Markets in Motion
Promises and Disruptions of Going Green
In this roundup of our essential ESG insights from July, we explore the impacts of ESG exposures and factor-based investing on indices, how ESG could weaken the performance of some benevolent companies, ESG’s emergence as a critical issue during the energy conference season, and the challenges seen in decarbonizing the U.S. grid.
Published: July 1, 2019
Richard Mattison
2019 is showing to be a transformational year for the sustainability agenda. Companies and financial corporations, global and local governments, and activist individuals are rapidly responding to climate impacts and risks. Better information is the key to managing uncertainty, and that’s why we’re collecting our best ESG insights and analyses into a monthly roundup to give stakeholders the essential ESG intelligence they need to make sustainable decisions with confidence.
ESG Exposures
Unintended ESG Consequences of the S&P Factor Indices: Part 1
ESG considerations have entered the forefront of investors’ priorities. Whether factor indices have ESG principles integrated or not, understanding a factor’s influence on ESG characteristics, such as the benefits of quality, can be advantageous. A responsible investor may consider implementing a carbon reduction strategy for a low volatility index or combining ESG with low volatility to gain stronger ESG exposures while still capturing the low volatility risk premia.
The environmental, social and governance movement could weaken the performance of companies that have already done a lot of good for society, Commissioner Hester Peirce of the U.S. Securities and Exchange Commission said in an exclusive interview for the latest episode of ESG Insider, an S&P Global podcast.
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Factor-Based Investing
Understanding the ESG Consequences of Factor-Based Investing: Part 2
Understanding the ESG consequences of factor exposure may lead to a more holistic investment approach. A responsible investor may wish to invest in strategy based on a quality-focused index. Alternatively, this investor may wish to implement an ESG or carbon reduction strategy for poorer ESG-performing factor indices, to gain not only factor exposure but also desirable ESG exposures.
Key Takeaways
- – What's changed: Sector allocations are important for determining carbon metrics. The consistency of sector allocations is factor dependent.
- – Why it's important: Sector skews of carbon intensities and ESG scores can potentially affect the factor indices, alongside other drivers such as stock-specific ESG characteristics.
Critical Energy Issues
During energy conference season, ESG emerges as critical issue
ESG has emerged as a mainstream concern for investors and corporations and was a major topic of conversation during recent energy finance-focused conferences, particularly as rating agencies incorporate ESG into their analyses.
Key Takeaways
- – What's changed: "One out of every four dollars of investments in professionally managed assets in the U.S. is invested according to some sustainability investment theme," Amanda Cimaglia, managing director for ESG at Solebury Trout LLC, said while moderating a June 18 panel at REFF Wall Street in New York. Cimaglia pointed out that this marks a 38% increase in U.S. ESG investment from 2016 to 2018, with global ESG investing totaling upwards of $30 trillion. Key to that uptick in global ESG investment are strategies to decarbonize.
- – What's coming: As corporate players and investors survey the ratings landscape, many are still weighing how ESG will be regulated.
U.S. Decarbonization
'Difficult and very consequential challenges' seen in decarbonizing US grid
In the past year, California, Maine, New Mexico, Nevada, Puerto Rico and Washington have joined tropical trendsetter Hawaii in establishing ambitious new laws aimed at completely decarbonizing their power supplies in coming decades. Similar efforts are underway, some in advanced stages, in Colorado, Florida, Illinois, Massachusetts, Minnesota, New York, Pennsylvania and Wisconsin. None, however, should underestimate the challenges of turning their visions of ubiquitous carbon-free electricity into reality, according to David Olsen, chairman of the governing board at the California ISO.
Key Takeaways
- – Changes: One of the pivotal transformations Olsen sees is the shift from the power sector's reliance on "conventional synchronous generators," including fossil fuel-fired power plants, to "asynchronous inverter-based solutions," such as wind, solar and battery arrays.
- – Challenges: Overall, the challenges have less to do with the technologies themselves, according to Olsen. "Replacing gas generation with clean resources is much more a policy and regulatory problem than a technical one," he said in a recent interview.
