Fresh concern about the state of ESG benchmarks

Greetings from London, where I am based this week — and have heard wails of concern from European fund managers about what is happening in America with the backlash against environmental, social and governance (ESG) investing. No wonder: the news that the Texas government is blacklisting 20 financial companies — of whom 19 are European — because of their alleged pro-ESG views has created shock.

So, too, the news that the State Financial Officers Foundation, the Republican treasurers’ group, is taking an anti-ESG stance (which is embarrassing for the pro-ESG London-based team of Federated Hermes, since that asset manager backs the SFOF.)

We were intrigued to see that this morning the Democrats hit back; sort of. Some 13 treasurers of Democratic states signed a joint letter stressing that investments need to be made “for the long term” — and thus take climate considerations into account.

“As we watch other states using blacklists to obstruct the free market, we want to make it very clear that we are in it for the long term,” they wrote, arguing that creating anti-ESG blacklists means “there will be two kinds of states moving forward: states focused on short-term gains and states focused on long-term beneficial outcomes for all stakeholders.”

ESG enthusiasts will cheer. But it is a pity that the Democrats’ treasurers waited so long to deliver a riposte — and it came in such a dense document. It smacks of a fight between the mafia and boy scouts.

Meanwhile, in other news, take note of our story this week about how British regulators are raising the bar on ESG benchmarking — and the asset manager Sarasin & Partners is trying to increase its scrutiny of auditors. The fights are getting more intense; read on. (Gillian Tett)

FCA warns firms on ‘poor’ ESG benchmarking

We’ll forgive you for missing it, since it was published on the day Queen Elizabeth II died, but last week the Financial Conduct Authority became the latest global regulator to issue a public warning about ESG benchmarking.

The move comes as market regulators remain suspicious of benchmarks following the long-running Libor scandal, and the European Union has floated the idea of its own ESG benchmark (please refer to Kenza’s piece on the topic from earlier this month). Now, the FCA has weighed in as well.

“We believe that the subjective nature of ESG factors, and how ESG data and ratings are incorporated into benchmark methodologies, give rise to an increased risk of poor disclosures in ESG benchmark statements,” the FCA said in its September 8 letter.

More information is needed about how an ESG benchmark is put together, the FCA said. When firms fail to make changes, the FCA warned it will “consider enforcement action.”

The FCA’s letter raises the heat on S&P, MSCI, FTSE Russell and other businesses raking in revenue from ESG benchmarking businesses.

Across the Atlantic, the Securities and Exchange Commission is also looking at ESG benchmarks. Tucked into a broad ESG disclosure proposal in May, the SEC said it wanted to introduce requirements on investment advisers to describe how they use ESG factors in portfolio management.

If, for example, a fund is evaluated by comparing its greenness or sustainability credentials to an ESG benchmark, then the firm should describe how the benchmark is put together.

Benchmarks are a backbone in financial markets. The regulatory pressure on ESG benchmarks underscore the pivot under way in sustainable investing. The days of greenwashing or general vagueness shrouding ESG products are being wiped away by global scrutiny of the sector. (Patrick Temple-West)

Don’t let auditors off the hook on climate votes, says asset manager

Shareholder resolutions with a laser-sharp focus on sustainability issues lost some of their shine with asset managers this year: BlackRock for instance voted in favour of such proposals half as often as in 2021.

As asset managers take a broader approach focused on routine pay and appointment votes, the pivot could put more pressure on auditors and company directors to take climate issues seriously ahead of next year’s voting season.

The UK asset manager Sarasin & Partners updated its shareholder voting policy today with tougher criteria that holds auditors and directors accountable for a company’s reporting, auditing and target setting in relation to net zero goals.

This policy will guide its votes at next year’s shareholder meetings at companies including British bank HSBC, Anglo-Australian metals group Rio Tinto and others in high-risk sectors like fossil fuels, cement and steel.

Alongside bigger players like Amundi and BlackRock, Sarasin is a member of the Net Zero Asset Managers’ Initiative, which, since its inception in 2020, has said members should align its voting policies to be consistent with a global net zero goal for 2050. In practice, however, members of NZAM voted against almost a third of climate resolutions last year, according to a report by the charity ShareAction.

“The majority of investors have not set out how they will turn these voting policies into credible, funded net zero transition plans across their corporate holdings,” Peter Uhlenbruch, director of financial sector standards at Share Action, told Moral Money. “Simply put, execution matters.”

As long as companies publish only sparse data on emissions across their whole value chain, it is tricky for asset managers to hold them to account on net zero pledges. Fewer than 50 of the 13,000 companies which provided information to the Carbon Disclosure Project last year submitted low-carbon transition plans it considered detailed enough to be credible.

Sarasin is calling on asset managers who support activist shareholder resolutions to also vote down board and auditor reappointments when a company fails to publish the “unvarnished truth” on its exposure to climate risk. For example, a resolution put forward by an activist investor calling on ExxonMobil to publish an audited report on how a net zero transition could impact its financial statement garnered 52 per cent support in May — but 96.8 per cent of shareholders voted in the same breath to reappoint Exxon’s auditors.

Sarasin’s net zero voting policy says it could vote down audit committee members, not just the chair. It could also vote against the reappointment of auditors if an audit does not take climate risk into account or provide commentary of how a transition pathway has been considered.

Additionally, the asset manager will ask companies to demonstrate that they are not lobbying against policy consistent with keeping global warming to 1.5C. A report from the Institutional Investors Group on Climate Change in July, however, said banks’ disclosure of lobbying and trade body memberships in line with the Paris agreement is still in its “infancy”. No bank had published details of its climate-related lobbying activities such as meetings with regulators, policy submissions or political donations.

“You have high profile shareholder resolutions, but there isn’t a huge amount of momentum behind routine voting,” Natasha Landell-Mills, head of stewardship at Sarasin, told Moral Money. “We urgently need to see that happen next year if we are going to get much more robust action on the climate.”

Shareholder resolutions should be seen only as a “stepping stone for drawing public and board attention, not a replacement for ensuring broad accountability through routine votes.” (Kenza Bryan)

Smart reads

• Russia’s war in Ukraine is straining Europe’s commitment to international aid and climate action, Bill Gates told Moral Money regular Andrew Edgecliffe-Johnson. The Microsoft founder went on to warn that the world is on track to miss almost all of the UN Sustainable Development Goals.

• Moral Money readers will be no stranger to the issue of thawing permafrost in Russia. This week, our colleague Alexandra Heal wrote an expert Big Read that details how Russia’s invasion of Ukraine has put the subarctic forests at further risk.