SEC Considers Scope 3 Requirements (12/10)

Regulatory Updates

SEC Weighs Emissions Disclosures for Companies’ Entire Value Chains

SEC Chairman Gary Gensler said Tuesday that the agency is considering whether to mandate non-financial reporting of Scope 1, 2, and 3 emissions, the broadest measure of greenhouse-gas (GHG) emissions. Disclosing Scope 3 emissions would require companies to calculate the environmental impact of their entire value chain, a feat some critics say is too difficult to implement. The SEC has not yet decided but says the reporting requirements hinge on the commitments companies have already made to shareholders regarding achieving net zero emissions.

Biden Signs Executive Order for the Government to Achieve Net Zero

On Wednesday, President Biden signed a new executive order directing the federal government to achieve net zero emissions by 2050. To meet the target, the Federal Sustainability Plan outlines five key goals:

Achieve 100% carbon pollution-free electricity by 2030
Purchase 100% zero emissions vehicles by 2035, including 100% light-duty vehicles by 2027
Achieve net zero emissions buildings by 2045, including 50% reduction by 2032
Achieve net zero emissions from federal procurement by 2050
- Require major federal suppliers to disclose emissions and climate risks and set science-based reduction targets
- Purchase low-carbon materials
- Maximize procurement of sustainable products and services
Achieve net zero emissions from federal operations by 2050, including 65% reduction in emissions by 2030

ESG Ratings & Reporting

ISS Releases Benchmark Policy Updates for 2022

In November, ISS released proposed changes to its proxy voting policies and opened a period for public comment. With the comment period now closed, ISS has announced its official policy updates this week. Most of these updates will be applied to annual general meetings that occur on or after Feb. 1, 2022. A couple of key policy updates include:

Board Diversity
- In 2022, ISS will generally recommend voting against the nominating committee chair at U.S. companies in the Russell 3000 or S&P 1500 indices that do not have any racially/ethnically diverse members.
- In 2023, ISS’s policy to vote against the nominating committee chair at companies that do not have female directors, will extend beyond the Russell 3000 and S&P 1500 indices to most US companies.
Board Accountability for Climate
- For significant GHG emitters, ISS will generally recommend voting against the chair of the responsible committee in instances where ISS finds the company is not adequately analyzing and mitigating risks related to climate change. Minimum steps for 2022 include thorough disclosure of climate risks, such as through TCFD, and GHG emissions reduction targets.

MSCI Releases Top ESG Trends to Watch for 2022

The fundamental goal of ESG integration is to anticipate risks and address them before they materialize. MSCI has released its top ESG trends for 2022, potentially providing a glimpse into the future of investing. This year, MSCI expects ESG to continue to grow in popularity, with E taking the lead over S and G. It also expects commitments regarding Scope 3 emissions to become commonplace. As well as a host of other trends, MSCI sees the standardization of non-financial disclosures occurring in the coming year.

CDP Publishes A List of Environmental Leaders

CDP has published its A List for 2021, comprised of 272 of the most sustainable companies. Most companies score below C, and only 2% achieve a score of A. This year, more companies than ever achieved a score of A, indicating growing support for the framework. CDP highlights both the best and worst companies, as well as those that avoided answering requests for information. Some leaders include L’Oréal, Unilever, HP, AstraZeneca, and PepsiCo. CDP called out Chevron, Exxon Mobil, and Berkshire Hathaway as laggards.

Investor Updates

Vanguard Launches Active ESG Funds

Vanguard has launched four new active “SustainableLife” funds, ranging from 50% equities to 100% equities. The funds will be actively managed by Wellington Management Company, incorporating Vanguard’s three methods of ESG integration: screening the investment universe, engaging with companies, and weighting funds based on sustainability criteria. These new funds are a step away from Vanguard’s typical passive offerings, such as its popular passive “SustainableLife” funds, which could facilitate more due diligence when making sustainable investment decisions.

Amundi U.S. Appoints New Head of ESG

Amundi, one of the world’s top ten largest asset managers, has appointed Annie Chor Joyce as Head of ESG. Prior to Amundi, Joyce worked for MSCI, the World Economic Forum, SoFi, and Barclays. The appointment follows Amundi’s recent commitments to the UN Principles of Responsible Investment and the Net Zero Asset Managers Initiative.

ESG Investing Expected to Quadruple by 2030

Broadridge has released a report predicting ESG investments could quadruple by the end of the decade. According to the report, ESG will see inflows grow at an exponential rate as institutions and governments give more importance to sustainability. The catalysts for this growth will be increased investment from institutional investors as they repurpose funds to meet government sustainability mandates, and from retirement plans which have largely been on the sidelines until recently.

Company Spotlight

Citigroup Making Bold Moves to Reach Climate Goals

Citigroup’s CEO, Jane Fraser, announced that the bank will cut off certain clients in order to achieve the bank’s goal of reaching net zero carbon emissions by 2050 across its financing portfolio. In determining which clients will be affected and how to fulfill Citigroup’s pledge, Ms. Fraser has announced the bank will make decisions industry by industry and will release related plans and targets in the next year. The bank is first outlining its plans for clients in the energy industry, and will take into consideration the client’s project, environmental commitments, and its importance to Citigroup.

A Focus on ESG Has Helped Nasdaq Beat NYSE in Record Year for IPOs

IPOs at Nasdaq have garnered more inflows than the NYSE this year, largely due to an influx of ESG-focused firms. The largest IPO of the year, the electric car maker Rivian, was on the Nasdaq. Other ESG-driven companies, including Allbirds and Rent the Runway, also chose Nasdaq over NYSE. Nasdaq has recently signaled strong support for ESG and controversially revised its listing rules to pressure companies to increase board diversity.

Walmart Adds Science-Based Targets to Supply Chain Finance Program

Walmart is helping its suppliers reduce emissions by providing them with new ethical standards, tracking tools, and financing. This includes co-investment in decarbonization technology and independent verification of reductions by SBTi. These will be especially helpful for small- and medium-sized suppliers who may lack the expertise and capital required to track and reduce emissions.

Companies Feeling the Heat

SEC Probes Tesla Over Whistleblower Claims on Safety Defects

A whistleblower at Tesla claims the company mislead investors regarding the safety of their solar panels. The SEC has opened an investigation into Tesla and their failure to transparently communicate risks to investors—such as selling products that unintentionally combust. This is not the first time Tesla has heard similar claims, but it is the first time the SEC has formally opened an investigation into the issue.

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