Germany’s Abstention Threatens EU Vote On ESG Regulation

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

Germany may abstain from ESG regulation vote

The European Union is scheduled to hold a vote on February 9 to adopt a rule that would create civil liabilities for companies that have ESG violations in their supply chains. But now Germany may abstain from the vote, possibly prompting other countries to follow suit and making adoption difficult, according to Bloomberg:

The EU was on track to move forward with the Corporate Sustainability Due Diligence Directive after December, when lawmakers and representatives of member states ended months of negotiations with a provisional agreement. Under the directive, companies would face civil liability for failing to address environmental and human rights breaches in their value chains. It also mandates climate transition plans. …

But now Europe’s largest economy is likely to abstain from the final vote among member states, currently scheduled for Feb. 9, according to a person familiar with the matter. An abstention by Germany could prompt others to follow suit, eroding support for and potentially burying the legislation, especially with time running short before EU elections scheduled for June. …

The stumbling block emerged when Germany’s Free Democratic Party, part of the ruling coalition, unexpectedly announced its opposition to CSDDD in a Jan. 15 declaration, citing “bureaucratic hurdles” and “legal uncertainty.”

In the states

Missouri Democrats continue pushback against rule opposing ESG

Missouri Secretary of State Jay Ashcroft (R) published a rule last July restricting the use of ESG in public investment strategies. The Securities Industry and Financial Markets Association (SIFMA) filed a lawsuit in August claiming that the regulation conflicted with federal law. Judge Stephen R. Bough of the U.S. District Court for the Western District of Missouri last month rejected the state’s request to have the suit dismissed, ruling that SIFMA and its affiliate organizations had grounds to sue. Ashcroft then requested $1.2 million in the state’s 2024 budget to hire a law firm to defend the rule.

Missouri legislators held a hearing last week questioning Ashcroft’s decision to hire the law firm. Opponents argued that the rule and its defense were politically motivated:

Democrats put Secretary of State Jay Ashcroft on the hot seat Thursday over his hiring of a private law firm to defend his office in a politically charged fight over investing rules.

During a tense, hourlong grilling by members of the House Budget Committee, the Republican candidate for governor defended his decision to request $1.2 million in the upcoming state budget for legal fees associated with a lawsuit that claims the rules violate free speech rights.

Rep. Peter Merideth, D-St. Louis, accused Ashcroft of using the rule change and the ensuing lawsuit to help him campaign for the GOP gubernatorial primary.  “I’m just tired of wasting our taxpayer dollars on legal fees for your campaign,” Merideth said.

On Wall Street and in the private sector

Corporations continue to avoid ESG terminology in earnings calls

At about the midpoint of the current earnings season, there have been almost no corporate mentions of ESG in earnings calls, according to recent FactSet data. Companies have either avoided the topic altogether or referred to ESG goals and strategies using different terms:

Midway through another earnings season, the free-fall in C-suite mentions of the movement for environment, social, and governance (ESG) strategies is on pace to plumb new depths.

There have been just nine direct mentions among S&P 500 companies of the politically controversial term amid the sea of hundreds of earnings calls in recent weeks, according to data from financial data company FactSet through Friday afternoon.

That is a far cry from the 156 mentions among S&P 500 companies during the fourth quarter of 2021, when usage of the term peaked according to the company.

Most asset managers did not receive top ESG scores in Morningstar survey

Only eight of the 97 asset managers surveyed for a recent Morningstar analysis received a top ESG score based on their responses, although Morningstar reported that most managers were moving towards accepting ESG practices:

Of the 97 firms under Morningstar’s latest ESG Commitment Level coverage, 8% are rated Leader, 24% scored Advanced, 45% of firms received Basic, and 23% earned Low. …

Out of the 12 asset managers highlighted in its accompanying report, five were upgraded, including: Comgest (to Advanced from Basic), Fidelity International (to Advanced from Basic), Pictet (to Advanced from Basic), Janus Henderson (to Basic from Low), and Man Group (to Basic from Low). Morningstar initiated coverage of Nordea at Advanced.

Since its previous reviews, Morningstar found Comgest and Fidelity International have invested “significantly” in personnel dedicated to sustainable-investing initiatives. Comgest’s team has nearly doubled in the past two years, and Fidelity International’s team has quadrupled since 2019. 

Changing credit market boosts ESG bonds

January was the biggest month for ESG bond issuance since the market was established 17 years ago. Credit market expectations of interest rate cuts from the Federal Reserve have reduced borrowing costs and boosted the issuance of ESG debt during the first month of the year:

Global sales of green, social, sustainability and sustainability-linked bonds totaled $149.5 billion last month, making it the most active January since the inception of the green debt market in 2007, according to data compiled by Bloomberg.

Falling borrowing costs and seemingly insatiable investor demand have turbo-charged issuance in bond markets across the globe. More than 540 bond sellers tapped primary markets last month — the most in records going back two decades — to raise a record $721 billion in both ESG-labeled and conventional bonds as of Jan. 26, ending the month at over $817 billion, according to Bloomberg-compiled data. In the US, the high-grade market had the busiest January ever. …

Sales of green bonds, the largest category of sustainable debt by amount, totaled $84.2 billion, a record for the month of January. Issuance of sustainability bonds, which can be used to fund both green and social projects, reached $32.4 billion, also a record for the month. Sustainability-linked bond — or SLB — sales, meanwhile, totaled just $3.7 billion.

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