This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
In an annual letter to board members on State Street’s 2023 proxy voting agenda, new President and CEO Yie-Hsin Hung discussed the asset managers' fiduciary duty, its stewardship activities, and commitment to effective oversight and governance to ensure portfolio companies properly consider risks and opportunities. The letter outlines State Street’s 2023 stewardship priorities, which includes effective board oversight, climate risk management, human capital management and DE&I. The priorities highlight State Street’s commitment to the consideration of ESG factors, encouraging portfolio companies to hire diverse directors, disclose information on human capital management practices and provide transparency into plans for managing climate-related risks.
- Teneo Takeaway: State Street continues to recommend its portfolio companies consider investment risks and opportunities relating to ESG factors – the term “ESG” is not cited. The asset manager also recently released a report on human capital management, which aims to help companies improve their oversight of employees through a better understanding of the employee voice.
The International Sustainability Standards Board announced that its global sustainability disclosure standards will first focus on climate. The decision to begin with climate-related standards, or S2, allows companies to prioritize their reporting practices and structures to provide decision useful information about climate-related risks and opportunities to investors in the first year of reporting once standards are finalized. Companies will also need to provide a full reporting on S1 – sustainability-related risks and opportunities, beyond climate – from the second year. Both S1 and S2 will be issued toward the end of the second quarter.
- Teneo Takeaway: ISSB’s decision to prioritize climate-related standards aims to provide transitional relief, allowing companies to focus initial efforts on ensuring they share relevant information around climate change to investors. Scope 3 emissions, however, will not be required in the first year.
The European Parliament voted to support new rules that will require firms to be transparent about employee salaries, ban inquiries about previous pay and work to rectify pay gaps that exceed 5%. Additionally, the directive recognizes the rights of non-binary people, including protections against discrimination.
- Teneo Takeaway: This directive comes on the heels of the recent law pursuing better gender representation on corporate boards adopted by the EU Parliament in November. This is the first instance the EU regulatory body has recognized non-binary individuals as a distinct community in need of separate protections.
The EU’s Corporate Sustainability Reporting Directive (CSRD) will likely require at least 10,000 companies outside the EU to follow CSRD’s proposed sustainability disclosures. The draft rules, which will begin to take effect starting in the next few years, include disclosures on greenhouse-gas emissions and plans aligned with the 2015 Paris agreement, as well as issues like pollution and gender pay differences. Companies with listed securities in the EU, have annual EU revenue of more than ~$163 million, or companies with an EU subsidiary that is a ‘large company’ will be required to follow the CSRD standards.
- Teneo Takeaway: Companies with large operations in Europe should prepare for tougher ESG disclosure requirements, as the standards could likely be more demanding than frameworks in development by the SEC.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) released a study with supplemental guidance for organizations to achieve effective internal control over sustainability reporting (ICSR), using the globally recognized COSO Internal Control-Integrated Framework (ICIF). The guidance highlights key themes as organizations begin or continue their journey toward establishing and maintaining an effective system of internal control over financial and sustainable business information. COSO Chair Lucia Wind noted that “sustainable business reporting is still subject to evolution and innovation. As a result, it will be a process of continuous improvement including building internal capacity and relevant assurance.”
- Teneo Takeaway: In additional to external assurance, companies are also focused on how better to assure ESG information internally.
New Hampshire Governor Chris Sununu issued an executive order directing executive branch agencies and the treasury to not place State funds in investment accounts solely based on ESG criteria. The order cites fiduciary obligations and urges the treasury and executive branches to act in the best interest of the State and the beneficiaries of the State’s trust funds. Previous anti-ESG actions in Republican states have targeted specific asset managers – which, in Texas alone, reduced competition and led to significant added interest for taxpayers (~$300-500 million). New Hampshire’s order criticizes ESG, implying ESG investing is non-fiduciary, without limiting State fiduciaries’ investment decisions.
- Teneo Takeaway: The New Hampshire executive order signals opposition to ESG investing while not restricting State fiduciaries flexibility. The order targets funds solely accounting for ESG factors, but ESG funds evaluate traditional monetary factors in addition to environmental, social and governance considerations.
They Said It: ESG Influencers Speak Out
Corporate law professor at Boston University David Webber said, “Political friction at shareholder meetings is not new, but appears to be coming back into vogue … there’s a long history of confrontational debates at shareholder meetings including over gay rights and segregation in previous decades … I think we’re definitely seeing a new wave of it now.”
Looking Ahead: Upcoming ESG Events
