It is easy to feel hopeless over the state of our planet; there is certainly a lot to be concerned about. The thought may have even crossed your mind: What’s the point? Destroying the planet is inevitable, and we’re all going to eventually die anyways — not even the sun will last forever! Then the rational part of my brain immediately snaps back, well then why does any work we do matter?

The truth is that yes, life is short. But it is not a reason to stop caring. In fact, it is more reason to devote all you have to what matters most to you.

And there is hope, and a reason for caring about our environment and about what we leave behind for future generations (and our future selves). What we decide to do today will determine the world they are born into. One reason for optimism is sustainable investing, an area that has been steadily growing—investments under the environmental, social, and governance label, or ESG, nearly doubled over the past four years globally, comprising more than $40 trillion in assets. 2020 may be remembered as a turning point in sustainable investing and climate action. In January, BlackRock added $7 trillion to the Climate Action 100+, an investor coalition that pushes companies to reduce their greenhouses gas emissions. In 2020, the COVID-19 pandemic resulted in a more than 10 percent decrease in greenhouse gas emissions in the U.S., the largest one-year decline since at least World War II.

We saw immense growth in active ESG managed funds in 2020. ESG ETFs saw a 223 percent growth over the year, with a new record of $189 billion in total assets under management, compared to $273.5 billion in assets in active ETFs. This amount is not nearly enough to solve our climate crisis — ESG is still a small percentage of all assets managed (the global exchange traded fund market accumulated $7.6 trillion in total assets under management over 2020), we still need government regulation, the long-standing problem of greenwashing hasn’t gone away, and not all ESG funds focus on cutting carbon. However, it is clear the markets are starting to tilt in favor of a low-carbon economy. Investors are starting to pressure companies to disclose their carbon emissions and commit to cutting them. Whether the ESG label is a bubble or not, the trend seems likely to continue—60 percent of the market could be ESG by 2025, according to Bloomberg Green. Eight out of 10 of the world’s largest economies, including China and Japan, have set goals to reach net-zero emissions within decades. With the incoming Biden administration, the U.S. will make that nine. This is crucial if we are going to have a chance of keeping global warming below 2ºC.

Just as stopping Covid-19 is the best way to stimulate the economy, addressing climate change is a win-win for both the economy and the environment. Decarbonizing the economy requires substantial investments in clean, efficient technologies, which creates jobs in the cleantech and renewables industries. It will not be cheap — the UN’s Intergovernmental Panel on Climate Change (IPCC) says that an annual investment of $2.4 trillion is needed until 2035 to limit temperature rise to below 1.5°C from pre-industrial levels (equivalent to about 2.5 percent of the world’s economy). But we are already paying the costs of inaction: unprecedented hurricanes, wildfires, and other disasters across the U.S. caused $95 billion in damages in 2020, almost double the amount in 2019. Some companies (like oil and gas) will have to adapt amidst the transition to a low-carbon economy, so constructing a “just transition” is key.

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The increasing pressure for companies to disclose sustainability risks

Having spent two summers in finance (including one in which I completed a project on ESG investing), a semester at a renewable energy advisory firm, a summer at the largest renewable energy company in India, and now working in environmental consulting where I’ve helped evaluate state energy efficiency programs and calculate companies’ carbon footprints (including my company), I’ve been really interested in how the finance, policy, and renewable energy industries can leverage their resources to create a more sustainable world.

One area that has grown immensely in the last few years is Environment, Social, Governance (ESG) investing, which at its core is about using an additional lens to understand how companies are proactively managing their ESG opportunities and risks, which directly impact the company’s financial outcome in the long-term. It is about looking at non-traditional factors to evaluate a company, from the company’s supply chain and energy usage to its treatment of workers and the diversity of its board of directors. More broadly, the trend mirrors the growth of carbon accounting in recent years in the broader corporate world (and hence my company’s success in entering this space). So why are public companies increasingly seeking carbon accounting and strategy services?

Investors are demanding more transparency and expecting that public companies do more to demonstrate their sustainability credentials.

As companies increasingly feel a responsibility to do their part in creating a more sustainable world, investors are increasingly focusing on ESG. There is evidence for a link between ESG and long-term financial performance: ESG funds have shown less downside risk compared to their traditional peers, and companies that do well in the long-term tend to be better positioned to respond to risks from climate change or other events (like a pandemic!). Investors increasing their review of companies’ ESG disclosures creates a feedback loop: by demonstrating that they are integrating ESG metrics, asset managers can thereby increase investor demand for certain listed securities. And as data on ESG metrics becomes more available and transparent, companies are held more accountable to demonstrate their sustainability prowess. (Unfortunately this mainly applies to public companies, as private companies are not held accountable for reporting on their greenhouse gas emissions and the like.)

In his consequential 2020 annual letter to CEOs and shareholders, BlackRock CEO Larry Fink argues that we need a clearer picture of how companies are managing sustainability risks — not just on carbon, but on all ESG factors. Fink proceeds to announce initiatives to place sustainability at the center of their investment approach (e.g. an intention to screen and exit fossil fuel investments): “By the end of 2020, all active portfolios and advisory strategies will be fully ESG integrated”; that is, portfolio managers will be accountable for managing exposure to ESG risks and documenting the role ESG plays in their investment decisions. 

Why would we care about what BlackRock says? Well, it matters that they are the world’s largest asset manager, managing $7.4 trillion. As a top shareholder in a company, they have a disproportionate amount of influence in company decisions. By taking a bold position, Fink makes clear that they are willing to vote against re-electing or rehiring management (e.g. CEO, board members) when companies have not made enough progress — a big deal given their leverage!

Investors want more info on how companies are managing their risks so that they can track and compare performance across companies. Thus, many frameworks have been developed as ways for companies to disclose this info. BlackRock, for example, asks companies to use TFCD and SASB.

Established in 2015, the Task Force for Climate Disclosures (TCFD) provides recommendations on how to disclose climate-related financial risks (disclosure: BlackRock is a founding member of the TFCD). The Task Force structures its recommendations around four thematic areas that represent core elements of how organizations operate—governance, strategy, risk management, and metrics and targets. They then recommend disclosures for companies to include, and provide guidance on implementing the recommendations (e.g. provide disclosures in public annual financial filings), as well as principles for effective disclosures (e.g. disclosures should be relevant).

BlackRock also endorses the SASB (Sustainability Accounting Standards Board), a framework of industry-specific standards that companies can use to report information on a variety of issues (labor practices, business ethics, etc.). The standards provide disclosure topics and accounting metrics. While TCFD provides recommendations on disclosure principles and metrics to use but does not ensure companies have all the tools they need to easily implement them, SASB helps companies implement these recommendations, incorporating them into their own disclosure guidance. The two are compatible — a company can use TCFD’s recommended disclosures with SASB. The Task Force’s recommendations provide a common set of principles that should help existing disclosure regimes come into closer alignment over time.

There are a few other standard framework developers too; these include CDP (founded 2000 — focuses on the environment), GRI (founded 1997 — first international guidelines), and the Ten Principles of the UN Global Compact (founded 2000).

The increasing demand has resulted in a shift towards required reporting or more standardized reporting for public companies.

For example, the Hong Kong Stock Exchange (HKSE) recently added new ESG disclosure rules, effective July 2020, to increase transparency and accountability. They are basically requiring more quantitative data on supply chain and climate risk, and that companies publish ESG reports each year. Companies are required to demonstrate how they assess and manage ESG issues and how climate-related issues could impact their business (e.g. for supply chain management, a company might disclose practices used to identify environmental and social risks along its supply chain, and practices used to select environmentally preferable suppliers).

There are quite a lot of new services and tools out there. For example, NASDAQ is pushing sustainability reporting and could even mandate it soon. In January 2020, NASDAQ announced a new ESG Reporting Platform to simplify the ESG reporting process, where essentially companies would only have to report their sustainability metrics in one place and NASDAQ would send it to all the standard-setters, including the SASB and TCFD, instead of companies reporting separately to the many different frameworks (companies currently have to send data multiple times to the different frameworks, all of which have different approaches). In May 2020, NASDAQ launched a new service, the ESG Footprint, which can track the sustainability footprint of a portfolio (e.g. here’s the sustainability footprint of investing x dollars in this portfolio in water usage, waste generation, and CO2e).

Currently, ESG reporting initiatives are centered in nongovernmental institutions, but institutional investors are also pushing the SEC and Congress to make ESG reporting more standardized and uniform.

As of this writing, nongovernmental standard setters and framework developers (such as GRI, SASB, CDP, and TCFD) are driving the changing landscape of ESG disclosures. NASDAQ has a voluntary ESG reporting guide and the New York Stock Exchange (NYSE) has declared support for ESG disclosures, but neither makes ESG reporting a listing requirement. The SEC requires companies to disclose trends that they determine may have a material effect on their financial condition (through annual/quarterly reports and proxy statements) — in short, this includes ESG to the extent that the company considers “material risks”. Regulation S-K mandates disclosure for certain governance topics, but not at the broad range that ESG proponents want to see in financial filings. (SEC is open, however, to reconsidering what constitutes “material information”.)

What might more standardized ESG reporting look like? The SEC could issue new rules mandating ESG disclosures or endorsing an ESG disclosure framework. Congress recently introduced bills that would require companies to disclose additional ESG information, such as climate change risks and the racial and gender composition of senior management:

• ESG Disclosure Simplification Act of 2019 (House): would require the SEC to issue rules requiring public companies to disclose certain ESG metrics.
• Climate Disclosure Act of 2019 (introduced in the House and Senate): would direct the SEC to require public companies to disclose information relating to the financial and business risks associated with climate change in their annual reports.

These guidelines could be more likely under a Biden administration that places greater focus on the climate change agenda; these types of bills could come of committee and reach the voting floor.

A key part of carbon accounting is target setting. In order to set meaningful targets, disclose sustainability information, meet investor demands, and stay competitive in the increasingly ESG investing space, companies need to understand their internal operations (e.g. how much water and energy they are using, how their supply chain functions). This requires collecting and analyzing large amounts of data or even creating a new data collection system. Thus, we can expect the demand for carbon accounting services to continue to grow, and I believe that is a good thing for businesses, investors, and ultimately the planet.