ESG Newsletter | Volume 03
In our first ESG newsletter of 2023, we discuss the contradictions of the anti-ESG movement, the risks associated with director “overboarding,” and emerging regulations regarding transparency in ESG reporting.
From likely hearings in the Republican-led House to the commencement of proxy and annual meeting season, we anticipate a steady increase in the volume of commentary across the ESG space in the first quarter.
As always, we hope you find these overviews and takeaways helpful and welcome your comments and input at Inquiries@AugustCo.com.
Anti-ESG Hypocrisy
As the anti-ESG campaign escalates (as seen in recent attacks on proxy advisors ISS and Glass Lewis), ESG proponents are increasingly highlighting the negative implications and contradictory arguments of the Republican-led movement.
For instance, a group of Democratic Senators penned a CNBC.com op-ed arguing that congressional Republicans who typically favor free market principles are abandoning that approach in their crusades against ESG. The authors add that they believe anti-ESG campaigns are thinly disguised efforts by Republicans to ensure continued funding from fossil fuel companies.
The Senators urge companies and regulators not to be intimidated by these attempts to “bully” them into “ignoring market demand and market risk.”
Similarly, an Impact Alpha article notes that anti-ESG positioning departs from traditional Republican “pro-business” sensibilities, as “increasingly, sustainability and inclusion mean good business.”
Bottom Line: This divisiveness and the challenges associated with balancing passionate ESG interests are likely to persist, and we believe the best way to navigate potential landmines is by grounding corporate messaging in market demand, tangible results, and doing “good business.”
The Risks of “Overboarded” Directors
“Overboarding,” when board directors take on more board seats than they can competently handle, is becoming a sticking point for investors as director responsibilities expand, board sizes shrink, and more directors than ever serve on multiple boards, according to a study published in the Journal of Financial and Quantitative Analysis.
As a recent Financial Times column points out, there isn’t a universally accepted threshold for overboarding. While ISS generally recommends voting against directors who sit on more than five public company boards or are CEOs of public companies and sit on more than two public company boards besides their own, some board directors argue these parameters are arbitrary.
In addition to potentially riling investors or spiraling into negative media coverage, Fortune notes that the risks of overboarding are multi-dimensional:
A board with overcommitted directors may not have the capacity to sufficiently oversee a company in crisis or may increase the likelihood of encountering one (an extreme example of this is Theranos).
The pursuit of seasoned, potentially overboarded directors over less experienced board members may inhibit board diversification.
Our Takeaway: Overboarding should be a key consideration for preempting crises and reputational problems for public and private companies. Boards should regularly evaluate members’ capacities to help navigate their companies through crises, and they also should take advantage of opportunities to refresh and diversify to best serve the needs of the organizations they oversee.
ESG Transparency
With the SEC expected to finalize a new rule standardizing enhanced corporate climate disclosures this spring, as well as FINRA’s recent notice urging brokers to assess the accuracy of their communications regarding ESG claims, regulators are raising the bar when it comes to ESG reporting and transparency.
As a recent Bloomberg Law article highlights, FINRA issued their notice on ESG reporting after discovering that some firms had made “deceptive” ESG statements.
Additionally, in a Reuters op-ed, business and sustainability journalist Mike Scott predicts that 2023 will be a “watershed moment” for investors on nature-related risk as a result of regulators’ efforts to standardize reporting and increase transparency, which will make it increasingly difficult for companies to get away with greenwashing.
So What: As ESG communications shift from a matter of reputational risk to one of legal compliance, it is more important than ever for companies to precisely and carefully communicate their ESG data and initiatives. Organizations should strategically combine their legal, compliance, and communications groups into a single working group to proactively evaluate and scrub ESG-related material for accuracy to avoid having to backtrack or rescind messaging once regulations are officially introduced.