ESG developments this week
Economy and Society is Ballotpedia’s weekly review of ESG stories that characterize the growing intersection between business and politics.
Around the world
European Commission sends 17 member states letters over ESG reporting requirement
The European Commission sent letters notifying 17 member states of new infringement procedures over a lack of compliance with ESG reporting initiatives. The letters addressed a commission requirement to integrate the Corporate Sustainability Reporting Directive (CSRD) into national law:
The CSRD is a major update to the EU’s Non-Financial Reporting Directive (NFRD), the previous EU sustainability reporting framework, significantly expanding the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000. Based on new underlying European Sustainability Reporting Standards (ESRS), the CSRD introduces more detailed reporting requirements on company impacts on the environment, human rights and social standards and sustainability-related risk.
The CSRD took effect from the beginning of 2024 for large public-interest companies with over 500 employees, with the first reports to be issued in 2025, followed by companies with more than 250 employees or €40 million in revenue in the following year, and listed SMEs one year later.
The deadline for states to transpose the CSRD into national laws was July 6, 2024, yet the Commission said that it is still calling on 17 member states to transpose the directive. The states receiving the letters include Belgium, Czechia, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia and Finland.
EU extends certain ESG regulations to U.S. companies
The European Union’s (EU) Corporate Sustainability Due Diligence Directive (CSDDD) will require certain U.S. companies to comply with ESG-related measures and regulations by 2026. As covered previously in Economy and Society, some European corporations argued against the EU’s regulatory approach promoting ESG, claiming it hinders their competitiveness and valuations. According to Forbes:
EU regulators included a wild card in the CSDDD’s complex deck. The American Bar Association reported in July that the Corporate Sustainability Due Diligence Directive adopted by the EU will require US companies with over €450 million in revenue in the EU to comply with a vast suite of EU regulatory actions, including the CSDDD and other ESG-related measures, by 2026. The Wall Street Journal estimates that as many as 10,000 non-EU-based companies will have to comply, 31 percent of which are American companies. …
Concerned about a lack of action from the Biden/Harris administration to protect American companies from this bit of foreign intervention into their business activities, 28 members of congress, all Republicans, wrote a letter to Treasury Secretary Janet Yelen [sic] last year. The letter points out that the Treasury Department has historically “defended American interests from the extraterritorial reach of foreign regulators,” and asks Yelen to provide information about what, if anything, Treasury is doing to intercede in this matter.
Yelen seemed to respond to the letter the next day, saying, “We’re looking very carefully at the EU’s corporate sustainability directive, and we’re concerned about the impact it could have on US firms. We’re consulting with the EU and making clear that we’re concerned about the directive’s extra-territorial scope.” The matter has remained dormant, at least publicly, since.
Australian federal court fines Vanguard over ESG claims
Australia’s federal court on Sept. 25 fined Vanguard Investments Australia over ESG claims related to its Ethically Conscious Global Aggregate Bond Index Fund. The lawsuit was filed by the Australian Securities and Investments Commission, which argued Vanguard made misleading claims about the fund’s ESG factors:
Australia’s federal court has fined Vanguard Investments Australia Ltd. A$12.9 million ($8.9 million) for making misleading claims about a fund, the highest penalty issued in the country so far over greenwashing.
In March, the court found the investment giant made numerous false or misleading claims surrounding the environmental, social and governance factors of its nearly A$1 billion Ethically Conscious Global Aggregate Bond Index Fund. As well as the fine, Vanguard has been ordered to publish a notice about the misconduct on its website for 12 months. …
The case was brought by the Australian Securities and Investments Commission as the watchdog ramps up its focus on environmental claims by companies and money managers. ASIC in August said it had made almost 50 regulatory interventions to address greenwashing in the 15 months through June.
On Wall Street and in the private sector
Survey reports decline in corporate boards’ focus on ESG
PwC, a professional services firm, published its 2024 Annual Corporate Directors Survey which reported a decline in corporate boards’ focus on ESG within American public companies. The report also highlighted less than 10% of directors surveyed believed that ESG and sustainability are interchangeable terms. According to ESG Today:
Corporate boards have been seeing a declining focus on ESG issues, with slightly less than half including ESG as part of their regular agenda, as most directors report ambiguity into the meaning of ESG, many viewing it as a charged term, and less than one in ten agreeing that ESG means the same thing as sustainability, according to the new U.S.-focused Annual Corporate Directors Survey released by global professional services firm PwC.
For the report, PwC surveyed more than 520 directors at U.S. public companies, across a wide range of industries, including 69% serving on boards of companies with greater than $1 billion in revenue, and 58% who have served on their boards for more than 5 years.
The survey found a decline in boardroom focus on ESG, with only around half (47%) of respondents reporting that ESG issues are regularly part of the board’s agenda, down from 52% last year and from 55% in 2022, although notably still well above 34% reported by directors in 2019. Additionally, while over half (55%) report that ESG issues are part of the board’s enterprise risk management discussions, this has also declined from 59% last year.
In the spotlight
Study argues fund managers prioritize financial considerations over environmental and social factors
Scholars Alex Edmans, Tom Gosling, and Dirk Jenter published a study arguing that fund managers from the United States, United Kingdom, and European Economic Area (EEA) prioritize financial considerations over environmental and social (ES) considerations. They contend that ES factors tend not to drive financial performance and challenge the efficacy of ESG investing:
[T]he dominant objective of investors, including sustainable investors, is financial performance. Only a minority of investors are willing to sacrifice any returns for ES performance, and very few would tolerate a substantial sacrifice, largely due to fiduciary duty concerns. This contrasts standard SI models, which assume that actions are taken by asset owners (principals) who maximize an objective function that includes ES performance. In reality, most stock selection, voting, and engagement decisions are taken by asset managers (agents), whose objective function is purely financial. …
[D]ifferences between typical traditional and sustainable investors are smaller than commonly thought. Both recognize the priority of financial returns and of delivering on their fiduciary duty, and both view long-term shareholder value as the main reason for engaging on ES issues. Majorities of both will not tolerate companies sacrificing returns to improve ES performance, and majorities of both have never voted for a shareholder proposal that was even slightly negative for firm value. The differences that exist tend to result from differences in beliefs (e.g., on whether ES leaders outperform) or constraints (e.g., from fund mandates).
[O]ur results call into question whether the asset management industry is likely to have a significant effect on companies’ overall ES performance. Most fund managers, including sustainable ones, are reluctant to sacrifice returns for ES, and most do not believe that firms are systematically investing less in ES than optimal for shareholder value. Consequently, without a change in fund managers’ objectives, the industry is unlikely to lead the charge to improve firms’ ES performance.