ESG Developments This Week
In Washington, D.C.
SEC halts enforcement of proxy advisory amendments
In July 2020, the Securities and Exchange Commission amended several rules under the Securities and Exchange Act of 1934, codifying 2019 regulatory guidance requiring greater scrutiny of Proxy Advisory Services. The amendments went into effect in November 2020 and were scheduled to begin mandatory compliance on December 1, 2021. Last week, newly installed SEC Chairman Gary Gensler issued a statement directing Commission staff to reconsider the guidance and the amendments, which, in turn, caused the Commission’s Division of Corporate Finance to issue its own statement, effectively halting enforcement of the amendments:
“Gary Gensler, the new chairman of the U.S. Securities and Exchange Commission, released a statement on June 1, 2021, directing SEC staff to consider revisiting its interpretation and guidance from September 2019 regarding the application of the proxy rules to proxy advisors (the 2019 Guidance), and the amendments that it adopted in July 2020 that modified Rules 14a-1(l), 14a-2(b) and 14a-9 under the Securities Exchange Act of 1934 (the 2020 Amendments)….
In response to Chairman Gensler’s directive, the Division of Corporation Finance issued a public statement that it would consider recommending that the SEC revisit the 2019 Guidance and the 2020 Amendments. Notably, the Division of Corporation Finance also stated that it would not recommend enforcement action based on the 2019 Guidance or the 2020 Amendments while the SEC considers further regulatory action. In addition, the Division confirmed that, in the event that the 2020 Amendments remain in place with the current December 1, 2021 compliance date, the staff will not recommend any enforcement action based on those conditions for a reasonable period of time after any resumption by ISS of its litigation challenging the 2020 Amendments and the 2019 Guidance.
It is uncertain how or when the SEC will move forward to review and perhaps revise the 2019 Guidance and 2020 Amendments, although it appears that a majority of SEC members do not support them. In the interim, for however long that interim period may be, the Division of Corporation Finance’s refusal to seek to enforce the 2019 Guidance, and 2020 Amendments once they become applicable, would seem to be tantamount to their suspension or repeal.”
The ESG impact of the SEC’s decisions is potentially significant, as the two largest proxy advisory services—Institutional Shareholder Services (ISS) and Glass-Lewis—are considered ESG allies in many proxy ballot measures, recommending their clients vote their proxies in favor of what are deemed ESG-friendly petitions and executive and director decisions.
SEC Commissioner and former acting-Chair, Allision Herren Lee also recommended that Commission staff examine and consider revisions to another amendment approved during the Trump administration, one dealing with the amount of stock that must be held and for how long it must be held before filing a first-time shareholder proposal. Commissioner Gensler has yet to announce his plans for this amendment.
On Wall Street and in the private sector
Activist hedge fund wins third seat on Exxon board
As noted in last week’s edition of this newsletter, the activist hedge fund Engine No. 1 challenged three seats of Exxon’s board of directors on this year’s proxy statement and, as of Exxon’s annual meeting (on May 26) and last week’s publication date (on June 1), it was clear that the activist upstarts had won two of those three seats. On Wednesday, June 2, Exxon updated the vote count, resulting in a larger victory for Engine No. 1:
“Exxon Mobil Corp (XOM.N) shareholders elected a third director nominated by hedge fund Engine No. 1 to the oil company’s board, the company said on Wednesday, extending the firm’s upset victory at one of America’s top energy corporations.
The election was a shock to an energy industry struggling to address growing investor concerns about global warming and a warning to Exxon managers that years of weak returns were no longer acceptable.
Engine No. 1 nominee Alexander Karsner, a strategist at Google owner Alphabet Inc , won the fund’s third seat out of its 12-member board, according to a regulatory filing.”
That same day, Ursula Burns, an Exxon director who was retained, spoke remotely to the Dallas Federal reserve and called the vote a watershed moment in shareholder activism and acknowledging that, in her words, “the timing was perfect” for such an effort by an environmentally focused activist group like Engine No. 1.
ESG: hot job sector
According to The Financial Times, the rapid growth of ESG as an investment scheme and a business-pressure tactic has turned those deemed to possess expertise in Environmental, Social, and Corporate Governance matters into the hottest commodity in the job market. In so doing, ESG is proving to be impactful well beyond the bounds of corporate finance:
“More than one in five of the world’s largest companies have made some form of commitment to reaching net zero emissions and investors are sharpening their focus on the social impact of companies they back, creating a boom in the market for specialists in corporate sustainability.
“The bottom line is demand far outstrips supply and so there is going to be a real war for talent and that will include compensation,” said Sarah Galloway, co-leader of recruiter Russell Reynolds Associates’ sustainability practice.
Demand for ESG experts is booming across professional services, including at management consultancies, boutique advisory firms and property companies, recruiters and executives said….
Experts are also being lured by private equity funds to fill roles as chief sustainability officer and head of ESG with salaries varying widely, recruiters said.
“Private equity has realised you can’t IPO a business unless it’s got a really strong sustainability or ESG story so they are all hiring heads of ESG or sustainability at very senior levels . . . to oversee their portfolios,” said Galloway….
Growing expectations that auditors will scrutinise non-financial metrics as well as companies’ accounts are also driving demand for new expertise at accounting firms, which are recruiting specialists and providing training to auditors.
“ESG metrics and reporting are fast becoming a business imperative, particularly due to increased scrutiny from investors, and we intend to move ahead of regulatory reforms by expanding our capability and capacity in this area,” said Scott Knight, head of audit at BDO, the UK’s fifth-largest accounting firm.”
Over the weekend, the South China Morning Post argued that the ESG movement in Asia, which has been hot, but not as hot as in Europe and the United States, would, in its words, take off:
“Environment, social and governance disclosures by mainland China-listed companies have improved but remain short of the needs of international fund managers, who are increasingly pushed by asset owners to embed ESG considerations into investment decisions, according to asset managers.
Engagement by foreign investors has already seen some companies enhance disclosures, while impending regulatory requirements would improve it further, they said….
Funds managed with strategies linked to companies’ ESG performance doubled in Asia to US$25 billion last year from US$12 billion in 2019, according to JPMorgan.
“We believe this could quite possibly double again this year, judging by the amount of investor interest and momentum we are seeing,” said Elaine Wu, head of ESG and utilities research in Asia excluding Japan at JPMorgan. ESG funds focusing on the region have outperformed global ESG funds by 2 to 5 percentage points in the past two years, she added.
Currently, mainland-listed firms are encouraged by the CSRC to voluntarily publish annual sustainability or social responsibility reports. These disclosures focus mostly on environmental sustainability and philanthropic contributions.
Over 1,000 or 27 per cent of these companies issued ESG reports in 2020, with 86 percent of the largest 300 mainland-listed stocks by market value doing so – up from 49 per cent in 2010, said Felix Lam, head of investment stewardship for Asia-Pacific excluding Japan at JP Morgan Asset Management.”
ESG down under
ESG is booming in Europe, in the United States, in Asia, and now, apparently, in Australia as well. Bloomberg reported last week on Australian Ethical Investment, Ltd., noting the company’s good fortunes of late and the concomitant boom in Australian ESG:
“There’s been a seismic shift in the interest and demand for this style of investing,” John McMurdo, chief executive officer at Australian Ethical Investment Ltd., said in an interview in Sydney Thursday. “There is significant momentum.”…
Funds and strategies that focus on environmental, social and governance factors are booming worldwide amid an uptake from investors and companies to own more sustainable investments. McMurdo says the addressable market — the audience — for his funds shot up to between 60%-80% of the Australian population, up from around 15% just two years ago….
“There’s a sort of myth that you have to give up investment performance to invest in an ethical way,” McMurdo said. “That myth has been well and truly busted.”
In the spotlight
Alignment theory in ESG, again
In several past issues, this newsletter has reported on various efforts to connect executive compensation to ESG performance—mostly in Canada and the EU but occasionally in the United States as well. Last Tuesday, The Wall Street Journal reported on private equity firms that are trying, despite complications, to link compensation to ESG performance metrics, which would change the business in significant ways:
“Private-equity investors are considering a novel strategy to make sure the firms they back are good corporate citizens: Tie their promises to their pay.
More institutions are weighing whether to link asset managers’ compensation to performance on environmental, social and governance issues, say people who consult with investors and help private-equity firms raise money.
These efforts—which are more advanced in Europe than in the U.S.—would represent a radical change in how private-equity managers get paid. For decades, buyout managers have received their main compensation through a 20% share of the profits when an investment is sold, referred to as a manager’s carried interest.
Advocates of linking pay to ESG say it shows firms mean business. Private-equity firms regularly talk up their ESG policies, but there is little data on how well the industry as a whole performs on these issues.
“Our carry-link shows we put our money where our mouth is,” Vishesh Srivastava, managing partner of Future Business Partnership, a European consumer-specialist impact-investing firm, wrote in an email….”
“My sources inside BlackRock say that over the past year, Fink has transformed the place into an ESG cultural center. Fink talks ESG nonstop at company town halls. Seminars on ESG investing seem to take place every week. An executive named Brian Deese was promoted to push money managers to consider ESG in all their investment decisions.
Deese is now one of several BlackRock officials who hold key positions in the Biden administration, as director of the president’s National Economic Council.”Charles Gasparino, “BlackRock’s ‘No. 1’ goal in ‘woke’ investing: Huge ESG-funds haul,” The New York Post, June 5, 2021