This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The European Parliament and Council reached a provisional agreement on a proposal for regulation of ESG rating activities. The new rules would require ESG ratings providers to be authorized and supervised by the European Securities Markets Authority (ESMA) and comply with transparency requirements into areas including methodologies used for ratings and sources of information. ESG ratings providers outside of the EU would be required to be either endorsed by an EU-authorized provider or recognized on a similar basis by the providers’ country of origin’s authorities. The agreement also provided further detail on areas of applicable exclusions, as well as clarifies the territorial scope of the regulation by defining what constitutes operating in the EU. Notably, as part of the agreement, the Council and Parliament amended the SFDR to require financial market participants or advisors that disclose ESG ratings as part of their marketing communications to include information on the methodologies used in such ESG ratings on their website.
- Teneo Takeaway: The provisional agreement is subject to approval by the Council and Parliament before going through the formal adoption procedure. The EU’s guidelines will likely shape global ESG ratings regulation and follows the UK’s voluntary Code of Conduct for ESG data and rating providers.
The European Commission recommended reducing the EU’s net greenhouse gas emissions by 90% by 2040, a target the Commission said will ensure the EU reaches climate neutrality by 2050. The plan aligns with what the EU’s scientific watchdog recommended in June. European Commissioner Wopke Hoekstra told European Parliament “We need to make sure we have a balanced approach … The vast majority of our citizens sees the effects of climate change, does want protection, but is also worried about what that implies for their livelihood.” The final targets will be voted on following EU Parliament election in June. The 2040 target would phase coal-power out and reduce fossil fuel use by 80% – replaced with renewable and nuclear power. Notably, after significant protests from EU farmers, the Commission removed a provision that would require the agricultural sector to cut non-CO2 emission 30% by 2040 from 2015 levels.
- Teneo Takeaway: The EU Parliament will hold elections this June. If more conservatives our elected, they may further weaken this legislation.
BlackRock has opened its Voting Choice platform to over three million U.S. retail shareholder accounts, representing about $200B of the fund’s $399B in assets. In 2022, BlackRock announced Voting Choice for institutional investors, which aimed to democratize investing and enable more investors to participate in shareholder voting. With the expansion to individual investors, more than half of BlackRock’s index equity assets under management are now eligible for the program. As of December 29, 2023, clients representing $598B in assets are exercising BlackRock’s Voting Choice. A majority of BlackRock’s eligible clients have continued to entrust BlackRock’s Investment Stewardship team with proxy voting responsibilities.
- Teneo Takeaway: The expansion of BlackRock’s Voting Choice program underscores the company’s commitment to empowering investors with more voting control. Despite its adoption by many of its clients, companies have not yet been materially impacted by this development.
Separately, BlackRock has scaled back its participation in Climate Action 100+, pulling out as a corporate member and shifting its participation to its smaller institutional arm. JPMorgan Asset Management and State Street Global Advisors also confirmed they were leaving the Climate Action 100+. In their decisions, all three asset managers cited the groups shift to “phase 2,” where it would shift from pressuring companies on climate disclosures to pushing them to actively reduce greenhouse gas emissions. BlackRock said it “believes the phase 2 strategy … conflicted with U.S. laws requiring money managers to act solely in clients’ long-term economic interest.” JPMorgan’s decision falls in line with its recent positioning around climate change, saying the firm “does not work in concert with other investors on investment matters and makes its own independent decisions concerning investee companies.” With none of the world’s largest give asset managers fully behind the effort, the climate group’s goals to leverage shareholder influence to decrease emissions has significantly weakened. Notably, many European firms have maintained participation in the group.
- Teneo Takeaway: The U.S. asset manager decisions to withdraw and scale back membership in climate coalitions follows intense scrutiny from anti-ESG policymakers over anti-trust allegations and “collusive ESG actions.” However, companies should not interpret these actions that asset managers no longer care about climate risk. For example, BlackRock’s updated proxy guidelines note that climate risk is a material risk for many companies to manage.
They Said It: ESG Influencers Speak Out
At a meeting with BlackRock’s Larry Fink discussing Texas’ energy grid, Texas Lieutenant Governor Dan Patrick called Fink, “the King of Wall Street,” saying “BlackRock has been a big investor in the fossil fuel industry, but it wasn’t the perception.” Patrick has previously accused Fink of “capriciously” discriminating against the oil and natural gas industry, and the firm continues to sit on the state’s blacklist of financial companies it has restricted ties to.
