ESG Ratings Are Not What They Seem – YouTube

Transcript:

 Capitalism right now is going through a reckoning.  There has to be a way in which profits and planet align.  ESG in theory should help, but that’s not what is happening today.  Our sustainable investments benefit you and parts of the world that need it most.  The whole business is built on the idea that you can invest in companies that will allow  you to do well as an investor, but also can do some good for the world.

 Perhaps the greatest investment opportunity in modern history.  ESG is now big business.  It represents, by some estimations, something like $35 trillion worth of investments.  And in the last two years, it’s grown by 15%.  And that rate of growth doesn’t seem to be stopping.  Underneath this entire system are ratings that look a lot like the credit ratings of companies,  but are based on completely unregulated data.

 And one company has come to completely dominate that business,  and that’s MSCI.  So even though a lot of people are talking about ESG,  not many know what goes into making an ESG rating, for example.  And that rating is what becomes the basis  for decision-making for investors.  ESG Ratings focuses in on what’s significant  to a company’s bottom line.

 What we found is that the foundation  of this multi-trillion dollar new cash machine for Wall Street  is not at all what it appears to be.  And that it’s really almost exactly the opposite  of what  people think it is.  I’m Cam Simpson.  I’m the senior editor and reporter for investigations at Business Week in Bloomberg.

 There are about 160 different companies  that sell data and ratings that report  to rate companies on their environmental, social,  and governance practices or factors.  Because it’s a completely unregulated business,  because it’s completely subjective,  the ratings can land anywhere across the board.  MSCI’s rating system is built on scores,  and they’re converted into ratings that look like credit ratings.

 Triple A, top of the line.  Triple C, bottom.  By mimicking a credit rating, which is regulated,  which is based on regulated data,  MSCI has created kind of an aura of respectability,  an aura of confidence for the investing world around these ratings.  I’m Akshat Rati and I’m a reporter with Bloomberg News. I write about all things climate.

 MSCI has been around for more than two decades and it started its life as a company that would  arrange stocks in an electronic index. As the company progressed,  it found this demand for ESG metrics,  that people were interested in not just ensuring  that they were making profits from their portfolios,  but that the companies within those portfolios  were also aligning with society’s goals.

 And so about 15 years ago,  MSCI acquired a  number of companies that gave it the ability to be able to create ESG  ratings. MSCI has become the giant in the field. By one estimate 40 cents on every  dollar that is spent on ESG ratings is owned by MSCI.

 So what MSCI does with its ratings really matters to the  entire industry.  So if you’re a company, especially a bigger company that’s included in the S&P 500, for  example, your ESG rating can really significantly help you in the world to get included in one  of these funds. It can lower your cost of capital, which also can help you. the world to get included in one of these funds.

 It can lower your  cost of capital, which also can help you. And so they’re really keen to have good  ratings. And so when a company’s rating goes up, MSCI produces an updated report  that shows what the key factors were that led to the company moving up the  ESG ratings ladder, moving up its score, moving up its rating.

 And so I started just with that, with a list of companies and upgrades, and to see how  quickly and how high some of them could climb.  We found half of the companies out of the 155 that we looked at got upgraded just for  sitting still because MSCI changed the way it weighted the score  or changed the methodology,  so their scores went up as a result.

 Take McDonald’s, for example.  Its total emissions are those that match  the entire country of Portugal or Hungary.  And much of those emissions come from its use of beef.  But when MSCI gave it an ESG rating upgrade in April 2021,  it did that by reducing the weighting of emissions from a mere 5% to nothing,  and instead replacing it with a new initiative that McDonald’s had launched around recycling.

 a new initiative that McDonald’s had launched around recycling. Except that the recycling initiative came from installing bins in select locations in the UK and France. And when we looked  at that, we found that within UK and France, there was either an upcoming regulation or a threat of a  regulation which would have forced fast food companies like McDonald’s and others  to anyway install these recycling bins.

 And so McDonald’s essentially got a ratings upgrade for  doing the bare minimum that it should have done anyway and for not being counted for all the emissions it was putting out into the atmosphere.  And McDonald’s is not a singular example. It’s actually quite typical.  When we looked at the 150 upgrades,  nearly half of the companies got that upgrade  in their ESG rating without even fully disclosing  their emissions.

 We found the factors that were driving upgrades over and over again  were for things like what MSCI calls corporate behavior.  The other one that also was kind of surprising was data protection  and also the structure of boards deemed to be a factor  in potentially having better outcomes for shareholders.

 Of the 155  rating upgrades that we looked at, we found only one where a reduction in  carbon emissions was cited as a significant factor in the upgrade. The  rating system and the ratings themselves create exactly the opposite of what many  investors believe they’re looking at.

 When they see a highly rated company, they think that company has strong environmental, social,  and governance practices in terms of its impact on the world, its sustainability.  But what they’re actually measuring is exactly the opposite. Is the company  sustainable? Is the value to shareholders sustainable? What’s the impact of the  world, climate change, water shortages, potentially on the company?  It was a hard thing to get our heads around until we saw it all together in the data.

 MSCI is the leading provider of investment tools in the world.  And as such, our basic raw material are sophisticated models, big data, and advanced technology.  Henry Fernandez is the CEO and Chairman of MSCI and has been since the founding of the company.  And we met Henry at COP26 where governments meet, but increasingly businesses have been playing a  role in shaping the conversation around climate change  and how much they are doing to help fight climate change.

 We asked him, do you think ordinary investors, retail investors,  have any idea that the entire lens of the system is the impact of the world on the company  and not the impact of the company on the world?  And he said no, that they didn’t have any idea.  And in fact, he said he thought even investment managers who are putting together these funds  didn’t grasp it.

 You know, they’re not really concerned about the impact on the world, the investment managers.  They’re fiduciaries, and their interest is in their fees.  He said he’s a libertarian and that he would like as little government intervention as possible  and wanted to ensure that the use of ESG would be one way in which he can stop any socialist ideas  from creeping into capitalism at any cost.

 This is a permanent change in the way capitalism works.  And by the way, we’re doing this to protect capitalism.  Otherwise, government intervention is going to come,  socialist ideas are going to come, and the like.  So it’s not against capitalism.  It’s about dealing with the externalities  that are created in capitalism.

 Henry Fernandez was born into an incredibly privileged family  in Latin America.  Henry wound up at Stanford, where he decided to get an MBA.  That was really kind of at the height of the Greed is Good movement on Wall Street.  And Henry then decided that he would go into finance.  He ultimately found himself at Morgan Stanley,  and Morgan Stanley had a partnership with a company called the Capital Group,  Capital Group International.

 By the start of 2019, it was clear that this massive shift, driven significantly by millennials and their pension funds, was really going to take hold. for investment managers all over the world to sell investments to the public  that purported to make the world a better place.  So Henry Fernandez took his bland  kind of back-office Wall Street company  and he rebranded it,  and he’s done pretty well from it since.

 Your company has had an amazing run  since it was spun off from Morgan Stanley.  What’d you say, up 10 times since 2008?  Maybe more.  We went public at $18 a share 12 years ago, and it’s $220 today.  Henry appears to be the first ESG investing billionaire.  His shares are now worth about $1.

3 billion, which makes him almost as wealthy as Tim Cook,  the CEO of Apple.  Companies have a hard time oftentimes getting their founders, getting their directors,  getting their executives to invest in their businesses.  Henry has his whole net worth in his business.  And basically, his board actually said to him,  we’d like you to sell a little bit of stock, Henry.

 And Henry said, I’m not going to sell stock.  I think I’m going to make three or four times my money in the next 10 years.  Why should I sell any stock?  ESG ratings have come under the scanner in recent years.  And so in this wild west of ESG ratings, regulators now are honing in on figuring out a way in which they can standardize how ESG ratings are made  and make sure that ESG ratings don’t end up greenwashing a company’s  activities.

 The Securities and Exchange Commission has come up with a regulatory agenda to bring  in more regulation as far as ESG disclosures are concerned.  It will be critical, I think, in the next several months to see what the Securities  and Exchange Commission does and whether or not they’re going to crack down on some of the claims that are really critical to bolstering ESG  investing versus what ESG investing really is.

 Society hasn’t changed.  You would have been intolerant of a transgression 100 years ago, except that you didn’t know  it.  It was not prevalent.  Now today, you can find out very quickly if somebody is doing something  wrong and therefore society’s tolerance towards that is very limited.  There’s no question that shareholder action can move companies, can move companies away  from things that are really, really driving climate change or other ills in the world. But those moments are incredibly rare.

 And the idea that these funds, investing in these funds, is doing anything to make the  world better, it’s really, really hard to see how that’s the case.  And there is a huge demand from people, especially young people around the world, to not have  their pensions and their investments destroy the planet that they live on.

 Whether it’ll be met with anything  that’s real is a really hard to answer question. Thanks for watching!

Episode 4: Green Finance | Sustainable Finance | SDGPlus – YouTube

Transcript:

 Dear Sustainability Guy, I think I get sustainable financing, but people keep talking about green financing. Can you explain to me what that is?  Green finance is actually a subset of sustainable finance. The most widely accepted definition is given by the United Nations Environmental Program.  Green financing is to increase the level of financial flows from public, private and not-for-profit sectors to environmentally friendly development priorities.

 The goal here is to manage environmental risks and take up opportunities that provide environmental benefits and a decent rate of financial return.  environmental benefits and a decent rate of financial return. Green bonds, green banks, carbon financing, community-based green funds are all examples  of green financing instruments.

 Hold on, if green finance is this win-win situation, how is it that a huge bulk of investment  still isn’t green?  Well, to start with, green projects still have several technology risks associated with  them.  For example, solar panels have uncertainties regarding their energy storage and weather  dependency.

 Therefore, this makes it difficult for financial institutions to evaluate the financial risk  for these types of green projects.  to evaluate the financial risk for these types of green projects.  Coupled with this is the issue of insufficient information.  Since many governments and companies are not openly sharing their environmental performance and progress,  there is limited information available on the success and failures of green projects. This makes it difficult for financial institutions to identify, price and manage

 their financial and environmental risk.  Then you have the issue of maturity mismatch. Many green infrastructure projects only pay  off in the long term. However, the financial system is dominated by short to medium term  investments resulting in a maturity mismatch. This is much  more common in banks because much of banks resources come from deposits and deposits are  usually used for short to medium term investments because most people who deposit money in banks  want their money back within one to five years. Finally, there are no reliable green financial policy frameworks.

 At present, many policy frameworks do not provide any incentives for financial institutions to  invest in green projects. All this is made more difficult with many policy frameworks  still providing fossil fuel subsidies. Okay, ok, we got technology risk, not enough information, maturity mismatch.  Do you know if there’s any solutions to overcome these challenges?  Yes, there’s a lot, but here are some of the more widely accepted ones.

 For tackling technology risks, the most common solution is to simply invest more resources  into researching, developing  and improving green technologies.  Another solution is to focus more on funding small and medium-sized green projects.  This reduces the cost of any individual failure and helps test green projects more frequently.

 A solution to insufficient information is for businesses and governments to disclose more information about the success and failures of their green projects.  Not only will this help reduce financial risks, but also minimize the chances of repeating  mistakes or wasting resources in reinventing the wheel.

 To help with this, you have platforms such as the Green Finance Platform, which has a  global network of countries, organizations, and experts who are looking to address knowledge gaps  in green finance.  Moving on to the maturity mismatch issue, research suggests that insurance companies  and pension funds can help scale up green investments.

 These funds prioritise making  medium to long-term investments unlike bank deposits.  Many people who invest in pension fund schemes are not looking for a financial return for at least a few decades.  Plus for every dollar that is invested in clean energy today, it could generate three dollars in future fuel savings by 2050.  in future fuel savings by 2050.

 Finally, central banks and governments need to work together to develop reliable green financial policy frameworks.  Central banks have regulatory oversight over money, credit and the financial system.  Therefore, this helps them easily understand the risks  associated with different green investment models and projects.

 Central banks can use this information to support the government  and develop a green financial policy framework that is suitable for their city or country.  Let’s recap.  We learned what is green financing and looked at examples of green financing instruments.  There are four major challenges that plague green financing from becoming mainstream.

 We looked at examples of  innovative solutions that can be used  to overcome the challenges in green financing. subscribe if you haven’t already and let us know in the comments what you’d like us to cover next  if you’d like to learn more about sustainability and test your knowledge go to our website

Why Do We Need Green Politics In India? – YouTube

Transcript:

 India is constantly struggling with environmental issues such as floods and  droughts every year. The water scarcity in Chennai and the air pollution in Delhi  are the prime examples of this problem. And yet we do not have a strong  political representation of these issues in the elections of our country.

 Therefore there’s an urgent need for green politics in India. But what is  green politics and why does India need it?  Let’s try and find out.  The values behind green politics in India are not exactly new. In fact, they have been found  in mainstream politics since the freedom movement.

 Mahatma Gandhi, for instance, strongly emphasized  on social justice, grassroots democracy, nonviolence  and respect for diversity in his vision for India. And all these values have been the  four basic pillars of Green Politics across the world.  Green Politics first emerged on the political front in Australia when workers under the  leadership of a trade leader and an environmental activist named Jack Mundey launched the Green  Ban movement. In May 1973, the workers refused to work on projects that damaged the country’s ecological balance.

 This ideology was soon replicated in West Germany,  where the political party called the Greens was inaugurated in 1980.  The Greens became a powerful force in the German politics,  forming a coalition government with the Social Democratic Party in 1998.  By 2016, the Greens have joined 11 out of 16 German state governments in a variety of  coalitions.

 Since then, Green parties have made huge strides in the Western world.  The Italian Federation of the Greens, the French Greens, the German Alliance 90 or the  Greens were part of the government during the late 1990s.  India, however, has not really seen a defined prominent Green Party till now.  For a country which saw movements such as Chipko Andolan and the Narmada Bachao movement,  it is disheartening to see this gap.

 With an ever-expanding population,  the burden on the environment is increasing day by day and the scales are tipping in the  wrong direction. If there ever was a time for a Green Party to flourish in India, it is now. That’s not  to say that Green Parties don’t exist in our country. Some parties with a specific  focus on conserving the environment have come up in the recent past.

 The first of  these was the Indian National Green Party which was launched on 7 January  1999. Soon other political parties followed.  Green Party of India, led by Subhash Dutta, was launched in January 2010.  The India’s People’s Green Party started in Jaipur in 2011.  The India Greens Party was launched in November 2018.

 But unfortunately, the real impact that these parties can have is limited.  They are simply not big enough for them to have any sort of solid reach, popularity or political impact. This power still lies with  either the prominent state parties or the national haunchos like the BJP and the Congress.  When it comes to elections, although environmental issues do find a place in the manifestos of  most major political parties, the follow through is hardly visible.

 For instance, BJP made huge promises to clean the river Ganga when it came into power, but  that hasn’t translated into any ground reality under its governance.  The National Ganga Council headed by Prime Minister Narendra Modi hasn’t met even once  since its formation in 2016.  According to a study by Sankat Mochan Foundation, an NGO in Varanasi, which has been monitoring  the water quality of Ganga since 1986, the water quality has actually worsened in the  last three years.

 On the other hand, last year, only four out of 29 members were present at a parliamentary  standing committee of urban development in Delhi NCR to discuss the rising air pollution.  Even big names such as Gautam Gambhir representing East Delhi in the parliament were absent.  He was seen in a picture shared online eating jalebis in Indore while the meeting got cancelled.

 The most effective way of engaging with green politics is to force these parties to look  at environmental issues as an active sector to work on and not as something that  they just mention in their manifesto.  This pressure on the political parties can only come from one source, we, the voters.  When the voters decide to hold their representatives accountable on environmental issues, even  the ones that are the most localized, we can expect to see a significant change in their  attitudes.

 The individual needs to become more responsible in this regard to make the idea of green an  indispensable part of their life and their politics.  The other way to address this is for politicians to realize the kind of limelight they can  bring to an issue by making it a central part of their election plank.

 Like the Aam Aadmi Party uses education as a central pole issue, making environmental  concerns a matter of elections could really bring about a change.  Unfortunately as we have seen, this is far from happening anytime soon.  With the rising concerns of climate change and the danger it poses to other living and  non-living bodies that we share the planet with, it becomes our responsibility as the  most intelligent species to protect  and sustain this blue-green ball of dust that we call our home.

 Making the environment an electoral issue is the first step in this direction.  Why do you think the environment is not an electoral issue in India?  And what do you think can be done to improve it?  Tell us what you think in the comments down below.  You can follow us on our social media handles and our website for more such stories.