Weighing up the ESG data rush

Microsoft is among the biggest fish in the environmental, social and governance (ESG) pond. The tech giant is the most widely held company among US ESG funds. And, as the second-best performer among Dow 30 companies this year, Microsoft has helped fuel ESG performance in 2021 and 2020.

But Microsoft’s lofty ESG reputation took a hit on Tuesday. At its annual meeting, a majority of shareholders defied Microsoft’s management and voted for a proposal calling on the company to reveal more about its handling of sexual harassment claims. This was the first time since at least 2000 that Microsoft has lost a vote on a shareholder proposal, according to ISS Corporate Solutions.

Microsoft revealed earlier this year that its board had hired an external company to look into a decades-old “intimate relationship” that co-founder Bill Gates had with an employee. Gates stepped down from the board before an investigation was completed, and the outcome of any inquiry has not been revealed.

If it were not readily apparent by now, the Microsoft vote underscores that the world’s giant investors are downright paranoid about what social risks might be lurking beneath the surface at well-performing companies.

Readers aspiring to higher standards in business may want to tune in to our full-day Investing for Good USA online event on Thursday. It features star guests ranging from Al Gore to Andre Agassi, in conversation with Moral Money writers and other FT journalists. If you’re a premium subscriber, you can get access for free through this link. — Patrick Temple-West

Does the world need a ‘Spotify of ESG?’

As interest in sustainable finance has exploded, so too have the number of data services from companies promising to help investors sort the green from the greenwash.

Today brings yet another product in this increasingly crowded space, one with a cute tagline: ESG Book from asset manager Arabesque is “the Spotify of ESG”, according to the company’s sustainability ratings head Daniel Klier.

The new product — launched in partnership with the International Finance Corporation, among others — offers scores on the environmental, social and governance performance of more than 9,000 companies. Basic access to the online database is free, in contrast with most similar offerings, but Arabesque will charge for additional analytics and other premium services.

The more high-quality data that is made available to investors, Klier said, the better the world’s chances of tackling the climate crisis in earnest. “Every industrial revolution, in my mind, needs fundamental reallocation of capital,” he said, adding that “financial markets are normally quite intelligent to reallocate capital if you give them good information”.

Yet that proposition is under increasingly heavy scrutiny from critics who warn that the mere proffering of data to investors will be far from enough to drive economic change at the scale required. Nadia Ameli, an academic at University College London, is among them.

The dramatic increase in ESG disclosures “is a solution proposed by the financial community, and it may protect the financial system from climate risks and instability”, Ameli told me. “But that doesn’t mean that this is going to support the low carbon transition.”

In a recent paper on this subject in Nature Climate Change, Ameli and two fellow UCL academics argue that while the rise of ESG ratings and disclosures might cause many investors to sell out of fossil fuel-related companies, “the tangible financial impact on fossil fuel finance and emissions reduction remains irrelevant”.

Meanwhile, they warn, there is no evidence that the transparency drive is doing much to redirect capital towards companies working to tackle the climate crisis.

The focus on transparency, they write, risks distracting from other policy areas that could prove vital — from new green factors in bank capital reserve requirements, to a serious integration of climate priorities into monetary policy.

Is Ameli correct to worry about an excessive focus on the power of disclosure? Or is Klier right to talk up the climate impact of market investors armed with better information? Let us know your thoughts at moralmoneyreply@ft.com. (Simon Mundy)

London Stock Exchange welcomes first B Corp

Over the past 14 years, the non-profit B Lab has awarded B Corp certificates to 4,000 companies that meet its exceptionally high standards of social and environmental performance. But only 29 of those companies are publicly listed, reflecting the tension between the demands of shareholders and those of B Lab.

And today, tech consultancy Kin + Carta will become the UK’s first listed B Corp as it joins the less than 1 per cent of B Corp certified businesses that are publicly traded.

“[B Corp] commitments have accelerated our performance,” J Schwan, chief executive at Kin + Carta, told Moral Money.

Schwan said the company’s performance, in terms of investor relations and employee recruitment, has improved since the shareholder vote to approve the B Corp status in September.

To secure B Corp certification, companies must submit to a months-long evaluation process, aimed at identifying companies with best-in-class standards of positive impact, public transparency and “legal accountability to balance profit and purpose”.

Some executives seeking to embrace the B Corp philosophy have run into trouble with investors. Emmanuel Faber was ousted this year as chief executive of Danone, the French food company that is B Corp certified in North America, amid shareholder unrest over a sustainability drive.

But momentum continues, with the number of certified B Corps steadily ticking up. In continental Europe, even the luxury fashion business is starting to show interest. Prada chief executive Patrizio Bertelli is planning to let his son, Lorenzo, take over the business sooner than expected. When the younger Bertelli set out his long-term strategy for the company, he unveiled the goal of achieving B Corp status.

Lorenzo, 33, may see B Corp certification as a way to keep luxury in the minds, and hands, of younger, sustainability driven consumers. If Prada, which is based in Italy but listed in Hong Kong, does receive B Corp certification, it would be the first Italian luxury brand — and only the second luxury brand in the world to do so. France’s Chloé was certified in October.

As more listed companies pursue B Corp status, they’ll need to carefully weigh the focus on “profit with purpose”. While the certification could provide a reputational boost among increasingly watchful consumers, it may spook some shareholders. (Kristen Talman)

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

While India and China attracted many headlines during COP26, other big emitters, such as Iran, largely escaped the spotlight.

As the world’s eighth largest emitter, Iran is one of the few countries in the world that has yet to ratify the Paris Agreement — but the country did send a delegation to Glasgow.

At the summit, Iran backed India’s effort to “water down” an agreement to phase out coal and fossil fuel subsidies. Less global fossil fuel consumption means less oil and gas income, the backbone of the country’s economy, said Kaveh Madani, research professor at the City College of New York.

Iran also tried to use the climate meetings as an opportunity to call for lifting sanctions, arguing that the penalties restrict its ability to fight climate change. Ali Salajegheh, head of Iran’s Department of Environment, told the BBC that Iran would ratify the Paris Agreement if all sanctions were lifted.

Madani, who led the country’s delegation at COP23 in 2017, said he was surprised to hear such “a strong verbal commitment” from Salajegheh. But Madani pointed out that such a decision could not be made alone in Iran. Ratification would have to pass through a rightwing parliament that was generally suspicious of international agreements.

There was rising hope, however, that Iran would eventually ratify the agreement as nuclear talks with the US and its allies resumed earlier this week.

“A successful outcome of the negotiations would likely have some impact on climate policy,” said Mia Moisio, an analyst NewClimate Institute, a German think-tank.

Chart of the day

To encourage companies to reduce carbon emissions, most investment managers and asset owners prefer to use their influence rather than divest, but post-COP26 data show the tides are shifting, according to a new report from global investment manager Ninety One.

Ahead of the UN climate conference, 55 per cent of investors preferred to use influence over divestment. That figure is now down to 45 per cent, according to the report. The number of companies that would choose to divest has also increased — up 6 percentage points, from 30 per cent ahead of the Glasgow summit.

Smart Watch

• At today’s Global Banking Summit, Moral Money’s Gillian Tett asked executives from Citi, Standard Chartered, Deutsche Bank and McKinsey how they are setting targets to eliminate carbon emissions from their portfolios. While McKinsey’s Daniel Mikkelsen likened the situation to “flying a plane while trying to build it”, banks are making progress on releasing disclosure guidelines. Tune in to hear how banks are setting goals leading up to 2050, and the growing debate around absolute emissions vs carbon intensity.