A new model of ‘trickle down sustainability’

The US president’s joint address to Congress is the closest American politicians get to the boisterousness of the UK parliament. There is endless cheering from party loyalists and insults from the opposition (remember the scandalous “you lie” hurled at president Barack Obama?) All fond memories from your correspondent’s days in the Capitol.

In President Joe Biden’s first joint address to Congress on Wednesday night, he emphasised the climate crisis as an opportunity to create new jobs: “For me, when I think about climate change, I think jobs.”

Biden is wise to tie climate to job growth. He is well aware of the lessons from the 2018 gilets jaunes protests in France: climate clean-up reforms can quickly unravel when voters do not see the incentives. For now, Biden’s plan does not include a carbon tax, which could raise costs for less affluent Americans.

Without the tax, can the US bring a legitimate climate plan to COP26? It is Moral Money’s job to keep you updated. — Patrick Temple-West

Companies use power of the purse to push supply chain sustainability

As environmental, social and governance (ESG) risks rocket up the corporate agenda, a growing number of companies are recognising that sustainability cannot be achieved in a vacuum.

In recent months we have seen a noticeable surge of companies grilling prospective vendors on sustainability before awarding a contract.

This is a clear indication of how ESG is permeating down through the supply chain. Big companies are probably asking these questions because investors and ESG rating agencies are asking them for documentation to show they are keeping an eye on their own risk.

Yet it may be unwelcome news for those on the receiving end of the questionnaires.

These surveys can be exhaustive, to say the least. One that we saw this week stretched to 58 pages and included more than 100 questions. It asked for hard data on topics such as plastics usage, gender and racial pay discrepancies and everything in between. Even the most virtuous company might balk at putting in the hours needed to complete it.

But at the end of the day, since there is actual money on the line, companies may have little choice in the matter.

Procurement can be a very powerful tool. When big companies can dangle lucrative contracts as a carrot on a stick, it will undoubtedly get people moving.

The important question, however, is whether or not this model of “trickle down sustainability” will actually achieve any ESG goals. And that will largely depend on whether or not these surveys are treated as box-ticking exercises.

If vendors start losing contracts because their ESG efforts aren’t up to par, it’s a safe bet they will change the way they do business. And that could have a major impact on people and the planet.

Or will buyers be satisfied with any disclosure (so long as it’s enough to placate investors and ESG raters) and continue hiring the lowest bidder, regardless of their sustainability? (Billy Nauman)

ESG showdowns begin at US company shareholder meetings

Shareholder voting season is well under way in the US, and various boardroom battles over ESG issues are coming to a head.

On Thursday, investors sent a strong message to Goldman Sachs concerning its workplace culture. Almost half of the bank’s shareholders supported a proposal calling on Goldman to publish a report about its mandatory arbitration policy.

The proposal was filed by the Nathan Cummings Foundation, which said it was concerned that mandatory arbitration settlements concealed harassment and discrimination. 

But in the “E” category of ESG, environmentalists fared poorly this week. Pressure group Majority Action targeted Wells Fargo chair Charles Noski (pictured) at the bank’s annual meeting. Wells Fargo is a top lender to fossil fuel companies and fracking businesses, Majority Action said, and a significant number of votes against Noski would deliver a strong message to Wells Fargo that it needed to change.

But investor advisory firm Institutional Shareholder Services recommended support for Noski. Wells Fargo had committed to net-zero financed emissions by 2050 and $500bn to sustainable projects by 2030, ISS said, adding that the bank issued a Taskforce for Climate Related Financial Disclosures report.

Noski was re-elected with at least 94 per cent of the vote, suggesting BlackRock, Vanguard and most of the bank’s other investors supported him.

Nevertheless, environmentalists criticised BlackRock and Vanguard for their votes.

“BlackRock and Vanguard did not live up to their rhetoric on climate action,” said Ben Cushing, a campaign manager at Sierra Club. 

In response, Vanguard said it did not want to dictate company financial decisions and regularly engaged with companies about climate risk. Without naming Wells Fargo or Noski specifically, Vanguard said: “If we see evidence of material risk that has not been addressed, we will hold board members accountable.” (Patrick Temple-West)

A new mask material could reduce environmental impact of single-use PPE

Masks are an essential tool in the fight against Covid-19, but how many face coverings have you used since the beginning of the pandemic? If history is a guide, 75 per cent of them will end up in landfill or polluting the ocean, according to a UN report. 

On a global scale, the use of plastics has increased dramatically since the start of the pandemic. Disposable mask sales alone grew from $800m globally in 2019 to $166bn in 2020.

In order to reduce microplastic harm to the environment, chemical producer Indorama Ventures this week launched a global partnership with London-based start-up Polymateria to produce PPE that is biodegradable.

“The polymer [the plastic used in single-use masks] is 100 years old. We celebrated 100 years of usage in 2020 and how it changed the way we live. Now, we’re looking at how to live in harmony with it,” Ting Xu, professor of chemistry and materials science and engineering at University of California-Berkeley told Moral Money.

Historically, biodegradable products have been produced using bamboo and linen, both of which absorb moisture, but also allow for the spread of pathogens — not exactly helpful as we try to stop the spread of Covid-19. But in February, Polymateria unveiled a newly formulated polyethylene film that prevents the spread of germs.

Indorama Ventures plans to apply the new biotransformation technology to make face masks, gloves, wipes, hygiene, and household applications biodegradable as the world continues to battle the pandemic, hoping to change the direction of the current end-output of PPE single-use plastic.

“Biodegradable is not the answer for everything. But it is a very good answer for single-use plastics” Xu remarked. (Kristen Talman)

Looking for public benefits in a public health crisis

The alarming news from India is a reminder that even a country with a thriving pharmaceutical industry is not immune from the suffering a pandemic can wreak. But Covid-19 also exposed the weaknesses in western countries’ supply chains for essential medicines. 

Moral Money readers will remember how the Trump administration, in its scramble to build domestic manufacturing capacity for active pharmaceutical ingredients (or APIs), floated a $765m loan to Kodak, only to pull back amid hostile headlines. 

Less noticed was a $354m-$812m contract it struck with a Virginia-based company called Phlow to manufacture APIs. It was unusual, not just because Phlow was only incorporated in 2019, but because it was structured as a public benefit corporation. 

Eric Edwards, Phlow’s chief executive, still rides in ambulances and trains paramedics, so has seen the impact of drug shortages up close. 

When India shut down the export of several APIs last March, “that’s when the [US] government said ‘we cannot look at these medicines as commodities . . . We should look at them as strategic assets’,” he recalled. 

Phlow has used the government funds to start construction on two manufacturing facilities in Virginia, but even with Washington’s backing it cannot compete on price with overseas manufacturers. “Some of the drugs we’re working on aren’t profitable at all,” Edwards noted.

But being structured as a PBC helps Phlow avoid “the shortsightedness of living quarter to quarter”, Edwards said. Noting how poorly pharma scores in polls of which industries Americans trust, he also sees a broader advantage.

“The US public lost confidence in the pharmaceutical industry because they see a broken system that’s highly complex, that lacks transparency,” he said. “By going down the public benefit model where we have a higher standard we have to live up to, [with] independent board members that hold us accountable, I think is a step in the right direction of restoring trust in our industry.” (Andrew Edgecliffe-Johnson)

Chart of the day

Emission trading systems (ETSs), have quietly become a successful government tool for pricing carbon and reining in global warming. Under an ETS, companies that exceed their carbon allowances must buy more. And companies with a surplus of carbon allowances can sell them for profit. Earlier this year, China launched a national ETS.

On Thursday, European industrial groups stepped up calls for the EU to hasten the introduction of a carbon border tax as record prices for CO2 allowances raise the cost of polluting in the bloc far above any other region.

Smart read

Germany’s top court has demanded changes to the country’s climate law, saying it places too much of a burden on future generations to reduce carbon emissions, in a crucial victory for young climate campaigners.

The measures the government had set out for the post-2030 period were “not sufficient”, it said, and demanded authorities set out clear goals for reducing greenhouse gas emissions after 2030.

Grit in the oyster

Many companies and investors say they try to “do well by doing good”. As a reminder that many still fall short, here’s a little grit in the ESG oyster.

ESG advocates often argue that companies do better when they treat their stakeholders (like the people who work for them) well. But it looks like markets are not yet on board with that concept.

A speech yesterday from US labour secretary Marty Walsh sent gig economy companies’ shares tumbling when he suggested that gig workers should be classified as employees and “treated respectfully”.

Further Reading

• US prison snacks provider faces investor pushback on debt deal (FT)

• EU industry calls for urgent carbon border tax as prices soar (FT)

• Distributors probe shops on ESG, diversity (Ignites)

• Green bond strategies face education, marketing hurdles (FundFire)

• Gen Z women are breaking into the venture-capital boys club (Washington Post)