Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
Last night, U.S. Senators Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY) announced an agreement to revive a reconciliation package focused on lowering carbon emissions, shoring up domestic clean energy production, and cutting healthcare costs. Now called the Inflation Reduction Act of 2022, the package includes about $370 billion in climate change resilience and energy security measures. It includes $60 billion in environmental justice programs to fight pollution and address public health harms in disadvantaged communities. Also included in these measures are $30 billion in production tax credits to accelerate U.S. production of batteries and wind and solar power components and critical minerals processing; $20 billion for “climate smart” agriculture practices; and a $10 billion investment tax credit to build clean technology manufacturing plants for EVs, wind turbines and solar panels
- Teneo Takeaway: As with all reconciliation legislation, the Senate parliamentarian will need to review the legislative text to ensure that all provisions are in compliance with the Byrd Rule. It is possible that the process will either be fast-tracked or delayed, although Senator Schumer has indicated that he would like to bring the legislation to the floor as early as next week, ahead of the scheduled August recess.
The U.S. House of Representatives passed legislation safeguarding the right to travel across state lines to seek an abortion after several states banned the procedure in the wake of the Supreme Court’s Dobbs v. Jackson Women’s Health Organization ruling last month. The bill faces unsure odds in the evenly divided Senate. Notably, a similar bill was blocked earlier this month. Some state legislators are considering bills that would penalize companies and individuals who aid those seeking out-of-state abortions.
- Teneo Takeaway: The policy, health coverage and legal landscape around abortion care continues to shift and evolve in a post-Roe setting. Companies can expect to engage in continual review of relatable employee benefits as well as consider messaging and responses to more inquiries from investors and other stakeholders as legislative action and legal challenges unfold.
The Human Rights Campaign released a letter signed by over 170 major businesses calling on the Senate to pass the Respect for Marriage Act, legislation that would codify marriage equality on a federal level. The bill passed the House with bipartisan support but faces an uncertain future as some Senators have suggested the legislation is redundant to current law.
- Teneo Takeaway: Companies should expect continued scrutiny of their lobbying efforts and company positions as legislators and activists focus on passing legislation safeguarding rights that are considered high-risk following the reversal of Roe v. Wade.
The ESG movement faces a significant ‘stress test’ as Republican officials across the U.S. launch a broad assault on large corporate ESG initiatives. Sen. Tom Cotton (R-AK) said BlackRock’s ‘abuse’ of its economic power to tilt corporate boards towards addressing climate change weakens national security and drives up the price of gas – noting that “the next Congress is going to take on this collusive racket.” Backlash also continues to ramp up on the state level, with legislators empowering officials to stop doing business with firms divesting from fossil fuels. The efforts could come with a cost, with a new paper by Wharton professor Daniel Garrett and Federal Reserve Board economist Ivan Ivanov suggesting that Texas state entities will pay an additional $303 million to $532 million in interest costs on the state’s $32 billion in borrowing during the first eight months following passage of two ‘anti-ESG’ laws last September. The paper claims that government regulation limiting the adoption of ESG “distorts financial market outcomes.”
- Teneo Takeaway: Investors do not seem to be backing away from their ESG priorities. According to a Morningstar report, sustainable funds fared better than broad market funds in Q2 in terms of asset flows and achieved a higher organic growth rate than the overall U.S. market. We expect investors to continue their sharp focus on material ESG issues that they believe drive long-term shareholder value.
Companies turning to coal as an alternative to a diminishing supply of Russian gas may face a hit to their ESG ratings, as major European investors say they will not relax their investment principles of reaching net zero targets on greenhouse gas emissions by 2050 despite an energy crisis following sanctions on Russia. MSCI executive director of climate change investment research Sylvain Vanston said, "When your emissions go up, all other things being equal, you are in more trouble from a ratings perspective… if you come up with a fantastic new commitment, that could counterbalance it."
- Teneo Takeaway: With the energy crisis in Europe, it remains to be seen how far either companies or investors can keep faith in ESG principles, like cutting out coal, if the situation worsens.
BlackRock’s Investment Stewardship group released the firm’s 2022 proxy voting spotlight, noting that it voted in favor of just 24% of environmental and social shareholder proposals in the latest proxy-voting year – compared to 43% in 2021. The firm highlighted that while it supports work on climate-related issues, BlackRock has declined to support “more prescriptive” proposals that seek “to dictate companies’ energy transition plans.” A BlackRock executive said that going forward, the firm will encourage companies to work on Scope 3 targets instead of imposing them through proxy votes.
- Teneo Takeaway: Enabled by new SEC guidance, shareholders and investors have steadily increased their focus on tackling companies’ ‘E’ and ‘S’ issues, with 133% more such proposals in this recent voting season. Moreover, investors cited climate change in opposing the election of a management-backed director at 225 U.S. companies this year – up from 157 in 2021 and 83 in 2020.
Last month, the UN-backed Taskforce on Nature-related Financial Disclosure released a new version of its beta framework for nature risk management and disclosure, building on an initial iteration from March and expanding specific metrics and sector guidance for pilot testing. Enhancements include a draft architecture for metrics and targets and an illustrative set of assessment metrics to support pilot testers. Moreover, the proposed approach in v0.2 update release distinguishes between assessment metrics and disclosure metrics. Future updates are scheduled for November 2022 and February 2023, with the final TNFD recommendations due in September of next year.
- Teneo Takeaway: To help assure standardization on metrics and guidance, the TNFD has aligned with the approaches of several other standards-setters like the ISSB and TCFD; its next set of illustrative metrics will be expanded to include risk, opportunity, and response assessment metrics as well as disclosure metrics.
The number of asset management firms incorporating ESG criteria into the fixed income investments increased significantly over the past year, according to the Index Industry Association. Currently 76% of managers implement ESG within fixed income, up from 42% in 2021, according to the not-for-profit association's survey of 300 investment management firms in the United States and Europe. Firms expect that 40% of their portfolios will include ESG elements in the next 12 months, up 13% from the 2021 survey, the Index Industry Association said.
- Teneo Takeaway: While inflows of sustainable index funds slightly diminished in the first of 2022, the Index Industry Association survey demonstrates continued investor interest in the ESG space.
They Said It: ESG Influencers Speak Out
The Economist called for a rethink of ESG in a new cover issue entitled Three letters that won’t save the planet: “It is an unholy mess that needs to be ruthlessly streamlined. It is better to focus simply on the e … [which] should stand not for environmental factors, but for emissions alone. … Government action, combined with clear and consistent disclosure, can save the planet.”
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
- The Climate Tech Event, Verge (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