The Whole Picture - Edition 2, Issue 21

The idea of the Anthropocene – an era in which earth’s systems are primarily altered by human activity – may seem far-fetched due to the planetary scale that it captures. But an ESG lens makes it more tangible, by magnifying the flows of capital that put aspects of the economy at risk. The magnification shows us the global effects of what we build and how we live . It shows how the portfolios we construct and the funds we create may affect the biodiversity of life, land, and sea; on what one famous scientist called this pale blue dot .

Editors: Jermaine Reyes , Carmen Simion , Melissa Chase

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From the Source ??

Article | Biodiversity in the Balance: Revisiting Portfolio Risks

To illustrate how investors could integrate material ESG issue (MEI) assessments into a double materiality investment strategy that seeks to mitigate land use and biodiversity risks, Martin Vezér, PhD , ESG Research Associate Director, Thematic Research and Qi Sang , Analyst, US ABS Ratings, Morningstar DBRS, developed three model portfolios, publishing the findings earlier this year. The portfolios were constructed using a rule-based allocation method that could have been executed by investors with access to Morningstar Sustainalytics’ ESG Risk Ratings during the study period between 2019 and 2023.

In revisiting the portfolio performance since the report was published in January, the three portfolios continued to perform well and the difference in their cumulative returns continued to expand. Findings include:

• Since the start of the study period, the long-short portfolio delivered more than 122% cumulative return, compared to 97% for the lower MEI risk portfolio and 22.6% for the higher MEI risk portfolio.
• The higher MEI risk portfolio continued to be less volatile than the other two portfolios over the extended study period, with a standard deviation of 12.4%, compared to 13.6% for the lower MEI risk portfolio and 15.1% for the long-short portfolio; however, it also had a deeper maximum drawdown at 21.7%.
• These results suggest that the lower MEI risk and long-short portfolios could have provided some protection against downside financial risk.

?Read the article .

Report | The Landscape of Biodiversity and Natural Capital Funds

There is growing awareness of the potentially catastrophic economic risks posed by biodiversity loss, as more than 50% of global GDP is moderately or highly dependent on natural ecosystems. In this report, Hortense Bioy, CFA , Head of Sustainable Investing Research and Noemi Pucci , ESG Quantitative Associate Analyst examine the global landscape of open-ended funds and ETFs that focus on the biodiversity theme.

They examine the range of options on offer based on three categories: risk-oriented, mixed, and solutions-focused. The analysis looks at the growth in assets, flows, and products in each grouping, and analyzes the funds and their most common holdings through the lens of a number of financial and ESG metrics. Key insights of the report include:

• Global assets held in biodiversity open-ended funds and ETFs more than doubled over the last three years to USD 3.7 billion, boosted by product development.
• Biodiversity funds have underperformed, on average, but showed resilience in the 2022 market downturn.
• How each type of biodiversity strategy, given their unique risk/reward characteristics, can fit into an investor's portfolio.
• An introduction to key metrics used to assess biodiversity investments.

?Download the report .

Article | Green Buildings on the Rise: Why Building Products Matter

The world’s growing population is driving demand for new buildings, making current construction and development decisions critical in shaping the long-term trajectory of energy consumption and emissions. In this article, Laura Coll , ESG Research Analyst, Industrials, examines the role of building products companies in the global green building transition and why investors should consider them as part of their sustainable portfolios. The article shows that:

• Among the 110 building products companies covered in the Morningstar Sustainalytics research universe, nearly 90% derive some portion of revenue from sustainable products and services.
• Currently, 68% of companies in the building products industry offer sustainable solutions, but do not report how much revenue they generate from them.
• Compared to other regions, Europe appears to be setting the pace in terms of sustainability solutions driving revenue growth. It hosts the largest number of companies that derive over half of their revenues from sustainable solutions.
• Considering companies from the building products industry in an investment portfolio can demonstrate a forward-looking strategy, not only from the standpoint of financial returns, but also supporting the transition towards a more sustainable built environment.

?Learn more .

Governance in Brief ??

Disney to Announce New CEO in 2026, Appoints New Chair

Disney has announced that it will appoint a new CEO in early 2026, providing the first formal timeline for its long-awaited succession planning. Current CEO Bob Iger already had his retirement date extended five times. Iger returned to the company’s helm in 2022, having previously served in the role for 15 years. He replaced Bob Chapek, who was ousted against a backdrop of disappointing company performance. Additionally, Disney appointed James Gorman as board chairman starting January 2025, replacing Mark Parker, who has occupied the role for nine years.

Recently, Disney has been targeted by activist investors who criticized, among other things, the company’s board for the way it handled succession planning. In March, when presenting its own competing slate of candidates, Trian Group alleged that Disney’s board had, “botched its most important job – CEO succession.”

Sources: Yahoo Finance | Euro News | Reuters | SEC | Trian Partners

Canada to Require Climate Disclosures From Large Private Companies

Canada plans to expand the coverage of mandatory climate-related financial disclosures to include large, federally incorporated private companies and intends to amend the Corporations Act to reflect the requirements. The government will launch a process to define the nature of the disclosures and the size of private companies that would be subject to them. While small and medium-sized companies will be exempt from the requirements, the government is encouraging these businesses to voluntarily provide climate-related disclosures. Additionally, Canada plans to develop sustainable investment guidelines, a voluntary tool that will help investors, lenders, and other stakeholders identify green and transition-labeled economic activities.

Source: Canada.ca

Tokyo Metro Stock 45% Up in Trading Debut

Shares of Japanese subway operator Tokyo Metro closed 45% up in their trading debut. The subway operator had raised JPY 348.6 billion (USD 2.29 billion) in Japan’s largest IPO of the past six years, with the stock being priced at the top of the price range, at JPY 1,200 apiece. The overall offer was more than 15 times oversubscribed. The Japanese government and the Tokyo Metropolitan Government each sold about half of their stakes of 53.4% and 46.6%, respectively. Tokyo Metro forecasts a dividend of JPY 40 (USD 0.26) per share for the financial year ending March 2025.

Sources: CNBC | RTE | MSN | Kyodo News | Al Jazeera

What We’re Reading ??

Reuters | Companies Boost Social and Climate Reporting Amid ESG Backlash

Why we care: Despite sustained political pressure, data reviewed by Reuters shows that many US companies increased reporting on environmental and social issues. The number of companies sharing environmental data has grown, with 85% of large-cap US companies disclosing details of their greenhouse gas emissions at the end of last year, up from 54% disclosing in 2019.

ESG Today | EU Cuts Greenhouse Gas Emissions by More than 8% in 2023

Why we care: According to a new report released by the European Commission, net greenhouse gas (GHG) emissions across the EU fell by 8.3% in 2023, marking one of the largest declines in decades. Among the top achievements highlighted is a 24% year-over-year reduction in emissions from electricity production and heating, due to renewable energy emerging as the leading source of electricity in the EU.

Across the Universe ??

Morningstar Indexes | Voice of the Asset Owner Survey 2024 Quantitative Analysis

Now in its third year, Morningstar Indexes 2024 Voice of the Asset Owner Survey delves into the motivations, challenges, and perspectives of these investors. The results of this annual survey of 500 asset owners from across the globe validates several key assumptions from previous years, while also uncovering emerging ESG trends. Insights include:

• More than two thirds of global asset owners (67%) believe that ESG has become more material to their investment process in the last five years.
• Climate transition readiness remains the most material environmental factor. For social and governance factors, the most material concerns are labor practices and business ethics, respectively.
• The majority of asset owners surveyed (78%) view active ownership as useful in driving the implementation of their ESG program overall.

Morningstar Research | Global Sustainable Fund Flows: Q3 2024 in Review

This quarterly report examines open-ended funds and ETFs focused on impact, sustainability, or ESG risk factors. In the third quarter of 2024, sustainable open-ended and ETFs witnessed a surge in net-new money, drawing in an estimated USD 10.4 billion. This represents a significant increase from the USD 6.3 billion inflow recorded in the second quarter, indicating growing investor interest in sustainable investment options.