Climate and Human Capital Regulations on the Horizon (Newsletter 5/21)

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Regulatory News

Regulators to Assess Risks Climate Change Poses to Financial System

President Biden signed an executive order mandating:

  • Financial Stability Oversight Council members to assess risks climate change presents for U.S. financial system and, within six months, give recommendations for reducing those risks.
  • National Economic Council Director to develop a strategy for assessing government’s climate-related financial risks and determine financing needs for the U.S. to achieve net zero emissions by 2050.
  • Labor Secretary to identify actions for protecting savings from climate change costs and assess how ESG factors have previously been accounted for in retirement investments.

SEC to Release Disclosures on Human Capital Data and Climate Risks

The SEC has repeatedly communicated its focus on ESG themes, even hinting it will develop an ESG framework to account for diversity and inclusion as well as climate change risks. SEC Chair Gary Gensler recently stated that the SEC will propose a rule in-line with investor demand around human capital data and climate change risks. He also announced SEC staff are creating recommendations for rules that would lead to increased human capital metrics, potentially including workforce diversity, turnover, and part-time and full-time workers.

Investor Updates

TIAA Committed to Net Zero Emissions in General Account by 2050

TIAA has plans to achieve net zero carbon emissions in its General Account, which is a $280 billion insurance investment account, by substantially reducing its portfolio’s carbon footprint and tackling any remaining emissions through investments targeted at removing carbon. It plans to search for investments related to climate solutions, including energy-efficient real estate, renewable energy, and companies transitioning to a low-carbon economy.

JP Morgan Sets 2030 Targets for High-Emitting Industries

In pursuit of its Paris-aligned financing commitment, JP Morgan Chase outlined specific portfolio targets, tied to a 2019 baseline, for the following industries:

  • Auto Manufacturing: 41% reduction in carbon intensity from manufacturing of new vehicles, and tailpipe emissions from such vehicles.
  • Electric Power: 69% reduction in carbon intensity from electric power generation, which accounts for the vast majority of the sector’s climate impact.
  • Oil & Gas: 35% reduction in operational carbon intensity, as well as a 15% reduction in end-use carbon intensity – reflecting a decrease in emissions from the combustion of oil & natural gas downstream and an increase in renewable energy generation.
  • Aviation and Pulp & Paper will be the next industry targets revealed, with the date set for 2022.

GAM Updates Proxy Guidance on Climate and Board Diversity

GAM Holding’s updated proxy voting guidelines affirm the manager’s support for TCFD and strengthen its position on climate risk and board diversity. The fund is now considering voting against:

  • Nominating committee chairs of boards that are less than 25% female or where the company lacks a broader diversity strategy and is not making notable progress,
  • Board chairs or other responsible directors at companies in high impact sectors failing to proactively manage and report climate-related risks, and
  • Reports and accounts or re-election of directors at companies that lack adequate risk oversight, management, and disclosure of material sustainability impacts or risks.

Proxy Season Briefing

ISS Supports Engine No. 1’s Clean Energy Campaign Against Exxon Mobile

In the ongoing Exxon Mobile saga, ISS backs three of the four board seats Engine No. 1 is campaigning for. Even with recent additions to the board, the proxy advisor does not believe Exxon is doing enough to combat climate change and support an energy transition.

Shell’s “Say on Climate” Vote Wins Large Margin of Support

Shell received 88.7% votes in favor of its climate transition plan in its “say on climate” vote. However, Follow This’ shareholder proposal, which requested Shell agree to different science-based Scope 1, 2, and 3 emissions reduction targets, also received 30.4% support (Proxy Insight).

Shareholders Revolt Over Skyworks Solutions’ CEO Pay Package

Shareholders protested high payouts and a lack of pay and performance alignment, with 77.7% of votes cast against the company’s “say on pay” proposal. The criticized proposal would allot the CEO $22 million in total compensation, which is 1,271 times Skyworks Solution’s median employee pay (Proxy Insight).

Walmart Faces Five Shareholder Proposals at June AGM

Initially facing 10 shareholder proposals, half of which were withdrawn or excluded by the SEC, Walmart is set to navigate five proposals at its upcoming AGM. These shareholder proposals touch on a range of topics, including disclosing lobbying activities, reporting on alignment of starting wages and racial justice goals, and creating a pandemic workforce advisory council (Proxy Insight).

Company Spotlight

Talking ESG at Investor Days

Ready or not, ESG is now viewed as a component of a company’s long-term strategy. Investors want to hear updates related to ESG periodically, rather than once a year or every other year from an updated corporate sustainability report. Companies are increasingly taking advantage of additional opportunities in front of investors to deliver pertinent ESG progress. According to FactSet, 129 companies in the S&P 500 mentioned “ESG” in their earnings calls from December 15, 2020, through March 5, 2021. Companies also commonly discuss ESG during investor days. Examples for showcasing ESG efforts are included below.  

Achievements & Progress Updates – Investors expect your company to consistently take action on ESG, so this is a good place to showcase actions, standings, goals or even high ESG rating scores.

Applied Materials, Inc.

  • Emphasizing its achievements on slide 19, Applied Materials lists its scores from CDP (climate and supplier survey results), MSCI, and Sustainalytics.
  • In providing updates, the company confirms it is on track to reach 100% renewable energy in the U.S. by 2022 and globally by 2030, and to report aligned with TCFD by 2022.

Okta, Inc.

  • At the end of the presentation on slide 106, Okta covers ESG achievements from 2020, which includes publishing a web page with ESG progress, administering its first GHG emissions inventory, and releasing an initial Diversity & Inclusion report.
  • Additionally, Okta announced its 2021 commitment to achieve 100% renewable electricity for its global real estate footprint by 2022.

Mid- and Long-Term Goals – Share goals that go beyond the next year. Targeting dates 5 to 15 years out will help investors understand how the goals are tied to your longer-term strategy.

Avery Dennison Corporation

  • On slide 9, the company displays charts with metrics impacting all stakeholders and ties in the ESG component of the company’s strategy, “Continuing to lead in an environmentally and socially responsible manner with New 2030 Goals.”
  • On the following slides, it touches on diversity of the Board and senior leadership team.
  • Within the appendix, slide 57 shares the path towards reaching Avery Dennison’s 2030 goals, with a breakdown of targets and metrics tied to each broader objective.

Integrate ESG – Prove ESG is part of your company’s core values. By dedicating a section to ESG or weaving topics throughout the presentation, you can relay the level of importance your company places on ESG.

Celanese Corporation

  • Starting on slide 58, Celanese dedicates a section to sustainability, calling out the company’s values and the E, S, and G topics in-focus at the company.
  • Slide 61 shows the structure of its ESG Council with the Board’s oversight, including an Environmental, Health, Safety, Quality, and Public Policy Committee.
  • In the following slides, the company gives both quantitative and qualitative updates while connecting the environmental and social progress to the overarching objective.
  • To conclude the section, Celanese provides a roadmap with the next steps it is taking in its sustainability program.

For more examples, click here to continue reading the full article.

Ratings & Frameworks

Small- & Mid-Cap Companies Gain Steam in S&P ESG Indices

S&P Global found the April 2021 rebalance of the S&P Dow Jones Indices revealed a significant increase in S&P DJI ESG Score improvement and ESG score potential for the S&P SmallCap 600 ESG Index and the S&P MidCap 400 ESG Index. These two indices saw significant year-over-year increases in ESG performance, while the S&P 500 ESG Index saw improvements, but not on the same scale. One possible reason smaller companies may be seeing an increase is a greater number of companies, across market caps, are taking part in the S&P Global CSA, which serves as the base of the S&P DJI ESG Scores.

ETFs Align with UN SDGs

Data from Trackinsight reveals 316 ETFs have aligned with the United Nations Sustainable Development Goals (UN SDGs) as of the first quarter of 2021. The ETFs are primarily aligning with three of the goals – Climate Action (SDG 13), Affordable and Clean Energy (SDG 7), and Industry, Innovation, and Infrastructure (SDG 9). Globally, 87 new ESG ETFs launched within the first three months of this year, with 758 ESG ETFs listed worldwide.

News Bites