This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
Broadridge published a paper on asset manager’s increased adoption of pass-through voting options. The report highlights the growing appetite in the industry for tailored processes to provide institutional and retail investors a direct voice in the proxy process, particularly in investment vehicles, such as ETFs, that have become more prevalent in global markets. Large industry players, like BlackRock and Vanguard, have led the charge and implemented models aimed at enabling better investor engagement – with State Street recently extending their voting choice program to ETFs and mutual funds.
- Teneo Takeaway: Teneo’s recent white paper on pass through voting noted that as these initiatives gain momentum and regulatory scrutiny, companies will need to closely monitor developments, potentially adjust their investor engagement strategies, and weigh impacts on future annual shareholder meetings.
A group of 13 financial institutions, spearheaded by Mirova and Robeco, launched a call for expressions of interest (CEI) to develop common global standards for avoided emissions factors and an associated company-level avoided emissions database. The group notes that avoided emissions, also sometimes described as scope 4 emissions, are currently calculated in a variable manner that can erode credibility and prevent their use at scale. Following the collection of responses from interested parties by July 16, the initial proposal will aim to provide comprehensive information on business climate performance – allowing investors to prioritize companies with decarbonized alternatives or solutions to the energy transition.
- Teneo Takeaway: While 'Scope 4' emissions have yet to show up in major regulatory mandates of ESG disclosure, it may eventually if the idea gains traction with investors. The group said that the databases will evolve in the level of detail and coverage overtime but will first seek to capture sectors most important to decarbonization.
A report from ISS Market Intelligence found that ESG funds weathered the market and political storms of 2022, ending the year on the positive side with $3 billion in net flows. With turbulent markets, spiking energy prices, and political backlash, demand for ESG products slowed in 2022 – but fund providers continued to launch new ESG products “at a relatively healthy pace indicating asset managers expect demand for ESG-themed investments to remain strong.” Author of the report and Head of U.S. Fund Research at ISS MI Christopher Davis said, “While 2022 revealed ESG products as hardly immune to broader pressures, their resilience amid challenging conditions should quell concerns that buyers would bail at the first sign of trouble … Such stability is a welcome sign that ESG funds’ recent market share gains were not merely a short-term phenomenon.”
- Teneo Takeaway: While new ESG launches were down from a record in 2021, many funds are still using ESG factors in their investment strategies – with more than $1.9 trillion in assets incorporating ESG elements into their investment process last year.
Members of the Net Zero Insurance Alliance held emergency talks on Thursday after a wave of defections, including the groups biggest member Munich Re. Ahead of the meeting, French reinsurer Scor became the latest member to leave the group. The talks follow a May 15 letter where 23 U.S. attorneys general said they were “concerned with the legality” of the NZIA, blaming the group for rising insurance and gas prices, inflation, as well as citing potential antitrust breaches. While there are no U.S. members of the group currently, the U.N Environment Program, which assembled the NZIA in 2021, said that the decision by some signatories to walk away was “in light of the recent discussions within the United States.”
- Teneo Takeaway: While it remains to be seen how robust the anti-ESG led allegations will be against the NZIA, the rhetoric has given some companies – even outside the U.S – reason to leave collaborative initiatives on ESG, especially climate. It is important to note; however, that the insurers that have left the coalition state that they’ll continue to target sustainable climate goals.
In a filing last week, lawyers for a Republican-led lawsuit asked a federal court to rule on the merits of its case against a U.S. Department of Labor rule that allows socially conscious investing by retirement plans. The states sued in January and asked the federal judge to temporarily block the rule pending the outcome of the case in February, which the judge has not yet ruled on. In March, President Biden issued the first veto of his presidency after Congress voted to repeal the rule.
- Teneo Takeaway: The rule has become a primary target of the anti-ESG movement. The key focus on the debate boils down to whether assessing ESG risks, such as climate risk, is in fact consistent with fiduciary duty.
The International Sustainability Standards Board has opened consultation for its proposed methodology to enhance the international applicability of the SASB standards. The standards will serve as critical guidance for ISSB’s general requirement standard (IFRS 1) by helping companies to identify sustainability-related risks and opportunities and provide appropriate disclosures beyond climate. Jeffrey Hales, Chair of the ISSB’s SASB Standards Board Advisor Group said, “The increase in companies around the world voluntarily applying the SASB Standards in response to investor demand sends a strong signal about the information investors need … Through this project, we hope to make it easier for companies to apply the SASB Standards regardless of where they operate and to help companies applying IFRS S1 produce comparable and decision-useful disclosures.”
- Teneo Takeaway: These ISSB ESG disclosure standards will continue to evolve with the market and stakeholder expectations. Final initial ISSB standards are expected to be released by the end of June – in line with the European Union Corporate Sustainability Reporting Standards.
They Said It: ESG Influencers Speak Out
Former attorney general of D.C., Karl Racine, said “Global companies find themselves between a rock and hard place … while Europe has embraced ESG and established regulatory and legal requirements to support it, the situation in the U.S. is shaped by partisan politics. Global companies are, thus, confronted with challenging questions as to how to navigate these disparate waters.”
Looking Ahead: Upcoming ESG Events
- Sustainability Summit: Thriving Amid The Global Energy Transition, The Conference Board (New York, NY) – July 13-14
