The US ESG themes to watch in 2023

Shareholder engagement, the energy transition and regulation will get a lot of attention

Last year was highly eventful for ESG and the sustainable and responsible investing world.

In the US, demand for ESG-themed funds continued to prove strong, despite the undeniable performance advantage of the energy sector in 2022. That short-term returns story gave ammunition to opponents of sustainable investing, with anti-ESG initiatives popping up in numerous states.

At the same time, shareholder engagement appeared to be at an all-time high, and many public companies found themselves facing proxy votes on ESG issues.

And in the background, regulators have been drafting new rules that could have a profound effect on sustainable investing.

As we kick off 2023, here are a few themes to watch across the pond:

Shareholder engagement

There were record numbers of shareholder resolutions filed at public companies in 2022, due largely to the Securities and Exchange Commission’s friendlier stance on them – a change that occurred in 2021. There will be a high volume of resolutions again this year, particularly as many companies set climate-related targets and shareholders press them for concrete transition plans or more ambitious goals.

So far, there have been about five such proposals filed with banks over their transition plans for achieving their stated goals, said Danielle Fugere, president of As You Sow. And insurance companies are increasingly being asked to set targets – resolutions have been brought at Chubb and Berkshire Hathaway, for example, she noted.

Early resolutions have also focused on social justice issues like hiring, retention and promotion, she said. There will likely be resolutions on access to reproductive health care, given last year’s decision by the US Supreme Court to overturn Roe v. Wade.

Other proposals will address companies’ publicly stated ESG stances versus their lobbying activities and industry groups they support.

Product packaging will also be a theme, with companies likely to be asked about waste and their uses of non-recycled plastic.

“We have seen targets set and companies finding them difficult to meet,” Fugere said. “We are asking about reductions in virgin plastic as well as understanding if they are encouraging reuse plans.”

That not only affects product makers and distributors but also the petroleum companies that supply the necessary ingredients for new plastic, she noted. As You Sow has been the lead filer of resolutions at Chevron, Dow and ExxonMobil, asking companies for audited reports on how reductions in demand for new plastic, due in part to environmental regulations, would affect their financial positions.

Additionally, investors will focus on how oil and gas companies divest from their dirtiest assets, Fugere noted. Some fossil fuel companies have sold off higher-polluting parts of their businesses – a strategy that helps them look cleaner on paper but may have a worse effect overall on global emissions.

Finally, some resolutions will address pesticides in supply chains and the use of regenerative agriculture, Fugere said.

Energy transition

More than half, 57%, of institutions expect to see the energy sector outperform the broader market this year, according to Natixis’ Global Survey of Institutional Investors, which included responses in October and November from 500 investors in 30 countries.

However, 46% said that they are increasing investments in renewable such as solar and wind power amid energy supply problems, a figure that the firm said is twice the rate of those increasing investments in fossil fuels. About a quarter said they are investing in energy storage, and another 13% are focusing more on nuclear energy, according to the report.

Further, 20% of investors said they are reducing their allocations to fossil fuels or other types of energy, and 29% said they plan on no changes this year.

In the US, last year’s Inflation Reduction Act bodes well for investments in clean energy, said Adam Bernstein, managing director at impact investor North Sky Capital.

That law “just dwarfs everything else” in terms of prior climate-related legislation, Bernstein said.

“This is not federal agency rulemaking … not a president committing us to Paris accords – this is a binding piece of legislation,” he said. “It can’t be undone. It’s permanent.”

It’s notable that the act follows technological advancements and cost reductions for clean energy, he said.

“Even if we have a global macro-economic slowdown, this will be one of the sectors that continues to shine,” he said.

Regulation and enforcement

Last year, the SEC proposed a set of rules designed to help curb greenwashing. Those rules, around fund naming and marketing, would go into effect in 2024, if finalized this year, said Michael McGrath, a partner at K&L Gates.

That will certainly affect the marketing approaches that asset managers use, but there is currently a strong motivator for them to avoid greenwashing – sweep examinations, McGrath noted.

“Even though we’ve seen the headline-grabbing enforcement actions [in 2022] against BNY Mellon and GSAM, the process of undergoing sweep examinations regarding ESG claims has really be going on for years,” he said.

That has been a reason why fund providers have removed sustainability or ESG branding from some products or have worked to back up sustainability claims – and that will likely continue this year, he said.

“That has had a greater impact on the approaches of firms to their ESG marketing actions thus far than have the new rules. That’s really because firms have an immediate concern that needs to be addressed,” he said. “The SEC views unsubstantiated statements as a violation of their fiduciary duties.”

With the pending SEC rules, however, firms with a global footprint will have to be extra careful in how they explain variations of similarly named strategies, such as US and EU versions. The SEC’s proposal to categorize funds as impact, ESG integration or ESG focused does not align with Europe’s Sustainable Finance Disclosure Regulation article 6, 8 and 9 fund descriptions, McGrath said.

“Managers are going to engage in some fitting of products to those rules and jurisdictions. Five years from now that is going to be process that you hear everyone griping about. It is on the horizon.”

Anti-ESG

Complicating that further are anti-ESG initiatives in some states. Texas, West Virginia and most recently Kentucky have made blacklists of asset managers that state leaders claim boycott the fossil fuel industry.

Asset managers that have built their names on sustainable and responsible investing will likely have to accept that they may not be competitive in some markets, McGrath said.

And some asset managers with successful franchises that have not made changes to demonstrate that their products are sustainability-minded may be inhibited from making any changes until the market forces them to, he said.

Big shops that have separate lines of funds that come in sustainable and regular versions, such as BlackRock, have found themselves in the middle of the fight against ESG. Such companies may increasingly have to prove to individual states that there is a distinction between those products, McGrath said.

“The challenge is that differentiation can be managed a lot better by a BlackRock or a Fidelity than a boutique or midsize asset manager,” he said. “It can be done better at scale than it can be done by otherwise nimble shops.”

So far, the biggest sign of the effects of the anti-ESG push on asset managers is probably Vanguard’s departure from the Net Zero Asset Managers initiative.

“We haven’t seen [other] companies leaving NZAM or alliances,” Fugere said. “I credit companies for understanding that climate risk is something they have to address if they want to be successful in business.”