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Teneo U.S. ESG Roundup 12.1.22

December 2, 2022
By Matt Filosa, Faten Alqaseer, Owen Farley & Sam Sorkin

Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.

ESG in the News

Teneo’s U.S. GA and Governance teams have published a brief “Who’s Down With ESG? The US Midterm Elections and the Future of ESG Investing.” The brief provides views on the potential impacts the U.S. mid-term election results will have on ESG investing. Moving forward, companies are likely to face the very thorny task of communicating their ESG initiatives to both pro- and anti-ESG investors and regulators.

The U.S. Department of Labor announced a final rule that will allow plan fiduciaries to consider climate change and other ESG factors when selecting retirement investments and exercise shareholder rights, such as proxy voting. The new rule annuls two rules issued by the Trump administration that Secretary of Labor Marty Walsh said “unnecessarily restrained plan fiduciaries’ ability to weight ESG factors when choosing investments. " The rule, “Prudence and Loyalty Plan Investments and Exercise Shareholder Rights," comes following industry concern about Trump-era regulation, which adversely effected investors’ capability to weigh climate change and other ESG factors when considering long-term retirement investment strategies

  • The rule marks a major step by the Biden Administration to legally allow the retirement assets of America’s workers and families to factor ESG issues such as climate into investment decision making.

Founding partner of Watchtell, Lipton, Rosen & Katz, Martin Lipton, recently published a memo on the role of ESG and stakeholder governance within the framework of fiduciary responsibilities. Lipton describes ESG not as a single principle or an assemblage of a fixed set of principles, but as a range of policies, practices and risks that a company must carefully balance within its own specific circumstances. He notes that a company embracing ESG would not exclusively consider climate change when making decisions. Instead, he suggests that companies consider “whether and how to minimize the effect of these impacts and weigh potential future actions that could impact climate change against the corresponding risk and against other material considerations to arrive at the optimal outcome for the company.” This approach, he argues, best promotes long-term sustainability and value creation for the benefit of both shareholders and other stakeholders.

  • Teneo Takeaway: From Wachtell’s perspective, “The politicization of ESG does not alter or undermine the ability of boards and companies to consider stakeholder and ESG risks and issues.”

In a letter to Congressional leaders, 17 Democratic Attorneys General suggested that the consideration of ESG factors “is consistent with legal responsibilities to evaluate potential risk and reward in assessing the merits of an investment.” The letter also highlighted that ESG factors promote value to investors, rather than investor values. The Attorneys General wrote in response to recent commentary from 19 Republican Attorneys General in an August 4 letter that said the use of ESG factors is inconsistent with “prudent investing.”

  • Teneo Takeaway: Similar to the published memo from Watchtell, the letter outlines the view held by most large investors that considering ESG factors is in fact consistent with fiduciary obligations.

Florida’s Chief Financial Officer said his department will pull $2 billion worth of assets managed by BlackRock, one of the world’s largest asset managers, accusing BlackRock of focusing on ESG rather than higher returns for investors. CFO Jimmy Patronis said Florida would remove BlackRock as manager of ~$600 million of short-term investments and have its custodian freeze $1.43 billion of long-term securities now with BlackRock. In a statement, BlackRock said “we are disturbed by the emerging trend of political initiatives like this that sacrifice access to high-quality investments and thereby jeopardize returns, which will ultimately hurt Florida’s citizens. Fiduciaries should always value performance over politics."

  • Teneo Takeaway: The move by Florida will likely not impact BlackRock’s over $8 trillion in assets but underscores Republican leaders’ opposition to the so called “woke agenda.”

As more corporate shareholders demand that companies assess their progress on ESG and DE&I, businesses are beginning to consider proactively conducting racial equity audits. Racial equity audits have been a focus for investors with over 20 companies undertaking audits. Voluntary racial equity audits are being used to help companies develop a strategic plan to advance their racial equity goals, explore various facets of its business without time pressure, and preempt the financial or reputational expense of battling shareholder requests on the topic.

  • Teneo Takeaway: The 2023 proxy season is expected to see a further increase in racial equity audit proposals, building on a growing trend in recent years. As racial equity audits become more common, expect an increase in the number of companies who pursue a proactive, voluntary approach allowing them to shape and embed the audit in their DE&I strategy.

They Said It: ESG Influencers Speak Out

Alison Taylor, executive director at Ethical Systems and adjunct professor at NYU Stern School of Business, in an interview with CFO Brew said, “This was the year we learned how dangerous it is to frame ESG as a set of objective performance metrics, divorced from wider questions of the role of business in society … The invasion of Ukraine, the end of Dobbs, and the mounting Republican backlash have all been framed as a ‘reckoning’ for ESG. What they highlight is that there are real, substantive debates to be had about the role of business in addressing social and environmental challenges.”

Looking Ahead: Upcoming ESG Events

  • Bloomberg Sustainable Business Summit, Bloomberg (New York, NY) – December 7
  • Aspen Ideas: Climate, Aspen (Miami, FL) – December 6-9
The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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