In the Industry: Q4 2023 Impact Digest

Calls for more uniform and stringent ESG reporting requirements are ongoing. Investors — individual and institutional alike — find it challenging to track down accurate, comparable data on companies and funds, making it difficult to assess ESG-related risk and opportunity.

Progress is being made, however, as new reporting requirements are put into place in influential markets like the EU and California, which can spur action in other areas. The push for tighter regulations is understandable given the relevance of ESG considerations to investment performance, and as investors by and large ignore the anti-ESG talking points and maintain their commitments.

Whether assessing risk posed by climate change or supply chain instability, or understanding the opportunities presented by companies with strong ESG performance, it is difficult to ignore the evidence that shows how impact investing can provide ways to lower risk and take advantage of opportunities that might otherwise be missed.

We highlight trends in shareholder advocacy and the resolutions our clients supported in our 2023 Annual Shareholder Resolution Impact Report. We’re thankful for our clients and their involvement and look forward to more opportunities to help our clients use their shareholder voices in 2024.

In the News


Ratings Firms Struggle With Climate Risk in $133 Trillion Market

With the impact of climate-related natural disasters continuing to grow, there is mounting concern that credit rating analysts are misreading climate risks in the $133 trillion global bond market, to the detriment of creditors and borrowers alike. Research by the European Central Bank shows that even when climate variables are statistically significant, they play only a marginal role in influencing sovereign ratings. And while S&P, Moody’s and Fitch all say that they do account for climate risks in their ratings, their attempts may not be up to the task. When the Institute for Energy Economics and Financial Analysis, a nonprofit in Lakewood, Ohio, looked at Moody’s ESG credit scores for 721 companies in high-emitting industries, it found that about 60% of issuers with high credit ratings were highly exposed to environmental risks, including climate change.

Wall Street Journal

Supply-Chain Sustainability Benefits Investors, Study Finds

Recent research from Northwestern University and the University of Hong Kong, which looked at U.S. publicly traded companies and their supply chains, found large-scale evidence of a link between the ESG risk in a company’s supply chain and that company’s future stock returns. Specifically, companies using more responsible suppliers relative to peers—meaning the suppliers had fewer negative ESG incidents—generated higher stock returns in the subsequent year than companies with more ESG risk in their supply chains. A portfolio taking a long position in firms with the fewest supplier ESG incidents and a short position in firms with the most incidents generated an excess return of 6.77% annually relative to its benchmark.


California Gets Ahead of SEC in Forcing Firms’ Carbon Disclosure

California Governor Newsom recently signed a bill passed by the state legislature that would leapfrog the SEC’s efforts to require companies to disclose their greenhouse gases and climate-related financial risks. As the world’s fifth-largest economy, California’s environmental rules are quickly followed by other states, even when they exceed federal requirements. The proposal, known as the Climate Corporate Data Accountability Act, would force many of the world’s biggest publicly traded corporations to make their carbon emissions public and to report on vulnerabilities to employees, supply chains, consumer demand and shareholder value, among other risks. The proposed measure is more expansive than the SEC proposal and would affect private and public companies doing business in the state—5,300 companies that generate at least $1 billion of annual revenue.


Kroll’s Message for Critics: ESG Makes Money

According to a new report from Kroll, a financial advisory firm focusing on governance, risk and transparency, companies with higher ESG ratings “generally outperformed” those with lower ratings during the nine-year period ending December 31, 2021. In its study, Kroll examined more than 13,000 companies across a variety of geographies and industries around the globe. Globally, so-called ESG Leaders generated an average annual return of 12.9% in the nine-year stretch, compared with 8.6% for so-called Laggard companies, according to the report. In the U.S., the country with the largest number of rated companies, the ESG Leaders earned an average annual return of 20.3%, compared with 13.9% for Laggard companies. Researchers acknowledge the “politicization” of ESG, but they conclude that investing simply involves considering “risks and opportunities” and that includes issues that may arise from various ESG trends.


California passes law mandating VC firms to release investments’ diversity information

Last month, California Governor Gavin Newsom signed into law Senate Bill 54, which will require venture capital firms in the state to annually report the diversity of the founders they are backing. This is the U.S.’ first piece of legislation that aims to increase diversity within the venture capital landscape. The law will go into effect on March 1, 2025. Once the law goes into effect, any venture capital firm operating in the state, which includes VC firms headquartered in California, have operations in the state, have invested in companies that operate in or are based in the state, or have received investments from California residents, must report, among other data, the race of the people they back, as well as their disability status and whether they’re a member of the LGBTQ+ community. Disclosing information is voluntary for companies receiving VC funding and founding teams won’t be penalized for not answering. The bill also requires firms to collect and release their diversity data to the public, and those who fail to comply with the new law may face a penalty as decided by the courts.


Asset managers tune out anti-ESG noise

Asset managers are tuning out political opposition to ESG when it comes to selecting investments but are being more careful in how they talk about ESG, according to a report from Cerulli Associates. Even though political controversy is swirling, asset managers are maintaining a commitment to ESG, according to the new Cerulli report. No participants surveyed plan to stop incorporating ESG considerations into investment decisions or expect to stop offering ESG/sustainable investment products, per Cerulli, yet, nearly one-third (30%) of asset managers will be more cautious about messaging around ESG-related activities through websites, marketing materials, prospectuses and other formal investment documents.

Research & Reports


Voice of the Asset Owner Survey 2023 Quantitative Analysis

Morningstar’s second annual Voice of the Asset Owner global survey, which surveyed 500 global asset owners, revealed several key findings: 1) The majority of asset owners believe that ESG is material to the investment process, and 67% believe ESG has become more material over the past five years. 2) Climate is the highest priority among asset owners, with many committed to net zero by 2050 initiatives, and they are interested in climate transition strategies that reduce real-world emissions, not simply reducing their own exposure to carbon-intensive companies within their portfolios. 3) Asset owners are looking for greater accuracy, quality and relevance when it comes to ESG data, ratings and indexes. And they’re looking to international standards, rating agencies and government regulators to help.