This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The SEC has finalized a wide-ranging cybersecurity-related disclosure rule, which will require publicly traded companies to disclose hacking incidents and establish, maintain and enforce written policies and procedures that are reasonably designed to address their cybersecurity risks. Companies will have four days to disclose a cyber breach once it is determined serious enough to be material to investors, with exceptions allowed if the U.S. Attorney General decides that the delay is necessary to protect national security or police investigations. The final rule also included parallel requirements for filings by foreign private issuers. Additionally, the SEC proposed a rule requiring broker-dealers to address conflicts of interest in the use of AI in trading.
- Teneo Takeaway: In a change from the draft proposed rule, the SEC will not require disclosure about whether any board of director has cyber expertise. Interestingly, the SEC has a related requirement to disclose climate expertise at the Board and management level in its proposed climate rule. It remains to be seen whether the SEC’s final climate rule will also exclude such requirement.
The Department of Education has opened a civil rights investigation into Harvard’s preferences for legacy applicants on the heels of the Supreme Court’s monumental decision to strike down race-conscious admission policies. Critics of these policies argue that the practice gives priority to children of alumni who are most often white while supporters contend it builds an alumni community and encourages donations.
- Teneo Takeaway: As we saw with the Supreme Court’s decision overturning Roe v. Wade last summer, this ruling is not the end. Proponents from both sides of the debate are taking action – supporters of the SCOTUS decision are taking that decision to go after corporate programs and opponents are responding by attacking legacy programs. This dynamic is consistent with activity from pro- and anti-ESG actors across stakeholder groups – including politicians, investors, and customers – who are increasingly pressuring companies from both sides.
A new poll from Morning Consult found that voters aren’t sold that companies are moving too far left. Only 43% of voters said corporations are pushing “wokeness” too far – and just 33% of voters were concerned with Wall Street specifically. While Republican voters view the term wokeness similar to socialism, among all U.S. voters only 35% see woke ideologies as an important issue when thinking about the 2024 election. Republicans continue to criticize Wall Street’s commitment to ESG. House Judiciary Chairman Jim Jordan recently warned BlackRock, Vanguard and SSGA that their agreement to decarbonize their assets could have “potentially harmful effects on American’s free and economic well-being.” A recent opinion piece from Republican members Sen. Tom Cotton and Rep. Andy Barr told Americans that, “your retirement account is likely bearing the financial risk of their social experimentation.” Despite the criticism, large asset managers continue to look to ESG investing for future growth.
- Teneo Takeaway: The Morning Consult poll follows similar reports that find Republicans’ attack on sustainable investing strategies is not resonating with a majority of voters. However, if the Presidential election polls change to show the “anti-woke” is resonating with more voters, then expect more ESG attacks from Republican candidates.
BlackRock announced plans to expand its Voting Choice program to its largest ETF, the iShares Core S&P 500, reiterating its commitment to include more retail investors in the shareholder voting process. Retail investors hold about half of the $305 billion fund’s assets. The planned expansion is subject to iShares Board approval and, if approved, is expected to be in effect for the 2024 proxy voting season. Under the new policy, clients will be able to choose among a range of voting plans from proxy advisors, including ones that prioritize climate considerations. Many shareholders will continue to rely on BlackRock to engage and execute voting on their behalf. In a statement, the asset manager said in such cases, it will continue to practice its fiduciary duty to shareholders when making investment decisions.
- Teneo Takeaway: BlackRock’s decision to expand investor choices comes as some activists and politicians increasingly criticize the firm for having too much control over publicly-traded companies. Companies should continue to monitor the uptake here as voting choice initiatives at BlackRock and other large asset managers could have an impact on future shareholder meeting results (as Teneo has written about here).
The International Organization or Securities Commissions (IOSCO) endorsed the ISSB’s two new climate and sustainability disclosure standards and called for the rules to be considered worldwide. The groups endorsement called on its 130 member jurisdictions to consider ways in which they might adopt, apply or otherwise be informed by ISSB Standards to promote consistent and comparable climate-related and other sustainability-related disclosures for investors. Jean-Paul Servais, Chair of the Board of IOSCO, said “This is a critical moment in advancing IOSCO’s goal of improving climate-risk disclosure for investors … IOSCO has found that the ISSB conducted a robust process and have concluded that these standards serve as an effective and proportionate global framework of investor-focused disclosures on sustainability- and climate-related risks and opportunities.”
- Teneo Takeaway: IOSCO’s endorsement of the ISSB standards signals widespread support from securities regulators around the world. Large institutional investors have also expressed strong support for the framework.
MSCI released updated information related to the firms ESG ratings process. The report highlights MSCI’s current practices for obtaining ESG data, releasing ESG scores, and the steps taken to review the quality of the analysis. The report also discusses the company’s ratings policies for spin-offs, mergers, and acquisitions and identifies the process by which methodical changes occur across the ESG Research Group. Each year, the group evaluates emerging issues relevant to ESG and consults with clients about proposed changes to Key Issue selections for each industry as well as any proposed new Key Issues.
- Teneo Takeaway: MSCI’s ESG and climate businesses unit has continued to rapidly grow, with revenue from the second quarter up by 29% from a year ago. While government regulations and voluntary disclosures continue to drive demand for its ESG and climate products, regulators are also increasingly monitoring ESG rater practices regarding transparency and accuracy.
They Said It: ESG Influencers Speak Out
A report from As you Sow, the Sustainable Investment Institute and Proxy Impact found that “ESG continues to feature in the campaigns of some presidential aspirants, though, and its opponents can draw on a deep funding pot to continue their efforts, including litigation … What remains abundantly clear is that the capital markets will continue to consider environmental and social policy metrics and corporate governance arrangements in investment management and corporate policy.”
Looking Ahead: Upcoming ESG Events
• Sustainability Reporting USA 2023, Reuters (New York, NY) – October 2-3