This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
State Street Global Advisors announced it will offer investors a new company board-aligned voting policy option to further expand investor choice. The Vote with Company Board Recommendation Policy provides retail investors the option to fully back corporate boards, aligning the voting of investor shares on all ballot items with the proxy voting recommendations of the boards of directors of the portfolio companies in which those funds are invested. The new policy follows the creation of the ISS Global Board Aligned policy, created earlier this year, but that policy had directed some proxy votes to be cast against boards’ recommendations on questions like executive pay or share structure. CEO of State Street Global Advisors Yie-Hsin Hung said “As pioneers in the ETF and mutual fund industry, we are proud to launch another meaningful enhancement that expands how investors can express their views … This new option, which will vote in line with a board’s recommendation, is proof of our commitment to expand proxy voting choices for our clients.”
- Teneo Takeaway: While the impact of pass-through voting on voting outcomes is still unclear, institutional investors giving more voting options to more of their clients is a development worth paying attention to. As described in our thought leadership piece here, pass-through voting could have a material impact on company shareholder meetings if enough asset manager clients decide to vote proxies themselves.
Glass Lewis published its 2024 Proxy Voting Guidelines for the U.S., Canada, UK, Europe and Korea, including guidelines for shareholder proposals and ESG-related issues. The guidelines outline Glass Lewis’ approach to assessing ballot items at annual general meetings. U.S. updates include changes to cyber risk oversight, executive ownership guidelines and the utility of clawback provisions. Other updates relate to board accountability for climate-related issues, expanding the policy's application to companies in the S&P 500 index operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that the companies’ GHG emissions represent a financially material risk, as well as companies that emissions or climate impacts represent an outsized, financially material risk. Notably, the guidelines also call on Boards to formally designate and codify the appropriate committee charters or other governing documents for oversight of environmental and/or social issues.
- Teneo Takeaway: Glass Lewis’ amended policies resonate with institutional investors’ focus on financial materiality in their approach to considering ESG related factors as part of their investment process.
Led by JPMorgan and France’s Natixis CIB, a new financial sector initiative aims to accelerate the UN’s Sustainable Development Goals, a set of 17 targets that range from ending hunger to universal education. The Impact Disclosure Taskforce (IDT), which is made of up financial institutions, capital markets participants and industry stakeholders will help establish voluntary guidance to help corporate entities and sovereigns measure and disclose their efforts to reduce major gaps in achieving the SDGs. The voluntary guidance draws on the principles of impact measurement and monitoring to attract sustainable pools of capital, including intentionality, measurability, ambition and targeting needs. The suggested guidance aims to complement efforts by the ISSB and does not a create a new standard or classification. The project follows similar initiatives, including the Global Reporting Initiative, that offer a set of tools to promote data sharing around SDG-related investment. IDT co-chair Cédric Merle of Natixis said that current ESG data frameworks have often focused too tightly on climate rather than social considerations, adding that “these are the shortcomings that we’ll try to solve [through] entity-level disclosures and targeting.”
- Teneo Takeaway: The Taskforce is aiming to complete its guidance for public consultation in April 2024, helping companies better assess their impact on the world.
The UK’s Financial Conduct Authority (FCA) announced the release of its new Sustainability Disclosure Requirements for asset managers and investment label rules, including new measures aimed at helping investors evaluate the sustainability attributes of investment products and funds. The new rules require firms to make sure sustainability-related claims are fair, clear and not misleading, as well as introduces naming and marketing requirements “so products cannot be described as having a positive impact on sustainability when they don’t.” FCA also introduced four new product labels for retail investors that can be used from July 2024. The regulator had initially proposed three product labels to cover various levels of sustainability but has now added a fourth "mixed goals" label to cover products that include diverse strategies, though a minimum of 70% of assets under all four labels must be sustainable. Notably, the EU’s securities watchdog ESMA will likely not introduce further labeling rules, with Irish Central banker and ESMA board member Derville Rowland saying the EU must “focus on implementing what we have well.”
- Teneo Takeaway: The FCA requirements are similar to rules that the EU has already introduced for asset managers, which promoted the reclassification of ~$192 billion from the highest sustainability classification.
New York’s Supreme Court will consider a legal claim from four New York City employees and the conservative nonprofit Americans for Fair Treatment that argues New York City’s pension fund managers violated their fiduciary duties by divesting billions of dollars in fossil fuel investments. The case suggests that former NYC Mayor Bill de Blasio failed to “discuss, cite, or refer in any way” to any financial studies with evidence that fossil fuel divestment would benefit the pension plans. The pension funds – the New York City Employees’ Retirement System, the Teachers’ Retirement System of the City of New York and the New York City Board of Education Retirement System – have moved to dismiss the case suggesting the complaint fails to plausibly allege that the pension plans’ “divestment decisions were careless, disloyal, or imprudent.” The pension funds also cited a 35% drop in energy stocks following their divestment.
- Teneo Takeaway: The case follows a similar challenge from Republican-led states that sued the Labor Department in February. While that ruling did not focus on fiduciary obligations, the ruling found that the Labor Department has “posited that ESG factors ‘may have a direct relationship to the economic value of the plan’s investment.'”
Australian investing giants IFM investors and Hesta have welcomed the Australian Accounting Standards Boards’s (AASB) sustainability reporting standards but pushed for broader alignment with the ISSB. The standards have been developed using ISSB’s two sustainability disclosure standards (IFRS S1 and IFRS S2). Notably, ASRS 1 replaced all references to “sustainability” in IFRS S1 with “climate” as the AASB proposed limiting the scope of disclosure to climate-related financial disclosures only. Maria Nazarova-Doyle, global head of sustainable investment at IFM investor, said she supported the proposal to allow companies three years of protection from private litigation over false or misleading representation claims as “disclosures will require positions to be taken on inherently uncertain matters, couple with a requirement to make forward-looking statements.”
- Teneo Takeaway: By following the ISSB model, Australia is focusing on “single” materiality whereby company disclosures are based on financial impact and not a company’s impact on society (as do the EU ESG disclosure rules). IFRS S1 and IFRS S2 rules are out for consultation until March 1.
They Said It: ESG Influencers Speak Out
At the New York Times’ DealBook summit JPMorgan Chase CEO Jamie Dimon said, “We finance more oil and gas companies in the world than just about anybody else, which I’m proud of. The best companies, the cleanest companies, they’re reducing their oil and gas, reducing methane – they will be the biggest part of the transition whether you think that or not. Yes, we’re also one of the biggest green financiers in the world, solar wind, all the R&D taking place. We just do our jobs. [If Texas restricts JPMorgan’s business] … There will be consequences to Texas. We bank their cities, schools, states, hospitals, companies, 30,000 employees and this time we’d punch back.”
