Insights

Week in Impact: Beyond the Vale

Does BlackRock's watershed CEO letter suggest the finance industry is finally taking climate risk seriously?

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🙏 The proliferation of sustainability accounting standards comes with costs. Fortunately, reports the Economist, there are early signs of consolidation. (More on that here.)

🎂 The impact investing market is coming of age, according the FT, thanks to an evolution in the way we measure—highly nuanced and deeply complex—net company impact.

📈 HNWs will almost double their allocation to impact investments in the next five years, a survey has found. The average allocation is set to increase from 20% to 35% by 2025.

❓ Corporate IR teams are feeling the heat. Almost 80% of firms surveyed by Citigate Dewe Rogerson reported an increase in ESG-related questions from investors this year.

🗳️ Despite its January pledge, BlackRock is under scrutiny for backing fewer environmental votes this year than last—even as its rivals head in the opposite direction.

🌱 Those rivals include the likes of JP Morgan, which just pledged to push clients to align with the Paris Climate Accord and work to global net-zero emissions by 2050.

🌍 Not to mention LGIM, which unveiled measures to protect its £1.2trn assets from climate change. Created with Baringa Partners, the framework draws from this model.

🗣️ LGIM is batting for ethnic diversity, too. The UK fund manager warned the FTSE 100 it would vote against firms that don't have at least one BAME board member by 2022.

👮 BLM has left its footprint on the market. Investors are graduating from the environmental to social, reports the WSJ, following a year of protests and pandemic.

🗺️ But it seems the E still takes primacy. In its annual survey, Russell Investments uncovered pressure on asset managers to address ESG issues—particularly climate risk.

🚨 Governments also face pressure. Climate risks are causing sovereign risk and macro instability, says SOAS, which warns of a spiral of climate vulnerability and debt burden.

🏦 Piling in are former central bankers Yellen and Carney, who, in a new report, warn climate risk is not priced in and urge governments to introduce mandatory TCFD reporting.

✅ Negative screening is out; positive screening is in. So finds Edhec Risk Institute, which reported 'best-in-class' screening is now the preferred approach for 45% of ETFs.

🏭 Exxon plans to increase annual emissions by as much as Greece's output, according to leaked documents reviewed by Bloomberg. A bad week for fossil fuel groups, overall.

Company spotlight: Vale S.A.

 

Vale SA

"ESG issues usually push credit ratings down not up," begins the FT, "but not so for one Brazilian miner."

This month, Vale regained an investment-grade rating from Moody's. "The upgrade of Vale's ratings to Baa3," wrote Moody's, "reflects the improvements observed in Vale's ESG practices." The credit rating agency went on to laud Vale's "enhanced risk management and governance oversight, supporting reparation of the population and areas affected by the tailings dam accident in Brumadinho in January 2019."

The upgrade marks a major step for the mining company, which attracted international attention after last year's dam collapse killed 270 people. In the wake of what Societe Generale referred to as a "high ESG controversy event," Vale's stock plummeted and the company found itself downgraded to junk. That event was a reminder that ESG issues are financially relevant. So is this.

As Rio Tinto discovered over the summer, companies can no longer focus on profits at the expense of other, non-financial, considerations. Today, they must tick myriad other boxes around social and environmental protections.

Of course, that might be achievable in a governance-focused world. As Vale has found, you can claw back your reputation and investment grade by implementing better risk management practices and integrating ESG targets into remuneration policies.

The question is, is it really enough?

As our analytics find, a shift in governance does little to improve Vale's impact on a host of other social and environmental metrics. Risk management may minimise the likelihood of another dam catastrophe. But, as an industry, mining causes a number of destructive outcomes that don't always make the news because they're no longer, well, news.

That might not matter to senior management and investors now. But as focus shifts to outcomes, rather than governance, the picture is likely to change.