Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
Company Moves: ESG Initiatives in the Corporate World
On August 9, the IPCC released a special report on Global Warming of 1.5ºC, forecasting continuing record-setting extreme temperatures in the next decade. Following the release, experts emphasized the significant role businesses must play to avoid potential climate disaster, including reducing physical material and energy in their products. For corporate leaders, the report necessitates prioritization of well-proven emission reduction solutions and comprehensive decarbonization policies throughout the supply chain.
- Teneo Takeaway: The IPCC forecast the findings of its report several months ago, and governments, ESG raters, and climate actors have started to shift their policies accordingly. We expect this trend to continue, especially with several COP 26 attendees—UK, the EU—advocating for aligning to 1.5°. Earlier this year, and prior to the release of this report, the Science Based Targets Initiative (SBTi) indicated that companies will need to align with 1.5°C instead of the previously accepted 2°C, and MSCI’s inaugural Net Zero Tracker report highlighted public companies’ progress toward both 1.5° and 2° targets.
On August 6, the SEC approved Nasdaq’s proposal requiring companies to disclose at least two diverse board directors, including one self-identified female and one underrepresented minority. SEC Chair Gary Gensler applauded the change, arguing the rule facilitates investor understanding of Nasdaq-listed companies’ approach to board diversity. If companies do not meet the proposed benchmarks, Nasdaq will require an explanation for lack of implementation. The new policy received mixed feedback: much of it was positive; some argued the change is overreaching and one-size-fits-all, while still others claimed it was not inclusive enough, noting disabled people are not considered under the proposal.
- Teneo Takeaway: The Nasdaq proposal could have a meaningful impact on board diversity. The rule echoes two California laws—passed in 2018 and 2021—that require California-based public companies to name one-to-three women and underrepresented minorities to their boards, respectively. As of late 2019, 14-months after passing the law focused on female directors, the number of all-male boards in the Russel 3K dropped from 93 to 17.
ESG Investing: Updates on Investors, ESG Ratings, ESG Rankings and ESG Investment Funds
Companies are struggling with complexity and inconsistency within ESG ratings firms even as they strengthen their climate risk measurement and carbon emissions accounting. While credit ratings broadly match each other, a WSJ analysis of nearly 1,500 companies ranked by each of three leading firms that conduct ESG scoring – Refinitiv Holdings, MSCI, and Sustainalytics – found that the firms craft drastically different rankings.
- Teneo Takeaway: Climate risk and emissions accounting is a nascent discipline within the ESG universe and, as such, is susceptible to many of the pitfalls we’ve seen in ESG ratings variation. As we have mentioned in previous ESG roundups, a number of regulators are working to standardize ESG reporting and rating to reduce the inconsistency in company ratings. The same regulators may turn to climate accounting as part of or subsequent to their regulatory scrutiny of ESG ratings.
University College Dublin academics formed GreenWatch, a group developing algorithms to help the financial services sector detect and quantify greenwashing through artificial intelligence. GreenWatch’s analysis of corporate statements of 800 global companies and corporate communications on carbon footprints, the group classifies companies as either green leaders, hidden green champions, green incrementalists, or potential greenwashers. Early findings by UCD and other researchers’ AI models exhibit that a sizable percentage of companies across sectors are guilty of greenwashing.
- Teneo Takeaway: These new AI models present an interesting and novel way for investors to hold companies accountable for failing to make good on some of their sustainability pledges. And as with any ESG rating utilizing AI, it will be a challenge for companies to have any input into or control over this rating.
They Said It: ESG Influencers Speak Out
In a Financial Times op-ed imploring investors to focus on financial returns, Church Investors Group vice chair Stephen Beer wrote, "The prize is found in integrating financial and ESG objectives... History is not preordained to repeat itself, but ESG investors should pay attention to prospective financial returns as well as other potential gains to society. If they are not aligned, someone will be paying over the odds."
Looking Ahead: Upcoming ESG Events & Happenings
- PRI, PRI in Person (Tokyo, Japan) – 14-16 September
- Climate Group, Climate Week NYC (New York) – 20-26 September
- The Economist, Future of Energy Week (Virtual) – 4-7 October
- CSR Europe, The European SDG Summit 2021 (Virtual) – 11-14 October
- United Nations, UN Biodiversity Conference (Kunming, China) – 11 October
- United Nations, UN COP26 (Glasgow, UK) – 1-12 November
- Global Reporting Initiative, GRI Summit (Virtual) – 18 November