Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The Supreme Court announced last Friday to overturn Roe v Wade, handing over decision-making power on abortion to state legislatures. Corporate response has focused on supporting employee access to reproductive care following the official decision.
- Teneo Takeaway: Corporate focus now shifts beyond affirming benefits to requests for further clarity regarding reproductive support and legal challenges at the state level. We expect companies will face increased scrutiny regarding user support as questions around personal data, privacy, and payment data become more prevalent.
In comment letters to the SEC, companies widely claim its new climate disclosure proposal would increase their legal liability, costs, and reporting burdens. While many businesses already report data around GHG emissions, the SEC seeks to standardize the process, add reporting on the financial impacts of extreme weather events, and requires third-party assurance so that investors find it easier to make comparisons. The SEC received more than 3,400 letters with feedback in the three-month comment period ending June 17 – a much higher volume than what it generally receives – including from over 40 U.S.-listed companies.
- Teneo Takeaway: The SEC will now consider responses from companies, investors, auditors, consulting firms, trade groups and others in deciding to modify the proposal and vote on the rule. As legal questions remain, any final rule is almost assured to be challenged in court.
The SEC announced its Spring 2022 Regulatory Agenda which includes many ESG issues. Some rules in the proposal stage are an amendment to the Fund Names Rule, as well as items related to increasing corporate board diversity, addressing investment companies’ ESG claims and disclosures, as well as shareholder proposals under rule 14a-8. Rules at the final vote stage include the climate disclosure proposal, an amendment to the Dodd-Frank Act to require reporting on the relationship between executive pay and financial performance, cybersecurity risk governance, and reforming short sale disclosures.
- Teneo Takeaway: Despite threats of legal challenges, the SEC’s ESG agenda seems to be moving full speed ahead. In addition to its rulemaking, the SEC’s ESG Enforcement Task Force also continues to be on high alert for instances of “greenwashing” by both companies and investors.
U.S. companies faced a record number of shareholder votes on environmental and social issues this year, but investor support has dampened amidst macroeconomic headwinds, including record energy prices stemming from Russia’s invasion of Ukraine. Shareholders have voted on 274 sustainability-related proposals this year, up 41% from last year, according to the Sustainable Investments Institute. Only 27% of proposals passed, down 5% from last year.
- Teneo Takeaway: Some shareholder proposals related to climate have become too prescriptive for some large asset managers. For example, BlackRock recently noted in a policy update that such proposals “may not promote long-term shareholder value.” Expect shareholder proponents of climate-related proposals to recalibrate their asks next year.
On June 30, the U.S. Supreme Court issued a ruling in West Virginia v. Environmental Protection Agency that revokes powers held by the EPA under the Clean Air Act to regulate carbon emissions from power plants. The EPA had claimed that it could devise carbon emissions caps based on a generation shifting approach. In a majority opinion, Chief Justice Roberts wrote that the EPA’s effort to make industry-wide changes in regulating greenhouse gases violated the major-questions doctrine – the idea that an agency must point to “clear Congressional authorization” when it asserts “highly consequential power” of economic and political significance.
- Teneo Takeaway: The opinion is likely to exacerbate existing U.S. policy gridlock around climate change, particularly at a time when inflation, supply chain disruptions, and high energy prices in the wake of the Ukraine war have already tested global commitments. The ruling will introduce more hurdles to establishing a carbon-neutral economy in the U.S. by 2050, particularly given the Biden administration was targeting an emissions-free power sector by 2035.
The EU’s securities markets regulator, the ESMA, wrote a letter to the European Commission providing findings on the EU’s “immature but growing” market structure for ESG rating providers. The ESMA received 154 responses, finding 59 ESG rating providers active in the EU. The consolidated market features a few larger non-EU providers and several much smaller EU entities. Common shortcomings included a lack of coverage of an industry or a type of entity, insufficient data granularity, and a lack of transparency around methodologies used by ESG rating providers.
- Teneo Takeaway: ESG ratings continue to be on the receiving end of regulatory scrutiny. It is increasingly likely that Europe will draft regulations that will seek to solve some of their alleged deficiencies, which may be good news for companies that have become increasingly frustrated by the differing methodologies and perceived lack of transparency.
They Said It: ESG Influencers Speak Out
Shareholders interested in corporate DEI practices and workplace culture are turning more toward litigation to hold companies accountable. Mike Delikat, Partner at Orrick Herrington & Sutcliffe and a global employment law expert, says: “These [cases] have now become much more than just individual employment claims, they’ve become securities litigation against the board of directors because that gets a lot more attention and reaction.”
Looking Ahead: Upcoming ESG Events
- ESG Performance Metrics in Incentive Plans, The Conference Board (New York) – 30 June
- Global Energy Independence Day – 10 July
