Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
In the second quarter of 2022, U.S. sustainable funds experienced the first quarter of outflows in over five years, shedding $1.6 billion during the quarter amid macroeconomic issues such as the energy crisis, inflation, and rising interest rates. Sustainable funds’ net outflows drove assets in these funds to $296 billion, their lowest point since 2021’s first quarter. Still, Morningstar noted a bright outlook remained for sustainable funds, as sustainable funds market sustained a higher organic growth rate than the overall U.S. market.
- Teneo Takeaway: Like the overall U.S. equity market, flows into ESG equity funds has slowed. Yet the number of new ESG fund launches increased in the second quarter, evidence that investors are also bullish on the growth of ESG funds.
Public companies are gradually shifting away from mandatory retirement age policies for corporate board members according to the Conference Board, dropping from 70% in 2018 to 67% as of July 2022. Companies are also increasingly permitting exceptions in order to retain long-serving directors.
- Teneo Takeaway: Companies are struggling to find a balance between retaining tenured directors who continue to add value while promoting board refreshment and diversity. While this month denotes the first time that every company listed on the S&P 500 has at least one racially or ethnically diverse director, companies will need to continue to emphasize board diversity initiatives to stay ahead of upcoming regulatory objectives and shareholder voting policies.
Institutional Shareholder Services launched its Annual Global Benchmark Policy Survey, covering climate risk management with a focus on questions concerning climate-related board accountability, climate transition plans, climate risks as a critical audit matter, and financed emissions for companies in the financial sector. “Our annual policy survey is an important mechanism by which we obtain robust feedback from a wide range of market participants, and we encourage all interested parties to share their views by participating in the survey,” said Georgina Marshall, ISS’ Global Head of Research. The survey will close on August 31.
- Teneo Takeaway: Another key topic in the survey is related to racial equity audits. ISS may be contemplating supporting these proposals unilaterally, as opposed to taking a case-by-case approach under current policy. ISS’ list of possible considerations may be a useful tool for companies contemplating performing a racial equity audit.
The European Union’s social taxonomy is unlikely to be finalized until the latter half of the 2020s at the earliest, due to political infighting. This would have covered pay, gender equality, and human supply chains; the social taxonomy had been set to be the next plank in the EU’s ESG regulations. The EU Commission originally had promised investors outlines on how it would create a social taxonomy by the end of 2021, but this was never completed, and no guidelines have been put forward since this February. The taxonomy had tentatively been slated for debate before the current commission ends its term in 2024, before the EU parliament fought over the decision to include gas and nuclear energy in its green taxonomy and a lack of progress on social questions set in.
- Teneo Takeaway: The ESG taxonomy underpins the bloc’s ESG rules for companies, bond markets and the broader asset management sector. As a result of the EU’s failure to finalize a social taxonomy, investors’ capital allocations on these issues will not be backed by a codified framework anytime soon.
Since the International Sustainability Standards Board published its first two draft sustainability reporting standards covering climate and general sustainability disclosures in March, over 630 climate-related letters have been submitted and nearly 700 general sustainability-related letters have been shared. Overall, stakeholders widely support a single set of global reporting rules, but investors and regulators argue the proposals are too vague, too narrow, and gives firms too much freedom over reporting. The most persistent criticisms were over the ISSB’s failure to define some of the basic terms used in the standards, with the Big Four accounting firms calling for a more concrete definition of terms used by companies to decide what to report. The proposal also wouldn’t compel companies to set specific sustainability targets, such as reducing pollution, and make them report ESG issues they could face over set, longer-term, periods.
- Teneo Takeaway: Stakeholders are hungry for more clarity over ESG standards. Expect more pushback on the ISSB’s proposal as investors and regulators look to end the muddle of conflicting voluntary standards being used to report on ESG risks.
They Said It: ESG Influencers Speak Out
Florida Governor Ron DeSantis announced he is proposing legislation that would prohibit the $240 billion Florida State Board of Administration, which manages the state’s retirement fund, from using any managers that consider ESG factors when investing the state's money. In a Twitter video, he said: "We're going to work … to make sure that we have statutory reforms so that we're putting the people of Florida first. We're going to do what's in their best interest, not whatever the delusion of some wealthy woke CEO wants to do."
Looking Ahead: Upcoming ESG Events
- Fortune Global Sustainability Virtual Forum, Fortune (Virtual) – September 29
- Reuters IMPACT, Reuters (London) – October 3-4
- ESG Impact, CNBC (Virtual) – October 6
- Innovation Summit Las Vegas, Schneider Electric (Las Vegas, NV) – October 12-13
- WSJ Pro Sustainable Business Forum, The Wall Street Journal (Virtual) – October 13
- VERGE 22: The Climate Tech Event, GreenBiz (San Jose, CA) – October 25-27
- The Deal’s ESG and Sustainability Forum, IMN (New York, NY) – November 2
- Fortune Impact Initiative, Fortune (Atlanta, GA) – November 29-30