- Environmental, social and corporate governing investing — funds that focus on the governance structure and the environmental and social performance of companies — has become increasingly important to banks and corporations seeking talent and customers, panelists said Thursday during a session at the American Council on Renewable Energy Finance Forum.
- The success of ESG funds has pulled capital away from other funds, which has drawn political scrutiny and action to limit ESG investing in some oil and gas states, said Ted Brandt, founder and CEO of Marathon Capital.
- Forthcoming rules at the Securities and Exchange Commission stand to shake up ESG investing in the U.S., but some have already begun to adjust their investment strategies based on drafts already released by the SEC, according to Jeanne-Mey Sun, vice president of sustainability at NRG Energy.
When is too much of a good thing a bad thing? Perhaps when it leads to political backlash against your business model, Brandt and other experts said at ACORE’s 2023 Finance Forum.
Renewable energy has never been more in demand and the Inflation Reduction Act has made industries such as hydrogen and carbon capture, which were financially marginal at best before the law, attractive and in-demand as investments, Brandt said. This has fueled an influx of relatively cheap capital into renewable energy companies—and it has come with a cost, he said. Financiers are flocking to what Brandt described as C and D-list deals in renewable energy, and it has sucked capital away from sectors such as oil and gas. Those sectors, he said, have struggled to close all but the top tier deals in recent months.
Brandt said this dynamic was key to understanding the political backlash against ESG investing in Washington DC and in oil and gas producing states around the country.
Meanwhile, ESG funds are performing better this year than they did last year—not because of the ESG principals themselves but because of broader market dynamics, Sun said. That has only drawn even more investment to ESG funds, in spite of the political scrutiny.
Even so, regulatory action — especially a rule due out from the SEC that would set reporting standards for companies making environmental claims to investors — stand to upend the ESG ecosystem. Panelists pointed to language from draft rules about scope three emissions, which are carbon emissions from assets not owned or controlled by a company, that the company affects indirectly through its sales or purchases, according to the U.S. Environmental Protection Agency.
Scope three reporting requirements have made companies nervous about their potential liability and the current difficulty of acquiring accurate scope three data,said Todd Fowler, a partner at professional services firm KPMG.
“What a lot of our clients are worried about with the disclosure of scope three is you are disclosing something in a document to the SEC that you have no control over,” he said.
Data are reported by a third party and users don’t always know how the controls of the data were previously used, Fowler said.
NRG Energy has begun to consider its scope three emissions in its reports, and realizes it comes with some benefits, Sun said. Although developers typically cannot count renewable energy credits that they have sold to third parties as part of their scope one or scope two emissions progress, they can be counted as scope three emissions improvements, she said.
Fowler said he expects the SEC will ultimately adopt a more “watered down” version of the scope three standard, but that some scope three requirement would remain alongside rules for reporting more direct emissions.
The reporting rules in general should have positive results in the long term, panelists agreed. But they could also create some challenges for companies that haven’t begun to track and report emissions data. Many companies, Fowler said, are still defining who within the organization will be responsible for collecting emissions data.
Most companies have yet to hire a vice president of sustainability, Brandt agreed.