Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
Company Moves: ESG Initiatives in the Corporate World
In a speech during the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar SEC Chairman Gary Gensler said he wants mandatory disclosure on climate risks by the end of the year. He noted the SEC is considering requiring companies to disclose their climate-change related risks in their Form 10-K filings, which would make it easier for the SEC to investigate firms for fraud or disclosure failures. Chairman Gensler also announced he has asked SEC staff to examine whether companies should disclose their “Scope 3” emissions, which include emissions of their supply chains. The commission is also considering mandating distinct disclosure metrics for specific industries.
- Teneo Takeaway: We eagerly anticipate additional information from the SEC staff regarding disclosure recommendations and proposed timelines for implementation. Should the SEC staff recommend disclosures of Scope 1 & 2 data, many large companies are likely to comply quickly. Since 2009, a number of industries—industrials, utilities, materials, and energy companies—have been required to report greenhouse gas (GHG) emissions in excess of 25k MT per year (by facility) to the EPA, which publishes the data on its site. Further, more than half of the S&P 500 publishes its own emissions data through CDP or Sustainability reports, and a growing number are signing onto climate pledges that require emissions disclosure. The addition of Scope 3 emissions or other reporting requirements could complicate compliance and could make reporting efforts more resource-intensive for companies.
Last week the Senate revealed a nearly $1 trillion bipartisan infrastructure bill including climate provisions such as over $150 billion to boost clean energy and promote “climate resilience.” The bill however has received significant criticism that it does not provide enough funding for the environment and instead offers at least $25 billion in new subsidies to fossil fuel companies. Further, the deal does not establish a Clean Electricity Standard nor a Civilian Climate Corps, two key components of President Biden’s original climate proposition.
- Teneo Takeaway: The compromise deal may go up for a vote as soon as this weekend. The 2702-page bill includes $550B for physical infrastructure, like bridges, roads, and water infrastructure, and it establishes an Office of Clean Energy Demonstrations within the Department of Energy. The deal needs 60 votes to pass and may still collapse, as legislators on both sides are under pressure to reject it in favor of a much larger package (totaling $3.5B) or greater austerity. Even if the Senate passes the bill, it may remain in limbo for some time. House Speaker Nancy Pelosi has indicated she will not take up the bill unless the Senate passes a complementary bill that advances climate and anti-poverty goals.
ESG-focused revisions to the Corporate Governance Code of the Tokyo Stock Exchange will be implemented by April 2022. These include corporate commitments for maintaining gender and ethnic diversity, sustainable operations, and climate risk measurements aligned with the Task Force on Climate-Related Financial Disclosure (TCFD) standards. In cutting its five market segments to three – Prime, Standard, and Growth – the reforms aim to up investor interest in firms with higher corporate governance standards, as companies in the top Prime Market will be required to adhere to higher disclosure standards. Additionally, the new commissioner of the Financial Services Agency, Junichi Nakajima, said the main regulatory priority this year is to “establish a framework to verify the eligibility of products that relate to environmental, social and governance (ESG) issues.”
- Teneo Takeaway: As with other markets, ESG investing has grown in Japan, and Japanese regulators are looking to improve reporting requirements around governance, sustainability, and ESG to protect investors and to avoid “greenwashing.” We expect this trend to continue in established markets. The G7 finance ministers in June expressed support for mandatory disclosures according to TCFD recommendations. This topic almost certainly will come up at the UN Climate Change Conference in Glasgow later this year.
ESG Investing: Updates on Investors, ESG Ratings, ESG Rankings and ESG Investment Funds
The Science Based Targets initiative unveiled a new strategy to increase minimum corporate target setting from well below 2°C’ to ‘1.5°C’ above pre-industrial levels. Alberto Carrillo Pineda, co-founder of the SBTi and Managing Director of the new initiative, will focus on decarbonization of economies. Notably, he remains optimistic companies will “play their part...to help us halve global emissions in the next eight years.”
- Teneo Takeaway: As of mid-July, 20 percent of the global economy had committed to the SBTi. The organization will give companies that have targets pegged to the well-below 2°C target time to adjust their operations to the new 1.5°C goal. Companies submitting after June 2022 will need to align with 1.5°C’, companies having made commitments under previous guidance will have until 2025 to update their targets. 600 companies are already aligned with 1.5*C, including 66% of this year’s SBTi applicants.
The Principles for Responsible Investment (PRI), The Generation Foundation, and the UNEP Financial Initiation published A Legal Framework For Impact, noting in several global jurisdictions investors are legally required to handle sustainability issues. The report includes “the first ever comprehensive analysis of how far the law requires or permits investors to take deliberate steps to tackle sustainability challenges in discharging their duties.” The report will underpin their new 3-year program, which will focus on 5 jurisdictions to help foster legal and regulatory environments equipped to meet sustainability initiatives. Jurisdictions covered are Australia, Brazil, Canada, China, the EU, France, Japan, The Netherlands, South Africa, the U.K., and the U.S.
- Teneo Takeaway: Many investors cite the tension that exists between their legal duties as fiduciaries and their desire to advance sustainability impact in their strategies. This legal uncertainty makes it difficult for some investors to fully-embrace sustainability. The PRI report, instead, considers the role of the investor within each of the 5 jurisdictions and aims to empower him to set impact goals and measure progress against them, across asset classes.
The International Organization of Securities Commissions (IOSCO) published its Environmental, Social and Governance (ESG) Ratings and Data Products Providers Consultation Report. Examining risks and challenges associated with ESG ratings and data products, the report suggests regulators should focus greater attention on ESG by improving publicly disclosed data sources, defining methodologies, managing conflicts of interest, increasing levels of transparency, and improving the handling confidential information.
- Teneo Takeaway: As we mentioned last month, both companies and investors are often frustrated with the variability of ESG ratings and likely welcome efforts to standardize and increase transparency of ratings methodologies. IOSCO’s ten recommendations included greater regulation of ESG ratings and data providers, publishing reports based on publicly available data (rather than having ratings contingent on responding to surveys), and streamlining the disclosure process. The consultation period will begin in September, at which point national entities will be able to respond to IOSCO’s recommendations.
Institutional Shareholder Services Inc. (ISS) announced the release of its 2021 Global Annual Benchmark Policy Survey, as well as a separate Climate Policy Survey. The surveys provide institutional investors, public companies, corporate directors, and all other interested market constituents an opportunity to opine on issues relating to boards of directors, executive compensation practices, takeover defenses and environmental and social practices, among others.
- Teneo Takeaway: ISS and its closest peer, Glass Lewis, control 90 percent of the proxy advisory market between them, and changes to their recommendations can impact institutional investors’ voting behaviors. For example, according to the American Council for Capital Formation, 175 asset managers controlling more than $5T voted with ISS more than 95% of the time. ISS’ policy surveys provide stakeholders a glimpse into ISS’ thinking on potential changes to its voting policy. Issues under consideration include non-financial ESG metrics in executive pay plans, workforce racial equity audits, votes on company climate transition plans and virtual shareholder meetings. The surveys will close later this month. ISS typically announces proposed policy changes and seeks additional comments before adopting its final policy in mid-to-late November.
They Said It: ESG Influencers Speak Out
In a speech during a Principles for Responsible Investment webinar, SEC Chairman Gary Gensler highlighted the importance of uniform ESG disclosures, saying, “It’s not like some sprinters run a 100-meter dash and others run 90 meters. Investors today are asking for that ability to compare companies with each other. Generally, I believe it’s with mandatory disclosures that investors can benefit from that consistency and comparability.”
Looking Ahead: Upcoming ESG Events & Happenings
- PRI, PRI in Person (Tokyo, Japan) – 14-16 September
- Climate Group, Climate Week NYC (New York) – 20-26 September
- The Economist, Future of Energy Week (Virtual) – 4-7 October
- CSR Europe, The European SDG Summit 2021 (Virtual) – 11-14 October
- United Nations, UN Biodiversity Conference (Kunming, China) – 11 October
- United Nations, UN COP26 (Glasgow, UK) – 1-12 November
- Global Reporting Initiative, GRI Summit (Virtual) – 18 November
