Why issuers, asset managers and IR professionals can’t afford to deprioritize ESG in 2024
Support for ESG proposals famously declined in the 2023 proxy season, with even BlackRock and Vanguard, two of the world’s largest investors, dialing back.
Should public corporations follow suit and deprioritize ESG in 2024?
Not according to the research findings highlighted in Diligent Market Intelligence's (DMI) 2023 Investor Stewardship Report, which shows mounting pressure for public companies to demonstrate actionable climate transition plans.
Read on to learn why ESG concerns should remain a priority for both investors and issuers — and how technology can help organizations stay ahead of the game.
Investors are moving from words to action
At Diligent's annual user conference, governance leaders explored the recent rise in anti-ESG sentiment. One observation: Investors are starting to demand evidence of action and oversight from issuers on climate transition.
Let’s take a look at the proposals themselves. According to DMI’s research, proposals that focused on disclosures, not company strategy, garnered more support. These proposals also tended to be less prescriptive: Rather than tell companies what they need to do, investors want to see what companies are actually doing in areas like plastic pollution and the environment.
What’s more, there are now higher expectations for what a robust climate transition should look like. We’re seeing evidence of this as Climate Action 100+ enters its second phase with a focus on actionable climate transition plans, and shareholders increasingly push back on “say on climate” proposals by management. Speakers at Diligent’s user conference also noted that investors are exploring other ways to hold issuers to account, like voting against directors.
As Kirsten Snow Spalding, Vice President of Ceres Investor Network, told DMI in a recent interview, “Investors are looking for companies to publish comprehensive climate transition action plans that provide more information about the company’s climate lobbying practices, capital expenditure alignment, climate accounting and their efforts that support a just transition as we move towards a more sustainable economy.”
Regulators are codifying and tightening their reporting requirements
Investors aren’t the only ones seeking more detailed climate reporting. The much-anticipated climate rule by the U.S. Securities and Exchange Commission is expected to be finalized in 2024, setting a new standard for climate reporting among U.S. public companies. Meanwhile, a new framework by the International Sustainability Standards Board (ISSB) will lay the foundation for a number of global regulations related to non-financial sustainability reporting, and the European Union’s Corporate Sustainability Reporting Directive (CSRD) will affect some international companies with operations in the EU.
These are just a few of the many regulatory developments raising the bar for climate disclosures, reflecting a hunger for standardization, transparency and tangible metrics.
As these regulations continue to evolve, the connections between climate, ESG and corporate risk are becoming more clear. With the bottom line on the line, investors want to be able to hold their portfolio companies accountable for net-zero targets. They want standardization, transparency and tangible metrics.
For portfolio investors, the number of ESG-themed assets is growing. According to the National Bureau of Economic Research, the number of global index funds with an ESG mandate has nearly doubled over the past three years. As such vehicles become more commonplace, investors want to make sure that a fund with an ESG label lives up to its name.
ESG has officially become part of risk management
New regulations are raising ESG’s profile as a compliance priority. But compliance is only one reason why this three-letter acronym should be a focus for issuers and asset managers alike.
As the world and our technologies evolve, environmental, social and governance issues have become inextricably entwined with risk. The liability risk associated with greenwashing is one example.
Companies are catching on. Half of the sectors in the S&P 500 now disclose at least one ESG-related risk factor in their annual reports. And many companies are starting to follow the advice of governance experts by conducting materiality assessments every two to three years and investing in risk management software to bring data together from across the organization, accelerate calculations like GHG emissions, and make sure sustainability and financial reports — like 10Ks — align.
Prepare for an ESG shift, not downshift, in the year ahead
Reduced support for ESG proposals doesn’t mean that ESG is a passing fad. ESG scrutiny and investor expectations are merely morphing.
The issuers, IR professionals and asset managers who understand ESG's intersection with risk management and prioritize action over words will find themselves well prepared for 2023 and beyond.
Learn how board reporting software can help companies meet rising expectations with a comprehensive view of ESG benchmarks, context and progress, all in one place — and download DMI's full 2023 Investor Stewardship Report for more insights into recent ESG trends.
