Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The Securities and Exchange Commission this week reversed a Trump administration policy prohibiting shareholder climate proposals that ask for timelines or targets for emissions reductions. As a result, U.S. companies will likely have a harder time blocking climate change and human rights petitions from annual shareholder votes. According to the SEC, its “staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company … Proposals that the staff previously viewed as excludable because they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable.
- Teneo Takeaway: Shareholder proponents, including activist investors, will likely have a lower barrier to entry to place ESG proposals up for a shareholder vote in 2022.
The IFRS Foundation announced the creation of an independent International Sustainability Standards Board (ISSB), which will publish a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. IFRS Foundation Trustees also announced that the Carbon Disclosure Project and Value Reporting Foundation — which houses the SASB standards and the Integrated Reporting Framework — would issue consolidated standards under the Climate Disclosure Standards Board next June. After half a year of discussions with major regulators and standards-setting organizations, these arrangements lay the technical groundwork for a global sustainability disclosure standard-setter for the financial markets.
- Teneo Takeaway: Next steps include the finalization of the ISSB and public consultation in 2022 on a proposed sustainability disclosure framework.
Institutional Shareholder Services (ISS) — the largest proxy advisor in the world — this week announced proposed changes to 16 policies, opening the comment period until February 1 of next year. Two prominent proposed changes center around climate change and climate-related risks, board diversity, and say-on-pay.
- Teneo Takeaway: Some of the proposed policies reflect the results of ISS’ annual survey — released last month — which found that more than half of investors favored the use of ESG metrics in incentive pay and nearly all investors (86%) wanted ISS’ climate policy to align to net zero goals.
Engine No. 1’s successful campaign to add new directors to Exxon’s board underscored a vulnerability for boards that are seen as not taking ESG concerns seriously enough. A significant issue for boards in 2022 may be engaging with investors before a potentially damaging vote, especially on ESG issues. According to Morningstar, average shareholder support for environmental and social petitions increased to a record 34% in 2021. A record 12 proposals on environmental issues filed at US companies in 2021 passed with a majority of shareholder support. DEI-focused resolutions won an average of 43% backing, with nine petitions passed.
- Teneo Takeaway: Regular engagement with shareholders may decrease an activist campaign’s appeal if management has demonstrated a willingness to engage and solicit feedback from investors. In those cases, investors may be more likely to give management greater latitude to set and meet ESG goals, rather than face an activist threat.
PwC released a study last week, The Economic Realities of ESG. The study analyzed how leaders can deliver both the business transformation necessitated by climate change and also the returns investors pursue as they discharge their fiduciary duties. The study found that “investors are paying more attention to the ESG risks and opportunities facing the companies they invest in, and are poised to take action.”
- Teneo Takeaway: The study’s findings underscored governance best practices of transparency and shareholder engagement.
A group of 450 financial institutions committed to use their collective $130 trillion in assets to “hit net zero emissions targets in their investments by 2050.” Former Bank of England governor, Mark Carney, leads the United Nations Glasgow Financial Alliance for Net Zero (GFANZ), made up of banks, insurers and asset managers from 45 countries. The group declared it would finance $100 trillion in projects over the next 30 years to address climate change, a number that dwarfs the $5 trillion that members of the alliance had committed to address climate change last year. GFANZ members have now pledged to set science-based emissions reduction targets and to report on their progress annually.
- Teneo Takeaway: Pressure campaigns from activist investors and governments almost certainly helped push some of the world’s largest banks — 34 of the top 50 — to join the alliance.
Goldman Sachs released a new tool that allows clients to measure the carbon emissions of their portfolio – including public equity, junk bonds and other corporate debt. Sarah Lawlor, Managing Director and COO of Goldman’s Global Markets Sustainable Solutions Council, said the new carbon analytics tool will help track the achievement of companies’ decarbonization as well as net zero goals.
- Teneo Takeaway: Goldman’s tool will make it easier for investors to keep track of, and hold constituent companies accountable for, the carbon emissions profiles of their portfolios.
They Said it: ESG Influencers Speak Out
In a Financial Times Op-Ed, Bill Gates wrote about how innovation is taking “center stage” at COP26: “There is now significantly more money for basic research and development and more venture capital for clean start-ups in hard-to-decarbonise sectors than ever before. As a result, some important clean technologies — like sustainable aeroplane fuel, green steel and extra-powerful batteries — now exist and are ready to scale up…. Hundreds of governments and companies have made net zero commitments, and they have billions of dollars to invest. If we create systems that incentivise them to finance these projects and to commit to buying products such as sustainable aviation fuel and green steel, then we stand a chance of speeding up the innovation cycle.”
Looking Ahead: Upcoming ESG Events