Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
On Tuesday, BlackRock released its Investment Stewardship Report – 2022 Policies Update, which sets new guidelines to increase companies’ focus on climate risk, board diversity, sustainability reporting, executive compensation, and shareholder voting power. BlackRock indicated that boards should “aspire to 30% diversity of membership,” with at least two female directors and one from an underrepresented group – surpassing Nasdaq’s SEC-approved board diversity requirements for at least two diverse directors. The report also outlined BlackRock's support for companies looking to convert its corporate form (e.g., public benefit corporations), which BlackRock notes should be put to a shareholder vote.
- Teneo Takeaway: BlackRock’s new guidelines focus on those issues the firm emphasized during the 2020/2021 proxy season. During the 12-month period ending 30 June 2021, BlackRock engaged nearly 2,200 times on board diversity and over 2,300 times on climate risk, respectively.
The New York State Common Retirement Fund and Illinois State Treasurer are among an investor group that has filed eight shareholder proposals for consideration at the annual meeting of Meta (f/k/a Facebook) to address harm on its platforms and overall governance. Proposals include modifying Meta’s share structure, board oversight of efforts to reduce harmful content, an assessment of the risk of the company’s metaverse efforts, and a review of its audit and risk committee. In 2020, members of the group submitted six proposals that were defeated by shareholders, including a call for an independent board chair.
- Teneo Takeaway: Meta shareholders face an uphill battle with shareholder proposals given the company’s dual-class share structure. Chairman, CEO, and founder Mark Zuckerberg controls about 58% of the vote and is unlikely to vote for his own ouster.
IFRS Foundation, the London-based nonprofit that oversees international accounting standards, has tapped the former chief executive of Danone to head its new International Sustainability Standards Board (ISSB). Emmanuel Faber, whose three-year term heading the ISSB will start in January, played a key role in advancing Danone’s sustainability efforts, including a carbon-adjusted earnings-per-share metric and committing to the “enterprise à mission,” a French legal framework of pursuing environmental and social goals on top of generating profit.
- Teneo Takeaway: Faber, who joins ISSB with sustainability bona fides, was targeted earlier in 2021 by activist investors that claimed the company was overfocusing on ESG issues at the expense of financial performance.
According to a new report from executive search firm Heidrick & Struggles, the pandemic has created an environment in which businesses need a “different kind of CEO.” A cultural shift towards “purpose-led, mission-led leadership” has become more important within company cultures, and the growing emphasis on ESG has created a shift in “what makes a great CEO.”
- Teneo Takeaway: The first half of 2021 saw a record number of CEO appointments, who, compared to their predecessors, were more likely to be women, to be non-native to the company’s HQ country, to have more diversified C-suite experience, and to have advanced degrees.
Glass Lewis released its 2022 Proxy Voting Policy Guidelines and 2022 ESG Initiatives Policy Guidelines for the United States last month. The update expanded policies on board composition and diversity “to reflect evolving state and regulatory rules.” Glass Lewis will generally recommend voting against the chair of a nominating committee of a board with fewer than two gender diverse directors, or the entire nominating committee of a board with no gender diverse directors. The update also introduced new policies to address “the unique governance issues relevant at companies following a business combination with a special purpose acquisition company (SPAC).”
- Teneo Takeaway: Glass Lewis’ policy updates provide a useful clarification on the proxy advisor’s overall approach to ESG, in which it will seek to evaluate all ESG issues with the long-term shareholder in mind.
Last month, Michael Hsu, the acting head of the US’s top banking regulator, called for banks to weigh risks posed by climate change when conducting mandatory periodic stress tests. Though the Office of the Comptroller of the Currency does not facilitate the risk analyses, the OCC announced that it will release a set of guidelines to help big banks account for potential threats to the financial system and ensure resiliency in the event of climate catastrophe.
- Teneo Takeaway: The OCC will hold its meeting in early June 2022 and is in the process of soliciting academic papers to inform its approach to climate-related financial risk management.
Small investor Enkraft is leading an activist campaign at RWE, Germany’s largest electricity producer. Like Engine No 1’s successful campaign at Exxon, Enkraft has used a small stake in RWE to pressure the company to reduce carbon emissions and to focus on renewable energy. Enkraft has argued RWE’s development of lignite, an especially dirty coal, hurts the share value because many institutional investors have policies that they cannot hold coal companies and leads to it lagging other producers. Coverage notes that this battle between activists and carbon-intensive businesses will continue to heat up in 2022.
- Teneo Takeaway: RWE is one of Europe’s largest renewable players but still operates legacy nuclear and coal assets, which are scheduled for gradual shutdowns. Enkraft argues that a rising price of carbon will quickly make RWE’s remaining coal plants prohibitively expensive ahead of their planned 2038 retirements.
They Said It: ESG Influencers Speak Out
In a Financial Times op-ed, activist investor Charlie Penner, formerly of Engine No. 1, wrote: “a legitimate debate can be had about how far and how fast the energy transition will go … the Exxon campaign was about better equipping its board to participate in this debate and plan for an uncertain energy future. But for investors to judge whether companies are pursuing their long-term best interests, they will need to set aside misleading arguments that cloud this debate.”
Looking Ahead: Upcoming ESG Events
- University of Virginia McIntire, Blue Ridge ESG Seminar (Charlottesville, VA) – 15-16 January
- World Economic Forum Annual Meeting, World Economic Forum (Davos, Switzerland) – 17-21 January
- The Real Deals & The Drawdown, ESG Conference (London, UK) – 26 January