Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
Democratic members of the House of Representatives announced last month the formation of the Congressional Sustainable Investing Caucus. Sean Casten (D-IL) and Juan Vargas (D-CA) will be co-chairing the caucus, which also includes Reps. Bill Foster (D-IL), Raúl Grijalva (D-AZ), Brad Sherman (D-CA) and Emanuel Cleaver (D-MO). Casten suggested the caucus would fight for rulemaking and legislation, saying that “Congress has a duty to craft policies that provide investor protections and transparency of information to market participants.” Caucus members have said they had informal talks with moderate Republicans who they consider to be potential allies, and plan to start formal across-the-aisle recruitment talks once the caucus is up and running. Meanwhile, Roll Call reported that House Republicans are expected to use their new majority to scrutinize SEC rules and ESG investing. The U.S. currently has about $8.4 trillion invested in ESG funds, according to a December study by the Forum for Sustainable and Responsible Investment (SIF), a sponsor of the caucus. This figure represents about 20% of the global total.
- Teneo Takeaway: The political reality for ESG today is that we now have an “Anti-anti-ESG” Democratic caucus to match the “anti-ESG” Republican caucus. Expect lost more political debate on the merits of ESG investing.
A new Department of Labor rule took effect on January 30 that explicitly allows fiduciaries to consider climate change and other environmental, social, and governance factors in the selection of corporate-sponsored retirement plans – the rule clarifies Trump-era guidance that left unclear whether climate factors could be considered material risks. Befitting their campaign against sustainable investing, 25 GOP state attorneys have already filed a complaint against the rule, which is also opposed by all Republican senators along with Senator Joe Manchin (D-WV). In 2022, employees at 4 major public companies for the first time filed shareholder resolutions with As You Sow asking their employers to dig into the climate impacts of their retirement investments.
- Teneo Takeaway: The DOL rules relating to ESG have flip-flopped for several decades now, depending on the President in power. All parties would benefit from a clearer and more permanent guidance as to whether ESG considerations are permitted under the DOL rule for retirement plans.
As scrutiny of ESG investing policies ramped up in 2022, large asset managers increased their investment in federal and state lobbying. BlackRock spent $2.38 million in 2022 on federal lobbying, up 63% from 2021. Following Republican criticism in Texas and Florida, the asset manager also added a total of seven registered lobbyists in the two states, up from none in 2020. State Street also increased its federal lobbyist spending in 2022, from $1.08 million to $1.76 million. In a statement, BlackRock said that it “works with U.S. policymakers to ensure the voices of investors are heard in considering critical issues like retirement security, market structure and the safeguarding of investors’ freedom to choose financial products that best suit their individual needs and goals.”
- Teneo Takeaway: With a Republican controlled U.S. House set on their campaign against ESG investing, BlackRock’s investment in federal lobbying will likely continue to increase. At some point, pro-ESG investors and companies will likely need to make their case not only with politicians, but directly to the American people.
Ron O’Hanley, CEO of State Street, one of the world’s largest index fund managers, said Republican politicians leading a backlash against climate-conscious investing “have left facts aside” and lost sight of the needs of long-term shareholders. State Street has been one of several financial firms facing pressure by conservatives over its use of ESG factors in investing. In an interview with the Financial Times, O’Hanley said, “We are the longest of long-term investors [and we expect] the board to incorporate climate … No one seems to question us when we say interest rates going up or down or GDP going up is an investment risk factor.” Despite Republican activities, investors continue to widely value incorporating ESG and climate risks into their investment decisions and corporate governance.
- Teneo Takeaway: Corporate executives and investors will need to be clearer managing ESG risks and opportunities, which can add value, bring long-term solutions, and stimulate economic activity.
Tech companies known for championing social issues and connecting DE&I efforts to their brand are shrinking their DE&I teams. Recent layoffs in the industry have disproportionately hit DE&I departments. Combined with a 19% decrease in DE&I job postings over the last year, there is a growing concern that progress on DE&I efforts might stall. This phenomenon will not be limited to tech as layoffs hit other parts of the economy.
- Teneo Takeaway: Delivering progress on DE&I outcomes does not reside solely in the DE&I team. Companies will need to ensure an ongoing commitment to DE&I goals and progress even in the wake of economic concerns, and be prepared to explain and address delays.
Vanguard published its 2023 proxy voting policy for U.S. portfolio companies, effective February 1. The policies covered its four main principles – board composition and effectiveness, strategy and risk oversight, remuneration, and shareholder rights. Vanguard noted diversity of backgrounds along with personal characteristics such as “gender, race, ethnicity, and age … meaningfully contribute” to boards’ ability to be effective stewards of shareholders’ interest. It noted a fund will usually vote against compensation committee members when it disagrees with its Say on Pay proposals or if it deems its pay practices to be “egregious.” Regarding strategy and risk oversight, Vanguard also clarified that a fund may support proposals that address shortcomings in a company’s disclosure relative to market norms or accepted frameworks, such as the Sustainability Accounting Standards Board or the Task Force on Climate-related Financial Disclosures (TCFD).
- Teneo Takeaway: Vanguard did not make any obviously major changes to its voting policies; however, tweaks to certain policy language may indicate a subtle shift towards supporting less ESG proposals than in prior years.
Institutional Shareholder Services ESG, the responsible investment arm of ISS, launched the ISS ESG Cyber Risk Score to support investors “by signaling the relative likelihood of a portfolio company suffering a material cybersecurity incident within the next 12 months.” The score assesses organizational cyber risk oversight and management through an array of IP and domain based data collections, as well as firmographic information that includes company size and the industry in which the firm operates. Lorraine Kelly, ISS” Global Head of Stewardship Solutions said, “With experts predicting potential cybercrime-related losses of US$8 trillion globally in 2023, the timely launch of ISS ESG’s Cyber Risk Score enables investors to identify and help manage cyber risk across their investment portfolios, and to proactively engage with companies to understand cyber breach risks.”
- Teneo Takeaway: Cybersecurity is quickly moving up the priorities list for some investors. The new ISS ESG tool will help investor address imminent and evolving cybersecurity risks.
They Said It: ESG Influencers Speak Out
On Tuesday, one of the two major proxy advisory firms, Glass, Lewis & Co. responded to criticism by Republican attorneys general regarding the proxy voting advice it gives on ESG proposals. In a statement, Glass Lewis said its recommendations on climate change and diversity proposals are based on “mitigating risk and promoting the long-term economic interest of shareholders … Climate risk—how companies are managing the risks and opportunities presented by climate change—is widely recognized as a material risk-return factor today.” ISS also responded with similarly stern rebuttals to the claims.
Looking Ahead: Upcoming ESG Events