Early Stage VC: ESG Strategic Advisory
ESG Integration for the venture capital space is still evolving. However, we are encouraged by the influx of activity. Case in point, we recently completed an advisory for a Japanese early stage FinTech VC where we provided a forward looking ESG strategic roadmap and refined a cohesive ESG policy. Our engagement covered peer benchmarking and gap analysis with global VCs with a Sustainability mandate. Please contact us for more information.
Net Impact Advisory
We provided advisory to an Impact Fund on refining Impact Investing metrics to provide a proxy for net impact assessment. Our scope of work included refining the alignment to UN Sustainable Development Goals (SDGs) and mapping to sustainability reporting (SASB, GRI, UNCTAD and WEF).
ESG Ratings Advisory
We advised a large cap media company on improving ESG ratings disclosure that involved addressing Governance and Social issues. The scope of work included a benchmarking of best practices in the industry, adopting SASB disclosure and referencing UN SDGs. We also recommended conducting a corporate wide preliminary materiality assessment to address stakeholder concerns, beyond the investment community.
Investor ESG Report and UN SDG Mapping
Gaya, through a strategic collaboration, worked with an infrastructure company in enhancing ESG disclosure. We mapped out the alignment with SASB, TCFD and GRI to enhance ESG reporting. In addition, the scope of work has expanded to include mapping the company’s sustainability disclosure to the 17 UN SDGs and the BlackRock Investment Stewardship guidelines.
Source: BlackRock Investment Stewardship
Mining : ESG Investor Engagement
We consulted a $41BN market cap international mining producer on enhancing the ESG and Sustainability disclosure to investors.
While mining is a highly controversial industry, given environmental impact and geopolitical risks, it is also a crucial industry that provides 'building blocks' for clean energy (such as lithium for EV batteries).
We were pleased to help our client highlight industry best practices and their commitment to UN Sustainable Development Goals.
UN Sustainable Development Goals
Our CEO served as a Consultant for the Office of Sustainable Development, under the Department of Economics and Social Affairs (DESA) since the launch of the Global Investors for Sustainable Development (GISD) alliance in October 2019. The project entailed defining a global framework for Sustainable Development Investing and measuring impact to SDGs using ESG data.
ESG Integration Research
Gaya Capital has been providing ESG advisory to a $25BN global equity boutique since April 2019. As part of this engagement, we provide detailed research on controversial portfolio holdings such as tobacco, oil sands and defense. We also provide sector frameworks for ESG Integration.
Sample ESG Integration Research (Scores Redacted)
Private Equity Client
ESG advisory on green financing, business development and capital markets.
Green financing remains prolific with recent deals showing strong oversubscription and secondary spread compression. In 2018, the global green bond issuance was $167.6 billion, or +350% from 2014. In aggregate, the estimated green fixed income market is $1.45 trillion [1] (of which 389 billion are green bonds, 497 billion fully-aligned and 314 billion aligned). Fixed income managers have been increasingly embracing the UN Principles of Responsible Investment (“UNPRI”).
Green financing will remain robust as significant investments are needed, estimated at US$5 - 7 trillion annually. China alone estimates green financing could reach US$600 billion [2] annually and it is estimated that 85% of green finance will need to come from private sources.
The healthy supply is further supported by lower funding cost of green bonds that according to BIS, averaged 18 basis points lower vs comparable bonds. Other empirical studies supporting this claim include Zerbib [3] (2017) and Barclays (2015) [4].
While the magnitude may not appear to be as significant, bear in mind the green bond market is largely dominated by investment grade issuers, of which over 50% are rated single A and above. Spread compression in the secondary market remains favorable as evidenced by recent utility green bonds trading through par (see Appendix).
The lack of standardization has resulted in broader issuances of green financing: in extreme cases, some funding sources are not clearly stipulated. As the growth of green financing has now extended beyond clean energy, infrastructure and public sectors, we note two recent issuances in the telecommunications sector that met with overwhelming demand: Telefonica’s order book was 5x oversubscribed and that of Verizon was 8x.
Given the likely sustained growth in green financing, it is imperative to survey common market practices given the lack of a standardized framework. We examine the recommended requirements under the ICMA Green Bond Principles are so-called “voluntary process guidelines”. For the full research report, please contact us.
Diversity : The Case for Alpha Generation
Research project for macro hedge fund in establishing correlation and causation between gender and social diversity and stock outperformance.
Social factors, such as diversity, tend to be of lowest priority in materiality analysis for ESG investors. We reviewed extensive academic literature and found most studies establish positive correlation of diversity to company performance. Studies have also showed similar positive correlation between diversity and stock outperformance.
Diversity Drives Fundamentals and Stock Performance: CS research highlighted firms with 20% female management had outperformed those with less than 15%. Cash flow returns on investment were 2% higher. Research shows positive correlation on stock performance and gender diversity:
CS showed shares of firms that had more women in management outperformed since 2010.
Fortune’s diversity ranking tend to have higher market values, as do firms with more women in managerial positions.
Hannon’s Event Study Methodology showed firms typically experience a jump in stock price after winning an award related to diversity initiatives.
Roberson and Park showed a positive relationship between diversity reputation and book-to-market equity
As for racial diversity, research shows improved innovation, performance and profitability:
Cognitive Diverse teams perform better on complex non-routine tasks based on the Diversity Prediction Theorem (Scott E. Page)
McKinsey establishes correlation on gender and diversity on corporate performance.
IFC shows women’s leadership is linked to reduced GHG, stronger worker relations and reduced incidence of fraud, insider trading, and other unethical practices.
However, most fail to establish causation. In fact, we also found studies that suggest gender stereotyping at organizations with women in leadership roles may experience negative market reactions. Ahern and Dittmar (2012) showed immediate stock price drop following the announcement of gender quota in Norway and lowered market valuation. Other studies include Dobbin and Jung 2011 and Lee and James 2007.
Recent research from CS, MSCI and HBS introduces potential explanations for discrepancy and could in fact help establish causation. We conclude that two important factors must be present for diversity to matter:
Threshold of women on Board or management roles (MSCI and CS). Diversity doesn’t work without psychological safety often expressed as number of minority members. There is a growing body of research that shows having three or more women on a corporate board is the material threshold for financial outperformance. According to MSCI, from 2011 – 2016, U.S. companies with at least 3 Women on the Board (“WOB”) experienced median gains in ROE of 10% and EPS of 37%. In contrast, companies over the comparable period with no female directors experienced median changes of -1% in ROE and -8% in EPS.
Normative / Cultural acceptance (HBS): gender diversity correlated to financial performance “in contexts where gender diversity was normatively accepted”.
Please contact us for a detailed discussion.