ESG Weekly Update – January 25, 2022

25 January 2022

UK: UK Becomes First G20 Country to Enshrine into Law Mandatory TCFD Requirements

The Department for Business, Energy and Industrial Strategy published a new statutory instrument requiring many UK companies to make certain non-financial disclosures. Under The Companies (Strategic Report) (Climate-Related Financial Disclosure) Regulations 2022—in amendments to sections 414C, 414CA and 414CB of the Companies Act—“high turnover” (defined as turnover above £500 million annually) companies with more than 500 employees, as well as those listed on AIM (and others already listed in the legislation), must include certain climate-related financial disclosures in their strategic reports. These changes are made in line with recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), following a consultation launched by the UK government in early 2021. Many companies are already voluntarily disclosing in line with TCFD recommendations, but these changes will accelerate this trend and help progress the United Kingdom’s roadmap toward mandatory climate-related disclosures across the economy by the end of 2025.

Notable disclosures mandated by the new regulations include:

  • A description of how climate risks and opportunities are identified, assessed and managed;
  • A description of how this information is integrated into the company’s overall risk management process;
  • A description of the impact of these risks and opportunities on the company’s business strategy;
  • A description of any targets in place with respect to managing risk and realizing opportunities; and
  • A description of key performance indicators to assess progress against these targets.

In addition, the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022—also published this week—will require LLPs with more than 500 employees and over £500 million in annual turnover to make the same disclosures in either their strategic report, if applicable, or their Energy and Carbon Report, which forms part of an LLP’s Annual Report.

The Department for Business, Energy and Industrial Strategy is expected to publish a Q&A guide to help companies comply with these new requirements, although no specific timeline for such guidance has been set.

The regulations come into force on April 6, 2022.

The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022
Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 
Consultation response
Roadmap towards mandatory climate-related disclosures

U.S.: SEC Examining ESG Disclosures in Wake of Recent Texas Laws

Early this month, the U.S. Securities and Exchange Commission (SEC) launched, out of its Texas office, a preliminary probe into companies’ disclosures related to their policies on climate change and gun control, considering them in light of recently enacted Texas state code provisions. This development illustrates the SEC’s commitment to scrutinize public company ESG statements and disclosures for inconsistencies with their actual practices. In 2021, the SEC took a number of steps indicating its intention to increase enforcement activity related to ESG disclosures, including the creation of an agency task force related to climate and ESG, the appointment of a Senior Policy Advisor for Climate and ESG, and a variety of statements indicating the SEC’s enforcement plans for 2022 regarding “greenwashing.”

In response to companies’ adoption of policies limiting their involvement in the fossil fuel and firearm industries, the Texas state legislature enacted laws restricting state and local government bodies from investing in or contracting with companies that boycott or discriminate against the fossil fuel and firearm industries, albeit providing an exception for Texas state pension funds where necessary to fulfill their fiduciary duties. Texas Government Code Chapters 809 and 2274 now require companies doing business with state and local government entities to certify that they do not “boycott energy companies” nor “have a practice, policy, guidance or directive that discriminates against a firearm entity or firearm trade association.”

The SEC inquiry appears to focus on whether companies may have acted inconsistently with their ESG policy disclosures in working to comply with Texas’ new laws.

Reuters - SEC's Texas office probes banks over disclosures on guns, fossil fuels
Texas Government Code Chapter 2274
Texas Government Code Chapter 809

U.S.: New ISS Proxy Voting Guidelines Reflect Investor Views on Climate, Diversity and Equality

Institutional Shareholder Services (ISS), a U.S. advisory firm providing corporate governance and responsible investment advice to funds and other asset owners, has published policy updates for its Benchmark Proxy Voting Guidelines. The new policies will apply to shareholder meetings in the Americas, EMEA and Asia-Pacific regions, beginning February 1, 2022. The updates encompass, among other areas, climate, diversity and voting rights.

Climate. ISS’s updates detail a non-exhaustive list of criteria for analyzing climate transition action plans put forward by management and shareholders:

  • When voting on management proposals that request shareholders to approve a climate action plan, ISS advises considering the company’s compliance with TCFD recommendations and market standards; disclosure of its operational and supply chain emissions; the quality of short-, medium- and long-term targets; the company’s “net zero” commitment; any third-party assurance of climate data; the company’s commitment to report on implementation of the plan; and disclosures regarding the company’s lobbying activities, among others.
  • When voting on shareholder proposals that request climate disclosures, reports or an action plan, ISS advises considering the company’s track record on violations, litigation or any controversies related to greenhouse gas emissions; the company’s actual emissions performance; the completeness of the company’s climate-related disclosures; and the extent to which a given proposal is overly burdensome.

In addition, ISS introduced a policy for board accountability on climate. Based on a 2021 survey, ISS determined that investors are strongly in favor of minimum criteria for large emitters, and on this basis, has decided it will recommend against current directors of companies identified in the Climate Action 100+ Focus Group list.

Board diversity. For US Russell 3000 or S&P 1500 companies, ISS recommends either “against” or “withhold” votes for the chair of the nominating committee, or other directors, in instances where a board does not have at least one woman and one individual from an ethnic minority background. This policy will be extended to all U.S. companies in 2023. In the United Kingdom, the policy currently applies for FTSE 100 companies.

In the United States ISS responded to the Black Lives Matter protest by putting forward factors to be considered by companies when overseeing racial equity and civil rights audits. These include considering whether the company has an internal process for addressing racial issues, whether it has published a statement on recent efforts and the company’s engagement with impacted communities. In Europe, the policy on social and environmental proposals includes “consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues.”

Unequal voting rights. In the United States, ISS has indicated it will vote against or withhold directors, committee members or entire boards in instances where a company employs a common stock structure with unequal voting rights. In Europe, ISS already has a policy of voting against the creation of preference shares with superior voting rights.

ISS – Voting Policies 2022
ISS Benchmark Policy Updates – Executive Summary

U.S.: Dow Jones Launches Sustainability Data Tool to Facilitate ESG Investing

Last week, Dow Jones announced the launch of a new sustainability data model, which aims to provide ESG insights to asset managers seeking to enhance their ESG portfolio strategies. The data set will provide sustainability scoring, rankings and ESG-related sentiment on more than 6,000 publicly traded companies. Dow Jones highlights a hybrid methodology as a distinguishing factor of its tool: the data set will include both “inside-out” news from a company’s self-reporting, as well as “outside-in” information from Factiva’s global content collection of external news. Dow Jones’ sustainability data is also SASB-aligned, as the model incorporates the five dimensions and 26 general sustainability categories of the Sustainability Accounting Standards Board’s (SASB) standards.

In describing the impetus for the tool, Dow Jones noted investor demand for better ESG information, as well as a significant surge in sustainable investing and a wave of policy and regulatory changes that drive demand for better sustainability data.

Dow Jones believes the tool will allow financial firms to stay on top of evolving ESG regulation and to facilitate greater transparency with respect to sustainability risks. Glenn Hall, editor at Dow Jones, stated: “We are seeing a wave of new policy and regulatory changes in the sustainable investment space that is driving demand for better data… As investors navigate these changes and increasingly consider more nonfinancial factors, they need a robust and dynamic way of evaluating how well companies are managing the impact they may have on people and the planet.”

Dow Jones – Press Release
Dow Jones – Sustainability Data for Asset Management
Arabesque S-Ray

Canada, U.S.: Leading Canadian and U.S. Banks Join Forces on Climate Risk

The Risk Management Association (RMA), a not-for-profit professional association focused on the financial services industry, recently announced the launch of the RMA Climate Risk Consortium. The coalition consists of 19 North American banks that have joined together to create climate risk management principles that banks can use in their operations. Participating financial institutions include: Bank of America, Fifth Third Bank, Huntington National Bank, KeyBank, M&T Bank Corp., MUFG Union Bank, National Bank of Canada, Regions Bank, Royal Bank of Canada, Silicon Valley Bank (and its parent, SVB Financial Group), Truist, U.S. Bank and Wells Fargo.

“As a financial institution, it is critical that we manage and mitigate risk related to climate change. This includes physical risks, transition risks—and opportunities—that will impact communities, the markets, consumer preferences and regulations,” stated Chair of the Consortium Mary Obasi, who is the Global Climate Risk Executive at Bank of America. “I think it behooves us—just like we do with any other area of risk—to really understand what could play out, what could happen and then just build out our processes to manage it well.”

The RMA Climate Risk Consortium intends to examine current industry efforts and develop a standard set of guidelines and terminology around climate risk management that can be incorporated into banks’ business. Further, the consortium seeks to cooperate with policymakers and regulators to impact ongoing policies surrounding climate change and the transition to a more sustainable economy.

ESG Today - Major North American Banks Collaborate to Develop Climate Risk Management Standards
WSJ - Big Banks Band Together to Measure and Manage Climate Risk

Global: NGO & Investor Campaigns Pressure Companies on Climate Change and Reproductive Rights

1. Milieudefensie, the Dutch branch of the environmental network Friends of the Earth, launched last week a new campaign targeting more than 30 companies in connection with their carbon emissions plans and policies. In a letter addressed to CEOs, Milieudefensie requested the companies implement climate plans aligned with achieving the Paris Climate Agreement’s goal of total global warming no greater than 1.5°C. Several of the companies who have received the Milieudefensie letter have responded that climate plans aligned with the Paris Agreement are already in place. Last year, a Dutch court ruled in favour of Milieudefensie in a decision affirming that both nation states and private companies have a responsibility to work to limit climate change. The Milieudefensie letter requests that the targeted companies develop the proposed plan by April 15 of this year.

2. With the U.S. Supreme Court expected to issue a decision that would curtail established abortion protections in the landmark Roe v. Wade case, institutional investors representing $11.8 billion in assets have launched an effort to pressure companies to align their political spending with their public statements of support for women in the workplace.

Investors spearheading the campaign include the Employees’ Retirement System of Rhode Island and Perpetual Ltd.'s Trillium Asset Management, foundations such as the Unitarian Universalist Association and ESG investing advocates As You Sow. The consortium of investors have filed political spending resolutions for the 2022 proxy season at more than 10 U.S. companies and financial institutions.

Many of the proposals would require companies to “regularly report on the congruence of political and electioneering expenditures during the preceding year against publicly stated company values and policies.” Other shareholder initiatives call on companies to indicate how they will support employees’ access to reproductive healthcare in the absence of Roe and the anticipated implementation of state laws severely limiting women’s reproductive healthcare options.

Activists press companies on abortion with Roe v. Wade at stake
Milieudefensie Letter of 13 January 2022