Our bi-weekly spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
With the United Nations General Assembly taking place this week, climate change has been heavy on the agenda. Ahead of the kickoff, President Biden held a virtual meeting where he urged fellow world leaders to cut methane emissions. In his Tuesday speech at the UNGA, the first major gathering of world leaders in nearly two years, Biden exhorted the world to act on climate change. He pledged $100 billion to support climate actions in developing nations. China’s Xi Jinping committed not to build new coal-fired power plants abroad and showed support for clean energy in developing nations. Despite those encouraging signs, UN Secretary General António Guterres criticized the handling of several crises, arguing that the world “is heading in the wrong direction.”
- Teneo Takeaway: Global leaders have seized on the topic of climate change. Their strong rhetoric surrounding policies or international agreements to curb emissions is likely to continue in the lead-up to COP26 in early November.
In Business Insider’s first installment of The Equity Talk, Citi’s head of diversity, Erika Irish Brown, discussed how she measures the impact of DEI. Citi is on track to hit respective targets of women in 40 percent and blacks in 8 percent of leadership positions by the end of 2021. Brown focuses on connecting racial equity, commercial and human capital initiatives, and has committed to increase economic mobility. In the last year organizations have recognized internal shortcomings in diversity, leading to more executive level positions and initiatives focused on tackling discrimination and improving representation.
- Teneo Takeaway: DEI is one of the most detailed and evolving disclosure topics within sustainability reporting, with nearly all companies – 93 percent of those surveyed – reporting some kind of demographic data.
Global plans to reduce carbon emissions require lots of semiconductors – essential for electric vehicles and solar panels – but decarbonizing the semiconductor industry remains challenging. Chip fabs consume massive amounts of energy and water. As of 2019, TSMC, the world’s largest manufacturer of semiconductors consumed 5 percent of Taiwan’s total electricity and is projected to consume 7.2 percent by 2022. The industry is taking steps to reduce emissions by switching to renewable energy sources, but water and energy consumption issues continue, as well as the emitting of toxic waste.
- Teneo Takeaway: Chip manufacturers are seeking methods to reduce their emissions and fresh water usage. Increasingly they are reporting on fresh water usage reduction as part of their reporting of material ESG issues.
The world’s top mutual fund company, Vanguard, issued its semiannual report on proxy voting and its investment strategies, highlighting its 2021 proxy voting and engagement activities to date. The report comes on the heels of Universal Owner’s report that concluded Vanguard is falling short on its climate commitments. The think tank found Vanguard has one employee to monitor climate issues for every 300 portfolio companies and that the firm lends millions of dollars to tar sands companies.
- Teneo Takeaway: Vanguard supported 20 percent of the environmental and social-focused resolutions in the first half of 2021, more than tripling its support for those proxy issues since last year. Still, some watchdogs think that large asset managers aren’t doing enough. Pressure on asset managers is likely to continue, which may push Vanguard and others to be more active on ESG in 2022.
Financial Timesreports investors put $97.4 billion into ESG ETFs through the first seven months of 2021 – up from a record $89 billion in all of 2020. According to Carolyn Weinberg, Blackrock’s global head of product for the iShares ETF and its index investments, the resilience of ESG-focused ETFs during the early days of pandemic-induced market turmoil has since caused greater investor interest in ESG-aligned assets.
- Teneo Takeaway: Many argue that passive strategies, like ESG ETFs, have limited ability to advance environmental and social issues, because the primary goal of those funds is to follow the market. They believe private investment – like venture capital or private equity – is a more effective vehicle to achieve impact on environmental or social goals. Despite this, investors continue to pour capital into ESG equity index trackers.
In mid-September, Institutional Shareholder Services (ISS) released their 2021 U.S. Proxy Season Climate-Related Voting Trends Report. The report highlights the escalation of shareholder engagement on climate-related issues, including investors moving beyond requests for disclosure to voting against directors for perceived failures of climate risk mitigation.
- Teneo Takeaway: The number of climate-related proxy items and the share of those that pass has increased over the last three years. In 2019, ISS recorded two climate-related proxy proposals, neither of which passed. 2021 has seen 22 climate-related proposals, 8 of which have passed. The days of climate risk as a niche issue are over, given widespread shareholder and government interest.
NN Investment Partners and Glass Lewis released a study in September that explores links between ESG supervision and performance. The study found companies with a stand-alone ESG committee at the board level held higher ESG scores based on the ESG Lens – NN IP’s propriety tool assessing a wide range of data points – compared to companies that did not. Companies that did not disclose details of their supervision of ESG risks and opportunities had the lowest ESG scores.
- Teneo Takeaway: As investors continue to press boards on their oversight of ESG issues, boards must be thoughtful about the best mechanisms for such oversight. This study provides evidence of the old business school axiom that, when it comes to ESG, “what gets measured gets managed,” and that companies committing resources to ESG issues tend to have higher ESG ratings and better ESG disclosure than companies that do not.
They Said It: ESG Influencers Speak Out
Keith Sonderling, a commissioner on the U.S. Equal Employment Opportunity Commission, wrote in his Chicago TribuneOp-Ed about artificial intelligence in the workplace: “If an employee's primary interface with his employer is an app or an algorithm, initiating that process may be daunting and employees may not be willing to disclose some of their most personal and protected issues to a chatbot….while AI is becoming mainstream technology in the workplace, discrimination-by-algorithm must not.”
Looking Ahead: Upcoming ESG Events
- 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