ESG: What You Need to Know This Summer – Part 2

by Water & Wall

Welcome to Part 2 of a two-part series on ESG

Note: we usually keep these updates exclusively for our clients and team, but figured we’d start summer by sharing a sneak peek of what we’re watching and why you should be watching it too. Interested in our ESG media expertise?

Reach out to jesse@waterandwall.com!

With ESG seemingly in the news all day, every day, it’s hard for even those of us focused on this space to keep up with everything happening. A few weeks ago we published Part 1 of this perspective. What you’re about to read is Part 2 of 2, hence the count starting with No. 3 :).

3. The California State Teachers’ Retirement System and Goldman Sachs Asset Management updated their proxy voting policies.

Going hand in hand with the SEC’s new proposal are updated proxy voting policies announced in March by the California State Teachers’ Retirement System (CalSTRS) and Goldman Sachs Asset Management (GSAM.)

CalSTRS, which manages $318 billion, announced that starting this proxy season it will vote:

  • Against the entire board of directors of companies that do not have at least one woman on the board.
  • Against directors on a board’s nominating committee if the company does not have at least 30% women board members.
  • Against nominating and governance committee members of companies in the Russell 1000 Index that do not disclose the skills and diversity characteristics of their board members.

On the climate front, CalSTRS plans to use its vote to support shareholder proposals that demand meaningful net zero actions” and committed to voting:

  • Against directors of the largest global 1,900 companies if they have not published a report on climate change that aligns with the TCFD.
  • Against directors of companies if they have not disclosed scope 1 or scope 2 emissions.
  • Against directors of the highest global emitters if they have not done the following three things: published a TCFD-aligned report, disclosed scope 1 and 2 emissions, and set appropriate targets to reduce greenhouse gas emissions.

Elsewhere in the institutional investor space, GSAM, the $2.5 trillion asset management arm of Goldman Sachs, plans to vote against directors at companies that aren’t disclosing material greenhouse gas emissions data, or whose current disclosures are insufficient, and who aren’t making enough progress towards updating and expanding their disclosures.

In an exclusive in Reuters announcing the move, GSAM global head of stewardship Catherine Winner said that the disclosures were necessary so the firm wouldn’t “have to rely on third-party data, which is often wrong.” While the policy aligns with the SEC’s proposal, given the review process and gradual phasing in planned for the proposal, Winner noted that GSAM is “not going to wait for the SEC rule to kick in.”

As reported by Pensions & Investments, GSAM also plans to vote against portfolio companies that violate the United Nations Global Compact principles. Focused on promoting sustainable development, the principles encourage best practices for companies around human rights, labor, the environment, and anti-corruption. The firm also announced changes to its voting to better account for region/country-specific differences.

Our take:

CalSTRS and GSAM’s updated proxy voting policies are a necessary step in the right direction. Institutional investors wield immense power with their portfolio companies, and have too often been afraid to use it. Through announcing these new policies, engaging with company boards/leadership, and using their vote to “walk the walk,” these firms can help drive much-needed progress in spurring board diversity and standardizing climate change disclosure.

Read more here:

4. The White House Office of Management and Budget released a new assessment looking at the potential impact on the federal budget from climate change.

Last May, at the direction of President Biden, the OMB began developing its first annual assessment of climate-related fiscal risk exposure. They found that by 2100, the U.S. government stands to lose around $2 trillion (with a T!) in revenue, annually, all thanks to climate change. That’s approximately a 7.1% annual Federal revenue loss. They also found that the government may need to spend an additional $25-128 billion annually on six climate change-related expenditures, including “coastal disaster relief, flood insurance, crop insurance, healthcare insurance, wildland fire suppression, and flooding at Federal facilities.”

The OMB notes a few examples of potential expenditures that might be impacted should climate change continue at its current pace, unchecked, including:

  • Federal expenditures on crop insurance premium subsidies are projected to increase 3.5 to 22 percent each year due to climate change-induced crop losses by the late-century, the equivalent of between $330 million and $2.1 billion annually.
  • Increased hurricane frequency could drive up spending on coastal disaster response between $22 billion and $94 billion annually by the end of the century.
  • Rising wildland fire activity could increase Federal wildland fire suppression expenditures by between $1.55 billion and $9.60 billion annually, the equivalent of an increase between 78 percent and 480 percent, by the end of the century.
  • Over 12,195 individual Federal buildings and structures could be inundated under ten feet of sea level rise, with total combined replacement cost of over $43.7 billion.  

In light of its findings, the OMB recommended Congress take a number of budget actions for fiscal year 2023, as laid out in the President’s budget. This includes $44.9 billion in funding to combat climate change, nearly 60% more than what the Federal government allocated in FY 2021. The budget provides funding for investment in clean energy development/deployment, climate resilience and adaptation efforts, and the reduction of greenhouse gas emissions, among other initiatives.

Our take:

While we’re still in the beginning stages of the federal budget process for FY 2023, it’s promising to see the President and OMB prioritizing climate change mitigation and the energy transition. The OMB’s analysis also offers us a new way of understanding just how climate change might materially impact the government and the country at large. Nevertheless, given the current deadlock in the Senate, and Senator Manchin’s proclivity for voting against climate change/clean energy efforts, it remains to be seen how much funding the final budget allocates towards climate change.

Read more here:

  • Read more in Reuters from Timothy Gardner
  • See the OMB’s blog on the report, and view its assessments here and here