This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
Earlier this week, BlackRock CEO Larry Fink published his annual letter to investors, which discussed the asset manager’s fiduciary responsibilities and the potential “domino” affects to the economy from raised interest rates and the recent collapse of SVB. Fink also reiterated his commitment to stakeholder capitalism and the inclusion of climate risk factors in BlackRock’s long-term investment strategy. The letter highlighted BlackRock’s mission as fiduciary in nature, with each element of its plan aligned with its responsibilities to clients, while avoiding the politically fraught topic of ESG investing.
- Teneo Takeaway: The letter also acknowledges that Mr. Fink will not be doing his annual letter to CEOs as “our stakeholders – BlackRock shareholders, clients, employees, partners, the communities where we operate, and the companies in which our clients are invested – are facing so many of the same issues.” Mr. Fink’s emphasis on BlackRock’s fiduciary role addresses ESG critics while also assuring proponents that considering climate risk is a fiduciary obligation.
More than 1,400 customers charged Vanguard with a “breach of fiduciary duties” by scaling back its attention to climate change and doing less than industry peers to mitigate climate risk. In a letter, the investors suggested that the asset manager is bowing to political pressure from anti-ESG interest and “has fallen far behind other prudent investors” in setting expectations for corporate boards to prepare for a net-zero transition. The investors also criticized Vanguard for not joining investor coalitions such as Climate Action 100+ and for recently withdrawing from the Net Zero Asset Managers initiative. The letter was first drafted by Sierra Club Foundation Director Paul Rissman.
- Teneo Takeaway: Vanguard has said the company considers climate change “to be a material risk to companies and their shareholders,” but supporters of ESG investing claim that by having one of the worst voting records for shareholder climate resolutions, Vanguard is neglecting its fiduciary duty. This may be an early salvo from pro-ESG organizations in response to the anti-ESG movement.
Ernst & Young recently commissioned a survey of Fortune 500 companies on the business relevance of sustainability and ESG initiatives, which confirmed that ESG is a high priority for executives. The C-suite Insights: Sustainability and ESG Trends Index targeted more than 500 C-suite leaders and members of executive management at U.S. organizations with revenues of $1.5 billion or more. 87% of respondents believes sustainability and ESG initiatives are very to extremely important. Additionally, half of the respondents indicated that securing sustainable supply chains for the future of their business is a critical factor to mitigate ongoing and predicted disruptions.
- Teneo Takeaway: Despite the anti-ESG movement, most executives seem to be in agreement that momentum for ESG initiatives is now propelling implementation forward.
Article 9 funds, the EU’s highest classification for ESG investment products, drew nearly $30 billion of new client money in 2022, but asset managers removed the tag from 40% of the market in the fourth quarter alone after stricter regulatory guidance. For Article 9 classification, the EU now only accepts portfolios with 100% sustainable investments, with some allowance for liquidity and hedging. Many managers are wary of the risk of greenwashing accusations and continue to wait for further clarification from the EU on what it means by a “sustainable investment.”
- Teneo Takeaway: The Sustainable Finance Disclosure Regulation first enforced in 2021 has since gone through significant updates and will likely continue to evolve. EU funds will need to be more diligent in its ESG integration in order to classify for the highest level (Article 9) of ESG funds.
They Said It: ESG Influencers Speak Out
In his annual letter to investors, BlackRock’s Larry Fink wrote, “For years now, we have viewed climate risk as an investment risk. That’s still the case. Anyone can see the impact of climate change in the natural disasters in California or Florida, in Pakistan, across Europe and Australia, and in many other places around the world. There’s more flooding, more wildfires, and more intense storms. In fact, it’s hard to find a part of our ecology – or our economy – that’s not affected. Finance is not immune to these changes. We’re already seeing rising insurance costs in response to shifting weather patterns.”
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