US Yield Curve, COVID Economics & Corporate Governance - ESG Weekly Roundup #11
ESG is a framework for risk management. Integrating it into your existing risk management framework is crucial. Many ESG risks already sit on risk registers.
Hi there, Each Sunday I’m putting together this brief roundup of ESG related content. A special welcome to all new subscribers, and thanks for the interesting correspondence I’ve received over the past few weeks. You can reply to this email, leave a comment, or message me on Twitter. Best regards, Brennan
Reading Time: 7 minutes
Chart Of The Week
The flattening of the US yield curve doesn’t bode well for the global economy over the next few years. Low inflation expectations and low economic growth expectations, funnily enough, may lead to some projects being approved because they make more economic sense on a net present value (NPV) basis at record-low interest rates.
But what will the COVID-19 economic shock deliver for stakeholders over the coming decade? There is an awful lot of uncertainty around the world, and interest rates are only one factor in making investment decisions.
The deluge of liquidity from central banks and enormous cash reserves sitting on some corporate balance sheets means that this crisis presents an enormous opportunity for a green economic recovery.
Source: JPAM Update
Quote Of The Week
There is compelling evidence that both concentration and profitability in oligopolistic industries have increased over the past two decades. Over roughly the same time period, the concentration of shareholding in the hands of the largest institutional investors has dramatically increased, with an increase in the degree to which investors (such as Vanguard, State Street and BlackRock) own large equity stakes in competing portfolio companies. A number of authors—focusing initially on airlines and commercial banking—have argued that the growth in this “common ownership” has caused the increase in oligopoly profits. They have followed this with a variety of policy responses.
Source: Does Common Ownership Explain Higher Oligopolistic Profits?
What I’ve Been Reading
Factors which fall within the ‘S’—frequently customer or product quality issues, data security, industrial relations or supply-chain issues—commonly impact businesses and ‘destroy value’. This prompted us to reconsider if ‘social’ was the correct word for the ‘S’ in ESG and whether ‘Stakeholder’ might be more appropriate. Indeed, the use of the term ‘social’ may have contributed to a failure to conceptualise the ‘S’ in ESG, leading to an absence of focus and measurement from the market.
ESG Ratings: How the Weighting Scheme Affected Performance:
Investors aiming to integrate ESG factors to achieve better long-term financial results have often overlooked how the combination of individual ESG indicators have been critical to their usefulness. In the short term, we found that both equal-weighted and optimized approaches more heavily weighted governance issues, but that short-term correlation did not mean long-term financial significance. The reverse was true for an approach that adjusted the weights of E, S and G Key Issues dynamically by industry; this approach displayed strong financial performance over the long term at the expense of short-term correlations to key financial variables.
NGFS Climate Scenarios for central banks and supervisors:
The NGFS Climate Scenarios (the scenarios) have been developed to provide a common starting point for analysing climate risks to the economy and financial system. While developed primarily for use by central banks and supervisors they may also be useful to the broader financial, academic and corporate communities. This document provides an overview of the key transition risks, physical risks and economic impact of climate change.
With Much of the World’s Economy Slowed Down, Green Energy Powers On:
The industry has also continued to bring down costs. The turbines at East Anglia One are 15 times as powerful as those installed in the first offshore wind farms almost 30 years ago, and so they produce much more revenue per unit. In the United States wind power often ranks as the least expensive source of electricity, according to Supriya Subramanian, a UBS analyst.
Industry executives argue that renewable energy is now mainstream, not a fringe player, and this gives them a stronger chance of emerging from this crisis in better shape. When looking at options for electric power, a vital force for all economies, governments and other customers often favor green energy options not only to reduce emissions blamed for climate change, but also because they are often cheaper.
Goldman's investment bank to increase Black staff hiring, recruitment:
Goldman Sachs Group Inc’s investment bank formed a new group to increase its recruitment and hiring of Black employees and improve career development and retention among existing Black employees, according to a memo sent on Tuesday that was seen by Reuters.
A Goldman spokeswoman, Nicole Sharp, verified the contents of the memo and said the new group will work on honing and improving diversity targets set in 2019 specifically for the investment bank.
What I’ve Been Watching
The ESG Alphabet Soup Series
Is ESG Investing Just Marketing Spin? [definitions]
Is ESG Investing Just About Climate Change? [environmental factors]
Social Risks, Modern Slavery, And ESG Investing [social factors]
Governance, The Keystone Of ESG Investing [governance factors]
What Is The Greenhouse Gas Protocol? [environmental factors]