Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
This proxy season is likely to be one of the most significant for shareholder proposals associated with ESG issues, after the SEC said last November that companies should generally present for a shareholder vote any questions raising "issues with a broad societal impact." The Interfaith Center on Corporate Responsibility, a group of institutional investors advocating for including social values in corporate decision making, reported that its 300-plus members had filed nearly twice as many shareholder resolutions by early March 2022 as during last year’s entire proxy season. ICCR noted the number of resolutions addressing new topics has more than doubled.
- Teneo Takeaway: While the number of shareholder proposals in the 2022 proxy season is likely to dwarf that of any previous year, it is too early to determine whether the passage rate will rise commensurately. Last month, two investor resolutions requiring a civil rights audit and the use of concealment clauses passed at Apple’s annual meeting, while this week, investors in all three American COVID vaccine manufacturers rejected shareholder proposals aimed at producing and distributing more vaccine doses for low and middle income countries.
The number of ESG shareholder resolutions filed is at an all-time high and exceedingly focused on social issues this year. At least a dozen resolutions secured a spot on ballots requesting companies to perform racial equity or civil rights audits – and early meetings have seen shareholders defy corporate recommendation and support these in-depth examinations. The last season of shareholder meetings saw ESG resolutions winning an average 33% support, up from 22% five years earlier, according to Bloomberg Intelligence.
- Teneo Takeaway: The SEC has allowed more environmental and social proposals to go to vote than in past years, increasing pressure on companies to continue efforts. Companies must also be prepared to increase ESG disclosure and programming, regardless of shareholder proposal success. Companies agreed to racial audits even in instances where the resolutions have previously failed. This accelerates the trend of racial equity audits gaining traction since initial requests began in 2016, with over 15 proposals from pension funds and other shareholder proponents in the last 3 years.
The FCA announced a new rule requiring issuers to detail whether they have met specific diversity targets in their annual financial report. These new rules mean that in-scope companies will be required to make new disclosures on a comply-or-explain basis regarding gender and racial/ethnic diversity of their boards and senior leadership.
- Teneo Takeaway: There is increased regulatory pressure on diversity disclosure, though the elements of these rules differ by regulator. The SEC is expected to announce its own policy sometime this year but may require a less-robust disclosure than the FCA has demanded of UK-listed companies, given pushback against the NASDAQ rule and a similar law in California, as well as the SEC precedent. The European Commission (EC) directive on female representation on boards was approved in March but still requires Parliament approval.
As companies take greater responsibility for how they run operations and generate profits, Mastercard’s CEO announced that the company plans to link all employee bonuses to ESG initiatives. This program expands an earlier initiative for senior executives and will ideally help Mastercard achieve its three main ESG-related goals of cutting carbon usage, improving financial inclusion and gender pay parity.
- Teneo Takeaway: Many companies are feeling pressure from boards and investors to reach ESG goals, especially after the SEC’s draft rule on mandatory climate risk disclosures that could come into effect as soon as FY 2023.
Last week, S&P Dow Jones Indices announced the changes in the S&P 500 ESG Index, effective prior to the open of trading on May 2, 2022, due to the April rebalance. There were 36 companies added, while 35 companies were removed from the index.
- Teneo Takeaway: Other changes to the S&P DJ ESG Indices will include amended eligibility requirements for ESG indices, new data providers for certain metrics, and expanded exclusions based on certain defined business activities, like oil sands, small arms, controversial weapons, military contracting, and tobacco.
They Said It: ESG Influencers Speak Out
Former senior policy advisor for climate and ESG at the SEC Satyam Khanna told the WSJ Pro Sustainable Business Forum that the Biden Administration has outlined a “whole of government approach that mandates all of Washington get involved in corporate climate issues. In the U.S. the SEC is part of a constellation of financial regulators, and a lot of those regulators have expressed some interest in climate-related financial risks… there’s a lot to keep track of.”
Looking Ahead: Upcoming ESG Events