Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The SEC voted in favor of two proposals that seek greater transparency of what constitutes an ESG fund. The first proposed rule would expand the scope of the Names Rule to cover funds that suggest a focus on ESG factors. If adopted, a fund considering ESG factors equally to other inputs could not use ESG or related terms in its name so not to mislead investors. The second would require certain “ESG” funds to provide specific disclosures on their ESG strategies, as well as disclose the fund’s carbon footprint and weighted average carbon intensity. The rules would not require added disclosure requirements for non-ESG focused funds, noted SEC Chairman Gary Gensler, who supports these new proposals. Meanwhile, Commissioner Hester M. Peirce voted against the proposals, opining that investors should be shaping best practices through their own choices and not because of regulatory mandates about what to consider.
- Teneo Takeaway: Interestingly, the rule also contemplates that proxy voting and engagement can be the primary means for an ESG fund to implement its ESG strategy. Engagement and voting data would also be required by the fund beyond what is already required in Form N-PX. One possible outcome of the rule, if passed as written, is that some institutional investors may increase their support for ESG shareholder proposals and increase their engagement intensity in order to satisfy the rule.
The SEC fined the investment management arm of Bank of New York Mellon $1.5 million for alleged misleading claims it made about funds that use environmental and social criteria to choose stocks. Regulators found that some of their U.S. mutual funds didn’t go through quality review of ESG factors from July 2018 to September 2021. BNY said that none of the six funds in question were part of its specific sustainable fund offerings.
- Teneo Takeaway: Combined with the previously noted proposed rule on ESG funds, the SEC has made so-called “greenwashing” a major priority – trying to ensure that investors are doing what they say they are doing when it comes to incorporating ESG into its investment and proxy voting decisions.
A California judge struck down a law that requires companies headquartered in the state to have a minimum number of women on their boards, throwing into doubt a corporate governance initiative that has gained momentum in the U.S. and other countries. Last month, another judge in the same state court struck down a law that required public companies in California to have at least one diverse director by 2021.
- Teneo Takeaway: As ESG-linked regulation continues to face hurdles in court, regulators are likely to focus on disclosure requirements more heavily than minimum thresholds.
A handful of proposals this proxy season ask companies to assess the business risks and mitigate the impact of restrictive reproductive care in states where they operate. A larger number of proposals focus on PAC misalignment, comparing political spending with stated values and policies, including issues of reproductive health care.
- Teneo Takeaway: Although employees have been a major proponents of company activism, the SEC policy change on “no-action letters” have emboldened activist investors to file more ESG-linked proposals. As abortion access is a unique issue for companies as employers are the main source of healthcare coverage in the U.S., we could see an uptick in similar proposals next AGM season.
In legislation introduced last week, U.S. Senator Dan Sullivan (R-Alaska) called for voting choice to be made available to individual investors in passive funds when money managers own more than 1% of a company’s voting securities. The legislation also notes that if individual investors lack interest in voting on matters their companies are considering, their vote would not be returned to the money manager; it would simply not be considered. As large asset managers have accumulated voting power on behalf of investors, they have often pushed companies to improve diversity, cut their climate emissions, and embrace other changes, moves criticized by conservatives who say it represents a creeping liberal bias. 12 Republicans co-sponsor the Investor Democracy is Expected (INDEX) Act, without any support from Democrats, who currently control the Senate.
- Teneo Takeaway: This legislation mirrors BlackRock’s announced initiative last year to give both its institutional, and eventually, retail clients the power to vote their own proxies. Large investors may be worried about allegations that they wield too much influence, and perhaps these types of initiatives could quell those concerns.
The International Sustainability Standards Board announced a working group to facilitate jurisdictional standard-setting in the field of sustainability-related financial disclosures, which it calls a relatively new discipline and an opportunity to align requirements for global baseline reporting. Members include the Chinese Ministry of Finance, the European Commission, the European Financial Reporting Advisory Group, the Japanese Financial Services Authority, the Sustainability Standards Board of Japan Preparation Committee, the FCA, and the SEC. At Davos this week, ISSB chair Emmanuel Faber pledged to make its reporting framework pragmatic and proportional, noting smaller companies should not be expected to adhere to the same standards as larger multinationals.
- Teneo Takeaway: The ISSB/IFRS initiative continues to expand its mandate, hoping to achieve the massive undertaking of creating a singular, global, industry-specific disclosure framework. SASB and TCFD continue to be the pillars of similar global initiatives, with a debate ongoing about whether “materiality” should be viewed from an investor or broader stakeholder lens.
ESG is high on the agenda at the World Economic Forum’s Annual Meeting in Davos, the first time since the pandemic began that business and political leaders have gathered there in person. The public-private First Movers Coalition – focused on jump-starting the market for the most ambitious clean energy solutions – announced at Davos it is expanding to 55 companies and nine countries, making up 40% of global GDP. John Kerry, America’s top climate diplomat, declared the U.S. and China will be putting together a combined group to work more quickly to reduce greenhouse gas emissions and coal consumption. Moreover, as vague sustainability reporting standards remain a barrier to progress, leaders discussed how companies can better track and deliver on ESG promises.
- Teneo Takeaway: Davos also held several discussions on the importance of a global ESG disclosure framework, endorsing the efforts of the ISSB/IFRS.
State Street Global Advisors announced new net zero targets aimed at aligning with the goals of the Paris Agreement to “ensure a just transition to the low-carbon economy.” The three targets include an increase in AUM invested in assets in material sectors that are either achieving net zero or aligned to net zero to 100% by 2040; ensure that 70% of financed emissions are net zero, aligned with a net zero pathway, or the subject of direct or collective engagement and stewardship actions and increase the ratio to at least 90% by 2030; reduce financed Scope 1+2 emissions intensity 50% by 2030 relative to 2019 baseline at portfolio level. The company said it will actively engage with clients to encourage them to adopt net zero goals and consider strategies that are aligned with net zero.
- Teneo Takeaway: Like many other large investors, SSGA has committed to net zero portfolios. However, that does not necessarily translate into divesting from companies or entire sectors. Rather, SSGA is seeking to ensure that all of its portfolio companies in carbon-intensive sectors are working towards net zero goals; and will use its proxy voting & engagement activities to prod companies along.
They Said It: ESG Influencers Speak Out
At a Davos panel, WTO Director-General Ngozi Okonjo-Iweala renewed her call for an international carbon pricing system and attacked the failure of developed nations to meet a pledge to provide $100 billion in climate-related financial assistance to developing countries: “There was a pandemic and we suddenly saw $14 trillion… It was the right policy response. But then it has bred skepticism. If the developed countries could come up with that amount of money in a short amount of time, what’s $100 billion compared with $14 trillion? Why can’t we come up with this money? There are no excuses on this.”
Looking Ahead: Upcoming ESG Events
- 7th Annual Global Conference on Energy Efficiency, IEA (Sønderborg) 7-9 June
- Global Energy Transition 2022, Reuters (New York) – 14-15 June