Saturday, November 23, 2019

You Have One Job

Recently, these stories caught my eye:

Neptune Says Readying for IPO Means Readying Low-Carbon Strategy

Neptune Energy Group Ltd. said that preparing to go public, possibly within the next two years, means it has to explain to potential investors how its fossil fuel-based business model is sustainable.

The company is putting together an ESG strategy, a term encompassing environmental, social and governance issues, which it will publish along with its annual report in April. The move reflects growing concern about climate change among investors in the sector, many of whom are demanding a stronger response from oil producers amid a gradual shift toward cleaner energy….

John Browne [the former BP Plc chief] who helped create the largest privately held oil company in Europe -- Wintershall DEA --- has said an ESG strategy is now crucial to attracting investment.

Indeed, even oil behemoth Saudi Aramco has been touting its relatively low carbon intensity -- the level of emissions per unit of energy produced -- to woo investors to its initial public offering.

These Agencies Want to Check Who's Naughty and Who's Nice

Credit rating companies are muscling their way into the burgeoning world of responsible investing, purchasing smaller outfits that provide environmental, social and governance (ESG) scores….

The 159-year-old ratings provider is also leaving the door open for more acquisitions in the future, as data is “enormously important” for companies that want to lead in the sector…

The explosion of investment products that are marketed as being environmentally and socially responsible is fueling the demand for ESG data and scores….

ESG ratings have been mostly used by investment-grade bond and loan issuers who tie their sustainability performance to transaction terms or pricing. This year, usage of ESG scores started to spread to leveraged loans, collateralized loan obligations,…

Green Bonds Get Rubber-Stamped as Investors Question the Label

Global investor enthusiasm for saving the planet has helped spur record issuance of green bonds. It’s also driving a surge in third-party verification that proceeds from the debt sales are actually destined for environmentally friendly projects, as fears of “greenwashing” mount….

Sustainalytics issued 35% more second-party opinions for green bonds in the third-quarter of this year compared to the same period a year ago. That included a 20-page opinion on Verizon’s green bond framework before the phone giant sold $1 billion in green bonds in February.

The benefit of getting the second party opinion outweighed the cost, according to Kee Chan Sin, Verizon’s assistant treasurer….

Some borrowers are going a step further and asking auditors to review the use and management of proceeds, as well as reporting after the bond is issued. Assurance that funds raised are being allocated to the right projects could help the market grow, said Kristen Sullivan, sustainability and KPI services leader at Deloitte, which provides assurance to green bond issuers.

Some investors are also doing their own audits.

It is obvious that investors are clamoring for reliable ESG data – at the very least regarding climate change vulnerability – and they are desperate enough to be willing to pay for it.  This is not some kind of social cause movement; these investors are seriously, financially concerned about the long-term viability of certain industries and industrial practices.

Still, due to coordination problems, there’s a lack of standardization of metrics, and a lack of comparability of data.

Which is why I stand in absolute amazement that (at least some) SEC Commissioners take all this as evidence that the SEC should not develop a disclosure framework, because the current metrics are too inconsistent.  We would normally take that as a sign of the need for coordination by regulators.  After all, when the federal securities laws were passed in 1933 and 1934, there wasn’t much in the way of accounting standards – it took a federally mandated disclosure regime coupled with decades of cooperation with the private sector to settle on a unified framework.

I mean, I suppose it’s great business for the private ratings industry, which gets to sell investors different analyses, but isn’t that kind of standardization the raison d’etre of the securities disclosure regime?

https://lawprofessors.typepad.com/business_law/2019/11/you-have-one-job.html

Ann Lipton | Permalink

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