This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The Securities and Exchange Commission adopted amendments to the “Names Rule,” which modernize and enhance the rule. Current regulations require registered investment companies whose names suggest a focus on a specific type of investment to implement a policy to invest at least 80% of the value of their assets in those investments. The revamped rule requires more funds to adopt the 80% policy, particularly funds using terms such as “growth” or "value,” and terms that reference a thematic investment focus, such as incorporation of ESG factors. The new rule will also require funds to review its compliance with the 80% policy quarterly and includes enhanced prospectus disclosure requirements for terminology used in fund names.
- Teneo Takeaway: While the updated rule targets “greenwashing,” fund names that focus on artificial intelligence, big data, or health innovation also fall under the new regulation’s authority.
The U.K.’s Financial Conduct Authority (FCA) published a Consultation Paper on diversity and inclusion in the financial sector. The paper includes flexible disclosure proposals aimed at improving outcomes for consumers and markets “by supporting healthy work cultures, reducing groupthink, unlocking talent and improving understanding of diverse consumer needs.” Some of the key elements of the proposal include requiring firms to report their average number of employees; collect, report and disclose certain D&I data; maintain a D&I strategy; determine and set appropriate diversity targets; and recognize a lack of D&I as a non-financial risk. The proposal would create a proportionality framework that establishes a baseline standard for in scope firms with additional requirements for large firms.
- Teneo Takeaway: FCA’s paper clarifies and strengthens its regulatory expectations around D&I and non-financial misconduct, which will apply variably to firms large and small, across the financial services sector.
Institutional Shareholder Services ESG launched its inaugural ESG Corporate Rating Survey to prompt market feedback as the group enhances and aligns its methodology. The survey, which closes October 20, will ask for feedback regarding ISS ESG’s global approach and foundation as well as materiality considerations. Additionally, the survey asks for views on the relevance of existing and emerging ESG issues, including climate change, freshwater use, biodiversity loss, regenerative agriculture and the circular economy. The survey follows the release of the ISS ESG Global Regulatory Update, which highlights recent developments and key themes in ESG-related regulations globally – including topics like the evolution of global disclosure frameworks and double materiality – and identifies some practical implementation challenges.
- Teneo Takeaway: The survey underscores the increasing focus on materiality from companies and investors, as ISS strives to enhance the value of its methodology for clients.
A federal judge upheld a Biden administration ESG rule for workplace retirement plans after 26 Republican Attorneys General sued the labor department – a key victory for the Administration over the anti-ESG movement. The ruling rejects the red states’ argument that the regulation violated the Administrative Procedure Act and Employment Retirement Income Security Act, which governs retirement plans – citing that the rule complies with those statues because it prioritizes financial considerations over environmental ones and thus has no “overarching regulatory bias in favor of ESG strategies.” Earlier this year, President Biden issued the first veto of his presidency after Congress passed a bill that would have reversed the Labor Department rule.
- Teneo Takeaway: While the ruling is a major victory for the Biden administration, it falls short of confirming that ESG issues can be financially material by separating financial considerations from environmental ones.
They Said It: ESG Influencers Speak Out
In a recent opinion piece, Chair of the UN-convened Net-Zero Asset Owner Alliance Günther Thallinger said, “At this point, the science is unequivocal: Climate change is affecting the global economy and promises to do more harm if we continue with a business-as-usual approach. Damages from natural disasters, which are exacerbated by climate change, totaled $165 billion in 2022 alone … These numbers speak for themselves. The effects of rising temperatures are reverberating across the economy, depressing productivity, increasing scarcity and imperiling the continued health of the global economic system. For long-term institutional investors, adverse climate impacts pose an existential threat … Beyond the emerging political debates, investors must consider how their investments impact — and are impacted by — the ongoing climate crisis."