Morgan Stanley, one of the largest financial institutions in the United States (U.S.), has just released the results of their study on the corporate sustainability of 303 public and private firms across North America, Europe, and APAC. The report indicates that most firms are aware that sustainability-related activities will play significant roles in firms’ survival and growth in the coming years. The report also highlights the firms’ perception of opportunities and challenges created by the movement toward sustainability. Indeed, up to 85% of companies believe that sustainability significantly affects their long-term corporate strategy. These firms see sustainability as a value-creation opportunity. The interesting point is that 93% of Chinese firms consider sustainability as an opportunity to create value, and this percentage is higher than that of European or American companies. According to the report, the result may come from the Chinese government’s incentives to grow green technologies, renewable energy, and others. The report also suggests that 59% of the surveyed firms believe that they meet or exceed expectations on sustainability strategy. Besides some opportunities created by corporate sustainability, there are challenges that the surveyed firms consider significant. The top concern is related to costs. Indeed, carbon reduction technologies and green technologies are still expensive, so the high costs of investment in these programs become barriers to corporate sustainability. Next to costs, the surveyed firm is concerned about investing in sustainability conflicts with its financial goals. Specifically, the investments in corporate sustainability programs will be contrary to the shareholders-maximization logic. The corporate sustainability survey from Morgan Stanley carefully examines how firms factor in sustainability criteria when making strategic decisions. Results show that 55% of the surveyed firms take into consideration sustainability when formulating strategic decisions on capital expenditures, R&D, product developments, and M&As. In addition, about 45% of the firms in the sample indicate that sustainability targets affect their executive compensations, either short-term bonuses or long-term incentives. According to the report, the top three issues corporate sustainability can pose are (1) the restructuring of the supply chain to meet human rights obligations, (2) the scarcity of raw materials and their higher costs, and (3) higher costs or legal risks engendered from sustainability regulation. In short, the report on the corporate sustainability survey from Morgan Stanley informs that sustainability poses both opportunities and challenges for organizations. Author: Bao Hoang, Ph.D.

In recent years, many investors have considered the necessity of reducing GHG emissions to combat climate change and global warming when making investment decisions. As a result, several investment funds now use the phrases “ESG” or “Sustainability” in their names to appeal to ecologically and socially sensitive investors. However, incorporating these environmentally and socially conscious elements in their names does not guarantee that these funds will contain many companies concerned with sustainability and a low-carbon future. Indeed, several funds have fooled their sustainability-conscious investors by using these letters in their names, but the companies in their portfolios show minimal commitment to ESG. This greenwashing practice caused the European Securities and Markets Authority (ESMA) to issue new rules governing when investment funds can use phrases like ESG, sustainability, and impact in their names. The ESMA’s goal is to protect clients from being misled by investment funds that use these words to recruit customers without producing a truly sustained impact. According to the new legislation, if a fund’s name contains any ESG-related elements, at least 80% of its investments must meet environmental or social criteria. Funds whose names include the word “sustainable” or a term derived from it must invest at least 50% in sustainability. Furthermore, if the investment funds’ names include the word “impact” or “impact-related term,” they must meet certain quantitative standards for investments that provide positive, quantifiable social or environmental benefit in addition to economic return. The ESMA believes that enforcing these new standards will help protect investors from being deceived by the names of investment funds, hence decreasing greenwashing risks. These new EU requirements came in tandem with the Securities and Exchange Commission’s (SEC) new guidelines on climate-related disclosure. The SEC requires public corporations to publish information about climate-related risks if they have a significant impact on the company’s business strategy, business model, or financial conditions. The disclosure will be required in registration statements and other routine filings, including Form 10-K for domestic issuers and Form 20-F for foreign private issuers. The SEC’s new regulation also requires a statement of management’s responsibility in monitoring and assessing such climate risks. It also requires corporations to describe the board’s oversight role in risk management and evaluation. Author: Quyet Pham, Ph.D.

On May 28, 2024, the Biden-Harris Administration introduced new guides that aim to improve the quality and integrity of the voluntary carbon markets (VCMs). The American government’s initiative took place in the context that the big corporations have voluntarily bought carbon offset credits to show their commitment to the net-zero goal. According to Morgan Stanley, the VCM size would reach $ 100 billion in 2030. However, the VCMs have been vulnerable to fraud, resulting in numerous high-profile scandals in recent years. Indeed, the Wall Street Journal points out that approximately 95% of buyers don’t satisfy the standards of this industry. The low integrity of the VCMs is the opposite, with the high hope that they will be a powerful tool to remove greenhouse gases (GHGs) and mitigate global warming. As a result, some well-known firms, such as Nestle, have partially withdrawn from these markets to focus on their own GHG reduction projections along their value chain. To restore the integrity of the VCMs, the Biden-Harris has announced new principles to promote the quality and integrity of these markets. This announcement also indicates the leadership and commitment of the United States (U.S.) to GHG emission reduction to cut it in half in 2030 and achieve net zero in 2050. The Administration’s new principles focus on seven topics. In essence, these seven themes mostly emphasize that the carbon offset credits have to generate measurable decarbonization, resulting in positive climate impact. In addition, firms cannot exploit these markets to replace their own GHG emission reductions in their current value chain. In other words, firms have to make efforts to reduce their GHG emissions from the operations along their value chain first. Buying offset carbon credits is the complementary solution that helps organizations offset the rest of the emissions that firms cannot remove by other means. In addition to the 7 seven principles that the VCMs’ participants must adhere to, the Administration announces some new projects to advance the integrity and quality of the VCMs. These projects cover a wide range of activities, including the creation of new opportunities for America’s farmers and forest landowners, the advancement of innovation in carbon dioxide removal (CDR), the participation in international standard settings, and support of international market development, and clear guidance to financial institutions that support net zero goals. In short, the Biden-Harris Administration’s introduction of the seven principles and numerous projects aims to boost the quality of carbon offset credits and ensure that the VCMs cannot be the culprit of greenwashing. The point was echoed by the Secretary of Treasure, Jenet Yellen, who cosigned these new principles. Furthermore, these initiatives signal that the American leadership has been back on the world stage in the fight against climate change and global warming, which the previous Administration less emphasized. Author: Bao Hoang, Ph.D.