This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The European Parliament announced an agreement on its proposed negotiating mandate for the regulation of ESG ratings as the bloc aims to eliminate greenwashing and protect businesses and consumers. The agreement clarifies the circumstances where ESG ratings fall under the scope of regulation and provides details on any applicable exemptions. The mandate also highlighted that ESG ratings encompass environmental, social and human rights or governance factors. If passed by the EU Parliament, ESG ratings providers that operate in the EU will require authorization or endorsement from ESMA to operate and will be subject to the powers of ESMA to request information and conduct investigations and on-site inspections. Notably, the proposed rules include an optional registration of three years for existing small ESG rating providers and new small markets entrants. The proposal reiterates the mandate that all ratings providers must stop providing consulting services to investors, the sale of credit ratings and the development of benchmarks among other things, to avoid potential conflicts of interest.
- Teneo Takeaway: The European Council will begin negotiations early in 2024 on the proposed regulation. U.S. ratings agencies that operate in the EU will also be subject to the final rules.
Similarly, The International Capital Market Association announced a voluntary Code of Conduct for ESG ratings and data products providers intended to be internationally interoperable. In line with recommendations by the International Organization of Securities Commissions (IOSCO), the Code focuses on promoting transparency, good governance, management of conflicts of interest, and strengthening systems and controls in the sector. The Code aims to foster a trusted, efficient and transparent market by introducing clear standards and providing guidance on how ratings providers interact with wider market participants. The U.K’s Financial Conduct Authority (FCA), which had appointed ICMA and the International Regulatory Strategy Group to develop the globally consistent voluntary code, called on all ESG data and ratings providers to engage with and sign up to the Code.
- Teneo Takeaway: The Code of Conduct stresses a more flexible approach to adoption than regulation, allowing signatory organizations to meet the expectations in a manner aligned to their own business model and structure. It is similar to the code of conduct for proxy advisors published by the EU about a decade ago.
ISS Governance announced updates to its 2024 benchmark proxy voting policies, integrating insights and feedback from investors and companies during and after the 2023 proxy season. The process incorporates an assessment of emerging issues, relevant regulatory changes, and notable trends seen across global, regional, and individual markets, plus relevant academic research, and empirical studies. Notably, the updated guidelines codified the case-by-case approach when analyzing shareholder proposals “requiring that executive severance arrangements or payments be submitted for shareholder ratification.” ISS’ U.S research team also held several one-one-one engagements with investors to discuss climate related analysis, disclosure frameworks and scope 3 targets, but did not provide any updated guidance on those topics. Discussing the updated policies, Georgina Marshall, Global Head of Research and Chair of the ISS Governance Global Policy Board said, “ISS Governance’s transparent, market-based approach to evolving the policies that are the basis of our informed, independent research and voting recommendations continues to help support our institutional investor clients in making informed voting decisions according to their investment and governance philosophies with regard to their investment stewardship responsibilities and fiduciary duties.”
- Teneo Takeaway: For the first time in recent memory, ISS did not make any changes to its U.S. benchmark voting policies. And while some may view this as a sign that the anti-ESG movement is having an impact, one could also argue that by not making any changes, ISS is remaining steadfast in its ESG views despite the headwinds.
Tennessee has sued BlackRock over “misleading” statements about its ESG investment strategies, alleging the firm downplayed the extent to which ESG considerations drive the firm’s strategies and their effect on companies’ financial performance and outlook. In the complaint, State Attorney General Jonathan Skrmetti said BlackRock has shown a “pattern of deception,” and has “engaged in a series of unlawful ESG-related misrepresentations and omissions in connection with the marketing or sale of its investment products and services to Tennessee customers.” In a statement, BlackRock said they rejected the Teneessee Attorney General’s claims: “BlackRock fully and accurately discloses our investment practices and our approach to proxy voting.” The asset manager and its CEO Larry Fink have increasingly avoided using the term ESG, shifting to labels like natural capital and climate-related risk that describe the firm’s approach to material climate-related risks, in line with fiduciary obligations.
- Teneo Takeaway: Despite the political and legal pressure placed on large asset managers for their ESG investment strategies, companies continue to believe that certain ESG issues are critical to their business and stakeholders. In Teneo’s annual survey of global public company CEOs and institutional investors – “Vision 2024: Where is the World Going in 2024 and Beyond” – 92% of CEOs stand by their ESG related programs.
The Taskforce for Nature-related Financial Disclosures has released sector-based guidance for implementation of the final TNFD recommendations published in September 2023. The draft sector guidance includes a range of industries – oil and gas, metals and mining, food and agriculture, chemicals, as well as biotechnology and pharmaceuticals, among others. The tailored guidelines aim to help organizations apply the LEAP approach, the identification and assessment of nature-related issues, in a manner relevant to their business and industry. The guidance is considered supplementary to the TNFD LEAP approach and is designed to help businesses to gather relevant insights to enable them to disclose on the TNFD’s 14 disclosure recommendations.
- Teneo Takeaway: The sector guidance will allow businesses to tailor their implementation plans and is available for stakeholder feedback through March 29, 2024.
They Said It: ESG Influencers Speak Out
In an exchange with Elon Musk and Bill Ackman on X (formerly known as Twitter) on the role of DEI in business, billionaire businessman Mark Cuban wrote: “Good businesses look where others don't, to find the employees that will put your business in the best possible position to succeed … By extending our hiring search to include [diverse candidates], we can find people that are more qualified. The loss of DEI-Phobic companies is my gain … Having a workforce that is diverse and representative of your stakeholders is good for business.”
