Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
This week the Missouri State Employees’ Retirement System pulled all public equities managed by BlackRock, as Missouri become the latest conservative state to propose or implement rules designed to curb the use of ESG investing. At the federal level, Sen. Steve Daines (R-MT) and Rep. Bill Huizenga (R-MI) are eyeing similar restrictions if their party controls Congress after the midterms. However, institutional investment firms and activist asset managers are resisting efforts to paint ESG as a political issue or “woke,” emphasizing the materiality of ESG in decision-making. Global asset managers are expected to nearly double ESG-related assets under management to $33 trillion within five years, according to PwC, whose base-case growth scenario for the U.S. shows such assets more than doubling to $10.5 trillion by 2026. The president and CIO of equities at Neuberger Berman, which manages $400-plus billion in assets, recently pushed back on anti-ESG political machinations. He cited how in the automotive industry, environmental and social factors are essential to understanding a company’s prospects, due to the weight of electric vehicle capabilities and labor union relations.
- Teneo Takeaway: With both Democrats and Republicans doubling down on opposing views of ESG, companies and asset managers remain in a difficult position as any middle ground seems increasingly vulnerable.
On October 7, the Securities and Exchange Commission re-opened the portal for public comments on its March climate disclosure proposal and 10 other proposed rules following “a technological error,” meaning the SEC will likely miss a self-imposed deadline to finalize the climate disclosure requirements. A prior public agenda laid out that the SEC planned to complete the climate rules this month, but this does not seem plausible given the new timeline. As a result, companies that would have had to adopt new climate disclosure requirements as early as 2023 will likely have more time to prepare. Corporate feedback has focused on the high costs of implementing the regulations and on Scope 3 indirect emissions reporting.
- Teneo Takeaway: While the potential for a delayed implementation may be welcomed by some corporates, companies would be wise to continue preparing for the seemingly inevitable requirement of climate disclosure contemplated in the proposed rule.
Institutional Shareholder Services published its 2022 Global Benchmark Policy Survey on what investors care about in the upcoming annual meetings, findings that suggest it may sour even further on boards at companies that lack appropriately strong climate plans. According to the survey of 417 large asset managers, public corporations, and advisors to both, a “significant majority” said it could amount to a material governance failure if a company’s climate-related disclosures were found inadequate. 79% of those surveyed said board directors should be voted out if the businesses fail to report in line with formats such as the Task Force on Climate-related Financial Disclosures (TCFD). Moreover, half of the firms polled said ISS should consider recommending votes against directors at oil and gas and other heavily emitting companies that do not have realistic scope 1 and 2 emissions targets.
- Teneo Takeaway: The results of the ISS survey point to the continued focus of many investors on climate risk disclosure and the board’s responsibility for overseeing it – despite regulatory ESG headwinds from certain factions of the Republican party.
Kenneth Squire, Founder and Portfolio Manager at 13D Activist Fund, wrote a CNBC opinion piece that claimed activist ESG investing (AESG) is the best practice to qualitatively advocate for ESG factors. According to Squire, AESG investing occurs when “an activist investor takes a position at a company and actively (usually from a board level) and qualitatively analyzes and improves not only financial, operational and strategic facets of the company, but also its ESG footprint.” AESG investors analyze ESG issues and opportunities, as well as the company’s financial and operations, to advance ESG and shareholder value. He argues that AESG helps solve the existing problems with ESG investment because it avoids ‘greenwashing’ relies on qualitative analysis and uses engagement to effect ESG change without sacrificing shareholder value.
- Teneo Takeaway: The piece represents a long-running debate between the merits of active versus passive investing, adding the ESG layer to the discussion. Passive managers would likely counter that passive funds can not only effect positive ESG change through its stewardship teams but can do so for much a lower fee.
They Said It: ESG Influencers Speak Out
In an FT opinion piece earlier this week, Ari Emanuel, CEO of the influential publicly traded entertainment company Endeavor, argued why businesses must speak out against antisemitism by Kanye West and generally: “Silence [by businesses] is dangerous. West is not just any person — he is a pop culture icon with millions of fans around the world. And among them are young people whose views are still being formed. Hatred and anti-Semitism should have no place in our society, no matter how much money is at stake. This is a moment in history where the stakes are high and being open about our values, and living them, is essential.”
Looking Ahead: Upcoming ESG Events
