Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
BlackRock and nine European financial services firms, along with nearly 350 individual mutual funds, have been barred from doing some business in Texas after it determined that these companies were boycotting the energy industry. Some financial firms quickly responded and argued this decision was not “fact-based” and disagreed with their inclusion on the list, as they continue to hold billions of dollars in energy company stock.
- Teneo Takeaway: It’s unlikely that these maneuvers by Texas and other states will have a material impact on asset manager ESG initiatives. Many retail and global institutional clients of large asset managers still strongly believe that ESG factors impact a company’s long-term financial performance.
Florida Governor Ron DeSantis banned state pension funds from screening for “non-pecuniary” factors. As a result, investment professionals are warning that campaigns seeking to “wipe ESG off the financial map” puts the savings of ordinary Americans at risk. While US large-cap sustainable equity funds focused on growth outperformed non-ESG funds on average annual rate in the last five years, according to Morningstar data, such moves to refuse to screen for ESG risks may result not just in lower returns, but also legal liability.
- Teneo Takeaway: Interestingly, the Florida law does not seem to prohibit state investments from being “ESG” but rather prohibits funds from considering “non-pecuniary” interests. The crux of the debate is whether “social” issues such as climate change and diversity can have a “pecuniary” (or financial) impact on a company over the long-term.
The Securities and Exchange Commission is expanding a crackdown on misleading labels of investment products, with its enforcement division’s asset management unit probing if managers of funds marketed as sustainable are trading away their rights to vote on environmental, social and governance issues. The unit is investigating if managers are properly disclosing when lending out shares and recalling them prior to proxy votes, a practice that lets asset managers earn fees benefiting investors, but which can also impact their ability to vote.
- Teneo Takeaway: Securities lending is a common practice among many asset managers as it increases revenue to the fund at historically little to no cost (i.e., losing the right to vote such loaned shares). However, with the importance of proxy voting growing over the last several years, especially for “ESG funds,” asset managers will need to revisit the issue to ensure an appropriately modern cost-benefit analysis is done in regard to its securities lending practices.
Nasdaq research of 3,000 earnings transcripts from 2022’s first quarter showed about 65% of Russell 3000 firms and 76% of the 278 companies designated as MSCI USA ESG Leaders discussed ESG issues on their quarterly conference calls. These topics focused on climate transition, sustainability, and supply chain management, as well as company culture and human capital management. Specifically, 49% of MSCI USA ESG Leaders discussed climate transition plans – up from 28% the prior quarter. Moreover, about 50% of all ESG-related questions on earnings call Q&As focused on climate transition, with analysts questioning company management about climate three-to-four times more than other topics.
- Teneo Takeaway: This research highlights the growing trend of companies utilizing the quarterly earnings call to keep shareholders updated on its ESG strategy and goals.
Last week, 64 global institutional investors and the non-profit Ceres launched the Valuing Water Finance Initiative to engage 72 corporate water users and polluters to value and act on water as a financial risk and drive the necessary large-scale change to better protect water systems. This initiative is the sole global investor-led initiative aimed at moving companies to respond to the global water crisis, prioritizing six Corporate Expectations for Valuing Water informed by scientific evidence aligning with the United Nation’s 2030 Sustainable Development Goal for Water (SDG6). One expectation is board oversight, with directors and senior management to oversee water management efforts. Signatories have committed to ensuring their business processes and governance incorporates sound water management.
- Teneo Takeaway: The Ceres initiative is another tool for its signatories to use when engaging with companies on their water stewardship. Companies that are severe laggards regarding its water stewardship standards risk receiving a shareholder proposal at future annual shareholder meetings.
They Said It: ESG Influencers Speak Out
Sasja Beslik, an influential sustainable finance expert and longtime pension fund executive, decried the decision by Florida Governor Ron DeSantis to ban its state pension funds from screening for ESG risks, saying the governor doesn’t “understand that long-term management of pension investments naturally includes material ESG issues that can impact returns. It is pension money that runs the most significant financial risk if they don’t take ESG into account. ESG—when done for real—is first and foremost a risk-management tool.”
Looking Ahead: Upcoming ESG Events
- Moral Money Asia, Financial Times (Singapore and Virtual) – September 7-8
- Fortune Global Sustainability Virtual Forum, Fortune (Virtual) – September 29
- Reuters IMPACT, Reuters (London) – October 3-4
- ESG Impact, CNBC (Virtual) – October 6
- Innovation Summit Las Vegas, Schneider Electric (Las Vegas, NV) – October 12-13
- WSJ Pro Sustainable Business Forum, The Wall Street Journal (Virtual) – October 13
- VERGE 22: The Climate Tech Event, GreenBiz (San Jose, CA) – October 25-27
- The Deal’s ESG and Sustainability Forum, IMN (New York, NY) – November 2
- Fortune Impact Initiative, Fortune (Atlanta, GA) – November 29-30
- Reuters NEXT, Reuters (New York, NY) – November 30-December 1