction, seeking to create greater transparency and comparability around the contribution that companies make to society and the environment. Much of this regulation is driven by the European Union and has a direct impact on how companies operate and report their performance. Examples in this direction are:

Non-Financial Information Reporting Act 11/2018.
EU Green Pact.
EU Sustainable Finance Action Plan. Restructuring funds focused on sustainability and cohesion.
The EU is finalising its Recommendation on the Non-Financial Reporting Directive (NFRD).

Access to capital

Around $30 trillion, one third of professionally managed assets globally, are already subject to ESG compliance and monitoring.

Between April and June 2020 alone, investors invested more than USD 70 trillion in ESG funds, indicating strong growth in ESG investments. In addition, 75% of investors apply ESG principles to at least a quarter of their investment portfolio.

Why can Transcendent help you with ESG reporting?

Transcendent is a consultancy specialising in Benchmark Business Impact in Spain. We have extensive experience in assisting all types of companies in the management of ESG reporting aspects, turning them into a lever for improvement of its activity.

The evolution of capitalism - opportunity or disadvantage?

20 June 202227 November 2020 by Ángel Pérez Agenjo

The "cotton wool test" is to measure business purpose by answering the question of how much impact it generates, and abstract answers full of intangibles will not do.

The value of the social and environmental impact generated by business has never been more important to humanity, more visible to society and more strategic to the economic activity of companies.

The unfortunate COVID crisis has highlighted not only the fragility of our health system, but has also exaggerated something that has been clear for many years about our economic model: that inequalities are growing and that the damage to the environment resulting from our actions is close to irreversible and we cannot look the other way.

There are many voices calling for a revision or modification of some of the principles of capitalism. And they do not come from radical or anti-establishment groups but from organisations as reputable in the corporate world as the World Economic Forum in Davos or the editorials of the Financial Times.

In this respect Rebecca Henderson, Harvard professor and author of the recently published book Re-imagining Capitalism, explains that she aspires to re-imagine capitalism, or at least our current version, which is obsessed with the short term and does not believe that business should care about the health of our society or our institutions. Doing so is the best way to ensure that both business and our society thrive for decades to come.

If capitalism is one of the great inventions of the human race, an incomparable source of prosperity, opportunity and innovation, we will not solve the problems ahead of us without it. To solve inequality, we need job opportunities adapted to the new reality that is coming our way. To solve climate change, we need (among other things) to transform the world's energy, transport and agricultural systems.

Time will tell whether this expected evolution of capitalism will happen in the short or medium term, but I believe there are grounds for optimism, despite the effects that the Covid crisis is having on our economy.

Measurement, key to assessing purpose

Measuring the effects that companies have on their environment, positive or negative, has never been more objective than it is today. In the coming months we will see data from many companies quantified in detail and incorporated into a new income statement that incorporates "impact" into the current accounting system. The activity of the Impact Management Project (IMP) and especially its Impact Weighted Accounts initiative are spearheading this evolution.

Companies' integrated reports or non-financial information statements are becoming more and more specific in their data and go deeper into the material concepts of each company when it comes to highlighting their progress in responsibility and sustainability.

Public administrations and regulators are doing their part, sometimes slowly. But initiatives such as the European Union's Green Deal or the variations in the fiduciary responsibilities of boards of directors in the United Kingdom, going beyond share value and considering all stakeholders, or the incorporation of Benefit Corporations as a new type of company in some countries are clear steps in the direction we want to go.

The "cotton wool" test

This year can be considered the year in which ESG investment took off. And although there is still a long way to go in separating the wheat from the chaff in true ESG investing, the next breakthrough that continues to grow is impact investing, also in Spain.

It is a fact that corporate purpose is "in" and most companies now claim to have a purpose with a social or environmental impact. The "cotton wool test" that they will all have to pass in a few months will be to measure that purpose by answering the question of how much impact their purpose generates, and abstract answers full of intangibles will not be valid.

In this trend of being more specific in measuring, valuing and comparing the added value of companies to society, there was a lack of an initiative that would shed light and detail on the importance of inclusive growth. And the project led by the Codespa Foundation, which Transcendent is a partner of, aims to highlight the contribution and performance of companies and to inspire other companies through its business practices to create a better world for all.

And all these developments can and must share the common language of the SDGs that give us focus and a time horizon to which we all need to contribute before it is too late.

Innovation with impact

This evidence of what is already happening is embodied in the kind of projects we are doing in recent months with our clients.

We are working with management committees to size the size of the corporate social impact opportunity in your company, grounding it in your strategy and identifying opportunities for growth and efficiency with an impact on your bottom line. These opportunities translate, among others, into innovation with impact (new business models, products/services, customer segments) or, in the case of efficiency, rethinking the way your business operates ("doing more with less").

We have embedded the SDGs at the heart of a company's business, as a framework for identifying opportunities for growth, efficiency and risk minimisation by measuring the extent to which they are being achieved and setting ambitious targets.

We are measuring the effect generated by a company in terms of ESG, seeking to raise it to the level of strategic impact and taking into account not only inputs but also outputs, with the aim of facilitating decision making with business impact.

We have structured impact management within the company and redesigned the governance of the company to increase opportunities for growth, efficiency and risk minimisation in all business and support areas.