In the span of a few years, the ESG (Environmental, Social and Governance) landscape has changed dramatically, both from the investor and issuer perspectives. It has had an increasingly significant impact on companies around the world, with many institutional investors now considering oversight and management of material issues to be table stakes. With the focus on ESG continuing to increase at a rapid clip, the top five trends we have our eye on in 2022 follow:
- Investor ESG expectations expand from reporting to action.
Over the last two years, we have seen a number of investors incorporate ESG reporting expectations into their proxy voting guidelines. BlackRock for example expects that its portfolio companies produce disclosure aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the standards developed by the Sustainability Accounting Standards Board (to be replaced by the International Sustainability Standards Board (ISSB) in the not too distant future, as a result of welcome consolidation within the voluntary reporting ecosystem). Furthermore, through forthcoming rulemaking the SEC will require companies to provide additional disclosures in their SEC filings related to climate, human capital management and cybersecurity.1
While investors continue to view transparency in company practices as necessary, updated voting guidelines for 2022 indicate that transparency alone is not sufficient to drive the progress that investors expect. In BlackRock’s recent 2022 guidance to companies, it makes clear expectations that companies not only set goals, but also demonstrate concrete plans to meet those goals. State Street likewise recently released guidance indicating that disclosure is but one component of its overall expectations for companies in managing material ESG issues. For example, State Street expects all companies to have at least one woman on their boards, and may vote against the Chair of the board’s Nominating Committee or the board leader if this expectation is not met. See trend 4 for more.
- Investors’ assessment of ESG practices are evolving.
Perhaps a corollary to our first trend, as investors refine their expectations, they are increasingly evolving the ways in which they assess companies’ practices and progress. According to a recent Morgan Stanley survey, more than 95% of institutional investors are integrating or plan to integrate ESG considerations into their investment decisions, but the way in which this integration occurs varies meaningfully from investor to investor2. With asset managers and proxy advisors now using proprietary ESG rating systems to evaluate companies, it is more important than ever to understand how your company is being assessed and which assessments are most utilized by your investor base. By understanding your specific investors’ priorities and practices, you can identify the ESG topics and third-party raters and aggregators that are most important to your company.
- Climate change and diversity, equity and inclusion remain top priorities; natural capital and employee voice are on the rise.
On the climate front, we expect to see rapid proliferation of target-setting and transition planning over the next 12 months. Beyond climate-related disclosure, BlackRock and State Street have both significantly expanded their expectations of companies, particularly those in carbon intensive industries. In its updated voting guidelines for 2022, BlackRock asks that companies disclose their climate transition plans, and demonstrate how those plans are resilient under the global aspiration to limit global warming to 1.5° C. BlackRock’s guidelines now explicitly link disclosure alignment with TCFD as well as a company’s short-, medium- and long-term Scope 1 and 2 emissions reduction targets to BlackRock’s voting on director elections and shareholder proposals. Similarly, in 2022 State Street will engage on climate transition plan disclosure with significant emitters in carbon-intensive sectors. In 2023, State Street will begin holding directors accountable if these companies do not show adequate progress on climate transition plan disclosures.
With respect to diversity, equity and inclusion, during 2021 disclosure of EEO-1 survey data went from minority to majority practice within the Fortune 100. This was in large part due to the New York City Comptroller’s successful campaign targeted on this issue3, and investors are expanding their scopes to understand company actions to further DE&I ambitions. As it relates to shareholder proposals on racial equity and/or civil rights audits, State Street will vote for proposals at companies that do not disclose the board’s process for overseeing risks related to racial equity and/or civil rights, have no plan in place to address these risks, and/or cannot identify the relevant risks.
While we don’t see either climate change or DE&I receding as issues of focus in the near future, we see other issues on the rise, particularly matters of employee voice and natural capital. With the Task Force for Nature-related Financial Disclosure recommendations on the horizon, and investors and companies alike recognizing employees as a key asset for companies, we expect these topics to increasingly surface on investors agendas in 2022 and beyond.
- Setting and assessing corporate climate goals
- Corporate Implications from COP26
- Increased volume and support for E&S proposals.
Notwithstanding the thematic priorities highlighted in trend three, companies should take note that overall support for proposals addressing environmental and social issues shattered records both in terms of volume and level of support in 2021, and 2022 is likely to continue that trajectory. Just consider that majority supported E&S focused proposals were practically non-existent prior to 2013, when shareholder proposals at CF Industries related to political contributions and sustainability reports passed4. Fast forward to 2021, where 33 E&S proposals passed within the S&P 1500.
Already as of April 8, at least 27 E&S proposals have passed, including several “firsts” addressing racial equity and civil rights audits, sexual harassment, and gender pay equity. To the extent that investors perceive an ESG issue to be material to a company, and opportunity exists for the company to improve its practices related thereto, investors’ willingness to leverage their vote as a tool to effect change is climbing.
- Don’t short change governance; G drives forward progress on E and S.
In particular, we see board composition and accountability as topping the agenda for 2022. While neither topic is a new area of focus, the introduction of the SEC’s recently finalized Universal Proxy rules in August will heighten both. For the first time, investors will have the opportunity in contested elections to mix and match between management and dissident candidates, elevating the importance of directors’ individual skills and contributions to the board.
Boards must also be mindful that proper oversight exists over the growing range of issues that are meaningful to a company. Board leadership and oversight is now essential to integrating ESG into a company’s overall strategy and measuring, managing, and communicating progress.
No matter what stage in your journey, Georgeson will help you progress your ESG agenda. Our advisory services help you understand your own unique ESG landscape, advance your practices and communicate with investors effectively. Contact us today to learn more.
1 SEC Shifts Could Have Major Impact on ESG
2 Reference: Morgan Stanley Sustainable Signals 2020
3 For those counting, this marks the fourth time New York City Comptroller’s office has driven a rapid, broad-market shift in ESG practices, starting with proxy access in 2015, followed by skills matrix disclosure in 2018, the Rooney Rule in 2020, and now EEO-1 disclosure.
4 Reference: Georgeson Annual Corporate Governance Review 2013