Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The International Sustainability Standards Board voted unanimously at its October meeting to include Scope 1, Scope 2, and Scope 3 emissions and use climate-related scenario analyses in their disclosures. The ISSB aims to complete and issue the final standards as early as possible in 2023. This is a landmark development for corporate climate and sustainability-related reporting standards. Scope 3 emissions have become a controversial part of the emerging disclosure regimes because they often occur outside of a company’s direct control along the supply chain or because of customer usage – and are the most difficult type of emissions to track and calculate as a result. The ISSB will also develop “relief provisions” at a later meeting to help companies apply the Scope 3 requirements, like those included in the SEC’s initial climate disclosure proposal.
- Teneo Takeaway: With regulators across major jurisdictions preparing mandatory sustainability reporting requirements, some of which may be based on these standards, the ISSB’s decisions on Scope 3 and climate scenario analysis will likely prove influential in how corporate disclosure rules are developed.
The U.S. Securities and Exchange Commission adopted new rules that will require companies that re-state their financials due to material noncompliance to claw back excess compensation from their executives. The 3-2 party-line vote revives measures initially mandated by Congress following the Great Recession that aimed at cracking down on corporate malfeasance by strengthening the SEC’s tools for penalizing executives. The new rules will apply to public companies and to any executive officers who performs policymaking decisions and has received incentive compensation, including stock options. SEC Chairman Gary Gensler said the “rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors.”
- Teneo Takeaway: The rules aim to incentivize executives to promote accountability and transparency. The next step is for the listing exchanges to develop listing requirements to codify the SEC rules.
The $8 trillion asset manager BlackRock will allow retail investors to vote on proxy battles for the first time as part of a 2023 pilot program with UK pooled funds. BlackRock CEO Larry Fink called this a “revolution in shareholder democracy [that will] transform the relationship between asset owners and companies.” Its Voting Choice program currently allows institutional investors holding $1.8tn in assets to decide how they want their shares to be voted – investors holding $452bn have thus far done so; this pilot will be the first time BlackRock’s smaller investors can express their views. Other asset managers like Vanguard, SSGA and Charles Schwab’s asset management arm have also recently announced pilot programs to let retail investors vote.
- Teneo Takeaway: The impact of BlackRock’s announcement will depend on how many investors ultimately utilize this option. If a significant amount of them do elect to vote themselves, “shareholder” engagement will become much more complex for companies. In addition, proxy advisors may become even more influential as voting with ISS or Glass Lewis is currently an option within BlackRock’s Voting Choice offering.
Senator Pat Toomey (R-PA) announced that he has requested information from 12 third-party ratings firms about how they calculate ESG scores and said that six of the 12 have either ignored or provided incomplete responses. In the letter, Toomey said that these firms “play a key role in the sustainable finance industry by providing third-party data and ratings on companies to investors…However, legitimate bipartisan concerns have also been raised regarding the veracity of third-party data, the opacity of rating methodologies, the processes by which ratings firms engage with rated entities and the management of conflicts of interest.” The letters align with broader Republican criticism of the ESG movement and plans to ramp up oversight over the industry.
- Teneo Takeaway: With Republicans likely to gain control of at least one house of Congress, we expect increased political attention and rhetoric around ESG issues and initiatives. ESG ratings may be specifically targeted, as were proxy advisory firms under the prior administration.
MSCI launched its MSCI Climate Action Index designed to help investors drive the low carbon transition by investing in companies making progress towards emission reduction targets. The new suite of equity climate indexes will consist of companies that are taking measurable steps to address their emissions. The tool will allow institutional investors to use these indexes as reference benchmarks; to create products including ETFs, derivatives, structured products and mutual funds; and as a performance measurement benchmark for actively managed portfolios. Head of ESG and Climate Indexes at MSCI Melissa McDonald noted that “At a time when the climate crisis must be tackled head-on, the decarbonization of investment portfolios is a critical first step … this launch demonstrates our ongoing commitment to ensure that investors have the information and tools they need to develop portfolios that meet their net-zero commitments, integrate climate considerations and fulfill their investment objectives.”
- Teneo Takeaway: New ESG investment products continue to launch despite the politically driven “anti-ESG” movement. Companies are making bets that there is still plenty of market demand for “pro-ESG” investment options.
With COP27 approaching, the United Nations-backed Science Based Targets initiative announced that it will hold companies to a strict 24-month timeline to provide plans to achieve public climate and sustainability pledges, starting January 31. Under SBTi, companies can make near-term and net zero commitments to cut emissions and have up to 24 months to present a plan for review, though this timeline was sometimes extended. The SBTi said it hopes this change will “provide consistency … and increased transparency and accountability.” As of October 31, when 55 firms faced an SBTi deadline to submit near-term plans, just six had validated targets. More than 100 new pledges are being made monthly, and the group has a waiting list for validation that stretches into 2023.
- Teneo Takeaway: The surge of net-zero pledges means investors, governments, and corporate watchdogs will be watching how companies specify roadmaps to achieve credible climate commitments and energy transition plans.
They Said It: ESG Influencers Speak Out
At this week’s Hong Kong Global Financial Leaders’ Investment Summit, UBS Group AG chairman Colm Kelleher spoke on ESG investing: “This movement is totally unstoppable. Our investors clearly are focused on this, so this is not going away. It’s what Generation X, Z, millennials, et cetera want … What we’re waiting for as financial intermediaries is codification, the rigor and regulations that go around it so we know what we’re reporting.”
Looking Ahead: Upcoming ESG Events