The Digital Industry ESG Imperative

ESG Gaining Momentum

the

propor tion of

What’s

trend

evidenced

that include an ESG

various industries and how this

playing out today and into the future.

Table of Contents

ESG : A New North Star for Investing

There’s growing awareness of the impor tance of ESG (Environment, Social, and Governance) As the focus on ESG (Environment, Social, and Governance) factors when it comes to corporate mission and strategy, and even more impor tantly f rom the investment community. Because of growing demand for funds with ESG strategies, there is increasing interest in companies that can exhibit good ESG characteristics or for companies that can ar ticulate a good stor y of transformation (for instance, in industries such as Oil and Gas that may not rate highly on environmental factors). ESG criteria are becoming critical investment criteria for many investors’ decision processes.

Management teams and companies will increasingly be compelled to ar ticulate their ESG strategies for ex ternal and internal stakeholders

The environmental component might focus on a company ’ s environmental impact—for example, its energy use or pollution output. It also might focus on the risks and opportunities associated with the effects of climate change on the company, its business, and its industry

The social component might focus on the company ’ s relationship with people and society—for example, issues that impact diversity and inclusion, human and consumers locally and/or globally, or whether the company invests in its community, as well as how its supply chain partners address such issues.

The governance component might focus on how the company is run—for example, transparency and reporting, ethics, compliance, shareholder rights, and the composition and role of the board of directors.

A quick refresher on the relevant component s of ESG from McKinsey :

What ’s Driving Grow th in Responsible Investing?

One of several critical f actors behind the grow th of ESG funds is the generational wealth trans fer as Boomers retire and downsize Looking for ward, Millennials are increasingly going to be making decisions about where to inves t for their retirement, children’s college funds , and other goals Research has repeatedly shown that Millennials prioritize doing good in the world over pure returns

allocated to ESG funds , and by 2020 there was already $ 5 1 1 billion channeled into “ sus tainable” funds Large inves tors are leading the way in putting pres sure on the criteriaESGonfocusincreaseddriving,companiesfoliotporofteamsmanagement

Investors Are Driving Corporate Focus on ESG

The inves tment communit y is becoming a pivotal catalys t to encourage companies to focus on their own ESG s trategies It’s not jus t equities (s tock s); there is a lot of

From a credit perspective, companies with favorable ESG scores tend to have lower credit risk, systemic risk, and overall governance risk. There is growing awareness of the impor tance of integrating ESG factors in corporate mission and strategy.

wrote a letter las t year to CEOs of companies in BlackRock ’ s inves tment por tfolio, s tres sing the impor tance of sus tainabilit y They pointed out that BlackRock would look to vote agains t any management and board unles s ESG requirement s are met

There is a proces s called “engagement” where inves tors look at their exis ting as set s the inves tor can either sell the as set s , s tay with them (and lower the ESG score for the por tfolio), or work directly with companies to help them improve their ESG scores Inves tors are doing more by encouraging companies in “brown” indus tries (those seen to more negatively impac t the environment e.g. oil and gas) to move in a more sus tainable direc tion .

Many seasoned inves tors s tar ted tracking pure “ green ” inves tment s , but his torically the return had been les s than s tellar (par ticularly solar inves tment s in the late 200 0 s) While the goal for inves tment managers is the bes t return, the role of ESG is gaining more impor tance in the proces s as major fund managers adopt ESG principles into their mis sion (with Blackrock leading the way), and of course, as more fund f amilies launch ESG funds adopted by Private Equit y inves tors “doing good” is also good business .

According to a Har vard Busines s School s tudy, the focus on ESG by inves tors is underpinned by not jus t idealism but also evidence that adherence to ESG principles

Regulator y Actions Add to Pressures to Adopt ESG Principles

Cer tain inves tors are ins trumental in the push to ensure greater adherence to ESG principles , but there’s also growing pres sure from regulators , and par ticipant s in the supply chain are taking note According to Gar tner’s lates t Emerging Risk s Monitor Repor t

move from voluntar y to required ESG regulator y requirement s landed in the second

A recent s tudy from KPMG showed that to the pandemic has caused their focus to shif t to the social component of their ESG program .

proposal for a regulation establishing a Carbon Border Adjustment Mechanism (CBAM) Deal. This proposal is intended to regulate greenhouse gas emissions embedded in product s including cement, cer tain iron, steel, I

increasingly issued “ withhold release orders” to exclude merchandise under Section 307 of the Tarif f Act of 1930 These release orders prohibit the impor t of merchandise mined, produced, or manufactured by forced or indentured labor

ESG funds are attracting

were made for E TFs or E TF f amilies since the end of May, and at leas t 2 5 of those have an ESG element These include several funds focused on Climate Change, Ocean Pollution, “Green” Bonds , even “green” metals , and emerging market s funds

This means that these ins titutional funds will be seeking for and as ses sing inves tment s based on ESG criteria The need to grow their companies is pushing as set managers’ interes t on ESG

S ources: but excludes fund of funds

Measuring and valuing ESG fac tors remains more of an ar t than a science, as major inves tment fund managers have been focusing on the methodologies and research needed to make better informed decisions and how to suppor t ESG oriented s trategies Much of the momentum in the inves tment communit y is coming out of Europe, with new disclosure regulations compelling fund managers acros s the globe to focus on ESG component s in their analysis

Demand for ESG Investment s Out strips Supply – For Now

There is an imbalance of companies and inves tment s with good ESG characteris tic s that “check the box ” In indus tries like tech and internet, which are already “green”

Investors will be looking for new oppor tunities , such as in “dir t y ” industries , to make the case that they focus on sustainabilit y or ESG factors , such as metallurgical coal miners that produce the materials needed for clean energy and technology uses or steelmakers that help produce wind turbines Companies with a good ESG stor y to tell will fare better in raising capital