This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The S&P Global Ratings system announced that it would no longer publish updated ESG credit indicators in its reports or update outstanding ESG credit indicators effective immediately. Following a review of its credit rating reports, S&P concluded that describing ESG credit factors in analytical narrative paragraphs would offer more detail and transparency. S&P Global Ratings started releasing alphanumeric ESG credit indicators in 2021 for publicly rated entities in certain sectors and asset classes. According to the S&P, by using alphanumeric scaling, the indicators were supposed to summarize the relevance of ESG credit factors to S&P's rating analysis. The recent announcement added that the S&P's ESG principal criteria would not be affected nor would its research and commentary on ESG related topics, including the impact that ESG factors may have on creditworthiness.
- Teneo Takeaway: Companies should note that this announcement only impacts S&P’s credit rating reports, and only in a limited way as described above. It does not have any impact on the S&P ESG ratings that are based on the annual Corporate Sustainability Assessment (CSA) that are primarily used by equity investors.
Recently, the UK Department of Business and Trade announced plans to develop a UK sustainability disclosure standard for businesses to report on their sustainability and climate change risks. According to the Department of Business and Trade, these standards will serve as the guidelines for any future legislation and regulations related to sustainability reporting. The UK’s plans noted that these standards will be derived from the sustainability and climate related reporting standards developed by the International Sustainability Standards Board of the IFRS Foundation, thereby ensuring that sustainability disclosures are internationally comparable and useful to investors. The UK added that these new rules would deviate only when necessary, in order to address UK-specific issues. The Department of Business and Trade also stated that the decision to require these disclosures will be taken independently by the UK government and the Financial Conduct Authority. Separately, the Secretary of State for Business and Trade will consider endorsing the IFRS sustainability disclosure standards to create UK SDS by July of 2024.
- Teneo Takeaway: One of the major aims of the voluntary IFRS disclosure standards was to have them be the basis for global regulation. It appears that they have succeeded here. And while UK companies will not be subject to the European Union’s recent rulemaking on sustainability disclosure, UK regulators seem to be just as keen on requiring the disclosure of ESG information as the EU.
The International Auditing and Assurance Standards Board recently published International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. With a concentration on assurance in sustainability reporting, the recently published ISSA 5000 will serve as the most globally in-depth sustainability assurance standard. The Board noted that the ISSA 5000 Standard was developed to meet the needs of both limited and reasonable assurance engagements on sustainability data reported across all relevant topics. As part of the new standards, the IASB has incorporated sustainability information prepared under other reportable frameworks which include several existing or in-development frameworks, such as those issued by the European Union, the International Sustainability Standards Board, the Global Reporting Initiative and the International Organization for Standardization. Additionally, the IASB committed to extensive outreach when developing these standards in order to ensure the widest range of views from stakeholders were taken into account.
- Teneo Takeaway: While many companies already provide some level of external assurance within ESG reports, there are currently limited standards around how this assurance should be conducted. This initiative seeks to change that.
A series of anti-ESG bills have been introduced by the U.S. House Financial Services Committee in an effort to limit the SEC's control over shareholder proposals. In July, several members of the Republican caucus announced new measures designed to mitigate the role corporations and businesses play in environmental, social and governance issues. As part of the new legislation, Representative Ralph Norman of South Carolina introduced the Businesses Over Activists Act. Specifically, Norman's legislation clarifies that the SEC does not have the authority to regulate shareholder proposals and would stop the agency from forcing companies to include or discuss shareholder proposals in their disclosures. Additionally, a bill entitled the Protecting Americans' Retirement Savings from Politics Act was introduced, which included a provision that would increase the resubmission threshold for shareholder proposals and allow companies to exclude proposals that relate to environmental, social and political issues. The bill would also require economic analyses from asset managers that decide to vote against board recommendations. The Act also contains language that would force investors to consent to the use of non-pecuniary factors when making investment decisions.
- Teneo Takeaway: Republican legislative efforts to quash ESG are mostly symbolic as the Democratic-controlled Senate and Executive branch have signaled no willingness to engage in the rhetoric. What will be critical is whether the Republican anti-ESG rhetoric is resonating with voters heading into the 2024 U.S. Presidential election. If not, expect a shift from many Republicans on the topic.
Separately, the U.S. House Judiciary Committee has been pushing for more oversight of proxy advisory firms and asset managers on ESG issues. At the beginning of August, the House Judiciary Committee released a letter that noted that the firms Glass Lewis and Institutional Shareholder Services (ISS), appeared to have “colluded with institutional investors to force American corporations to ‘decarbonize’ their assets and reduce their emissions to net zero.” Furthermore, the Judiciary Committee noted that the “collusive agreements harm competition and consumers and are illegal under the Sherman Act.” The Judiciary Committee also issued letters to ESG activist investors including Engine No. 1, Arjuna Capital, Trillium Asset Management and Aviva Investors Americas asking for information about their participation in climate initiatives. The Judiciary Committee's work builds upon the House Financial Services committee's investigations, as well as the recently passed bill sponsored by Wisconsin Representative Bryan Steil that includes language requiring proxy advisers to register with the SEC, provide advice exclusively in the best economic interests of shareholders, and disclose their methodologies behind their voting recommendations.
- Teneo Takeaway: Arguments posited by the Republican Party are not new as attacks on proxy advisory firms have been launched many times over the years with little success.
The EEOC has proposed new protections for workers who are pregnant or recently gave birth as baseline terms to operationalize the Pregnant Workers Fairness Act. The legislation, signed into law last December, prohibit employers from denying opportunities to potential and current employees because of medical conditions caused by pregnancy or childbirth. The EEOC’s proposed rule includes telework opportunities, schedule changes, and longer, more frequent breaks.
- Teneo Takeaway: The Pregnant Workers Fairness Act was originally introduced in 2012 yet did not garner enough support until after the overturning of Roe v. Wade. Limitations to reproductive healthcare is projected to increase the nation’s birth rate as well as the number of high-risk pregnancies which require additional support. The proposed rule coincides with corporate efforts to provide more extensive fertility, childcare and parental leave benefits to employees.
They Said It: ESG Influencers Speak Out
The IOSCO formally endorsed the ISSB’s Sustainability-related Financial Disclosure Standards following extensive engagement with the ISSB over the last few years, which resulted in a “comprehensive and independent review” of the final standards issued by the ISSB. Jean-Paul Servais, Chair of the Board of IOSCO, commented on the endorsement saying, “IOSCO has found that the ISSB conducted a robust process and have concluded that these standards serve as an effective and proportionate global framework of investor-focused disclosures on sustainability- and climate-related risks and opportunities.” Servais added, “this endorsement by IOSCO is an important milestone that we expect will result in global capital markets being able to access reliable, consistent and comparable sustainability related information which will allow investors to price sustainability risks and opportunities and help them make investment decisions.”