Events of the past three months have overtaken my personal learning objective of increasing awareness of ESG in our local equity market. I planned to do this by encouraging the sell-side to incorporate ESG into their research by starting annual awards for the leading reports. However, pressure on sell-side revenue has intensified, which saw another international house exit cash equities here and a bulge bracket house retrench some of its top rated local analysts. Meanwhile, rumours abound that another may exit equity research globally. Research heads note that incorporating ESG is very costly because it requires hiring scarce skills and often paying for specialized data, in an industry already struggling with declining commission/revenue and profitability. So encouraging the sell-side to publish thematic ESG research is an increasingly hard sell.
However, the rising interest in climate change among fund managers that I flagged in my last post has accelerated. An NGO and shareholder activist forced a second large bank to include resolutions on climate change and transition risk in the coal-fired power sector at their AGM later this month. And, in first for my country, six large investors co-filed a climate risk resolution to compel our largest petro-chemical group to report on whether their (unambitious) emissions targets align with the Paris Climate Agreement. Unfortunately, the company refused to, but it was a rare instance of big local investors working together and challenging a corporate publicly, rather than behind closed doors.
Our investors still focus far more on ‘governance’, after yet another corporate accounting scandal this year, followed by ‘social’ (largely inequality), with ‘environment’ far behind. Interestingly, last week Moody’s reduced the baseline credit assessment for our state-owned agricultural lender due, at least in part, to ‘a high level of environmental risk’, which is the first time I’ve seen this. The rating agency cited physical risks (drought and hail) and increased frequency of disease reducing clients’ ability to repay their agri loans. I think rising temperatures and fires are more of a threat than the last two risks that Moody’s mentioned.
Reassessing how best to raise awareness of ESG in our local equity market, increasing my group’s ESG disclosure (in our integrated report and results announcements) may be the most efficient way. Flagging the importance of ESG directly to investors via our investor relations narrative, rather than by getting the sell-side to write about it, appears more likely to produce dividends. Improving our ESG disclosure also addresses investors’ complaints about the lack of ‘usable’ ESG information in our market more generally (rather than us specifically).