This year, ESG, like so many aspects of life, became a starkly partisan subject.
While the engagement that investors and asset managers showed with public companies reached an all-time high, so too did the objections to shareholders influencing the operations of the companies they own.
The year also saw major developments in legislation and regulation that affect sustainable investing, including proposals from the Securities and Exchange Commission and a long-awaited final rule from the Department of Labor.
Inflation Reduction Act
If for nothing else, 2022 would be a landmark year for the sustainable investing world given the Inflation Reduction Act, the largest piece of climate legislation passed in the U.S. It includes about $370bn for investments in energy security and for addressing climate change. That could be used to help reduce greenhouse gas emissions in the U.S. by an estimated 40% in 2030 compared with levels seen in 2005.
The most significant regulations on sustainable investing came from the SEC, which proposed a rule that would require public companies to disclose their greenhouse gas emissions. Most would have to report carbon data known as Scope 1 and Scope 2 emissions, and eventually, those numbers would need to be verified by independent third parties.
And many companies would also have to measure and disclose Scope 3 emissions, which are related to the materials they use and the products they sell. That is the most contentious aspect of the proposal, as Scope 3 emissions are by far the most difficult to calculate. However, they also represent the biggest component of many businesses’ carbon footprints.
Separately, the SEC proposed two other rules designed to combat greenwashing, which would affect fund naming and marketing for advisers and fund providers. Final versions of all three rules will likely be published in 2023.
Additionally, the DOL issued its rule governing the use of ESG factors in retirement plans. Countering a rule passed late in the Trump administration, the Biden DOL moved to specifically allow ESG considerations by plan fiduciaries. However, the new rule does not necessarily require plan sponsors and advisers to incorporate ESG factors in their decisions, even while those considerations can be material.
Record proxy season
Shareholder resolutions flooded proxy ballots, thanks largely to a change in the SEC’s stance on the ability of companies to exclude those proposals. There were more than 250 ESG-themed resolutions that went to a vote, although some asset managers were less eager to support shareholder proposals than they were in prior years. BlackRock, for example, noted that its position on ESG issues had not changed, but there were a larger number of proposals, many of which asked for more than earlier ones, and the company expected to support fewer of them as a result.
Overall, climate change and social justice were the themes in resolutions that saw the most success, with shareholders voting in favor of proposals at companies including Apple Inc., Walt Disney Co. and Costco Wholesale Corp.
With the growing interest in ESG and greater success that asset managers have had at engaging with their portfolio companies came pushback from Republicans, who have all but vilified sustainable investing. Numerous states have accused big firms, namely BlackRock, of boycotting the fossil fuel industry, even as those firms are the biggest investors in the sector. Florida, for example, has moved to stop state money from being invested with ESG considerations, recently pulling $2bn from BlackRock. Other states have similarly pulled investments from the firm, and Texas has created a blacklist of investment providers that it has threatened to stop doing business with.
In response, Vanguard pulled its membership from the Net Zero Asset Managers initiative, a development that appeared to win the firm a pass from being grilled last week by legislators in Texas. BlackRock and State Street representatives were not spared from that hearing over their stances on ESG issues.
BlackRock, which is not an NZAM signatory, this week published its annual investment stewardship principles, seeming to maintain the same stances it has had on proxy voting issues, despite the pressure from anti-ESG groups.
Conference of Parties
There were few announcements of new finance-related goals at COP27, with much of the focus on clarifying targets set at last year’s COP26 and determining how to meet them.
That included how the energy transition can be financed globally and how carbon markets can get up and running in Africa.
The International Organization for Standardization, or ISO, published guidelines for a common definition of “net zero” and other terms, principles around climate neutrality, emissions reporting and other areas.
Further, the International Organization of Securities Commissions, or IOSCO, issued recommendations for establishing compliance carbon markets and sought industry feedback for how financial markets regulators should be involved with those.
At COP15, an investor initiative called Nature Action 100 launched, similar in premise to Climate Action 100+.
A major development coming out of COP15 was the agreement on the Kunming-Montreal global biodiversity framework, or GBF. That framework, which was backed by about 150 financial institutions, set four goals and 23 targets for nature-protecting initiatives globally by 2030. Nearly 200 countries adopted the framework, which includes a pledge to reform a total of $500bn in subsidies that have been connected with environmental damage.
Additionally, the International Sustainability Standards Board, or ISSB, announced at the conference that its disclosure standards will define sustainability as “inextricably” linked to nature.