Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
On August 25, the Securities and Exchange Commission adopted new amendments that will require public companies to disclose more information on the relationship between executive compensation and financial performance. The new rules require disclosure of a company’s financial performance for the last five fiscal years, specifically total shareholder return for the company and of peers, its net income, and a chosen financial performance measure. Companies must also provide three to seven measures it has determined most important for linking executive compensation actually paid to company performance; these can include non-financial measures.
- Teneo Takeaway: The new rules go into effect ahead of the 2023 proxy season and mark the most significant enhancement of executive compensation disclosure in the past decade. These amendments come after first being proposed in 2015 and 12 years after Congress passed the Dodd-Frank Act, which required the SEC to implement pay-versus-performance rules. Look for Teneo’s thought leadership piece on this topic to be published shortly.
54% of FTSE 100 firms now have developed ESG board committees, with a “shrinking minority” not having formalized sustainability-focused committees. All companies listed within the oil & gas and mining sectors have set up board-level ESG committees. Only 13% of non-bank financial services – including insurers and asset managers – have taken this step. The study notes that, of the companies with an ESG committee in the FTSE 100, 56% include only non-executive directors, which could help provide more independent assessments.
- Teneo Takeaway: Investors don’t necessarily have a preference as to the “how,” but they do expect robust disclosure from companies as to their oversight of material ESG risks as well as what relevant ESG-related education and or training directors have received.
New Morningstar research exhibits that U.S. public pension funds are among the strongest supporters of shareholder resolutions on climate change, political spending, and workers’ rights and pay equity –according to 2021 public fund proxy-voting data. The sample of state and local municipal defined-benefit public pension funds invest on behalf of almost 14 million people across $3.4 trillion in assets showed a higher rate of support than ESG-focused funds and average shareholders. The pensions funds voted 90% in favor of ESG shareholder resolutions, while ESG-focused funds averaged 85%; these key resolutions garnered an average 63% support rate across the 72 key ballot items from general shareholders. Moreover, while support from public pensions in Democratic-leaning states outpaced that of Republican-leaning states, general pension support for these causes crossed party lines.
- Teneo Takeaway: These results offer evidence that, despite recent actions by Texas and Florida on the topic, most large state pension funds view many ESG issues such as climate as a financially material issue for many companies – and that is unlikely to change any time soon.
BlackRock published a letter pushing back on claims from Republican attorneys general that accused the company of putting its “climate agenda” ahead of clients, collaborating with climate activists and boycotting energy companies. The letter seeks to correct what BlackRock views as several inaccurate statements by the attorneys general. The company reaffirmed that it continues to invest in energy companies, including fossil fuel companies, and reaffirmed that its participation in ESG initiatives “is entirely consistent with our fiduciary obligations” to clients. Earlier in August, BlackRock’s head of U.S. business responded to Texas’s decision to single it out as hostile to fossil fuels, saying that “trying to stop a U.S. company from doing business in its own backyard is bad for business…We have never turned our back on Texas oil and gas companies.”
- Teneo Takeaway: BlackRock’s response symbolizes our view that large institutional investors are not likely to de-emphasize relevant ESG issues despite pushback from certain Republican attorneys general. In fact, we expect investors and other ESG proponents to double-down on the issue heading into next year’s proxy season given this recent pushback.
JPMorgan Chase & Co. has partnered with software firm Datamaran to develop a data-analysis tool that embraces the concept of double materiality – which considers the importance of ESG issues from two perspectives: financial and impact materiality. While double materiality is built into EU ESG standards, JPMorgan’s ESG Discovery is among the first U.S. based services that incorporates the concept. The architect of the new tool, Jean Xavier Hecker, said the concept is “the only way to think about ESG in a way that is both forward-looking and comprehensive…A focus on double materiality is a business necessity for investors.”
- Teneo Takeaway: The debate over “single” and “double” materiality continues with European investors preferring a “double” materiality approach and U.S. investors preferring “single” materiality. This can lead to confusion among companies when deciding what type of ESG disclosure to focus on.
Assets in China’s ESG portfolios have doubled to around $50 billion since the start of 2021, with at least 112 new funds launched in the past 20 months. Chinese asset managers’ definition of ESG closely follows Beijing’s political priorities, including aligning with the CCP’s “common prosperity” initiative and 2060 net-zero goal. Critics note that many funds don’t rule out coal, defense, steel, and liquor companies, as well as solar energy and technology firms with alleged ties to forced labor in Xinjiang.
- Teneo Takeaway: China’s aggressive ESG expansion comes with its own interpretation of ESG and highlights a layer of flexibility for countries to define their own standards.
They Said It: ESG Influencers Speak Out
Stuart Kirk, former head of responsible investment at HSBC Asset Management, wrote a Financial Timespiece on ESG’s two competing perceptions: “Regulators have never bothered disentangling them, so the whole industry speaks and behaves at cross purposes … One [meaning] considers E, S and G as inputs into an investment process, the other as outputs to maximise … A bright future for both forms of ESG is possible if each makes sense on its own terms. Keep conflating the two, however, and large areas of the ESG landscape will not make sense, nor can the necessary debate occur for the industry to advance.”
Looking Ahead: Upcoming ESG Events
- Forbes Sustainability Leaders Summit, Forbes, (New York, NY) – September 20
- 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