This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The International Sustainability Standards Board published its inaugural standards, launching a set of G-20 backed global rules that aim to curb greenwashing. The rules build upon the foundation of the TCFD framework and provide a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and the opportunities they face, as well as sets out specific climate-related disclosures. The new standards form a global baseline centered on financial materiality – addressing the need for market participants to accurately assess the value of companies with information on sustainability matters most relevant to financial outcomes. ISSB Chair Emmanuel Faber said, “The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable and verifiable manner.”
- Teneo Takeaway: While the ISSB standards are voluntary, they may quickly become expected company disclosures if stakeholders, including large institutional investors, pressure them to do so. SASB standards are also voluntary, yet a majority of S&P 500 companies currently disclose to their standards.
The House Financial Services Committee has kicked off a month of hearings examining environmental and social policy investing and its impact on investors. Rather than focusing on companies that implement ESG considerations, House Republicans are targeting regulatory changes by the SEC on proxy voting and proposed sustainability disclosure rules, proxy advisors like Glass Lewis and ISS, as well as ESG shareholder activism. Recently, the National Association of Manufacturers sent a letter to the House Financial Services Committee asking lawmakers to rein in proxy voting – claiming that the SEC is “putting their ability to finance their growth in jeopardy.” In a hearing Wednesday, Committee Chair Rep. Patrick McHenry said, “the SEC has turned its attention towards non-material, environmental, social and political issues … (that) hinder the competitiveness of American public companies.” Democratic Ranking Member Maxine Waters criticized Republicans, saying, “The Republican effort to dismantle ESG is integral to their agenda to gut diversity and inclusion across the board.”
- Teneo Takeaway: Congressional debate largely centers on the issue of whether ESG considerations are financially material. The hearing will conclude with votes on several bills targeting ESG practices that have limited viability with the current Democratic-controlled Senate.
The Voluntary Carbon Markets Integrity Initiative has published guidance on how companies should use carbon credits as part of high-quality corporate action. The voluntary rules aim to standardize methods that assess the quality of corporate claims amid intense scrutiny of the carbon offsetting industry. The VCMI recommends firms should buy high-quality credits from a separate standards body, the Integrity Council for the Voluntary Carbon Market (ICVCM) – which has released an initial set of rules for suppliers of credits covering what makes a high-quality offset. The group will announce further recommendations on what counts as a “good” carbon credit later this summer. The carbon-offsets market has faced criticism that many credits fail to deliver the emissions cuts they promise.
- Teneo Takeaway: Many organizations are avoiding the market altogether due to potential reputational risks. Offsets will likely continue to improve as international standards attempt to curb greenwashing.
A recent research report reviewed the key developments in climate change litigation, analyzing over 2,300 cases. The Grantham Research Institute on Climate Change and the Environment report found that more than 50% of climate cases have direct judicial outcomes that can be understood as favorable to climate action, with significant indirect impacts on climate change decision-making beyond the courtroom. Legal challenges have largely focused on corporate actors, particularly around greenwashing, as well as cases against the climate policy response of governments and companies. Notably, litigation concerning investment decisions has increased, which may help clarify the parameters within which decisions can be made in the context of climate change.
- Teneo Takeaway: The report predicted increasing litigation on biodiversity, the responsibility of governments to protect oceans, and cases arising from extreme weather events among other issues.
European market infrastructure provider Euronext announced the launch of new indices that exclusively invest in companies with climate goals approved by the Science Based Targets initiative (SBTi), as in line with the 1.5°C goal of the Paris Agreement. The two indices will track companies within the Europe 500 and Eurozone 300 indices, solely targeting companies with clear emissions reduction targets validated by the SBTi. CEO and Chairman of the Managing Board of Euronext Stéphane Boujnah said, “The launch of the Euronext Europe SBT 1.5° and Euronext Eurozone SBT 1.5° indices is a first major step towards expanding the family of Euronext’s climate indices, after the successful launch of the CAC SBT 1.5°. This launch demonstrates our strong commitment to our “Fit For 1.5°” and Growth for Impact 2024 Strategy.”
- Teneo Takeaway: The new indices seek to offer investors exposure to investments that have transparent climate targets aligned with the Paris Agreement. While investments in ESG funds have slowed in the U.S. this year, European index providers and asset managers may still see an opportunity in that market.
They Said It: ESG Influencers Speak Out
Klaus Schwab, Founder and Executive Chairman of the World Economic Forum commented on the ISSB’s new standards, saying, “The publication of the first two ISSB Standards represents a vital step forward in establishing a global baseline for sustainability reporting. Consistent and comparable sustainability information, paired with financial information, empowers investors and stakeholders to gain a comprehensive understanding of a company’s performance and their commitment to driving sustainable value creation. We look forward to our continued collaboration.”
Looking Ahead: Upcoming ESG Events
- Sustainability Reporting USA 2023, Reuters (New York, NY) – October 2-3