This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The SEC’s Division of Examinations released its 2024 examination priorities, designed to inform investors on the key topics the Division plans to focus on in the upcoming year. Notably, there was no direct reference to ESG in the 2024 exam priorities, which had been a consistent area of focus in the last three years. The SEC highlighted that the published priorities “are not exhaustive of the focus areas of the Division in its examinations, risk alerts, and outreach.”
- Teneo Takeaway: The exclusion of “ESG” in the 2024 report highlights that the SEC may shift away from the political debate around ESG. Fiduciary duty of investment advisers came to top of the list, which resonates with notable focus on governance from major institutional investors across their stewardship policies in 2023.
The SEC has revisited its pay-versus-performance disclosure rule with a series of comments letters to 18 companies, as well as guidance in the form of nine compliance and disclosure interpretations (C&DIs), about various technical aspects of the rule and how companies should treat valuation issues and metrics when calculating disclosure figures. The PvP rule was a new addition to disclosures during the 2023 proxy season and required companies to determine a “compensation actually paid” figure for the CEO and an average CAP for named-executive officers, among other data. The guidance and letters could signal potential regulatory shifts on PvP, as the SEC reviews implementation of the disclosures and industry experts to clarify expectations for the upcoming 2024 proxy season. Dan Ryterband, chairman and CEO of compensation consulting firm FW Cook said the new guidance raises many questions – “a lot of time and energy will be spent in their interpretation and practical application.”
- Teneo Takeaway: The SEC’s added guidance on PvP disclosures potentially underscores a broader agency focus on supporting practical implementation of current rules and regulations.
The SEC voted to adopt new Rule 13f-2 to increase short position reporting to the SEC by institutional investment managers – providing greater transparency to investors and other market participants. The final rule will require investment managers with large short positions to file a Form SHO report within 14 days after the end of each calendar month for any position at or above $10 million or 2.5% of outstanding shares of an equity security. The SEC will aggregate the resulting data by security and share publicly within four weeks of the end of each calendar month. SEC Chair Gary Gensler noted that the rule “addresses Congress’s mandate and improves upon existing sources of short sale-related data in the equity markets.” The rules have garnered pushback from investors and banks worried about meeting the reporting requirements and investors concerned that the information could disclose their positions.
- Teneo Takeaway: The new rules will become effective 60 days after publication in the Federal Register, with compliance required 12 months after the effective date of the adopting release
The Task Force on Climate-related Financial Disclosures released the sixth and final status report, describing the progress which companies have made in publishing climate-related financial disclosures. The report found that the percentage of public companies disclosing TCFD-aligned disclosures continues to grow. In 2022, 58% of companies disclosed in line with at least five of the 11 recommended disclosures, up from 18% in 2020; however, only 4% disclosed in line with all 11. The report also found that 97 of the 100 largest companies in the world have declared support for the TCFD, report in line with the TCFD recommendations, or both. Moving forward, the ISSB will monitor progress on the state of climate-related financial disclosures by companies and support effective implantation of its standards.
- Teneo Takeaway: TCFD voluntary standards continue to provide guidance as companies develop and implement sustainability standards aligned with the latest global disclosure frameworks.
Japanese pensions funds managing $600 billion will sign the Principles of Responsible Investment, an initiative that encourages investment that takes ESG factors into consideration. Japan’s Prime Minister, Fumio Kishida, announced the decision saying, “the initiative enables asset managers and owners to engage in dialogues with companies and promote growth and sustainability outcomes.” He also emphasized Japan’s commitment to cooperate with peer Asian countries to achieve global net-zero emissions. Japan’s over $14 trillion in household financial assets hold significant potential to drive sustainable growth. At the PRI in Person forum, Kishida also outlined four major Japanese policy priorities aimed at addressing global issues and promoting corporate activities and investments that facilitate growth: Green Transformation, Supporting Startups, Enhancing Human Capital, and Strengthening Sustainable Finance.
- Teneo Takeaway: Kishida and Japan’s commitment to the PRI underscores the continued demand for ESG integrated investments and potential for sustainable finances to drive progress in addressing diverse challenges such as climate change, an aging population and natural disasters.
California Governor Gavin Newsom signed into law a bill that will require VC firms to report annually on the diversity demographics of portfolio company founders beginning in 2025. Covered firms include those whose portfolio companies are headquartered in, or have significant operations in California, as well as firms that receive fund commitments from residents of the state.
- Teneo Takeaway: Although it’s the first piece of legislation in the country aimed at increasing diversity of VC funding, critics point out the law only requires firms to report the percentage of underrepresented founders in the portfolio but not the percentage of dollars they receive. The broad definition for VC means PE and other funds might also be covered.
Newsom also signed two new climate-related disclosure but signaled that the bills’ timelines may be pushed out and cost impacts on businesses addressed before implantation of the new laws. In a statement released by the Governor announcing the signing of the bill, he warned that the implementation deadlines “are likely infeasible,” and that the new rules’ reporting protocol “could result in inconsistent reporting across businesses.” He also instructed the California Air Resources Board (CARB), the agency charged with implementation, to “monitor the cost impact as it implements this new bill and to make recommendations to streamline the program.” The California laws come ahead of finalized SEC climate disclosure rules, which have also received criticism over requirements to report on Scope 3 emissions, particularly related to their impact on smaller businesses.
- Teneo Takeaway: The laws will likely face similar legal challenges as the pending SEC’s climate disclosure rules. CARB will also have significant regulatory oversight during the law’s implementation process, which will shape the final impact of the new regulations. .
They Said It: ESG Influencers Speak Out
On the WSJ’s Free Expression podcast, BlackRock Chairman and CEO discussed the political debate on ESG, criticisms of BlackRock’s focus on ESG, and Fink’s position on the issue: “Everything we do is on behalf of our clients, and everything we do is with the purpose of financial returns … That is our fiduciary responsibility, and we live that every day … The reason why I backtracked from the term ESG, because it means something to every different person. It's almost so amorphous that you can't put your hands around it … Many clients of ours are choosing to invest in investment strategies that are ESG-focused or sustainability-focused … The reality is, more and more investors are looking to find ways of decarbonizing investing, whether that is because of the IRA in the United States or other areas where they think you're going to get financial return. Most of the investors look at it as a good long-term financial return, and our job is to provide clients different choices, different investment styles, different ideas.”