This spotlight explores key ESG-related market developments and their implications for corporates and investors.
Teneo published our annual study of proxy season trends, entitled: 2023 Proxy Season Review: Institutional Investor Expectations in a Divided World. In addition to covering recent proxy voting trends, the report looks at regulatory developments, investor considerations impacting vote decisions, and what this could mean for companies in 2024.
Institutional Shareholder Services (ISS) released the results of its annual global benchmark policy survey, a key part of ISS' annual policy development process. The survey received 455 responses primarily from asset managers, as well as representatives of public corporations. Topics covered this year included governance and stewardship issues, specifically U.S. non-GAAP incentive pay program metrics, director independence classification, and global environmental and social questions, among others. Respondents highlighted the need for global consistency on environmental and social principles and policies, with some suggesting market-specific policies. Notably, three-quarters of respondents indicated that companies should evaluate expected material impact on the environment and society, with 44% saying that these impacts can be expected to effect the company’s financial performance in the medium to long-term, and 31% saying that they should be considered material whether or not they would financially influence the company. Approximately 90% of respondents outside of the U.S. responded that materiality assessments should include company environmental and social impacts.
- Teneo Takeaway: The survey also found that respondents favored TCFD recommendations and Science-Based Targets initiative guidelines when assessing company climate transition plans. The results of the survey overwhelmingly reinforce institutional investor focus on the ESG issues that are material to a company and industry.
ISS ESG released methodology enhancements to its Governance QualityScore (GQS) scoring solution for global institutional investors. These updates will impact company scoring and ranking immediately when launched on December 1, 2023. The annual exercise is designed to ensure that GQS evolves to meet emerging governing trends at global and local levels. The latest enhancements expand board structure, compensation, audit, and risk oversight to new markets. An additional 11 factors covering board structure, compensation and shareholder rights were enhanced to capture more detailed information from companies.
- Teneo Takeaway: ISS methodology changes on its Governance QualityScore follow changes earlier in the year to its environmental and social QualityScores. Expect ESG ratings methodologies to continue to evolve to meet investor needs.
For a second consecutive year, banks are generating more revenue providing loans and underwriting bond sales for green-related projects than earnings from fossil fuel companies, according to a study by Bloomberg. Banks have made ~$2.5 billion from climate-focused financing so far in 2023, compared with ~$2.2 billion from their work with oil, gas and goal companies. Bloomberg Intelligence analyst Grace Osborne said that net-zero 2050 goals and the clean-energy transition represent the potential to open “significant new revenue streams,” including more fees from green-bond underwriting and lending, in addition to returns from investments in low-carbon technology and other forms of sustainable financing.
- Teneo Takeaway: Despite the political rhetoric against ESG as hurting company performance, the need for transitioning to a more climate risk conscious world continues to create revenue opportunities for the financial sector.
House Judiciary Committee Chairman Rep. Jim Jordan accused As You Sow, a non-profit group that promotes environmental and social corporate responsibility, of violating U.S. anti-trust laws. As You Sow President Danielle Fugere said that the group would “answer reasonable questions, but noted that “the subpoena is flawed, with demands that are inapplicable to As You Sow, and is so broad as to be virtually unbounded.” The subpoena suggests that As You Sow is forcing corporations to enter into agreements to decarbonize and reduce emissions to net zero. The request for documents from As You Sow follows a similar letter to Glass Lewis that also accused them of potentially violating U.S. antitrust law.
- Teneo Takeaway: The anti-trust campaign against groups like As You Sow and Glass Lewis is another extension of the Republican rhetoric against ESG.
They Said It: ESG Influencers Speak Out
Michele Giuditta, Director at research firm Cerulli, said “The political backlash and negative press have left some institutional investors skeptical about the merits of ESG … Being explicit about how relevant ESG data helps investors better evaluate the risk/return profile of investments to drive long-term economic value should help managers keep ahead of the negative repercussions.”