Forests are an important biological resource with a critical role to play in carbon sequestration. In this webinar replay, Cornerstone CEO Erika Karp talks with Bettina von Hagen, CEO of EFM, which specializes in implementing ecological forestry principles within an investment context. They discuss the role of forestry investing in limiting global warming, potential risks from timber harvesting and how to mitigate them, and the potential for investments to foster rural and tribal economic development in the Pacific Northwest. Erika and Bettina are joined by Cornerstone’s Jennifer Leonard, Executive Director of Market Strategy & Manager Research.

During the webinar we received several questions that our speakers couldn’t get to during the session. The team at EFM have kindly provided answers below.

How can we incentive our communities to plant more trees and how can we reinforce ‘greening’ of our urban areas?

Supporting carbon policies and markets that finance and reward reforestation and forest protection is one of the most powerful mechanisms to incentivize tree planting  The California regulatory carbon market has spurred significant reforestation projects, especially in the Mississippi Delta.  There are also emerging carbon protocols for urban forests.  In addition to carbon markets, land use and development codes that include trees and other natural infrastructure are also significant catalysts for increasing urban tree cover.

In terms of urban forestry, there are local non-profits that advocate and take action on urban greening and advocate for sound urban policies to preserve trees and pay for ecosystem services generated by our urban tree canopy. For example, in EFM’s Portland location, Friend of the Trees https://friendsoftrees.org/ is one option.

How does this intersect with the 1 Trillion Trees project?

EFM’s actions to create greater value in native forests, increase standing volume,  and to keep forests as forests, support the goals of the Trillion Trees project.  While our goals are similar, we differ in that The Trillion Trees is a non-profit project that focuses on the important work of forest landscape restoration globally, while EFM is a for-profit business that demonstrates the commercial viability of natural climate solutions to generate returns for investors and focuses on the carbon-rich forests of the western U.S. In the context of our investments, we restore and protect forested landscapes for the benefit of local communities and generate positive biodiversity, water and climate outcomes.

Do any of the panel members have high level product development/product approval contacts at governmental agencies?

At EFM our team is dedicated to developing relationships with the USFS and other governmental agencies that are focused on land acquisition and restoration in the Western US. We work closely with both federal and state forest agencies, as well as the forest products industry and nonprofits, on products that contribute to healthy and intact forests and restoration.  There are a number of products – existing and new – derived from wood fiber and other forest resources that support forest restoration and forest health, from biofuel to cross-laminated timber to biochar, and we are engaged with a number of partners on further developing and building supply networks for these products.

What is the experience of EFM in implementing forestry management strategies in national/state/local open space or urban forested lands?

While EFM focuses on the acquisition and management of private lands, many of our forests are designated to be acquired by public owners – State, Federal and Local. We are currently working on enabling several community forests, and are engaged in a few federal land sales. After decades of efforts through multiple administrations, the Great American Outdoors Act was passed by Congress and signed into law on August 4, 2020.  This bill has two components – funding $9.5 billion of delayed maintenance for national parks and other federal lands and, very significantly for EFM’s strategy – fully funding the Land and Water Conservation Fund (LWCF) at $900 million per year in perpetuity.  The LWCF is the source used by the US Forest Service, national parks, and other federal land agencies to acquire land for recreation and conservation.  It is relevant to our Funds’ strategy as there are properties in the portfolio that we want to sell to federal agencies as part of the long-term ecological uplift plan for the property.  In addition, many of our forests are located adjacent to federal, state and other public forests.  We work collaboratively with these public landowners on forest health, fire risk reduction, and improving public access to forestlands.

Is there an intention to invest in forests in Brazil?

EFM’s current funds are focused on restoring the natural forests of the western United States.  EFM does offer natural climate solutions advisory services across North and South America and Brazil presents an interesting opportunity for climate-smart forestry investments. We are able to discuss specific opportunities on a one-on-one basis based on desired investor outcomes.

What is Bettina’s view on how to handle invasive species such as the ash borer in the context of sustainable forestry?

There are a host of both introduced and native pest species that pose a risk to forests, from introduced species like the ash borer to native pests like bark beetles and Swiss needle cast (caused by a fungal pathogen, which, despite its name, is native to the western US).  While introduced pests are uniquely troublesome as there are (at least initially) no established predators or controls, native pests can also become invasive in the right conditions. The best defense against pests, whether introduced or native, is to foster a healthy, structurally complex, species-diverse forest.  Pests thrive on same-age plantations and on trees weakened by excessive density and competition.  Active management also plays a role, by immediately removing pest-affected trees and taking appropriate control measures.  In all cases,  a holistic perspective is helpful, including tolerance for a background level of pests that may be an important part of the food chain and creation of habitat such as standing dead trees that are so critical for nesting and foraging habitat for hundreds of species.

This is not to minimize the seriousness of introduced aggressive invasive species, where a public-private mobilization of active prevention and control measures is called for.

In terms of introduced tree species, forest health is seriously compromised when non-native species become established and aggressively expand into native forests. Invasive species can persist for decades and may drive out native species, reduce wildlife habitat, and alter soil moisture regimes. Our policies generally include:

How do you engage with those who have had a long history of resisting forest management?

We believe that timberland investing has changed and in today’s market requires a differentiated approach to investing, one that includes the kind of climate-smart forestry that creates value for investors, stores carbon and helps mitigate the impact of climate change. Since 2004 EFM has been developing climate-smart approaches to natural forest management that are the keys to unlocking value in a carbon-constrained future. Our approach allows us to create value beyond producing logs and wood fiber, including improved carbon storage, habitat, soil formation, climate regulation, and water storage and purification. Additional benefits include community enhancement by creating locally based employment opportunities alongside the economic contributions of timber harvests and forest management and restoration activities.

How do you factor the risk of value destruction from wildfires that might start elsewhere then encroach on your properties?

Fire and weather events (such as high winds) are risks inherent to forestland investment and management and can be part of the natural cycle of renewal and regeneration for natural forests. Fire incidence can be infrequent to frequent depending on the forest type but is generally increasing as a result of climate change.  EFM moderates fire risk through the development of a detailed fire plan for each property, coordination with agencies and neighboring land owners on early detection and fire suppression, joining land-owner collaboratives that detect and suppress fire and through silvicultural treatments such as thinning and introducing physical fire breaks, all of which substantially reduce fire risk.  We primarily self-insure through geographic diversification which is weighted (by value) towards the coastal, temperate region. This region is very wet, and the incidence of historical fires is so low that commercial insurance is not efficient given the cost of insurance and the potential incidence of loss from fire.  However, we do seek insurance (although it is not consistently available) for properties that lie in drier regions where the incidence of fire is higher.   Finally, should a fire occur in a merchantable stand of timber, generally 70-80% of the timber value of the merchantable stands can be captured through salvage harvesting in the first two years after a fire.  With regard to fire risk from neighboring properties, one of our strategies is to create a shaded fuel break along our property borders.  These fuel breaks provide a place to stop or slow down a fire that starts on an adjoining property, and is usually built next to a road that provides access for fire suppression.

 

 

Agriculture sits at the nexus of some of the world’s most pressing challenges: climate change, food security and nutrition, water and soil quality, biodiversity and sustainable livelihoods. It is clear that business as usual is no longer an option.
Recently we hosted a discussion with Dr. Sally Uren, OBE, Chief Executive Officer of Forum for the Future. (We are pleased to note that Sally is also a member of Cornerstone’s Global Advisory Council.) Forum for the Future is a leading international non-profit working with business, government and civil society to solve complex sustainability challenges. The organization recently released a compelling report, Growing Our Future: Scaling Regenerative Agriculture in the United States of America. The report’s central premise is, “While progress towards regenerative agriculture in the U.S. has accelerated over the last five years, there are significant barriers holding us back. What are they? And how can we overcome them?”
Sally was joined by Cornerstone’s Chief Impact Strategist, Katherine Pease, who addressed ways in which investors can fuel growth in regenerative ag practices, and Cornerstone Founder & CEO, Erika Karp, who moderated the session.

We recently hosted a second discussion on the near-term impact and longer-term implications of the current coronavirus pandemic. Cornerstone Managing Director Alison Smith moderated a Q&A session with CEO Erika Karp and CIO Craig Metrick, based on questions submitted by attendees. The dialogue focused on asset allocation, implications for various sectors and asset classes, and the role of environmental, social and governance analysis in crafting resilient portfolios. We hope you find this replay helpful, and welcome your feedback at info@cornerstonecapinc.com or via our website Contact Form.

The economic model of our current era is linear. We take resources from nature, make them into a product and then throw the item away when we’re done with it. The result? Overflowing landfills, trash filled waterways and, too often, toxic waste. This rampant waste of resources poses an existential threat to the world as we know it. A circular economy uses as few resources as possible in product creation; keeps resources in circulation for as long as possible, extracting the maximum value from them while in use; then recovers and regenerates products and their components at the end of their service life. Embracing circular economy principles is perhaps the most essential initiative we can undertake as a global society. We believe it is the only way forward if we want to sustain humankind.

–Intentional Design: Embracing the Circular Economy, Cornerstone Capital Group, October 2019

Amidst these difficult times, we are pleased to see that the European Union has moved forward with a bold, comprehensive plan to embrace the circular economy. The new Circular Economy Action Plan, adopted on March 11, 2020, focuses on the design and production of a circular economy. It aims to ensure that the resources used are kept in the EU economy for as long as possible. The introduction of this new framework follows the December 2019 European Green Deal, which set a roadmap towards a climate-neutral circular economy. [1]

We believe this is an important, proactive policy development that could serve as a model for government entities in other regions. The framework offers some specific guidelines for various economic sectors and lays the groundwork for strong rules and restrictions. We are especially encouraged by the proposals for sectors such as electronics, food and packaging—areas of the economy that tend to generate the most waste.

We recognize that these are recommended guidelines.  Actual legislation still needs to be formulated and passed. Given the current coronavirus pandemic, we suspect that implementation of any legislation will likely be delayed due to the pandemic’s negative economic impact globally. Looking out longer term, however, we believe this type of legislation will be beneficial for the economy and the environment.

Executive Vice President for the European Green Deal, Frans Timmermans, said: “To achieve climate neutrality by 2050, to preserve our natural environment, and to strengthen our economic competitiveness, requires a fully circular economy. Today, our economy is still mostly linear, with only 12% of secondary materials and resources being brought back into the economy…With today’s plan we launch action to transform the way products are made and empower consumers to make sustainable choices for their own benefit and that of the environment.”[2]

The EU Circular Economy Action Plan:

1)  Propose legislation on a Sustainable Product Policy, to ensure that products placed on the EU market are designed to last longer, are easier to reuse, repair and recycle, and incorporate as much as possible recycled material instead of primary raw material. Single-use will be restricted, premature obsolescence tackled, and the destruction of unsold durable goods banned.

2) Empower consumers so they have access to reliable information on issues such as the reparability and durability of products to help them make environmentally sustainable choices.

3) Focus on the sectors that use the most resources and where the potential for circularity is high. The Commission will launch concrete actions as shown in the table below:

 

Virginijus Sinkevičius, commissioner for the environment, oceans and fisheries, said. “The new plan will make circularity the mainstream in our lives and speed up the green transition of our economy. We offer decisive action to change the top of the sustaina­bility chain–product design. Future-oriented actions will create business and job opportun­ities, give new rights to European consumers, harness innovation and digitali­zation and, just like nature, make sure that nothing is wasted.”[4]

The full EC report can be found here: https://ec.europa.eu/environment/circular-economy/pdf/new_circular_economy_action_plan.pdf

 

[1] https://ec.europa.eu/commission/presscorner/detail/en/ip_20_420

[2] Ibid.

[3] https://www.gcimagazine.com/marketstrends/regions/easterneurope/Circular-Economy-Action-Plan–568743741.html

[4] https://ec.europa.eu/commission/presscorner/detail/en/ip_20_420

On March 19, 2020, Cornerstone Capital Group held a conference call addressing concerns about the current coronavirus pandemic and its impact on the markets, the economy, and importantly, the changes in how we think about the infrastructure of our society over the longer term. Cornerstone’s Erika Karp, Craig Metrick and Michael Geraghty were joined by two equity managers on the Cornerstone platform: Cathie Wood of Ark Investment Management, and Garvin Jabusch of Green Alpha Advisors. The full call replay can be accessed here.

Managing Portfolio Risk Through Integrated Analysis

The participants on the call focused on the benefits of integrating environmental, social and governance (ESG) factors into the investment process in an effort to de-risk long term portfolios and identify critical growth opportunities.  Both Ark and Green Alpha look at multiple risk factors at a systemic level to minimize exposure to threats such as climate change. This extends to investing in methods to address risk — such as pandemic crisis. In their view, by focusing on innovation and the future while considering all stakeholders instead of only shareholders, investors may experience better long-term returns with lower volatility.

Kicking off the discussion, Erika highlighted that “sustainable investing is a proxy for quality. It’s a proxy for innovation and a proxy for resilience. And that is precisely what we need right now.” She asked whether, when we emerge from this current crisis, we would be forever changed:

“We have to think about issues like distance learning, telecommuting, distributed health systems. We have to think about supply chain logistics. We have to think about surge capacity. We have to think about virtual entertainment, emergency service centralization, obviously food safety, water quality, hygiene standards. We have to think about mental health provision. We have to think more proactively and in an innovative way about investing. Going forward to attack these challenges, we remind everyone that impact and sustainable investing is just investing.  But a more conscious, predictive way to invest.  Impact investing is the new cornerstone of capitalism.”

Michael Geraghty, Cornerstone’s market strategist, discussed the volatility of the markets under the current coronavirus situation. He doesn’t believe the markets will stabilize until the virus is either contained or a vaccination is developed and made available to the public. Michael notes, however, that this is a short-term shock to the system and not a structural one. That’s not to say that this pandemic won’t have a profound effect on the economy or the markets near term.  The consumer accounts for 70% of U.S. Gross Domestic Product (GDP). If consumers are staying home and hunkering down, a cut in rates by the Federal Reserve and a payroll tax cut by the Federal government won’t have a strong impact on consumer behavior.

Craig Metrick noted that Cornerstone focuses on long term investment objectives while creating an investment plan which is designed to achieve social and environmental impact. He then interviewed Cathie and Garvin as to their views on the longer-term implications of the current crisis.

Investing in Disruptive Innovation and Strong Governance

Ark Investment Management focuses on investing in disruptive innovation over a five-year time frame.  Its five core themes are: DNA sequencing, robotics, artificial intelligence, energy storage and blockchain technologies. Cathie Wood noted that the companies her firm invest in are not typically in any indices. Other managers are selling these names while buying names in the indices, such as the S&P 500, giving firms like hers an opportunity to buy these innovative company stocks at lower valuations. Over the long haul, she believes these investments should outperform older economy names that still dominate the indices.

Garvin Jabusch noted that a recession is already priced into the markets and his firm is looking for companies that will perform well out of the downturn.  Bottom-up analysis is key, in his view. He looks for companies that are good stewards of capital, are innovative and create solutions that will make the economy more productive. Green Alpha is a long term buy and hold manager. The firm focuses on innovative companies that can help de-risk the economy such as those engaged in decarbonization, biotech and electrification.

Summing up the discussion, which included a very lively Q&A, Erika noted: “When it comes to ESG analysis, the “G,” governance, is first among equals. Because if we’re talking about a well-governed company, then by definition it is looking at environmental and social issues. And if a company is not looking at environmental and social issues, it is by definition not well-governed. It’s tautological.”

Ark Investment Management and Green Alpha are two of the strategies included in the Cornerstone Capital Access Impact Fund. Click the link to view standardized performance and the Fund’s top ten holdings:  https://cornerstonecapitalfunds.com/quarterly-commentary

You should carefully consider the investment objectives, risks, and charges and expenses of the Fund before investing. The prospectus contains this and other information about the Fund, and it should be read carefully before investing. You may obtain a copy of the prospectus by calling 800.986.6187. The Fund is distributed by Ultimus Fund Distributors, LLC. Cornerstone Capital Group is the adviser to the Fund. Investing involves risk, including loss of principal. Applying ESG and sustainability criteria to the investment process may exclude securities of certain issuers for both investment and non-investment reasons and therefore the Fund may forgo some market opportunities available to funds that do not use ESG or sustainability criteria. Securities of companies with certain focused ESG practices may shift into and out of favor depending on market and economic conditions, and the Fund’s performance may at times be better or worse than the performance of funds that do not use ESG or sustainability criteria.

9827671-UFD-3/23/2020

As new members of the World Benchmarking Alliance, we have been delving into their work to understand how WBA benchmarks corporate performance in terms of their contribution to the UN Sustainable Development Goals.

WBA’s approach aligns closely with Cornerstone’s thinking: they recognize that transformational, systems-based change across key sectors and issues is critical to achieve a regenerative and inclusive global economy. Recognizing that the private sector has a tremendous role to play in bringing about such change, and that clear and consistent measurements of progress are essential to the effort, WBA is creating benchmarks or indices for key focus areas:

Below we offer highlights from WBA’s recently released assessment of the automotive industry, part of its climate and energy benchmark.

Measuring the world’s 25 most influential auto manufacturers

Given the transport industry is responsible for 15% of the world’s greenhouse gas emissions, automotive companies play a vital role in decarbonizing our economy. To measure their progress toward reaching the Paris Agreement goal of limiting global warming to well below 2°C, WBA analyzed the world’s leading automotive companies to determine if they can meet that target. We have summarized their key findings below.

Destination Decarbonization: Stuck in the Slow Lane

Companies are stalling in the low-carbon transition. Of the 25 companies, only Groupe PSA, Ford, Renault, and Mazda have established fleet targets that are fully aligned with the pathway required for the low-carbon transition, with only Mazda and Nissan setting long-term targets that reach as far as 2050.  In addition to beefing up target emissions reductions, companies need to map out a clear strategic plan to achieve those targets. Groupe PSA is the only one of the 25 companies assessed that has embedded reduction targets into a publicly available low-carbon transition plan.

Driving with the Brakes On

A company’s investment in new battery technologies and electrification is a strong indication of its commitment to decarbonization. Some companies are making progress in boosting their low-carbon vehicle sales. BAIC, for example, boosted its share of low-carbon vehicle sales from less than 1% of total annual sales in 2013 to 7% in 2017. Likewise, BMW grew its low-carbon vehicle sales from less than 1% in 2012 to nearly 6% in 2018.

However, for 16 of the companies assessed, low-carbon vehicles accounted for less than 1% of sales. Several of these laggards have, encouragingly, made quantifiable commitments to rapidly increase their sales to transition to a low-carbon economy.

Sales: Customers Taking the Road Most Travelled

Though the auto sector is renowned for its high-profile marketing campaigns, less than half of the companies benchmarked show noticeable efforts to market low-carbon vehicles as a more favorable option. According to the WBA, there remains significant room for improvement from automotive companies to shift consumers towards low-carbon vehicles to help decarbonize the automotive industry.

Of the 25 companies, Tesla plays a strong role in shifting the passenger vehicle market toward electric vehicles by actively engaging consumers, increasing the number of showrooms, and creating unique customer experiences. BMW and Groupe PSA also actively promote their electric vehicles and encourageconsumer uptake. Efforts to shift the consumer mindset would require automotive companies to actively promote low-carbon models across multiple sales regions through a variety of methods.

Revving up Public Commitments to Climate Policy

There is an industry-wide reluctance for automotive companies to publicly commit to a positive, transparent and proactive approach to climate policy. None of the companies assessed show leadership in engaging with trade associations or regulatory bodies to help mitigate climate change. Nor does the industry as whole systematically safeguard against influencing climate-related regulations in a negative way, directly or indirectly, in consultations with regulators.

Though all of the companies – with the exception of Tesla – show a level of engagement with a trade association or regulatory body, none have a publicly available engagement plan, which is widely considered a best practice. That said, Ford, Groupe PSA, General Motors and Renault have established more defined positions relating to “climate-friendly” policies and what actions to take if an affiliated trade association has climate-negative positions.

Driving Change: The Future of Mobility

To better prepare for a low-carbon economy and remain profitable, auto manufacturers need to identify new business opportunities that move away from traditional passenger vehicle ownership. While automotive companies like Tata Motors, Tesla, BAIC, Honda, Nissan, and Toyota are exploring alternative business activities, they are far from scaling up operations: most companies do not offer a scope of operation, a sense of market share or profitability, and lack expansion plans with a defined timeline. This suggests that these activities may not have been given sufficient consideration in terms of the broader business strategy. To facilitate the transition to a low-carbon economy and help achieve the goals of the Paris Agreement, auto manufacturers could further demonstrate action towards diversifying their business models.

Conclusion

Car companies have a responsibility to current and future generations to change the high-emission mobility culture. Change can only occur if manufacturers proactively increase investments in and marketing of low-carbon vehicles, engage with policymakers on low-carbon solutions, and seek out new business opportunities.

Most companies have a low-carbon vehicle, but there is insufficient investment in this market. There also needs to be a more positive and proactive approach for companies to market low-carbon vehicles to consumers. As a whole, the industry needs to work with trade associations and react to climate policy. In sum, the WBA’s report illustrates that the 25 auto manufacturers are not on track to meet the goal set by the Paris Agreement.

For the full assessment please visit https://climate.worldbenchmarkingalliance.org/

Cornerstone Capital Group Founder and CEO Erika Karp addresses the state of impact investing, offering a clear distinction between impact investing, ESG analysis, and sustainability. No matter what labels are used, someday this will all simply be called “investing.” Note: This video originally appeared on cornerstonecapitalfunds.com

The economic model of our current era is linear. We take resources from nature, make them into a product and then throw the item away when we’re done with it. The result? Overflowing landfills, trash-filled waterways and, too often, toxic waste. This rampant waste of resources poses an existential threat to the world as we know it.

What is the way forward? The circular economy. A circular economy uses as few resources as possible in product creation; keeps resources in circulation for as long as possible, extracting the maximum value from them while in use; then recovers and regenerates products and their components at the end of their service life. Embracing circular economy principles is perhaps the most essential initiative we can undertake as a global society.

In our report Intentional Design: Embracing the Circular Economy, we look across a range of sectors to identify critical resource issues and identify examples of companies that are adopting circular economy practices into their supply chain management. In many cases, companies are increasing their efficiency, reducing waste, and saving money through their investments in the relevant processes and technologies. The transition to a circular economy is also spurring new business models and collaboration across supply chains.

For investors, forward-thinking asset managers are increasingly incorporating circular economy considerations into their investment processes; “pure play” circular economy investment vehicles, though rare, do exist. The report highlights several existing investments that we consider under the circular economy umbrella. In our view, investing in the circular economy is poised to become a central theme in sustainable and impact investing.

Download Intentional Design.

It seems clear that the “circular economy” is the only way forward for humanity.  In my view, adopting circular economy principles will combat our current crisis of waste – wasteful manufacturing, wasteful packaging, food systems, technology, extractive materials.  We can begin to repair the planet. The concept resonates deeply with me and the team at Cornerstone, which was founded with the vision for a regenerative and inclusive global economy.

For those who don’t know, a circular economy “aims to redefine growth, focusing on positive society-wide benefits. It entails gradually decoupling economic activity from the consumption of finite resources, and designing waste out of the system.” [1]

I recently attended the Circularity 2019 conference, hosted by Greenbiz. It was a fascinating and thought-provoking few days, with sessions ranging from Digitizing Circularity  to Catalytic Capital.  I participated in a fascinating panel with Ron Gonen, Co-Founder and CEO of Closed Loop Funds, and Emily Landsburg, Director at private equity firm Ultra Capital, on the role of investors in financing companies engaged in the circular economy. I’m pleased to share Greenbiz’s recording of that conversation.

[1] https://www.ellenmacarthurfoundation.org/circular-economy/concept

 

UN Sustainable Development Goal 12: Sustainable Consumption and Production is about promoting resource and energy efficiency, sustainable infrastructure, and providing access to basic services, green and decent jobs and a better quality of life for all. Its implementation helps to achieve overall development plans, reduce future economic, environmental and social costs, strengthen economic competitiveness and reduce poverty.1

Progress toward this goal requires a move toward practices that limit harmful by-products. SDG 12 is further refined by targets that can be more readily translated into actions. These targets highlight the interconnected nature of the goals: For example, strategies to promote SDG 12 also support progress toward SDG 13 (Climate Action), SDG 6 (Clean Water and Sanitation) and SDG 11 (Sustainable Cities and Communities). Below are a series of synergies that can come from providing access to products, services and systems that address Responsible Consumption & Production.

Invest in Access to Clean Air

Air quality is damaged by many production and consumption activities. Industrial activity and vehicles are the largest emitters of outdoor air pollutants such as carbon monoxide, nitrogen oxide, and fine particulate matter.2,3 These types of pollution are strongly linked to higher rates of cancer, heart disease, stroke and respiratory disease, causing over 4 million deaths annually.4 Encouraging responsible production cycles and consumer decisions that limit harmful emissions can increase access to clean air. In fact, air quality in the US has mostly improved since the 1990s due in part to more efficient technologies and the regulations of the Clean Air Act.5

Learn More About Investing in Responsible Production & Consumption

Invest in Access to Clean Water, Sanitation and Hygiene

The production of goods consumed globally has a major water footprint — irrigation accounts for 70% of all human withdrawals of water, while industry accounts for 20%.6 Excessive consumption of water depletes a resource that is already stretched thin; 40% of the world’s population is affected by water scarcity, and water use exceeds recharge in many watersheds.7 At the same time, increasing amounts of water are becoming contaminated. Agriculture is by far the greatest polluter of water, discharging chemical inputs and excessive organic material.8
Industry is also a significant culprit, dumping millions of tons of heavy metals, solvents, toxic sludge and other wastes into water bodies
each year.9 Wider access to clean, safe water depends on the promotion of sustainable water consumption habits to ensure there is enough for a growing population, and on water-conscious production practices to avoid contaminating water.

Invest in Access to Education

While personal consumption habits and decisions have major environmental consequences,10 they can be made more sustainable by increased access to education. Education, especially when targeting environmental issues, has been shown to enhance learners’ ability to assess the consequences of their actions and causes a shift to more environmentally friendly behavior.11,12 Changing consumer habits is increasingly important as the global population pushes toward 8.6 billion by 2030 and as the 1.8 billion children below the age of 1413 mature and make consumer decisions.

Learn More About Investing in Responsible Production & Consumption

Invest in Access to Affordable, Sustainable and Modern Energy

Globally, nearly 1 billion people lack access to electricity, and nearly 40% of the population relies on inefficient energy sources such as biomass, coal, and charcoal for heating and cooking.14,15 These fuels not only pollute indoor air, but contribute to environmental issues
such as deforestation and climate change.16 Providing access to modern, clean-burning cookstoves makes the consumption of energy by this 40% of the population significantly more sustainable. For those who have access to electricity or who are gaining access, associated energy sources will need to become more sustainable and efficient. Increased access to energy-efficient technology and renewable sources of energy have proven to be important factors in making energy consumption more sustainable.17

Invest in Access to Safe, Affordable and Sustainable Transportation

By 2030, consumption related to personal transportation will increase substantially with 1.2 billion more cars on the road and a 50% increase in passenger traffic over 2015 totals.18 These trends are expected to raise greenhouse gas contributions from the transport sector, which already contributes 18% of all human-made emissions.19 At the same time, emissions from freight and shipping are rising even more rapidly than those from personal transportation.20 Yet, access to transportation is key to economic growth and social opportunities.21 As more people worldwide seek the benefits of mobility, access to sustainable transport options means great reductions in the consequences of their consumption choices.

Learn More About Investing in Responsible Production & Consumption

SDG 12: References

1 UN Sustainable Development Goals
2 Union of Concerned Scientists, Vehicles, Air Pollution, and Human Health
3 Institute for Health Metrics and Evaluation, The State of Global Air, 2018
4 World Health Organization, Ambient Air Pollution: Health Impacts
5 Environmental Protection Agency, “Our Nation’s Air: Status and Trends Through 2017”
6 United Nations
7 UN Sustainable Development Goals
8 UNEP. 2016. A snapshot of the world’s water quality: towards a global assessment
9 The United Nations World Water Development Report 2017: Wastewater, the untapped resource
10 Visions for Change: Recommendations for Effective Policies on Sustainable Lifestyles, UNEP, 2011
11 The Consumer Citizenship Network, Project Report 2005-2006, Hedmark University College, 2006
12 Zsoka et al. 2013. Greening due to environmental education? Environmental knowledge, attitudes, consumer behavior and everyday pro-environmental activities of Hungarian high school and university students
13 United Nations, World Population Prospects 2017
14 UN Sustainable Development Goals
15 Access to Modern Energy: Assessment and Outlook for Developing and Emerging Regions
16 Anenberg S. Balakrishnan K, Jetter J, Masera O, Mehta S, Moss J, Ramanathan V., Cleaner Cooking Solutions to Achieve Health, Climate, and Economic Cobenefits. 2013
17 Global Energy Trends, 2018 edition. A step backward for the energy transition?
18 Global Mobility Report, 2017, Sustainable Mobility for All Initiative
19 Ibid
20 Decarbonizing Transport For a Sustainable Future: Conference Proceedings, Fifth EU-US Transport Research Symposium, National Academy of Sciences, 2017
21 Global Mobility Report, 2017, Sustainable Mobility for All Initiative.

On May 20, we hosted a video webinar with Cornerstone’s Katherine Pease and Craig Metrick, who provided an overview of our new impact measurement framework, the Access Impact Framework.  Katherine and Craig provided background on why Cornerstone created the framework, our rationale for basing our framework on the UN Sustainable Development Goals, and described our methodology.

Rising income and wealth inequality is a widely recognized social concern in the United States. This is a multi-faceted issue, with root causes that vary according to demographics, and one that impact investors have shown strong interest in addressing.

Since the 1990s, there has been a growing disparity in economic opportunity for rural Americans. This demographic issue has gained public awareness in mainstream social discourse in the recent past. In this report, we lay out the key challenges faced by rural America, highlight approaches to revitalization that have proven effective, and describe existing investment strategies.

Download a brief overview or our full report.

Key challenges

The decline of manufacturing and shift to a knowledge- and service-based economy left many rural communities unable to recover adequately from the Great Recession of the late ’00s. The resulting challenges can be summarized as:

Effective strategies for revitalization

Asset-based community development (ABCD) is a “self-help” strategy that sets the stage to attract private loans and investments by taking advantage of a community’s existing strengths. Initially a community might use government or foundation funding to develop community assets, e.g. supporting existing local entrepreneurs or developing local natural resources to offer an attractive quality of life. Once an initiative proves viable it may be possible to attract private investment.

Community Development Finance Institutions (CDFIs) and other local intermediaries can help aggregate capital to support local investment. Aggregators attract capital to an investment theme and allocate sums to projects that need funding.

Real estate development is another possible path to revitalization, with Opportunity Zones potentially attracting investment that might not otherwise be economically feasible.

We highlight several initiatives that are under way related to broadband projects in small communities that may finally begin to deploy this critical infrastructure.

Lastly, we highlight how some communities are making a concerted effort to attract a younger population and stem the “brain drain” of rural youth to urban areas.

Investment opportunities

For investors interested in promoting capital investment in infrastructure and businesses that create jobs in rural America, there are various strategies one can consider across asset classes. We describe these strategies in this report; some are general categories of investment, and in other cases we refer to specific strategies available to our clients.

In our recent report Sustainable Protein: Investing for Impact at the Nexus of Environment, Human Health and Animal Welfare, we pointed out that in developed countries, diet-related health concerns and less- or no-meat lifestyles have sharply reduced consumption of red meat.  Flexitarian, vegetarian and vegan preferences have been driven, in part, by animal welfare and climate change concerns.

Today, a flexitarian diet – one that doesn’t adhere to a specific eating style and may combine plant-based and meat-based dishes – is now practiced by 31% of Americans, with another 13% subscribing to a specific eating lifestyle such as veganism or vegetarianism. In the U.K., almost 13% of the population is now vegetarian or vegan, with a further 21% identifying as flexitarian, according to a 2018 survey of British consumers.  Our report also highlighted a preference by consumers for fresh and organic products.

On February 21, Kraft Heinz announced that it was writing down the value of some of its best-known brands by $15.4 billion which, according to a Bloomberg article[1] was “an acknowledgment that changing consumer tastes have destroyed the value of some of the company’s most iconic products.”  Subsequently, the stock price of Kraft Heinz plunged 21%.

Another Bloomberg article[2] observed that “all the old guards of the supermarket aisles are struggling as consumers opt for fresher, less-processed and more on-the-go food items from upstart businesses.”  In our report, we pointed to rapid growth in the organic yogurt, almond milk and protein bar categories in recent years, with many of the leading companies being relatively young start-ups.  While Kraft Heinz attempted to respond to these trends, its efforts haven’t been enough.  As Bloomberg observed, the company “has tried to spruce up a tired suite of brands — from organic Capri Sun to natural Oscar Mayer hot dogs.”

Our report concluded that, reflecting the shift to sustainable protein, opportunities exist in alternative proteins, organic foods, new agricultural technologies, sustainably managed farmland, and sustainable fisheries and aquaculture.

[1] Kraft Heinz Falls Near Record Low on $15.4 Billion Writedown, 2019-02-22

[2] Kraft Heinz’s Financial Recipe Turns Sour, 2019-02-22

Advances in agricultural technology, changes in human diet, and rising awareness of the environmental destruction caused by factory farming are accelerating the rise of sustainable protein.

Investors can target a number of outcomes — access to a sustainable food supply, lower greenhouse gas emissions, more plentiful and cleaner water, and a reduction in animal cruelty — through sustainable protein related investments. Opportunities exist in alternative proteins, organic foods, new agricultural technologies, sustainably managed farmland, and sustainable fisheries and aquaculture.

In this report we outline how a confluence of behavioral, technological, and regulatory changes have fueled the trend toward sustainable protein; identify emerging developments in the “alternative protein” space; and highlight ways to consider sustainable protein investment across asset classes.

Download Sustainable Protein: Investing for Impact at the Nexus of Environment, Human Health and Animal Welfare

This article originally appeared in Investment News on December 13, 2018. 

Sustainable and impact investors are set to intensify their decades-long support for action on climate change on the heels of a recent report from the Intergovernmental Panel on Climate Change and the Fourth National Climate Assessment, issued by the U.S. government.

The U.S. government notes that unless urgent action is taken, climate change could shrink the U.S. economy by hundreds of billions of dollars every year in direct costs. Consistent with these findings, the IPCC’s alarming (and unsurprising) conclusions are that urgent global economic transformation is needed to head off catastrophic damage to ecosystems, communities and economies beginning within a quarter century.

Many investors now understand that climate change is not merely an environmental issue but a material economic risk for long-term portfolios. However, investors should avoid a single-minded focus on climate change that ignores the relationship between ecosystems and human development.

The IPCC report stresses that an effective fight against climate change must include efforts to achieve sustainable development goals such as gender equality, the eradication of poverty, and food security.

In other words, how we fight climate change matters. Even the most optimistic scenarios will require substantial human adaptation to changed ecosystems, which will be especially challenging for poor or marginalized communities. Achieving sustainable development goals will strengthen the ability of poor communities to adapt to inevitable change and complement more direct efforts to mitigate climate change. However, these climate mitigation efforts by themselves may either help or hinder progress towards the sustainable development goals.

For example, mitigation strategies such as reforestation or biofuel development may reduce the land available for agriculture at a time when crop yields are already declining because of rising temperatures and water stress. The resulting increases in food prices have the effect of reducing buying power and possibly destabilizing civic and political cultures in developing countries.

Conversely, sustainable agricultural strategies, conducted with attention to social equity, can increase food security and counteract some of the negative effects of climate change on drinking water, biodiversity and income inequality, while reducing greenhouse gases associated with intensive farming practices.

The empowerment of women can also support and reinforce both climate change mitigation and adaptation. Improving the quality of cookstoves available to poor women has the direct effect of reducing fuel use and deforestation. It also reduces asthma rates, which improves educational outcomes, and empowers women by freeing them from the labor-intensive “drudgery” of traditional cooking methods.

Numerous studies have also shown that as women gain education and empowerment, they earn more income and often choose to have fewer children, which is associated with reduced poverty and lower greenhouse gas emissions.

The introduction of modern technologies such as cookstoves into poor households would have an undeniably positive effect on quality of life for the poor and the resilience of their communities. However, the resulting increase in the demand for energy could undermine the intended climate benefits unless these strategies are accompanied by investments in renewable energy and energy efficiency — both of which come with additional benefits for income and energy access.

These and many other examples demonstrate the need for a holistic understanding of the connection between issues of climate and human development. Yet much of the financial capital flowing into climate mitigation today is motivated solely by opportunities for financial return arising from new public policies and the dramatic improvement in renewable energy technology.

These flows are important for achieving global scale for environmental solutions. However, a lack of attention to the social dimension of investment decisions may create a blind spot for unintended consequences that counteract environmental benefits.

The insights of sustainable and impact investment offer an essential complement to mainstream financial analysis. Integrating environmental, social and economic concerns into investment analyses can yield a more nuanced understanding of the complex interactions between climate and society. As part of this analysis, a commitment to stakeholder engagement will help investors incorporate the perspectives of local communities who will be impacted by investment decisions — because, as the IPCC report notes, climate change will impact people differently depending on geography, income and culture.

So what can investors who are concerned about climate change do? First, their investment policy statements should explicitly incorporate both climate change and key related social issues, such as gender equity, poverty, food security, and health. Second, the evaluation of investments or investment strategies intended to address climate change should integrate an analysis of their impact on broader sustainable development goals. Third, investors should use their voice to ask companies, governments and financial markets how climate change and sustainable development is incorporated into policy, planning and performance measurement.

An effective response to climate change will require the mobilization of every resource available to society, including governments, business, and civil society. Given the unique power of financial markets, investors can contribute to a long-term solution or exacerbate existing problems. Sustainable and impact investors have an opportunity to influence the outcome, if they choose to take it.

In today’s economy, the goods we consume are often produced far from where they are purchased, successively changing hands along complex and opaque corporate supply chains. The International Labour Organization estimates that across these supply chains, there are approximately 24.9 million victims of forced labor in the world.

Where forced labor risks are not addressed, they can result in serious legal, reputational, and financial repercussions for companies. Investors are uniquely positioned to help companies recognize the importance of managing this risk, and are increasingly using their voice to do so.

KnowTheChain is a resource for companies and investors to understand and address forced labor risks. We believe that companies and investors can be a powerful force for improving the lives of people who labor in their global supply chains.

Through benchmarking current corporate practices and providing practical resources that enable companies to operate more transparently and responsibly, we aim to drive corporate action while also providing considerations for investor action. KnowTheChain recently evaluated  38 of the largest global food and beverage companies on their forced labor policies and practices.

The 2018 Food and Beverage Benchmark Findings Report finds that while many of the companies evaluated may have policies and commitments in place, the majority do not provide evidence that their policies and practices are being effectively implemented. Without evidence of implementation of these policies, companies may be unprepared to respond to an egregious abuse uncovered in their supply chain by an NGO, trade union, or reporter.

Agriculture workers are particularly vulnerable

Human Rights Watch tells the story of Saw Win, a Burmese migrant worker smuggled into Thailand on the promise of a food processing job for US$4.50 a day. He was sold to brokers who were controlling work crews at fishing piers in a Thai port town. Initially, he worked on a trawler with no pay for three months. Upon returning to the port town, he was locked in a room for three days before being sold again to another boat. Eventually, Saw Win escaped by jumping overboard near the Malaysian coast and returned to land for the first time in two years.

Men and women seeking gainful employment in the agriculture industry are particularly vulnerable to exploitation – whether through force, fraud or coercion – and are often made to work for little or no pay, cut off from their homes or families. As the food and beverage sector increasingly pushes agricultural work into more rural areas to accommodate its land-intensive activities, it’s exacerbating the remote nature of the work and putting workers at greater risk.

How are companies scoring?

Unilever, which was the top scoring company in KnowTheChain’s first food and beverage sector benchmark in 2016, remains at the top with a score of 69 out of 100. Kellogg took second place with a score of 66.

Five companies score below 10 out of 100. None of them have a publicly available supplier code of conduct, nor do they take any action on worker voice and recruitment.

Scores by theme

The average score across the benchmark remains low, at just 30 out of 100, indicating that companies need to take further action to address forced labor risks across all tiers of their supply chains.

Overall, companies scored the lowest on indicators of worker voice and recruitment, suggesting that little or no action is being taken to listen to, engage with, or empower laborers across supply chains. These themes have the most direct impact on the lives of workers, and concerned investors can ask companies about their practices.

Improvements are (slowly) being made

Comparing the 2018 benchmark to its 2016 counterpart, we can see that more companies now have policies prohibiting recruitment fees, and in general, companies are providing more substantive examples of how their policies are used in practice. Of the 19 companies benchmarked in both 2016 and 2018, 17 disclosed additional steps taken to address forced labor risks.

It’s encouraging to see some companies making additional commitments since the 2016 benchmark, but progress for workers is not moving fast enough. Companies across the board must do better to make demonstrable improvements for workers.

Investors are taking action

In addition to scoring and ranking companies, this report provides good practice examples and recommendations for companies as well as considerations for investor action.

Investors representing more than $3 trillion in assets have signed the KnowTheChain Investor Statement, which lays out expectations for how companies should address forced labor risks, in-line with international standards and existing human rights due diligence tools.

Investors may wish to integrate KnowTheChain’s findings into their investment decision-making and active ownership practices. Shareholder advocacy organization As You Sow introduced a resolution on behalf of Monster Beverage shareholders, citing its 0/100 score in our 2016 benchmark report and asking the company to address the lack of transparency regarding slavery and human trafficking in its supply chain. (Monster scored 4/100 this year.)

Through responsible purchasing practices, strategic collaborations, and extended standards on issues such as ethical recruitment to lower-tier suppliers, companies can positively impact working conditions across their supply chains.

Investors who hold any of the companies KnowTheChain has benchmarked can use KnowTheChain to engage their portfolio. For each company in the benchmark, KnowTheChain has created a two-page summary identifying what steps the company can take. These company scorecards can provide a clear path for engagement for investors. Investors can further ask how companies are working to ensure migrant workers are not exploited, and how they engage with workers in their supply chains to empower them to exercise their labor rights, while ensuring that an early warning system is in place for when abuses occur.

KnowTheChain will be releasing a similar benchmark report on the apparel and footwear industry in the very near future, and we hope the audience for this research continues to grow.

“Creativity & The Arts” is a relatively new theme for impact investors to consider, despite being embedded in every cultural and technological advancement that has occurred since the dawn of civilization. As illustrated in this report, many impact-focused development initiatives integrate arts and creative endeavors, even when not defined as such. This highlights the importance of establishing common frameworks of understanding when considering impact investing.

The UN Sustainable Development Goals (SDGs), though not originally designed for investment or philanthropic applications, have become an important frame of reference for sustainable and impact investors. We at Cornerstone Capital Group have been developing our own framework for supporting investors to incorporate SDGs into their investment process. Our efforts have focused on:

One challenge we face in considering the SDGs in an investment context is their interrelated nature. Performance or improvement in any one SDG will likely be highly correlated with performance across a range of SDGs. Similarly, one can make a case that “arts and creativity” are intertwined with almost every SDG.

Of particular relevance to this report are SDG 5: Gender Equality and SDG 10: Reduced Inequalities. Several of our contributors specifically reference the ways in which artists and creatives who are women and/or people of color and/or LGBTQ can be nourished and supported through affordable live/work art spaces. These are tangible examples of how art and creativity can be considered in the context of the SDGs – and specific investment opportunities.

As an example of the interrelated nature of the SDGs, affordable housing in a broader sense is responsive to SDG 11: Sustainable Cities and Communities. One can target SDG 11 as a matter of personal interest, while simultaneously considering SDG 5 and SDG 10, using art and creativity to connect the three.

In addition to creative culture serving to connect various impact investment goals—and more important—it is a bridge-builder between and among cultures. The arts can help communicate shared human experience in ways that transcend language and other societal structures and social norms. The arts offer amazing ingenuity, fresh and unique perspectives, and uses of media and tools from across every corner of the globe and every culture.

With this report, we hope to convey the numerous ways in which a focus on the arts and creativity can reveal meaningful and impactful investment opportunities. We can readily identify opportunities not only to support artists and creatives themselves, but also the spaces in which they live and work, the positive effects that they can bring to the communities in which their work is made and shown, shared experiences and bridging of cultures and communities, and improvements in the overall human condition.

At Cornerstone, we think of impact investment in a total portfolio context. This report shares perspectives from asset owners who are interested to find a fiduciary-level investment perspective on this issue. We hear from entrepreneurs using art and creativity as a driver of value in their business models. We also feature several managers currently offering diversified managed investment strategies in the private equity and fixed income asset classes, as examples of the creative thinking occurring in the finance arena. As the landscape of such opportunities continues to develop, Cornerstone will thoughtfully review the investment and impact goals of all such strategies.

Creativity and the arts are critical elements to finding the solutions to the systemic challenges that we face today. For those ready to participate in creating a better world through impact investing, we welcome the inclusion of arts and creativity as guideposts to our investment process, and an important new tool to creating the more sustainable world we want to build.

Slavery is outlawed throughout the world, yet an estimated 25 million children and adults are still victimized as forced laborers. Modern slavery particularly affects the supply chains of the Apparel & Footwear, Information & Communications Technology, and Food & Beverage industries, but no industry is immune. Sustainable and impact investors, who have long called on companies to respect human rights throughout their supply chains, now have a growing number of investment options available to mitigate the tragedy of forced labor.

We recently hosted a webinar featuring leading experts to discuss the implications of human trafficking and forced labor for global investors. The panel covered:

Our panel, moderated by John Wilson, Head of Research and Corporate Governance for Cornerstone Capital Group, featured:

Kilian Moote, an expert in supply chain transparency and legal disclosure. He is the Project Director for KnowTheChain, a Humanity United project dedicated to helping businesses and investors understand and address labor abuses in their supply chains. In addition to joining our discussion, Kilian notes, “We have quite a few helpful resources on KTC that might be useful to your audience. For example, we have a section on our site now that is dedicated to resources for investors. We also have specific guides, such as KTC Investor Engagement Guide and a guide by ShareAction that details how forced labor can be an investment risk.”

Julie Tanner, Director of Socially Responsible Investing at Christian Brothers Investment Services. Julie  develops robust and substantive agreements with corporate boards and senior managements to improve environment, human rights and governance performance.

Craig Metrick, Managing Director. Institutional Consulting & Research at Cornerstone Capital Group, where he oversees the firm’s manager and fund outreach and review process and provides investment advisory services for institutional clients.

 

 

Cornerstone Capital recently hosted water expert Will Sarni for a conversation about “The Data-Driven Future of Water.” Sebastian Vanderzeil, Director and Global Thematic Analyst, interviewed Will, covering questions such as:

Will Sarni has been providing consulting services to private and public-sector enterprises for his entire career, with a focus on developing and implementing corporate-wide sustainability and water strategies. He has worked with companies across a range of industry sectors in evaluating the technical viability and market potential of innovative water technologies, market entry strategies and supporting M&A programs.

Sebastian Vanderzeil is a Director and Global Thematic Analyst with Cornerstone Capital Group. Sebastian’s research spans a range of themes including climate, energy, income inequality, automation and technology. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian holds an MBA and was a Dean’s Scholar at NYU’s Stern School of Business.

Editor’s Note: The post was originally published on BSR’s website on November 7, and is republished with permission. See original post here.  We continue to track issues of transparency and governance in the extractives sector following our flagship report Extractive Company Values in late 2016.

The U.S. government’s decision to withdraw from the Extractives Industry Transparency Initiative (EITI) landed with the thud of inevitability in early November. The stated explanation for the decision—which affirms a commitment to EITI principles and focuses on unique aspects of the U.S. tax system—has little credibility, given the current state of play in the anti-corruption field.

While the U.S. policy environment may be shifting, extractives companies would nevertheless be well advised to continue to pursue holistic, innovative approaches to stakeholder engagement, strategy, and values in order to restore and maintain the public trust, which is increasingly essential to protecting their reputations and licenses to operate.

The EITI was created in 2002 as a joint effort by government, business, and civil society to help citizens of resource-rich countries hold their governments accountable. EITI aims to provide the public with knowledge of exactly how much money oil, gas, and mining companies pay to governments in taxes, royalties, and other fees.

Its essential goal, however, is the protection and support of fundamental human and civic rights. The premise? With access to this information, citizens can try to ensure that these vital financial resources are used for public health, education, and infrastructure, rather than to enrich powerful figures linked to national governance.

Corruption used to be viewed as a problem afflicting developing countries, but this is no longer the case. The release of the Paradise Papers by the International Consortium of Investigative Journalists has picked up and amplified Lux Leaks, the Panama Papers, and other whistleblowing efforts. Just as money launderers can easily buy property in New York and San Francisco, offshore tax havens are used by politicians, the children of dictators, and some of our most prestigious multinationals.

Transparency activists immediately slammed the U.S. decision on EITI, emphasizing that traditionally recalcitrant Russian and Chinese energy companies now adhere to higher disclosure standards than the U.S. demands of American enterprises. America has already stepped away from its goal of being a role model on human rights, climate justice, transparency, and international cooperation under the current administration. The turn away from EITI is more of the same.

Of greater interest than Washington’s isolationist agenda is what energy and extractives companies might gain from the U.S. decision to stall on transparency regulations. The short answer is: not much. But responses to the EITI debate provide fresh evidence of a widening split over how oil and gas majors regard the sector’s long-term future, as well as their relationship with investors and the public.

Those companies that have made corporate commitments to meet the EITI’s standards of payment transparency include BP, Repsol, Shell, and Statoil. It is no coincidence that these are the very companies that have also chosen openly to embrace the Paris climate agreement while touting their investments in gas and renewables. Exxon Mobil, too, publicly supported the Paris Agreement in the wake of Donald Trump’s election.

The big strategic distinction in the oil industry is no longer over whether to acknowledge and plan for the existential challenges facing the sector; it is about how transparent companies ought to be while the energy transition proceeds. To this end, two strategies have emerged.

The first has been to acknowledge the science of climate change and the problematic history of the sector’s relationship with the government, and then to model best practice on disclosure to regain trust. Some companies, mainly based in Europe, are making headway in this direction—with the understanding that, when it comes to transparency, the horse long ago bolted from the stable. Because companies today must act as if everything they say or do might become public, disclosure has become the optimal approach to issues like payments to governments and political candidates, plans for stranded assets, or strategies to meet a low-carbon future.

The second option has been to invest in the carbon transition and support transparency aspirations publicly while privately obstructing and stalling specific regulations and disclosure efforts for as long as possible. This approach may seem foolish to observers, but it buys some time for big investors and incumbents of the C-suite, who seem to think they might squeak through to retirement before the deluge strikes.

Oil and gas companies are perfectly aware of the deep deficit of trust. Some corporations seem to have concluded that efforts to move beyond a defensive public relations stance are destined to fail; indeed, the reputational benefits accruing from a more progressive approach have been mixed. So, with much of the debate polarized and entrenched and no clear path to public approval, some companies are retreating to the practices of habit as they wait to be dragged into the present after all other options have been exhausted.

With traditional approaches to managing corporate reputation no longer fit for purpose, companies need to devise strategies that extend far beyond reactive communication and public relations. Those corporations that hope to be considered innovative will need to embrace a holistic approach to stakeholder engagement, strategy, and values that prioritizes the importance of restoring trust, regardless of whether public policy requires them to do so.

Alison Taylor is Director, Sustainability Management, at BSR, a global nonprofit business network and consultancy dedicated to sustainability. Alison leads BSR’s sustainability management practice and also works closely with energy and extractives member companies. She focuses on approaches to sustainability through risk management, strategy, stakeholder engagement, transparency, ethics and governance, and organizational change.