ESG+ Newsletter – 21 November 2024

A bumper ESG+ opens with the key takeaways from our ninth annual corporate governance and activism event, which was held in Dublin last week. From there, we review Vanguard’s decision to expand its proxy voting policy options; have a further report from COP29, where President Trump’s incoming administration looms over the climate transition; and look at EU and UK progress on ESG ratings agencies regulation. Lastly, we also look at the potential impacts from EU countries that have failed to transpose the CSRD into national law, and calls for more detailed climate disclosures to enable investors to assess and price risks more effectively.

Insights from FTI Consulting’s annual governance & activism event

Last week, FTI Consulting hosted its ninth annual corporate governance event in Dublin, featuring speakers from Euronext, the UK Investment Association (IA), institutional investors – Fidelity International, ILIM and LGIM – and leading proxy advisor, Glass Lewis. This year, the traditional governance panel was followed by a discussion of the latest developments in shareholder activism and how companies can prepare, react,  and respond. Full details and key takeaways from the event, and what governance and activism trends companies need to be aware of, are available here. 

Vanguard broadens investor ‘voting choice’, shifting towards greater personalisation 

This week, Vanguard, the world’s second largest asset manager, announced plans to bring “corporate democracy to the masses,” as reported by Reuters. Vanguard will expand its Investor Choice program by adding three new funds and two additional proxy voting policy options for asset owners. The expansion will nearly double the number of participants to almost four million who collectively manage close to $250 billion in assets. Investors can select from a range of proxy voting policies to influence how their proportional fund ownership is voted at shareholder meetings. While individual investors cannot cast votes on specific company resolutions, they can align with policy options that reflect their preferences. Vanguard has also added a new “wealth-focused” policy option, provided by proxy advisory firm Egan-Jones, emphasising shareholder value maximisation as the core tenant of proxy voting.  

By offering more personalised options, the firm aims to balance diverse investor priorities, counter criticism, and maintain its competitive edge in a market increasingly driven by client demand for responsible and tailored investment solutions. For companies, this makes Vanguard’s voting decisions harder to predict, underscoring the importance of engaging with the fund to understand how its clients are using the new policy options. 

Companies face a challenging net zero balancing act amidst a changing market backdrop

With COP29 entering its second week, the impact of the next four years of a Trump administration on the climate transition is at the top of the agenda. Against a backdrop of President Trump – a vocal climate change sceptic – looking to withdraw the US from the Paris Agreement for a second time, many attendees at COP29 reaffirmed their commitment to the net zero transition, according to a Bloomberg article. While these reassurances will be welcomed by those seeking to spur greater action to address climate change, challenges remain for companies trying to balance their short and long-term objectives. According to the article, many companies have opted to push back their net zero target date, while CFOs have noted concerns over their preparedness for new reporting requirements and their ability to provide data that is both robust and accurate. Additionally, there was frustration amongst CFOs regarding the lack of regulatory coherence, particularly between the US and the EU. 

The absence of convergence towards one reporting standard, coupled with the expectation that the Trump Administration will dilute – or abandon – any efforts to mandate climate disclosures, represent challenges for companies who have a clear ambition to decarbonise their businesses. However, it is clear in the sentiments expressed by company executives that, despite growing uncertainty, there remains a resolve to transition to net zero, both from a financial competitiveness and license to operate perspective. 

Ratings agency regulation progresses

It has been a busy week in the world of ESG ratings agencies, with both the EU and UK providing landmark updates on their respective plans to regulate the industry. In the EU, the European Council (EC) formerly adopted new rules aimed at improving reliability, comparability, and transparency, while the Financial Conduct Authority (FCA) published a consultation response and accompanying draft legislation, looking to address the same issues. Both pieces of legislation have been long in the making and are detailed in their outcomes and, importantly, territorial scope. Outcome wise, the EC and FCA have been clear in the need for end users to understand methodology, use of data, and where there may be a conflict of interest on the part of the provider. On the scope front, neither regulator has restricted their respective rules to ratings agencies based only their jurisdictions, focusing instead on the user and their exposure to the provided solution.

In practice, this will likely re-align the ratings agency universe, and their ways of working. Regulatory obligations to improve transparency and attractiveness to the consumer, will trigger out of scope providers to match new “best practice”, or else risk being left behind. Furthermore, the most influential drivers of capital all operate across jurisdictions, covering funds and companies from the US to Europe to Asia. As demonstrated by the FCA’s consultation response, ratings agencies and their user base have been critical in the determination of the suggested rulings.

Failing to transpose CSRD risks increasing compliance costs 

The EU countries that have not yet transposed the Corporate Sustainability Reporting Directive (CSRD) into national law are risking increased compliance costs, particularly for independent assurance of reports, experts say. Nations like Spain, Greece, Portugal, and Malta have missed the deadline, prompting warnings from the European Commission and potential penalties from the European Court of Justice. The delay creates uncertainty for companies, particularly as late transpositions might introduce unexpected requirements, with companies in non-compliant countries potentially facing competitive disadvantages. Additional compliance costs are especially linked to obtaining limited assurance of sustainability reports. Marc Boissonnet, ESG director at TIC Council, criticised the limited role of independent sustainability assurance providers in most countries, favouring traditional financial auditors who often lack expertise in sustainability assurance. This approach stifles competition, potentially driving up costs and reducing quality. Differing approaches to assurance across EU countries could lead to inconsistent types of assurance internationally. Markus Pretzl, ESG director at TIP Group, highlighted that the costs associated with limited assurance of sustainability reports are a significant challenge, comparable to the costs of a full financial audit. He advocated for opening the market to independent sustainability assurance providers to enhance competition and reduce costs. 

TCFD review demonstrates climate disclosures require more attention 

Emmanuel Faber, Chair of the International Sustainability Standards Board (ISSB), has emphasised the need for companies to disclose more detailed information to enable investors to assess and price climate risks effectively. This call follows the publication of the first Taskforce on Climate-related Financial Disclosures (TCFD) annual report since it came under the remit of IRFS Foundation. While the report demonstrates progress, it also underscores significant gaps. Fewer than 3% fully adhered to all TCFD recommendations in 2023. Furthermore, resilience of corporate strategies and the integration of climate risks into overall risk management remain the least disclosed topics, impeding investors’ ability to make well-informed decisions. Positive trends include a 10% increase in greenhouse gas (GHG) emissions reporting and an 8% rise in disclosures of climate-related metrics. Energy and insurance businesses disclosed on more TCFD data points than other industries, and companies based in Europe have the highest reporting rates. Global uptake of ISSB standards is also gaining traction as El Salvador, Tanzania and Uganda are considering adoption, while the EU is exploring the ISSB framework as an alternative reporting option to its own CSRD. An IRFS Foundation survey found nearly 90% of 72 investor respondents expect portfolio companies to transition from TCFD-aligned disclosures to ISSB standards. However, the FSB has called for further efforts to address the challenges of adopting the ISSB standards for SMEs and companies in emerging and developing markets. 

ICYMI 

• The French government has announced the launch of a national scheme for voluntary biodiversity credits in an attempt to mobilise private financing towards nature conversation and restoration, according the Environmental Finance.
• A survey conducted by Fundación Mallorca Turisme reveals that 72% of surveyed travellers from major East Coast markets in the US believe that Mallorca is at the forefront of responsible tourism.
• ESG News reports that the IFRS Foundation has published a new guide to aid companies in identifying and disclosing sustainability risks and opportunities.