This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The California Public Employees’ Retirement System (CalPERS) announced its Sustainable Investment 2030 Strategy, which will more than double its climate-focused investments to $100B by 2030 and cut in half its portfolio’s emissions intensity. CalPERS CEO Marcie Frost said the strategy will help improve the pension funds’ “long-term investment returns while also making meaningful progress in the fight against climate change.” Head of CalPERS sustainable investing Peter Cashion said the new capital will be spread among companies that mitigate emissions and make climate resilient infrastructure, among other investments. The new strategy also promotes diversity, equity, and inclusion through a variety of efforts – including surveying external managers to keep track of their diversity achievements and “continued efforts on regulatory requirements and shareowner action.”
- Teneo Takeaway: The Sustainable Investment 2030 Strategy follows CalPERS’ board voting against divesting from fossil fuel stocks last March. At the time, CalPERS indicated it would develop a process to evaluate whether companies are prepared for strong climate regulations or shifts in consumer demand, which the 2030 Strategy attempts to implement.
The board of Oklahoma’s Public Employees Retirement System (OPERS) voted in favor of a fiduciary exemption allowing BlackRock and State Street to continue managing 65%, or $6.8B, of its portfolio. Oklahoma’s Energy Discrimination Elimination Act had required OPERS to divest from “woke” asset managers allegedly boycotting energy companies, but the pension fund determined it would be “inconsistent with its fiduciary responsibility” to comply with the law. Oklahoma is among a group of Republican-led states, which led a backlash against ESG investments last year, that have started to see pushback from prominent investment managers. While many of these anti-ESG laws suggest ESG investing puts political and social objectives over financial responsibility, OPERs cited its fiduciary obligation to avert compliance with the law.
- Teneo Takeaway: Ultimately, state chief investment officers and fund managers want control of the decision making and investment allocation. Laws that dictate and restrict fiduciary aligned capital allocation strategies may continue to face significant resistance from state treasurers and chief investment officers.
The Equal Employment Opportunity Commission (EEOC) and state civil-rights agencies have received an increase of disability discrimination charges filed by workers. This appears to be driven, in-part, by rejections of work-from-home accommodations for mental health reasons conflicting with the renewed push by many corporate leaders to have employees return to the office. EEOC complaints citing anxiety, depression, and post-traumatic stress disorder rose by at least 16% for each condition between 2021 and 2022.
- Teneo Takeaway: Companies are being called on to reexamine employee policies due to operating in a more volatile, post-pandemic marketplace. Employee mental health and wellbeing are now a larger part of ESG mandates. They join a growing list of employee-centric practices that have a direct impact on corporate bottom lines
Glass Lewis released the findings from its first-ever client Policy Survey, which aimed to gather feedback from corporations and investors to help develop and update Glass Lewis’ market-specific benchmark policies. The survey questions spanned a variety of areas, including executive compensation, ESG and shareholder proposals, capital structure/voting rights, and director commitments, among others. Notably, respondents overwhelmingly indicated that companies should set greenhouse gas emissions targets but acknowledged the practical hurdles involved, including the need for industry-level standardization in applying emissions calculation methodology. Glass Lewis released its 2024 Benchmark Policy Guidelines today based on the survey results. Key updates include their approach to holding board members accountable in cases of material cyber breach in light of the series of cyber rules being published by multiple U.S. regulatory bodies.
- Teneo Takeaway: The survey findings reinforce corporate and investor calls for standardized emissions disclosure and target methodologies. Inclusion of cybersecurity oversight in the updated Benchmark Policy Guidelines also suggest an increased focus on the topic from various stakeholders.
The New York Department of Financial Services published final amendments to its cybersecurity requirements, adding strict provisions around board oversight and ransom payments. The amendments alter the current regulatory framework by requiring greater senior officer and board responsibility for cybersecurity; expand the incidents that are reportable within 72 hours; and revamp the annual certification process. Boards of directors are charged with overseeing cybersecurity risk management and must retain “an appropriate level” of expertise around how cybersecurity programs are supervised. The new rules also require companies that pay a ransom to submit a report that describes the decision-making process that resulted in payment and other options considered.
- Teneo Takeaway: DFS regulations, while in some cases more detailed than the SECs, have been the model for multiple federal and state cybersecurity regulations.
ISS ESG announced enhancements to its ESG Corporate Rating offering, including additional metrics and greater granularity that increase transparency of assessments of specific business practices. ISS’ ESG Corporate Rating considers ESG risks, opportunities, and impacts along the entire corporate value chain, including a company’s supply chain, its own operations, and where applicable, disposal of products. The rating also incorporates a double materiality lens, acknowledging that business operations' impact on stakeholders and/or the environment can affect the economic value of a company over the short, medium, or long term. In a statement, ISS ESG said, “these enhancements represent a critical change in line with merging and evolving disclosure and ESG performance expectations.”
- Teneo Takeaway: Amidst the ongoing debate over the term ESG, proxy advisors and investors alike are shifting to discuss materiality of specific issues that fall under the ESG umbrella.
A record number of companies have been recognized for their transparency around political spending in the 2023 CPA-Zicklin Index of Corporate Political Disclosure and Accountability. One hundred S&P 500 firms have received the designation of trendsetter, given to firms scoring 89% or higher across multiple factors, including board oversight of political spending. The report also found significant shareholder engagement around political spending disclosures, with 234 S&P 500 companies facing a shareholder resolution on the issue since the 2004 proxy season. CPA president Bruce Freed said, “despite a blistering crusade against ESG principles, companies that have voluntarily made sunlight and accountability for political spending a norm are not wavering.”
- Teneo Takeaway: As we move closer to the 2024 elections, investor appetite for transparency around political donations will likely continue to increase.
They Said It: ESG Influencers Speak Out
In a Chicago Tribune op-ed, Illinois State Treasurer Michael Freirichs said, “We welcome debate on investment strategies. What we don’t welcome are the impulsive deployment of blacklists and politically motivated government mandates that force investment professionals to ignore decision-useful risk information, fundamentally misunderstand the role of fiduciaries and impose massive costs on taxpayers, pensioners and hardworking families … The simple fact is that investors and firms have embraced ESG risk information out of a growing recognition that current financial reporting according to generally accepted accounting principles, or GAAP, is inadequate.”