ESG+ Newsletter – 17th November 2022

US proxy votes and government suppliers subject to heightened regulatory demands

In the latest efforts to drive greater transparency in the proxy voting process, the SEC has adopted rules that will make mutual funds provide details on how they’ve voted on a range of issues, including ESG and executive compensation.

“This is the most important sustainability rule you’ve never heard of,” said Satyam Khanna, a former SEC ESG adviser who’s now a fellow at the Stanford Institute for Economic Policy Research. The changes build on legislation from 2003 which mandated proxy vote disclosures in NP-X forms; however, as Bloomberg Law reports, those filings have not brought clarity to underlying investors. The rules will apply to all votes from July 2023 and will once again raise the bar in terms of explanation and justification for mutual fund voting practices, in turn putting increased pressure on public companies.

Meanwhile, as the SEC is perhaps reconsidering the scope of its recent climate disclosure requirements, the US government looks set to make carbon emission and climate risk disclosure mandatory for all suppliers. Under the rules, contractors with more than $50m in annual business with the government would have to disclose Scope 1, 2 and 3 emissions, while those with $7.5m to $50m in contracts would be required to report Scope 1 and 2 data. According to the White House, about half of government contractors currently disclose carbon emissions. One way or another, whether it be for procurement or in response to investor pressure, companies of all sizes are likely to be looking at significant increases in emissions reporting over the coming year.

Another week, another greenwashing investigation

As the US continues its focus on enhanced transparency, so too do Europe’s three primary financial regulators. The European Banking Authority (EBA), The European Insurance and Occupational Pensions Authority (EIOPA), and The European Securities and Markets Authority (ESMA) have come together to launch a study into greenwashing. As highlighted by ESG Today, regulators globally have been ramping up efforts to tackle greenwashing risks, including the EU’s own Sustainable Finance Disclosure Regulation (SFDR) framework, as well as recent product label and disclosure proposals in the US, the UK, Australia and Singapore.

The study is a call for evidence to understand how greenwashing comes about and where the most significant risks of greenwashing lie. With initial findings due in the middle of 2023 and a final report to be filed a year later, all stakeholders making green or sustainable claims are likely to be increasingly expected to be able to be expected to show proof of progress. In the latest evidence of the impact of such rules, BlackRock announced it had recategorized $26 billion of ETFs to meet the latest EU guidance.

Diversity the focus of latest UK and US Board indices

Now in their 37th and 27th year respectively, Spencer Stuart’s US and UK Board indices reflect the growing focus on diversity in senior leadership. In the US, the report’s highlights pointed to almost all companies in the S&P 500 now disclosing their racial or ethnic composition, with 50% including policies on including underrepresented groups in the recruitment process. Further, a third of S&P500 Directors are now women, while more than a third were appointed to a public company Board for the first time.

The UK report highlights were similar, finding giant steps forward in ethnic representation; first time directors; and, female representation on Boards and Committees. Nonetheless, when reviewing executive positions, the same progress is not evident, with 16 of the top 150 companies led by female CEOs while 25 have appointed female CFOs.

In light of the level of progress on Boards across the largest companies in the UK and the US, investor focus may shift markedly toward driving greater change in executive positions, which may spur even greater evaluation of talent pipelines and the role of Nomination Committees.

Net Zero guidance aplenty as ISO issues guidelines

Like the adage about waiting for buses, the last week has seen a barrage of updated guidance on how businesses can go about shifting toward a net zero future – the latest from the International Organization for Standardization (ISO). ISO has been a leader in producing standards for the certification of sustainability efforts.

The stated aim of the net zero guidelines is to provide “guiding principles and recommendations to enable a common, global approach to achieve net-zero greenhouse gas emissions through alignment of voluntary initiatives and adoption of standards, policies and national and international regulation” while also pointing to the positive aspects of other net zero guidelines.

On the back of the UK’s consultation announced last week, as well as pressure from UN-backed groups, companies will have a range of guidance in crafting their updated net zero plans. However, perhaps more importantly, investors and other stakeholders will now also have the tools with which to rigorously evaluate those plans and question companies who fail to make sufficient progress on the same.

Water risk rises with data centres; with implications for reporting

Over the past decade, the number of data centres has risen with the growing demand for storing and processing data and applications. These centres have not avoided scrutiny and now concerns are being increasingly raised about their impact on water security, with vast amounts of water needed to cool the heat generated from huge amounts of power usage.

As CNBC reports, researchers from Virginia tech estimate that certain data centres use the same amount of water as about 100,000 homes per day. With water security rising up the ESG and sustainability agenda, including at COP27 this week, owners and users of data centres may find themselves having to demonstrate robust efforts to mitigate their extensive water usage, perhaps heralding in a new battlefront between investors and companies in ESG. Indeed, the UN has estimated that the world faces a 40% water deficit by 2030 under a business-as-usual scenario and ESG Clarity points to evidence that asset managers may – for the first time – have specific asks on reporting and behaviours of companies when it comes to water management.

Advocacy guidelines a key part of climate leadership

As ESG and sustainability have risen up the agenda, we have seen stakeholder pressure shift sector by sector, and issue by issue. This week, as part of efforts to guide businesses to be more responsible in their engagement with policymakers, Corporate Leaders Groups (CLG) published its Advocacy Toolkit for Business Climate Leaders. The document aims to “Incentivise and support businesses to advocate for ambitious climate and energy-related policies fit to deliver the transition towards a climate neutral and prosperous Europe.” With shareholder proposals and certain activist groups emphasising the importance of trade association membership and goals, including seeking transparency on company interactions with regulators, we are likely to see increasing guidance on best practices for advocacy; and, greater pressure on those pursuing aggressive lobbying strategies.

In Case You Missed It

• A recent ADP Research Institute report has found that 83% of young workers (between 18 and 24) in India would quit companies without a diversity and inclusion policy, while 82% stated that they recognise the gender pay gap exists and is “unfair”.
• The European Central Bank (ECB) has taken steps to develop a framework for assessing systemic cyber risk, pointing to the overarching risk of disruption to financial networks if the threat of cyber attacks is not actively addressed.
• Galway City Council, in Ireland, has launched an application to the European Commission to become a Net Zero Pilot City. The Pilot scheme will select 30 European cities to enact a two-year programme to reduce carbon emissions and potentially set the scene for widening strategy to have a greater impact.

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