This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The number of shareholder resolutions on ESG issues for the 2023 proxy season are on track to exceed 2022, though average support for ESG proposals has declined by 7.8% compared to the prior year period. Climate change continues to be the biggest single topic, with emissions and disclosures taking up the most significant volume. Notably, resolutions about reproductive health – in response to the U.S. Supreme Court Dobbs decision last June – union organization, and biodiversity all rose significantly in 2023. Increased scrutiny from U.S. states amending fiduciary duty laws to dissuade the use of ESG factors and investors’ concern about greenwashing likely contributed to the chilled support for some ESG proposals. Anti-ESG resolutions have continued to proliferate without much support, with resolutions mostly targeting social issues rather than climate change.
- Teneo Takeaway: Proxy season results seem to be mixed when it comes to determining how investors feel about ESG. While average support for proposals on environmental and social issues is down a bit, support for “anti-ESG” proposals continues to be microscopic. Investors are likely unsure about ESG – which in and of itself is a big change from the past five years.
The SEC has delayed its climate change disclosure rulemaking to a tentative October deadline, according to an updated rulemaking agenda, which was made public on June 13, 2023. The Commission has faced backlash on its agenda, including the climate disclosure proposal, which critics suggest is an overreach of the SEC's authority. In a statement on the updated rulemaking agenda, Chair Gensler said, “In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour … consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition. Thus, I am pleased to support it.”
- Teneo Takeaway: While the issue of whether to include Scope 3 in the SEC climate disclosure framework remains unclear, many U.S. businesses may need to disclose them regardless due to disclosure requirements coming out of the European Union.
Climate Action 100+ has launched its next phase, running until 2030, to “inspire a global scale up in active ownership,” and focus corporate action from climate-related disclosures to the implementation of climate transition plans. The new phase will encourage signatories to focus on strong governance frameworks, reduce emissions across the value chain, and enhance disclosure on and implementation of transition plans. The plan also calls on investors to work with the companies in which they invest to address the material financial risks and opportunities of climate change consistent with their fiduciary duty.
- Teneo Takeaway: Over the past five years, Climate Action 100+ investor signatories have grown from 225 to 700 as more companies recognize the material impacts of climate change to their businesses and the fiduciary responsibility to investors to address it. Climate Action 100+ has also been a key target of the Republican campaign against ESG.
The EU proposed stricter regulations on ESG ratings agencies to address potential conflicts of interest, which may require some agencies to restructure their businesses. The draft legislation would entail that ratings agencies must stop providing consulting services to investors, the sale of credit ratings and the development of benchmarks. Providers will need to be authorized and supervised by the European Securities and Markets Authority (ESMA) and breaching the new rules could land them with a fine of up to 10% of their annual net turnover. The draft proposal also includes new criteria for the EU’s green taxonomy, the systems that classifies which products and aspects of the economy can be marketed as sustainable investments.
- Teneo Takeaway: The proposal aims to address the market demand for improved ESG ratings. The rules will also apply to non-EU ESG rating providers that operate in the European market, so like many EU rules, they could have an impact on U.S. companies.
The European Commission released proposed changes to the European Sustainability Reporting Standards (ESRS) that aim to reduce the burden on smaller companies and first-time reporters. The rules extend the phase-in times for smaller companies on factors such as Scope 3 value chain emissions and propose an extra year for all companies to disclose information on anticipated financial effects related to non-climate environmental issues. Other proposals in the draft include making some disclosures voluntary, including biodiversity transition plans, measures to ensure interoperability with global standard setting initiatives such as the ISSB and GRI, along with other technical modifications.
- Teneo Takeaway: The Commission’s modifications intend to allow companies to effectively implement the rules in a reasonable time. Critics of the changes note that it reduces reporting requirements at the expense of the public interest.
ISS ESG, the sustainable investment arm of Institutional Shareholder Services, announced planned methodology enhancements to its Environmental & Social Disclosure QualityScore solution for global institutional investors. The update revises, retires and adds underlying scoring factors to provide an improved measure of corporate disclosure practices and increase coverage of materials issues. Topics and enhancements include added in-depth assessments of labor relations and occupational health disclosures; improved tracking of disclosures in areas of workforce diversity and equality, and an increase in granularity of reviewing carbon and climate-related disclosure.
- Teneo Takeaway: Companies will have from July 10 to July 21 to verify and submit changes to their data on all factors before scores and calculated and made available.
They Said It: ESG Influencers Speak Out
Following U.S. Secretary of State Antony Bliken’s trip to Beijing, U.S. climate envoy John Kerry confirmed that he has been invited to visit China, saying, “We're talking about the things we very much hope China will be able to do and together with us. We have to create a partnership here. China and the United States are the two largest emitters in the world … President Biden believes they (U.S.-China climate talks) should be free standing and the Chinese have said to me that they believe now that it is free standing and should be …. I think there is a general agreement that you cannot let a threat to everybody - every society, every country, every human being - that threat should not be allowed to be caught up in bilateral differences, which are real.”
Looking Ahead: Upcoming ESG Events
