State Street Expects TCFD & Human Capital Management Reporting (Newsletter 1/14/2022)

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Investor Updates

State Street’s Proxy Voting Agenda Spotlights Climate Change & Diversity

In his 2022 letter, CEO Cyrus Taraporevala identifies climate change and diversity as State Street’s primary focus areas for the 2022 proxy season. More specifically, State Street details a number of new and/or enhanced expectations:

  • Climate Change:
    • In 2022, companies in major indices will be expected to align with TCFD’s climate-related disclosures, specifically: (1) board oversight of climate-related risks and opportunities; (2) Scope 1 and 2 emissions; and (3) targets for reducing greenhouse gas (GHG) emissions.
    • In 2022, State Street will engage with significant emitters around climate transition plans and companies and directors that do not meet the investor’s expectations in 2023 should expect no votes.
  • Diversity:
    • In 2022, all holdings globally are expected to have at least one woman on their boards. Previously, this policy has been upheld for only major indices in certain markets.
    • In 2023, companies in major indices will be expected to have at least 30% female directors on their boards.

State Street Enhances Guidance on Human Capital Management

In addition to its CEO Letter, State Street has released guidance on its expectations for human capital disclosures. At a minimum, the institution expects companies to disclose on the following topics:

  • Board Oversight – Oversight of risks and opportunities related to human capital
  • Strategy – The role human capital management plays in furthering the company’s long-term business strategy
  • Compensation – How the organization’s compensation strategy aids recruitment and retention of employees as well as encourages an effective human capital strategy
  • Voice – How employee feedback is gathered (and utilized, as applicable) and how employees are engaged throughout the company
  • Diversity, Equity, and Inclusion – The company’s practices around advancing diversity, equity, and inclusion

State Street Launches 3 ESG ETFs

State Street Global Advisors (SSGA) announced new ESG ETFs, including the SPDR S&P SmallCap 600 ESG ETF (ESIX). The fund provides exposure to companies that meet certain ESG criteria while keeping similar industry weights as the S&P SmallCap 600 Index. The fund’s ESG criteria are as follows:

  • Screens for and excludes tobacco, controversial weapons, and thermal coal
  • Screens for relative ESG and United Nations Global Compact (UNGC) scores
    • Excludes issuers with low UNGC scores relative to their global universe
    • Excludes issuers with S&P DJI ESG scores in the bottom 25% of its GICS Industry Group and within the bottom 10% of ESG scores in the underlying index
  • Ranks remaining companies by S&P DJI ESG Score within each GICS Industry Group and selects companies for inclusion from the top down, targeting 75% of the market capitalization from each group
  • Monitors and reviews for controversies that may cause an issuer to be removed

Company Spotlight

EY CEO Outlook Survey: ESG Impacts M&A

In EY’s 2022 CEO Outlook Survey, over 2,000 global CEOs were asked questions about the opportunities, challenges, and risks facing their organizations. A few highlights are listed below:

  • 99% of respondents stated that ESG and sustainability concerns are now factored into their buying strategies, with 6% admitting they have walked away from deals in the past year over ESG-related concerns.
  • 20% of respondents said their primary planned M&A activity will be to strengthen ESG ranking/performance/sustainable footprint.
  • 65% of respondents said they have faced pushback from investors about their sustainability transition plans.

America’s Most JUST Companies 2022

Just Capital and CNBC announced the 2022 rankings for America’s Most JUST Companies. Surprise… 9 out of the top 10 companies are in the software and technology sectors. JUST Capital’s methodology behind the rankings included interviewing the American public in focus groups on issues that represent “just corporate behavior”, evaluating companies listed in the Russell 1000 Index based on metrics related to the top 20 issues and 241 data points to measure performance, collecting feedback from companies on the data gathered by JUST, and ranking companies based on the final information. A more valuable way to read the rankings is to filter by industry. For example, in the automobiles and parts industry, the top 5 companies are ranked as listed:

  1. Ford (overall rank: 20)
  2. GM (overall rank: 30)
  3. Aptiv (overall rank: 171)
  4. Lear Corporation (overall rank: 199)
  5. BorgWarner (overall rank: 458)

Big Banks Join Forces for Climate Risk Standards

A group of 19 banks, including Bank of America, Wells Fargo, and Royal Bank of Canada, and the Risk Management Association have joined a consortium with plans to develop consistent standards for measuring and managing climate risk. This comes as the financial industry has been called out for not promptly redirecting capital to support the transition to a net zero economy. Banks may take on the larger role of monitoring emissions and climate risks stemming from its customers. For further details on how banks can measure financed emissions, read more here.

Kaiser Aluminum Focuses in on Emissions

Kaiser’s 2020 Sustainability Report contains a number of exciting enhancements to its ESG programs, most notably the company has set the following emissions reduction goals using a 2019 benchmark:

  • Reduce Scope 1 and Scope 2 GHG emissions intensity by 20% by 2030
  • Lower Scope 3 estimated emissions intensity by more than 35% by 2030
  • Cut overall Scope 1, 2, and 3 estimated emissions intensity by over 30% by 2030

Additionally, Kaiser has enhanced its Board of Directors’ oversight of ESG and a variety of environmental metrics, including greenhouse gas emissions, water withdrawal, and air emissions.

ESG Ratings & Reporting

SBTi Has a Busy Year Ahead

The Science Based Targets Initiative (SBTi) announced key updates that we can expect to see throughout 2022. Highlights from the list are as follows:

  • January 18th SBTi collecting feedback on Forest, Land and Agriculture sector guidance.
  • In February, SBTi will launch science-based target setting methods, tools, and guidance for shipping and aviation companies. See status of additional sector guidance documents here.
  • In Q4 2022 SBTi will launch the Measurement, Reporting and Verification (MRV) Framework to help companies track progress against science-based targets. 
  • During the year, SBTi will conduct a comprehensive review of its Scope 3 target setting methods to make sure they are aligned with best practices and SBTi’s Net-Zero Standard.

Regulatory Updates

New York Proposes to Implement a Fashion Sustainability Law

Apparel and fashion retailers in New York may soon face strict reporting standards on the sustainability of their operations and supply chains. The Fashion Sustainability and Social Accountability Act will affect apparel and footwear companies with more than $100 million in revenues, requiring them to create:

  • Environmental and social materiality assessments and due diligence policies,
  • Water, energy, waste, and GHG emissions tracking systems and targets, and
  • Supply chain mapping in line with a number of guidelines, including the United Nations Guiding Principles on Business and Human Rights.

Companies will have 12 months for supply chain mapping and 18 months for disclosures around their own operations if the bill is passed, likely in spring of 2022. Failure to meet these standards could result in a fine up to 2% of annual revenues.

News Bites