Welcome to Moral Money. Congrats on making it to Friday.
Back in November, we asked Moral Money readers for your insights into the challenge of weaning investors and companies off their obsession with short-term performance. You responded with characteristically perceptive ideas and recommendations, which helped inform a deep dive into the subject that we are proud to be publishing today.
The inaugural report from the Moral Money Forum, a think-tank focusing on key issues in ESG, is called “How to take the long-term view in a short-term world.” We’ve tried to focus not just on the case for looking to a further horizon, but on the practical ways in which some long-term leaders are showing it can be done — and to bolster our reporting with revealing data.
A new way to fund the UN’s sustainable development goals
As loyal Moral Money readers will assuredly know, there’s one major hurdle in the way of the UN achieving its sustainable development goals: money.
A report out this week from the UN’s High Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (or FACTI, for short) presents a possible solution.
According to FACTI, stamping out “illicit financial flows” would not just be a great way to fund the SDGs (it estimates as much as $2tn is paid in illegal bribes every year alone), it would help restore “trust in public ethics” by reforming a system that “drains resources, pushes people into poverty and hamstrings efforts to tackle global challenges, including Covid-19 and the climate crisis”.
While a big part of FACTI’s plan is centred on stopping illegal practices such as money laundering and bribery, the report also devotes a lot of attention to curbing legal “tax avoidance” schemes, such as “corporate profit-shifting, or the shopping around for tax-free jurisdictions by multinational corporations”.
“Not everything that is legal is good,” Dalia Grybauskaite, FACTI co-chair and former president of Lithuania, told Moral Money.
Some people, like Donald Trump, may think it is “smart” to avoid taxes, but as our colleague Martin Sandbu pointed out last month, eradicating “kleptocracy” should be a priority for governments. FACTI has presented a path to do just that.
To help curb these practices, FACTI wants countries to establish a public “centralised registry” of beneficial ownership information on all companies and require multinational entities to “publish accounting and financial information on a country-by-country basis”.
What is particularly interesting is that FACTI is calling for greater scrutiny on “enablers”, which include the law firms and financial institutions helping clients dodge taxes.
Given that some of these “enablers” and their clients also advocate for environmental, social and governance (ESG) practices, it raises critical questions such as, is it hypocritical for investment managers to offer, say, “tax-loss harvesting” services at the same time they are claiming to help their clients have a positive impact on the world? (Billy Nauman)
Is AI green?
When it emerged late last year that Timnit Gebru, co-head of a research group studying artificial intelligence ethics at Google, was leaving abruptly, this sparked heated debate about whether Silicon Valley was still beset with racism and sexism.
Gebru, a black woman who has been championing diversity in AI, said she was fired after Google took exception to a paper she wanted to publish about the risks posed by bias in large natural language processing sets; as I noted in a column these biases threaten to further Silicon Valley’s gender and racial imbalance.
But one overlooked detail about the paper is that it also highlighted the environmental risks posed by huge natural language processing platforms, such as the Google BERT, due to their energy consumption.
“Training a single BERT base model (without hyperparameter tuning) on GPUs [graphics processing units] was estimated to require as much energy as a trans-American flight,” it points out. Some of that energy is green, or offset by carbon credits, but the majority is not.
Google executives insist that the paper’s calculations about energy costs are wrong since they do not take account of rising efficiency. Indeed, they are so vehement about this in internal emails that it is possible that it was the green criticism — not the racial issue — that sparked the strong reaction.
Whatever the truth in this murky saga, the important point is this: tech giants need to pay more attention to their fast-expanding AI platforms if they want to hit carbon-zero targets; and it’s an urgent issue for investors too, given that Google’s parent Alphabet currently sits inside many ESG funds. (Gillian Tett)
US climate cha- cha- changes
Corporate sustainability reports, long viewed by investors as not terribly useful, are about to gain new significance.
As we reported last week, John Coates, the acting director of corporation finance at the Securities and Exchange Commission indicated that the agency may start looking more closely at “voluntary disclosures, for example in sustainability reports”.
And this Wednesday the SEC announced it was beginning to update its guidance for corporate climate change disclosures.
The SEC’s announcement will spark “open season” for agency staffers to raise concerns about companies’ climate change information disclosures, Andrew Jack, a partner at Covington in Washington, told Moral Money.
“The most ripe target will be companies that are disclosing scope 1 and 2 emissions, and their goals with respect to emissions reduction in their sustainability reports, but say little if anything about that topic in their SEC filings,” he said.
The SEC has a host of auditing rules it should consider updating to bring US rules in line with ESG, said Tyler Gellasch and Lee Reiners of the Duke University School of Law in a report this week. This includes pressing the US accounting industry watchdog to revise auditing standards to reflect updates in ESG-disclosure requirements.
“The SEC has failed to sufficiently scrutinise ESG-related accounting methods and disclosures, and has not meaningfully enforced compliance with existing ESG-related rules and guidance,” they said.
The SEC is not the only agency scrambling on climate issues to make up for lost time during the Trump years. In her congressional testimony last month, US treasury secretary Janet Yellen proposed the idea of a climate hub in the treasury department to co-ordinate the Biden administration’s efforts.
On Thursday, the Climate Bonds Initiative and 140 other organisations called on Yellen to quickly staff the climate hub. “We need someone with deep regulatory expertise and experience at the Federal Reserve and the treasury department to drive and co-ordinate an effective agenda among financial regulators,” the groups said.
Also on Thursday, lawmakers in Congress started work on legislation that would require new disclosure requirements for ESG, political spending, tax dodging and climate risks, among other things. The bills are still being drafted, but with Democratic control of Congress and the White House, it’s very likely some of these proposals will become law this year or next year.
This flurry of activity will only intensify in the months ahead. Moral Money will keep you up to speed. (Patrick Temple-West)
Oatly’s success shows how ESG can turn self-interest into impact
Seeing the success of companies such as Oatly, the vegan oat milk maker planning a $10bn IPO, hedge fund manager Jeremy Coller believes the world is finally coming around on issues he has raised for years, such as animal rights and stopping the horrors of factory farming.
But he doesn’t believe the rise of plant-based meat and dairy alternatives happened because people like himself finally got their message through about the plight of the “poor animals”.
Instead, he credits the change to a shift in how food companies look at systemic risks. As the founder of the Farm Animal Investment Risk and Return (FAIRR), a network of investors with $30tn in assets, Coller has worked to make people look at factory farming as “a human global sustainability issue”.
He said it wasn’t until investors started putting pressure on food companies to account for their contribution to problems such as climate change, biodiversity loss, deforestation or antibiotic resistance, that they started thinking seriously about alternatives to meat and dairy — and putting effort into developing plant-based proteins that people would actually want to consume.
The power of ESG in creating positive impact, as Coller sees it, is not in shifting the hearts and minds of companies, but rather appealing to their own self-interest.
“It’s just good business. It’s about not getting caught with a massive lawsuit or social media against you,” he said. (Billy Nauman)
Grit in the oyster
The move by partners at consulting giant McKinsey to deny Kevin Sneader a second term as the firm’s managing director was prompted in part by a case of “the partners not wanting to take the medicine”, sources told the FT in a report on Thursday.
Some alumni and insiders said the vote was a rejection of Sneader’s efforts to reform the private firm by tightening scrutiny of which clients its partners took on. The vote by the firm’s 650 senior partners was seen as a referendum on Sneader’s handling of crises, including US litigation over the consultancy’s advice to opioid manufacturers and its work in autocratic countries around the world.
Chart of the day
Nearly every charging, electric vehicle and battery company that is long on hope and short on profits is down more than 20 per cent from their all-time highs. That’s bear market territory. Please read Alphaville’s report here.
The Gulf Stream system has weakened to its slowest pace in more than 1,000 years, according to scientists, as global warming makes the powerful ocean current that controls much of the Atlantic Ocean slow down. Two studies published this week revealed climate change was slowing down the ocean current, which carries warm water to Europe, more dramatically than previously expected. Please check out the cool graphic in Leslie Hook’s article about this here.
UK companies face greater scrutiny on climate risks at upcoming AGMs (FT)
Danone’s test case for sustainable business (FT)
Vanguard tops list of world’s largest coal investors (FT)
Spac and ESG Fads on Collision Course With Billions at Stake (Bloomberg)
Rich Asian Families Are Pouring Millions Into Impact Investing (Bloomberg)
Super regulator calls for ‘climate-first’ sustainability disclosures (Ignites)
BlackRock Confronts Cultural Issues as Current and Former Staffers Raise Complaints (FundFire)