EU Delays ESG Reporting Rules; US Sees Outflows From ESG Funds

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and corporate governance (ESG) trends and events that characterize the growing intersection between business and politics.

Around the world

EU Delays Sector-Specific ESG Rules for Two Years

European Union (EU) legislators on January 24 introduced a proposal to delay ESG reporting rules for eight specific business sectors until 2026. The rules were initially scheduled to take effect this year. 

Supporters of the proposal argued that businesses needed more time to adjust to general ESG reporting standards under the EU’s corporate sustainability reporting directive before the specific standards took effect:

The European Parliament’s legal affairs committee approved a draft proposal from the European Commission to delay eight sector standards by two years until June 2026. EU member state approval is also needed.

The sectors cover oil and gas, mining, road transport, food, cars, agriculture, energy production and textiles.

The aim is to give companies time to focus on implementing initial, broader ESG disclosures they must include in their annual reports for 2024 and onwards under the EU’s corporate sustainability reporting directive (CSRD).

In the states

State agriculture commissioners join ESG pushback

Agriculture commissioners from 12 states sent a letter on January 29 to the heads of six banks, arguing that ESG efforts to promote net-zero carbon policies would hurt farmers and inflate consumer food prices:

The top state officials penned a letter Monday morning to top executives of Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, taking issue in particular with their collective membership in the Net-Zero Banking Alliance (NZBA). They warned that the banks’ involvement in the global eco alliance may impact food availability, lead to price increases, limit credit access for farmers, and have broad negative economic consequences. …

in their letter Monday, the state agriculture commissioners warned that the banks’ net-zero commitments made under the NZBA’s framework may have severe consequences for American farmers such as cutting beef and livestock consumption, forcing a switch to “inefficient electric farm equipment,” and moving away from the nitrogen fertilizer “necessary for American agriculture to thrive.”

“Achieving net-zero greenhouse gas emissions in agriculture requires a complete overhaul of on-farm infrastructure — one of the goals of the NZBA,” the letter stated. “This would have a catastrophic impact on our farmers. Proposed net-zero roadmaps describe dramatic, impractical, and costly changes to American farming and ranching operations such as switching to electric machinery and equipment; installing on-site solar panels and wind turbines; moving to organic fertilizer; altering rice-field irrigation systems; and slashing U.S. ruminant meat consumption in half, costing millions of livestock jobs.”

Texas bans Barclays from purchasing and underwriting municipal bonds

Texas Attorney General Ken Paxton (R) on January 26 banned Barclay’s from participating in the state’s municipal bond market because the company did not respond to requests for information related to its ESG commitments:

Barclays was previously identified as a potential “fossil fuel boycotter” under Texas law. The bank subsequently opted not to respond to questions about its ESG commitments, Paxton’s office said.

The Attorney General’s Public Finance Division ruled that “we will not approve any public security issued on or after today’s date in which Barclays purchases or underwrites the public security or is otherwise a party to a covered contract relating to the public security.”

The initial letter from the attorney general’s office in November identified several banks as subjects of the review including Bank of America, JP Morgan Chase, Morgan Stanley, and Wells Fargo. None of the other banks under review have said they would be unable to respond to the state’s inquiries, the division said.

On Wall Street and in the private sector

ESG funds experience first global net outflow

Outflows from ESG funds, especially in America, created a global net ESG selloff last year for the first time in history:

US fund clients withdrew a net $5.1 billion in the final three months of 2023, according to a fresh analysis by Morningstar Inc. published on Thursday. Combined with $1.2 billion of outflows in Japan, that was too severe a retreat for Europe’s $3.3 billion of net inflows to bolster the global market.

In all, the global sustainable fund market experienced net redemptions of $2.5 billion in the fourth quarter, marking an historic low point for the industry. US skepticism toward ESG follows years of attacks by Republicans who accuse the strategy of being “woke” and anti-capitalist. Legislators in New Hampshire have even sought to criminalize ESG. At the same time, investors have started to question the strategy’s staying power, after an extended period of poor financial returns on a relative basis.

ESG fund withdrawals in the US coincided with a huge slump in traditional green stocks, with the S&P Global Clean Energy Index down more than 20% last year, compared with a 24% increase in the S&P 500. For the whole year, US investors redeemed a total of $13 billion from ESG funds, the Morningstar data show.

Even in Europe, actively managed ESG funds experienced reduced inflows in Q4 2023 compared to the previous quarter:

ETFs provided the bright spots for ESG asset gathering in the last quarter of 2023 as active strategies suffered considerable outflows, according to new research by Morningstar. …

Morningstar said $3.3bn cumulative inflows across European ESG funds in Q4 was significantly down on the $11.8bn recorded in Q3.

It added the decline was “entirely attributable to actively managed sustainable strategies”, which bled $18bn, while passive strategies welcomed $21.3bn in the final three months of the year.

Corporations incentivize executive ESG compliance

New research shows that more than three-out-of-four companies in the S&P 500 now tie executive compensation to ESG compliance:

Seventy-six percent of U.S.-based S&P 500 companies reported in 2023 proxies incorporating at least one ESG metric into executive incentive plans, according to newly released research by Willis Towers Watson (WTW). This is an increase from 69% the previous year and 60% in 2021, meanwhile in Europe the prevalence of ESG metrics has increased from 90% to 93% year over year.

Some U.S. companies might not use the ESG label because they view it as counterproductive, Ken Kuk, senior director of work and rewards at WTW, told me. Meanwhile, he added, other companies may fully support using the term “and even for the companies that want to address some of that sensitivity in the market, what we’re seeing is that they’re still looking at how these things connect to the business and drive value.”

In determining the connection to bonuses, companies rely on a mix of empirical ESG goals and qualitative assessments, according to WTW. The median weighting of ESG metrics (collectively when more than one is used) is, on average, 20% in the U.S. and Europe.

The same study shows that more Asian companies are also integrating ESG performance metrics into their executive compensation packages:

A growing number of companies in the Asia-Pacific are integrating environmental, social and governance (ESG) metrics into executive pay packages amid pressure from investors and stakeholders to promote sustainable business practices, according to headhunters and professional services firms. …

The proportion of Asia-Pacific companies factoring ESG metrics into executive pay increased to 77 per cent last year, compared with 63 per cent in 2022, according to WTW’s analysis of the largest 264 companies among those that make such disclosures in seven markets in the region. …

Disclosures on executive incentive metrics are a common practice in Australia, Japan and Singapore but less so in other Asia-Pacific markets, according to the report. These three countries also led the region in terms of the prevalence of ESG metrics, which stands at 93 per cent of companies in Singapore, followed by Australia at 86 per cent and Japan at 72 per cent. Meanwhile, Hong Kong and mainland Chinese companies trailed their Asia-Pacific peers, at 55 per cent and 29 per cent, respectively.

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