Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The Institutional Investors Group on Climate Change (IIGCC) published a new component for the Paris Aligned Investment Initiative’s Net Zero Investment Framework (NZIF), providing guidance on aligning private equity portfolios with net zero goals. The guidance covers the metrics, targets and implementation actions relevant to general and limited partners, and offers a coherent industry-wide approach to net zero. The CEO of IIGCC, Stephanie Pfeifer said, “when it comes to net zero, private equity is currently a blind spot for institutional investors…ultimately, the more asset classes that can be incorporated into net zero analysis and strategy, the better chance asset owners and managers have of delivering real-world impact.”
- Teneo Takeaway: In the absence of regulatory guidance, pressure continues to mount on asset managers to strengthen disclosure on climate-related risks and opportunities, while continuing to maximize returns for investors. This new component means the NZIF now covers five asset classes: listed equity, corporate fixed income, sovereign bonds, real estate, and private equity.
The European Securities and Markets Authority launched a review of the bloc’s fast-growing but largely unregulated ESG ratings. The ESMA seeks to shape the “size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU.” With trillions of dollars in sustainable investments worldwide, the ESMA believes there is a need to “match the growth in demand for these products with appropriate regulatory requirements.”
- Teneo Takeaway: Last year, the ESMA warned that the unregulated nature of ESG ratings is a potential risk to investor protection — some studies show low levels of correlation between various ESG ratings — due to the lack of transparency and comparability, as well as potential conflicts of interest. The regulator will take feedback on its review and expects to report results to the European Commission by the end of the second quarter.
The SEC’s 2021 report on Nationally Recognized Statistical Rating Organizations concluded that by adding ESG factors, ratings firms may deviate from their usual methodologies and face new risks. The agency warned that adding ESG ratings raises the risks of new conflicts of interests if firms feel pressure to give higher ESG ratings than warranted when the company is a client.
- Teneo Takeaway: The SEC’s report reviewed credit ratings agencies including Fitch, Moody’s, and S&P, all of which have launched ESG offerings the last several years. MSCI and Sustainalytics, the two largest purveyors of ESG ratings, were not included in the review.
Parnassus Investments, the world’s largest money manager dedicated to ESG factors, plans to start filing shareholder resolutions pressuring companies to address ESG issues. While Parnassus did vote on other investor proposals in the past, the fund traditionally preferred to raise issues directly with corporate executives in private meetings, due to leadership views that activist campaigns were too time-consuming. Its shift to a more activist mold comes as Jerome Dodson – the firm’s champion since he founded it 40 years ago – has stepped away in recent years.
- Teneo Takeaway: Dodson has criticized the “ESG bubble,” arguing that ESG analysis often lacks rigor and investors and companies exaggerate their efforts and impacts. With $48B in AUM, Parnassus’ shift to a more activist approach comes on the heels of several successful shareholder campaigns, especially Exxon’s loss to Engine No. 1 — a fund with $240M in AUM.
In its January shareholders meeting, Prada appointed ESG experts Pamela Culpepper and Anna Maria Rugarli to its board as independent non-executive directors. Culpepper is the founder of the diversity, equity and inclusion consultancy Have Her Back, and was Chief Human Resources Officer at exchange operator Cboe. Rugarli, the Corporate Sustainability Vice President of Japan Tobacco International, previously launched Nike's Sustainability and CSR programs in Europe, the Middle East and Africa. As fashion companies see increased scrutiny from consumers and investors on sustainability and inclusion, Prada also established an ESG board at the meeting, with the support of its founding family and company leadership.
- Teneo Takeaway: Increasingly, investors are demanding that directors have relevant expertise on ESG issues material to the companies they lead. Prada’s new board members, and the creation of the ESG board, likely signals to investors the company’s commitment to sustainability.
Seventy percent of Costco shareholders voted for a proposal calling on the company to lay out plans to reach net zero emissions by 2050 or sooner, including Scope 3 emissions. The company’s board had opposed the proposal saying, that it posed a “monumental challenge…while we seek and will continue to seek to influence our suppliers to reduce their emissions, we cannot directly control their actions.” Competitors – like Walmart, CVS and Target – have already set out plans that include Scope 3 emissions.
- Teneo Takeaway: Shareholder votes on Scope 3 emissions are likely to show up on an increasing number of proxy ballots, as investors continue to push for greater disclosure on sustainability issues. Accounting for Scope 3 emissions is difficult for consumer companies with large, complex supply chains, and retailers face meaningful costs and uncertainties in trying to trace the practices of their suppliers.
They Said It: ESG Influencers Speak Out
After shareholders voted for an activist’s proposal to have Microsoft issue a public report on its sexual harassment policies, which it will release this spring, Microsoft President and Chief Legal Officer Brad Smith said, “I think we recognize that in some ways the nature of the conversation is even changing, not just at Microsoft, but more broadly. We’re seeing more shareholder groups come forward, they have a broader range of proposals. It’s almost a sea change to some degree in the relationship between shareholders, and, I’ll say, especially large companies.”
Looking Ahead: Upcoming ESG Events
- Sustainability Week Asia, The Economist (Virtual) – 14-17 February
- 17th Symposium Energy Innovation, World Energy Council (Graz, Austria) – 16-18 February
- ABI Annual Conference ABI, (London) – 22 February
- IGCC 2022 Summit, Investor Group on Climate Change (Sydney) – 28 February-1 March
- 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
