With corporate annual meetings underway and new climate and environmental, social and governance (ESG) disclosure requirements taking shape, we are seeing what appears to be a shift away from investors simply asking for information or for companies to consider the effects of their policies towards a stronger push for concrete, standardized data and tangible action on issues that are priorities for investors. Three years out from the pandemic and the racial justice reckoning that marked 2020, there is a growing expectation that companies have already undertaken the voluntary analysis needed to understand the ESG risks and opportunities of their business practices, and that the time has come for concrete action on a wider scope and scale.
In the News
Wall Street Journal
New global sustainability standards could simplify reporting for companies and provide more consistent information for investors. Last month, the International Sustainability Standards Boards released their first two reporting standards. The first is a general standard that requires companies to disclose information about sustainability-related risks and opportunities along with some industry specific information. The second standard specifically addresses climate-related risks and opportunities. While U.S. and EU regulators are developing their own climate reporting requirements, there has been understandable interest from both companies and investors in establishing a single set of standards.
Annual company meetings are underway and workers’ interests have thus far led the way. Investors filed over 140 shareholder resolutions this year asking companies to address employee-related issues, including paid leave, health and safety, benefits and labor rights. Agreements have been reached between shareholders and companies on about one-third of the resolutions, and the rest will go to a vote. As on other issues, these efforts have been met with some backlash. There are at least 20 proposals on ballots this year from organizations that say there is a negative cost to business in meeting demands on activist investors.
After being conspicuously absent as a wide range of industries committed to cutting carbon emissions over the past several years, venture capital firms are catching up and making their own net-zero or emissions-limiting proposals. A group of 23 firms have formed the Venture Climate Alliance, encouraging early-stage investors and the firms in which they invest to stop greenhouse gas (GHG) emissions. Member firms pledge to reach net zero for their own GHG emissions by 2030 and for their portfolio companies by 2050.
Wall Street Journal
The EU has approved long-discussed legislation to tax imports based on the GHG emissions associated with their production. This first-of-its-kind tax scheme is designed to push global economies to take stronger stances on GHG emissions and to protect EU manufacturers from being undercut by imports from countries with no or little regulations. U.S. companies and officials expressed concerns about the potential impact on U.S. exports, as the rule as written only offers credits on the tax for countries that place an explicit cost on carbon emissions, as opposed to the incentives for green energy in place in the U.S. There are also concerns that emerging economies with less infrastructure and resources to transition quickly to greener energy sources, may face the most severe penalties.
State pension funds or other powerful players in at least five states say that instead of creating excellence, new anti-ESG culture-war policies are interfering with the market and could cost pensioners and taxpayers billions of dollars. Last month, the Kentucky County Employees Retirement System wrote a letter to Kentucky State Treasurer Allison Ball stating that her requirement that the pension fund divest from companies her office deemed as boycotting the energy sector — including BlackRock, JPMorgan Chase & Co., and Citigroup, among others — was “inconsistent” with the pension’s fiduciary obligations. A recent Sunrise Project report concluded that if Kentucky, Louisiana, Florida, Missouri, West Virginia, and Oklahoma follow the Texas model, their combined municipal bond underwriting costs could jump between $264 million and $708 million per year.
Research & Reports
Bain & Company
Research from Bain & Company and EcoVadis evaluated how ESG activities impact the 100,000 primarily private companies tracked by EcoVadis. The findings suggest that positive ESG outcomes are a trait of successful companies and that sustainability measures correlate with better financial performance, including encouraging revenue growth and EBITDA margins. Companies that rank in the top 25% of their industry for executive team gender diversity have annual revenue growth approximately two percentage points above that of companies in the bottom quartile, and their EBITDA profit margins are also three percentage points higher than that same group. Companies at the forefront of sustainable procurement also have a profitability edge, with margins three percentage points above those that don’t focus on their suppliers’ ethics, environmental, and labor practices.
After an atypically slow 2022, sustainable indexes had what appeared to be a bounce back in the first quarter of this year. Sustainable investment strategies once again benefited from the outperformance of big tech names like Nvidia, Salesforce and Microsoft, and were broadly able to dodge the hit taken by stocks in the energy sector as oil prices lost ground. The longer-term data continues to be broadly positive. For the trailing five-year period, the Morningstar U.S. Sustainability Leaders Index gained 86.4%, while the standard Morningstar U.S. Sustainability Index advanced 70.4% for the same period. Both beat the broader equity market, which rose 64.9% as measured by the Morningstar U.S. Market Index.