Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The U.S. Securities and Exchange Commission is asking many public companies to clarify their physical, legal, and regulatory climate-related risks as it readies new disclosure requirements for later this spring. The SEC is expected to vote on the proposal as early as March 9. Data from Audit Analytics shows the SEC sent at least 43 letters to U.S. public companies on these matters last year. This marks the most in one year since 2008 and a marked change from SEC’s actions during the prior administration, as it sent zero across the previous four years.
- Teneo Takeaway: Companies are facing a relatively new regulatory risk from the SEC, making it imperative that legal teams be involved in the sustainability report process.
BlackRock recently published the BlackRock Investment Stewardship (BIS) Engagement Priorities, highlighting five priorities: Board quality and effectiveness; strategy, purpose and financial resilience; incentives aligned with value creation; climate and natural capital; and company impacts on people. The firm noted that where corporate disclosures do not align with TCFD pillars or provide information on scope 1 and 2 emissions, it would likely refuse to support directors responsible for climate risk oversight. BlackRock highlighted that this year it will be encouraging companies to report their considerations of the interests of their workforce in relation to the global energy transition.
- Teneo Takeaway: The recently released BIS priorities echo those set out in CEO Larry Fink’s letter earlier this year, which has been to pursue ESG priorities that also advance investee companies’ long term value creation.
This week, the UN’s Intergovernmental Panel on Climate Change issued its newest report, Climate Change 2022: Impacts, Adaptation and Vulnerability, focused on solutions in a warming world. IPCC discussed the need to practice on what it called Climate Resilient Development, which combines adaption, mitigation, and sustainable development strategies. This report identified sizable gaps between ongoing efforts and necessary adaptation techniques, noting that the world must seriously increase adaptation funding to prepare for expected rising temperatures, particularly through innovative approaches like blended finance. IPCC highlighted that by 2100, up to $14 trillion in assets will be exposed to climate hazards on the coastlines alone.
- Teneo Takeaway: The IPCC will release two additional sections to this report in the coming months, one focused on efforts to cut greenhouse gas emissions and another on lessons for governments, in the leadup to COP27 in Egypt this November.
German fund manager Allianz Global Investors recently announced that, starting 2023, it would vote against large UK and European investee companies that fail to link executive pay to ESG metrics. While AllianzGI – which has €673 billion in assets under management – opposed only 21% of all global management proposals last year, it voted against nearly half of those related to remuneration. In the UK, AllianzGI voted against just one of every 25 proposals overall, but voted against one of every five pay proposals. PwC found that over 40% of the UK FTSE 100 don’t link ESG benchmarks to executive pay.
- Teneo Takeaway: Executive pay and linking it to ESG priorities is likely to continue to be a priority for regulators and some investment managers. Last month, SEC Commissioner Alison Herren Lee, during the re-opening of the Dodd-Frank rule that requires companies to disclose the relationship between executive compensation and financial performance, suggested that executive pay should also account performance on climate, diversity, and a range of other ESG goals.
The Science Based Targets initiative, which sets standards for corporate climate plans while validating companies’ emissions targets for thousands in fees, hired its first CEO, Luke Amaral. Since it was founded in 2014 and expanded rapidly due to support from philanthropists, SBTi has run into concerns of governance and potential conflicts between its dual roles. Amaral noted he will initially set up an internal firewall to ensure standard-development and target-validation work are done separately. Two prominent charities – the Bezos Earth Fund and the IKEA Foundation, which each donated $18 million to SBTi in 2021 – said they were pleased to see these new initiatives.
- Teneo Takeaway: The organization’s push to improve its own internal governance may provide some of the necessary mechanisms to improve transparency and prevent conflicts of interest. The SBTi has faced heavy criticism over the last few months for its opaque methodology, with some NGOs, like the New Climate Institute, accusing it of being a platform for greenwashing.
After Russia invaded Ukraine, global companies and governments have mobilized en masse to cut ties with Russia and support the people of Ukraine. Sanctions on Russia have essentially isolated the country’s leadership, and prominent index managers have removed Russian securities from their indices. Sporting organizations like FIFA have suspended Russian teams from participating in global competitions. Some multinationals are donating millions of dollars in aid and supporting humanitarian efforts, refugees, and nonprofits on the ground. Many companies are increasingly halting economic activities in Russia, including pausing theatrical releases, stopping major energy projects like Nord Stream 2, suspending exports, and refusing support for Russian airlines.
- Teneo Takeaway: Like the global pandemic, the war in the Ukraine will have ESG implications for both companies and investors. Employee health and safety, human rights, supply chain risk management and many other ESG issues are a central focus to the ongoing crisis in the region.
They Said It: ESG Influencers Speak Out
After the release of the latest IPCC report, United Nations Secretary-General Antonio Guterres said that the “IPCC report is an atlas of human suffering and a damning indictment of failed climate leadership. With fact upon fact, this report reveals how people and the planet are getting clobbered by climate change. Nearly half of humanity is living in the danger zone – now. Many ecosystems are at the point of no return – now. Unchecked carbon pollution is forcing the world’s most vulnerable on a frog march to destruction – now.”
Looking Ahead: Upcoming ESG Events
- 9th Annual World Ocean Summit Virtual Week, The Economist (Virtual) – 1-4 March
- Climate Capital Live, Financial Times (London) – 8-10 March
- Technology for Change Week, The Economist, (Virtual) – 8-11 March
- Global Sustainable Business Summit, Bloomberg (London) – 31 March
- Asia Energy Transition Conference, S&P Global (Virtual) – 30-31 March