In this week’s edition of Economy and Society:
- European Commission announces ESG regulatory simplification
- Investors pulled money out of European ESG funds in Q4
- Republican state officials request ESG clarification
- Wyoming Treasurer, Secretary of State debate over ESG bill
- Vanguard changes DEI proxy voting policy
Around the world
European Commission announces ESG regulatory simplification
What’s the story?
The European Commission (EC) released a report last week on its plans to promote European business competitiveness, including a planned ESG regulatory simplification.
Why does it matter?
This newsletter previously reported on complaints from European corporations and asset managers that the EU’s ESG reporting rules hurt corporate and economic performance. The EC’s planned changes may address the arguments raised.
Read more
According to ESG Today:
Among the first initiatives to be undertaken under the new roadmap is an “Omnibus” package, set to be proposed next month, which the Compass said will “cover a far-reaching simplification in the fields of sustainable finance reporting, sustainability due diligence and taxonomy.” Key regulations expected to be targeted for simplification include the EU’s Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD), and Taxonomy Regulation.
Many of the most significant measures likely to be proposed in the upcoming sustainability reporting-focused Omnibus package will be targeted at smaller businesses, with the new roadmap outlining goals to reduce reporting burdens by at least 25% for all companies, and 35% for SMEs.
Among the most significant initiatives outlined in the roadmap to ease the reporting burden on smaller companies is an upcoming proposal to create a new definition of small mid-cap companies, encompassing thousands of EU businesses and described as “bigger than SMEs but smaller than large companies,” which will be subject to less complex sustainability reporting and due diligence requirements than larger companies, in a similar manner in which SMEs have simpler obligations under the CSRD.
Investors pulled money out of European ESG funds in Q4
What’s the story?
European ESG investment funds experienced a pullback in Q4 2024, with record outflows, fund closures, and realignments away from the investing strategy.
Why does it matter?
American ESG funds experienced consistent outflows in 2024. The Q4 outflows in Europe may indicate a broader, global move away from ESG investment products. European funds account for roughly 80% of the global ESG market (by assets).
Read more
According to Bloomberg:
ESG fund managers are facing one of the toughest moments in the strategy’s history, as investment clients pull record amounts of money.
Funds complying with the European Union’s strictest ESG standards suffered record outflows last quarter, according to fresh data from Morningstar Inc. That follows an analysis by the market researcher showing ESG fund managers in the US just had their worst year ever. At the same time, a record number of funds has now scrapped ESG and related terms from their names, Morningstar reported.
“The story for equity funds in ESG hasn’t been great,” Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said in a phone interview on Wednesday. A lot of ESG funds offering “clean energy, clean-tech and climate solutions haven’t done well in the context of high interest rates.”
In the states
Republican state officials request ESG clarification
What’s the story?
Twenty-two Republican state financial officers—treasurers, auditors, and a comptroller—sent a letter Jan. 28 asking the U.S. Department of Labor (DOL) and the Securities and Exchange Commission (SEC) to issue new rules clarifying and updating ESG policies enacted or proposed during the Biden administration.
Why does it matter?
The DOL and the SEC each issued ESG and sustainability investing rules under the Biden administration that Republicans opposed. Congressional Republicans sought to block the DOL’s rule permitting the use of ESG in ERISA-governed pension plans using the Congressional Review Act, and Republican attorneys general have aimed to block the rule in court. The SEC’s emissions reporting rule also faced legal challenges and was suspended by the Commission while lawsuits were considered.
The Trump administration may now seek to reverse or otherwise eliminate those significant rules.
Read more
According to Pensions & Investments:
The state officials, which include treasurers, auditors and a comptroller, sent a letter Jan. 28 to Vince Micone, acting labor secretary, and SEC acting Chair Mark Uyeda asserting that action is needed to protect retirement savings for millions of Americans.
“There is an indisputable trend, among large asset managers, to prioritize political and social agendas over the financial security of hardworking Americans,” the officials wrote. “Retirement security should not be jeopardized in order to facilitate corporate virtue signaling and activist-driven initiatives.”
The letter cites a Jan. 10 federal court decision in which a judge ruled that American Airlines and its retirement plan fiduciaries violated ERISA’s guidelines by putting corporate interests ahead of participants’ interests due to using ESG factors in their investment decision-making. In that case, a former American Airlines pilot sued the company and plan fiduciaries for two 401(k) plans in June 2023 saying the plans’ doing business with certain investment managers — including BlackRock — violated ERISA due to their investments, proxy voting and other actions that included support of ESG principles.
Wyoming Treasurer, Secretary of State debate over ESG bill
What’s the story?
The Wyoming Legislature is currently debating a bill to prohibit ESG considerations in state investments. Most recently, the state’s treasurer and secretary of state (who both say they oppose ESG investing) have taken different positions on the anti-ESG legislation.
Why does it matter?
States with Republican trifectas tend to enact legislation opposing ESG, while states with Democratic trifectas tend to enact legislation supporting ESG. The disagreement between Treasurer Curt Meier (R)—who opposes House Bill 80—and Secretary of State Chuck Gray (R)—who supports the bill—shows that approaches can vary even between ESG opponents.
What’s the background?
See here for more on Wyoming HB 80.
Read more
According to Cowboy State Daily:
Although both State Treasurer Curt Meier and Secretary of State Chuck Gray oppose ESG, they expressed significantly different opinions about HB 80 and the topic of ESG on Cowboy State Daily’s Morning Show with Jake on Monday.
Meier takes a slightly more agnostic approach to ESG and argues that the state should be most concerned with making as much money as possible, while Gray believes Wyoming should take a hardline stance against ESG regardless of the financial fallout.
“We shouldn’t have anything to do with them (ESG),” Gray said.
On Wall Street and in the private sector
Vanguard changes DEI proxy voting language
What’s the story?
Vanguard, the second largest asset manager in the world, released its updated U.S. proxy voting policy, softening its language related to corporate board diversity expectations.
Why does it matter?
Corporate diversity, equity, and inclusion (DEI) policies fall under the social pillar of ESG investing. Vanguard’s move away from stricter board diversity voting procedures departs from a key ESG principle.
Read more
According to ESG Today:
Vanguard, one of the world’s largest investment managers, released its updated proxy voting policy for U.S. portfolio companies, which included less prescriptive language on board diversity expectations for companies.
While the updated policy guide includes a similar explanation to prior years that Vanguard “look for boards to be fit for purpose by reflecting sufficient breadth of skills, experience, perspective, and personal characteristics (such as age, gender, and/or race/ethnicity),” it no longer included as an explicit factor for funds to consider that board should “at a minimum, represent diversity of personal characteristics, inclusive of at least diversity in gender, race, and ethnicity on the board,” that had been included in recent years’ policies.
The new policy also changed language calling for race and ethnicity disclosure, from “disclosure of directors’ personal characteristics (such as race and ethnicity)” in last year’s policy to “disclosure to provide an understanding of the directors’ personal characteristics to enable shareholders to understand the breadth of a board’s composition.”