ESG darlings face fresh risk over social issues

Hello from New York, where the newsroom is buzzing with the start of another earnings season — a unique one, amid the war raging in Ukraine.

Comments from some of the biggest US financial players suggest Wall Street has not shied away from ESG, even as commodity producers and energy companies surged in the first three months of 2022.

At BlackRock, Larry Fink was asked directly about demand shifting for environmental, social and governance products amid lagging performance and booming commodity prices. He said the energy transition was real “but it’s not going to be a straight line”. In the first quarter, BlackRock had “about $19bn of sustainable flows” — down from the previous two quarters but certainly up from two years ago, he said.

Goldman Sachs’ chief executive David Solomon remained bullish on ESG. He said Goldman’s acquisition of NN Investment Partners last year was accelerating ESG capabilities for the bank. NN Investment Partners has a strong position in ESG investing, notably in areas such as green bonds, impact equity and sustainable equity.

For today’s newsletter, Kristen gets into the social issues facing big US technology companies, specifically those at ecommerce platforms. I delve into the burgeoning fight over the SEC’s emissions disclosure rules and their far-from-certain future. See you on Monday. (Patrick Temple-West)

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Etsy put to the test over ‘S’ factor

Ecommerce became an essential service during the Covid-19 pandemic. But the inequalities that Covid laid bare also raised awareness of the social issues bubbling beneath strong sales. Now, the world’s big ecommerce companies are facing a wave of pressure ahead of their annual meetings.

In a regulatory filing on Wednesday, Amazon said its shareholders would vote on no fewer than 14 investor proposals at its annual meeting on May 25. Notably, most of these petitions involve workplace rights concerns such as non-disclosure agreements as well as diversity in the workforce.

These issues underscore an emerging trend facing ESG investment. Are workplace issues “social” matters where ESG investors can agitate for change? Or are these tensions an inevitable result of these companies’ fundamental reliance on third-party sellers?

Take, for example, a fight between Etsy, an online marketplace specialising in handmade products, and the thousands of people who are making these trinkets. This week, 14,000 of the ecommerce company’s sellers boycotted the platform due to a 30 per cent increase in the site’s transaction fee. Sellers are not employed by Etsy Inc, but are crucial to the company’s existence. Without sellers, the business would be crippled.

In a letter to management, Etsy sellers said they “realise that Etsy has to generate a profit but after giving Etsy two years of record profits under the most difficult circumstances imaginable, we’re tired, frustrated and ready to fight for our seat at the table”.

The group asked the company to cancel the fee increase and to crack down on resellers. Those boycotting the platform have also said that Etsy’s move to increase the transaction fee was the perfect example of “corporate greed”.

The platform hosts 5mn active sellers and more than 45mn items.

Technology companies traditionally have a record of excellent environmental performance, said Julie Gorte, senior vice-president for sustainable investing at Impax Asset Management. But for the tech giants, she said, social issues “have been historically challenging to tackle, whether that be wage gaps or working conditions”.

As consumers and investors increasingly pay attention to the “S” in ESG, the tech sector has joined the ranks of companies such as Starbucks, as a former ESG darling now being put to the test over social issues.

“Our sellers’ success is a top priority for Etsy. The new fee structure will enable us to increase our investments in areas outlined in the petition, including marketing, customer support, and removing listings that don’t meet our policies,” Etsy said in a statement to Moral Money.

Sellers have grown concerned that the company is beginning to prioritise growth and its ongoing competition with Amazon over supporting its existing seller base. Earlier this year, Etsy’s chief executive Josh Silverman said the goal was to make “Etsy the starting point for your ecommerce journey . . . we must and are competing against the biggest names in ecommerce and all of retail for that matter”.

As of Thursday evening, more than 77,000 people had signed the petition to cancel the increased fee. Sellers are also encouraging would-be buyers to boycott the site this week.

Etsy has not announced its annual meeting yet, but it will probably take place in early June, giving its investors plenty of time to consider whether and how to respond to the fee increase furore. (Kristen Talman)

Battle lines form on SEC climate rule

As Simon mentioned on Wednesday, Securities and Exchange Commission chair Gary Gensler is working to defend his agency’s proposed rules mandating disclosures for carbon emissions. He is springing into action after congressional Republicans earlier this month wrote two letters to the SEC asking for the rules to be scrapped. The Republicans argue — without offering any evidence — that as energy prices surge, additional climate reporting will only further burden US oil and gas companies that are needed to keep America running.

But notably, Gensler and the Republicans are drawing opposing conclusions while emphasising the same core point: that many companies are already making carbon emission disclosures.

“Many companies already provide substantial amounts of information regarding their sustainability practices that are subject to existing statutory prohibitions against false and misleading statements,” Republican senators said.

In his remarks on Tuesday, Gensler made the same point: “It makes sense to build on what so many companies are already doing to enhance the consistency, comparability, and decision-usefulness of these disclosures for investors.”

Who is right? Is it true that we need traffic lights even though most drivers look both ways at an intersection?

From his days at the Commodity Futures Trading Commission, Gensler knows how to spar with Republicans over rules that companies do not like. At the end of this process, none of these arguments will matter — only what appeals court judges think. When the rule is finalised later this year or in 2023, companies or Republicans will probably sue to stop it in court. Now that Republicans have tilted the courts to favour businesses, it is a big unknown whether the SEC’s climate rule will survive.

For the foreseeable future, emissions reporting in the US will remain where it is today: voluntary. For all the energy behind ESG investing, it is still up to companies to decide how much they want to disclose. (Patrick Temple-West)

Chart of the week

Last week, the Institute of International Finance issued grim news for ESG investors: flows to ESG funds fell flat in the first quarter of this year, with inflows falling to $15bn, the lowest level since March 2020. (Regular Moral Money readers may remember the below chart we pointed out last Friday.)

The decrease in fund flows has led some to ask whether ESG has reached its peak, Bank of America said. Is it time to say RIP to ESG? The US bank, in a call with reporters last week, has become the first major financial player to dispel the rumours, or so they claim.

“While there has been a drop in overall capital markets activity, if you peel back the onion the growth rate in ESG activity is still significant. Overall ESG volume in the first quarter represented about 12 per cent of the overall market [down from 13.5 per cent in 2021] but that it is up from 2020 and 2021 when the numbers were about 5 or 6 per cent,” a representative said to a group of reporters on Friday.

“The noise around the activity dropping is misleading. The trend and trajectory [among corporate clients] remains very good,” BofA said. (Kristen Talman)

Smart read

• President Joe Biden, who entered office in January 2021 as a clean energy champion, has been humbled by the energy crisis stemming from Russia’s invasion of Ukraine. Natural gas is back in favour at the White House. Don’t miss our Energy Source colleague Derek Brower’s Big Read on the energy crisis engulfing the Biden White House.