Welcome to Moral Money. One thing to start: Rio Tinto’s chief executive Jean-Sébastien Jacques will step down by the end of March after the company’s scandal involving the destruction of an ancient Aboriginal site in Western Australia. This is a big moment for ESG — not least because it occurred in spite of a strong share price performance — and a wake-up call for any C-suite. Most of the mainstream media has hitherto ignored this battle. But Moral Money followers will not be surprised by the news: we wrote about it back in May.
Also today we have:
UBS coaxes clients to go green
Stakeholder and shareholder advocates reflect on 50 years of Milton Friedman
Incremental progress on ESG’s alphabet soup problem
Landmark climate report from a Wall St regulator
UBS recommends sustainable investments to all of its clients
If anyone is still wondering if environmental, social and governance investing is a passing fad, UBS made a landmark announcement yesterday that should put the issue to bed.
The Swiss bank, which oversees $2.6tn in client assets under its wealth management division, is recommending sustainable investments over traditional investments for all of its clients that invest globally.
While ESG has been high on the agenda for many big banks and wealth managers, UBS is the first major financial company to make such a sweeping recommendation. UBS will still support non-sustainable assets in “some circumstances”, but after seeing years of historical data on ESG returns — coupled with the outperformance in the market downturn earlier this year — the company believes investors will not be penalised for choosing sustainable funds.
“The evidence is there to show this is a credible way to invest . . . [and] a credible way to outperform,” said Tom Naratil co-president of UBS Global Wealth Management and president of UBS Americas.
This decision was not taken lightly, said Iqbal Khan, co-president of UBS Global Wealth Management. The bank’s entire global management team was involved, he said.
It is hard to pin down exactly how much money will immediately shift as a result of this announcement. Of course, UBS clients and their financial advisers are still free to choose whether or not to follow this recommendation. But UBS has investment discretion over hundreds of billions in client assets, so the flows could be massive. “When we move 1 per cent of our clients assets in any direction it’s $26bn,” said Mr Khan.
More importantly, this signals a philosophical shift from one of the biggest financial companies in the world — a move Mr Khan expects will be a tipping point for the industry.
A growing number of investors were looking for ways to go beyond philanthropy and to utilise their capital to “deliver better outcomes for society” while also generating returns, said chief investment officer Mark Haefele. And seemingly every other wealth manager is pushing to compete for ESG-minded investors’ money.
But while UBS believes in sustainability, Mr Haefele is quick to caution that not all sustainable funds are up to the task. “I spend my time worrying about getting the proper products . . . it’s all about sourcing at this point,” he said. (Billy Nauman)
Friedman’s 50-year legacy endures
Fifty years after Milton Friedman penned the shareholder primacy doctrine, his legacy continues to send shockwaves through corporate boardrooms. His disciples remain adamant that public companies exist to serve their shareholders. But the Business Roundtable, one of the largest business lobbying groups in the US, appears to be distancing itself from this legacy. So, too, the US Democrats eyeing the White House.
So who is correct? One of the most influential Friedman adherents remains Republican SEC commissioner Hester Peirce. In an interview with Moral Money, Ms Peirce insisted that “companies do best when they have a singular focus, which is to maximise the value of the corporation”. Moreover, “when they try to do multiple things and please multiple constituencies we view results that are worse for everyone”, she said.
Ms Peirce’s comments, and her August speech on this topic, should not be shrugged off by corporate boards. Ms Peirce is a top candidate to be the next Securities and Exchange Commission chair and it is an appointment that would be likely to have companies re-evaluating their stakeholder-friendliness.
Her views are echoed by some academics. The Chicago Booth School of Business, for example, held a lively event on Thursday to discuss his legacy, at which Professor Steven Kaplan argued that Friedman’s exclusive focus on shareholders remained as relevant as ever. The only reason why companies should adopt ESG, he argued, was if they stood to reduce profits by failing to do this (say, if employees and customers demanded more ESG adherence, which Prof Kaplan conceded was actually an increasingly important issue today in a world of rising transparency).
Others, however, disagree. In another nod to Friedman’s essay, former Delaware chief justice Leo Strine Jr and Allbirds co-chief executive Joey Zwillinger warned of the dangers of shareholder primacy, in a New York Times op-ed. Given the OK to focus solely on profits, the pair wrote, companies had set issues such as tackling discrimination and pollution avoidance to the side.
This dynamic had created a “natural shift towards the more powerful interests from the correspondingly less powerful ones”, Mr Strine said at a New York Times virtual event on Thursday. “And that’s really the framework we have to change.”
Businesses had to focus on profits to survive, both Mr Strine and Mr Zwillinger acknowledged. But not at all costs. If footwear company Allbirds could save one penny per pair of shoes while creating a “devastating” environmental impact, Friedman’s argument suggested making that bet on behalf of shareholders, said Mr Zwillinger, which he believed was a mistake.
“The rules have eroded so much, and the risk has been socialised so dramatically that businesses do need to change and take accountability,” he said. (Patrick Temple-West, Gillian Tett and Jennifer Williams-Alvarez)
ESG groups step closer towards standardisation
How many ESG groups does it take to bring clarity to sustainability disclosures? Five, if a paper from leading standard-and framework-setting institutions has anything to say about it.
Companies and investors have grappled with the confusion created by a multitude of sustainability metrics. With the paper, the group hoped to “address the noise”, said Eric Hespenheide, board chair at the Global Reporting Initiative (GRI), one of the report’s authors. “We still hear from companies that say, ‘Well it’s too confusing, when you guys figure out which standard to use, I’ll think about using it, or when the government tells me I have to do it, I’ll do it’.
“We’re trying to take that argument away and really put the onus on companies,” Mr Hespenheide said.
In the paper, the GRI, the Sustainability Accounting Standards Board, CDP — a disclosure system for environmental impacts — the Climate Disclosure Standards Board and the International Integrated Reporting Council outline a pledge to work towards a comprehensive reporting system. The arrangement would seek to replicate the clarity found in financial accounting standards, SASB chief executive Janine Guillot told Moral Money.
But recent collaborative efforts on disclosure consistency give reason for optimism and illustrate an appetite for continued work in this area. From the International Organization of Securities Commissions looking for “commonalities” in the disclosure standards to the demand from key stakeholders on ESG reporting, there was a high level of interest on making progress, particularly in Europe, said Kevin Dancey, chief executive of the International Federation of Accountants, which released a call for sustainability standards in conjunction with the group of five.
“If you go back a couple of years, you wouldn’t have seen any of those signs,” said Mr Dancey. “If you go three, four, five years down the road, I think people are going to look back at this time and say, ‘Did all of these stakeholders park some of their differences, park some of their self-interests and make the right decision so we can get progress?’” (Jennifer Williams-Alvarez)
Grit in the oyster
While many companies are taking extraordinary steps to pitch in for the greater good, that is only part of the story. Here’s a little corporate grit in the oyster.
With an investment from activist hedge fund manager Jeff Ubben and a Tesla-like business model, electric truckmaker Nikola was a high-flying success after it went public earlier this year.
But Nikola is now under siege from a short seller, who alleges the company faked a product video in 2018 by rolling its Nikola One truck along a downhill stretch of highway, to disguise the fact that the vehicle had no working engine, and filming it to appear it was being driven.
Chart of the day
US companies have made great progress over the past decade on adding more women to their boards, but they are still lagging behind on ethnic diversity. A new report from recruiting firm Heidrick and Struggles shows that more than three-quarters of board directors in the Fortune 500 are white.
However, companies have made significant progress on gender diversity. Women represented 44 per cent of board directors in the US in 2019, compared with less than 20 per cent in 2009.
Social Progress Imperative, a global non-profit known for its Social Progress Index report, held a virtual forum yesterday. In the report, SPI estimated that the world would not achieve the UN’s Sustainable Development Goals until 2082, citing Covid-19 and the economic crisis as a main delay to further progress. Moral Money’s Gillian Tett spoke with Costa Rican president Carlos Alvarado Quesada on how the country has thus far mitigated Covid-19 and the impending climate crisis.
Citi becomes first big Wall Street bank to be run by female CEO (FT)
Companies need a new compact for working from home (FT)
Lockheed subsidiary calls for global agreement on deep sea mining code (FT)
European companies were more keen to cut divis than executive pay (FT)
Uber goes green (FT)
‘Dignity isn’t a privilege. It’s a worker’s right.’ Abigail Disney (TED)
Faces of Power: 80% Are White, Even as US Becomes More Diverse (NYT)
State Street’s Global ESG Head Departs (Ignites)