This spotlight explores key ESG-related market developments and their implications for corporates and investors.
Teneo’s Governance and Sustainability team published a piece on “Three Key Consideration for Companies Heading into 2024 Proxy Season.” The piece highlights challenges for 2024 proxy season and shares considerations for companies to help them manage shareholder and proxy advisor expectations.
ESG in the News
The SEC announced the agency will vote on its proposed climate-risk disclosure on March 6. The regulator is reportedly likely to remove Scope 3 emissions reporting and loosen proposed disclosure requirements for emissions generated directly from a company’s operations as well as its energy usage, known as Scope 1 and 2. In a statement, the SEC said it won’t comment on “speculation about what may be in or out of a rulemaking.” The agency’s climate disclosure requirements have faced backlash from major business groups and conservatives who have threatened litigation, particularly over proposed Scope 3 requirements. SEC Chair Gary Gensler has recently commented on the importance of the SEC’s “sustainable rulemaking,” saying it’s critical for the agency to adopt rules “the public understands, the court understands, that’s within the law.” If adopted, the revised draft would significantly deviate from the EU’s CSRD, which will require U.S. companies listed in the EU, or companies with an annual turnover of above €150 million in the EU, to disclose Scope 3 emissions. Notably, voluntary initiatives such as the ISSB already recommend disclosing Scope 3 emissions as best-practice.
- Teneo Takeaway: The revised rules will likely bolster the SEC’s chances to defend an onslaught of litigation upon finalization of the rule next week. Absent SEC mandated Scope 3 disclosure requirements, many large U.S. companies will remain subject to the EU’s climate-disclosure law and California’s Scope 3 requirements.
A U.S. District Court judge has rescinded the SEC’s authority over proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis. In 2020, an SEC rule interpreted the term “soliciting” proxies under the Securities Exchange Act, obligating proxy advisory firms to public filing requirements and anti-fraud provisions. In response, ISS sued the SEC asserting that its business doesn’t involve “seeking proxy authority or asking shareholders to vote a certain way.” The agency loosened some restrictions in 2022 – removing a requirement for proxy firms to give their voting advice to their client and companies at the same time. ISS claimed the 2022 revision “missed the mark by failing to address the most critical defect; namely, the reclassification of proxy advice provided in a fiduciary capacity as proxy solicitation.” Linda Kelly, chief legal officer of the National Association of Manufacturers, said the group is considering an appeal to the District Court decision, arguing that proxy advisors “exercise outsized influence over manufacturer’s corporate governance decisions,” and that the District Court has “undermined the SEC’s obligation to protect investors and provide certainty for businesses.” The National Association of Manufacturers and U.S. Chamber of Commerce both have separate pending cases in federal appeals courts that argue for the restoration of the SEC’s original 2020 final rule.
- Teneo Takeaway: Certain business groups will continue efforts to revive the SEC’s 2020 rules that were overturned with the administration change, especially if Republican candidate Donald Trump wins the Presidency and reconfigures the SEC.
The U.S. Chamber of Commerce and the Business Roundtable have signaled their intention to join Exxon’s litigation against shareholder climate activists. In a legal filing, the groups asked a Texas federal judge to accept an amicus brief that says the SEC makes excluding resolutions too difficult, saying “by opening the door to shareholder proposals pushing social and political agendas, the SEC has allowed a subset of activists to commandeer corporate proxy statements for their own parochial ends.” Earlier this month, ExxonMobil decided to persist with its legal action against activist shareholders Arjuna Capital and Follow This despite the latter dropping the shareholder proposal in question.
- Teneo Takeaway: As we discussed in Teneo’s recent thought leadership piece on the 2024 proxy season, major institutional investors may express discontent at Exxon for going to court against its own shareholders for exercising their right to submit proposals.
In response to several asset managers retreating from participation, Climate Action 100+ released a statement saying, “hundreds of investor signatories remain committed” and that “actively managing climate-related risk is consistent with managing any other financial risk.” JP Morgan Asset Management, State Street and PIMCO all recently withdrew from Climate Action 100+, citing the groups intention to actively push companies to reduce greenhouse gas emissions. In the release, Climate Action 100+ said the group has “always been action-oriented and about more than disclosure … Furthermore, the updated ask of companies to implement transition plans in phase two is logical and naturally builds on what came before – indeed many investors have already been asking companies for these for some time.”
- Teneo Takeaway: Climate Action 100+ is not backing down amid the anti-ESG backlash, arguing that a focus on climate transition plans and advocacy for near-term greenhouse gas reductions have always been part of the plan.
A KPMG survey found that ~90% of U.S. companies plan to dedicate more financial resources to ESG over the next three years. Over 550 board members, executives and managers were surveyed globally, with just over three-quarters indicating their organizations are planning to restructure teams with a focus on ESG, and around 24% are planning to significantly increase incorporation of ESG within non-ESG roles. Notably, ~43% of companies said they will add employees dedicated to ESG factors, while 40% will invest in ESG-specific software. KPMG U.S. ESG Audit Leader Maura Hodge said the key reason for company’s focus on ESG “is really regulatory pressure,” with regulations forcing companies to “inject the same level of rigor into its sustainability reporting that is required of financial spending.”
- Teneo Takeaway: Driven by the continued emergence of regulations around climate and other ESG related disclosures from global jurisdictions, companies continue to invest in bolstering their investments in both reporting and continuing their efforts on environmental and social sustainability.
They Said It: ESG Influencers Speak Out
Consumer bank Standard Chartered CEO Bill Winters said environmentally conscious investing can be good for business despite a politically toxic environment for ESG: “Obviously, the political environment in the U.S. is toxic, times 10 — and so people are going quiet. But one of the stats that I love is the biggest renewable power center in the United States is the state of Texas, right? Which is the state that has been leading the charge against pension fund managers who have a ‘woke’ agenda or whatever … I mean, I do want to wake up one day and have a planet so if that makes me woke, shoot me … This is not political wokeness. This is do the right thing for the planet, do the right thing for your business. That’s what we’re doing, and I don’t see other people backing away from that.”