Companies prepare for global climate reporting standards

ESG developments this week

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.

In Washington, D.C., and around the world

Companies prepare for global climate reporting standards

The SEC has paused enforcement of its rule requiring corporate climate disclosures, but companies are still preparing to comply with ESG standards, especially from the European Union:

The pause on the U.S. Securities and Exchange Commission’s (SEC) climate disclosure rule has injected a dose of uncertainty into the world of environmental, social, and governance (ESG) reporting. However, this development should not be misconstrued as a sign of a slowdown in the global movement toward standardized ESG transparency.

Regardless of the pause on the SEC ruling, organizations are still being impacted by global regulation, with July marking the official halfway point of the first year of reporting under the Corporate Sustainability Reporting Directive (CSRD), and many are continuing to actively prepare for compliance.

The CSRD was finalized by the EU in December 2022 and is widely considered the most comprehensive ESG regulation ever, bringing together financial data, ESG information, and assurance for the first time. And they aren’t the only country doing so, the U.K., New Zealand, Japan, China, Brazil, South Korea, Hong Kong, and the European Union (EU) have all proposed or passed similar regulations.

Some companies are already starting to report ESG data in response to uncertainty over when regulations will become enforceable, according to a recent Fortune piece:

[E]ven with uncertainty over when government-mandated climate disclosures will be issued and what they will look like, experts say companies are still moving forward by measuring their environmental, social, and governance (ESG) risks and opportunities. And many businesses are already proactively tracking that data and sharing it publicly in anticipation of the rules changing.

“The timeline for what companies will have to report and where they’ll report is somewhat in question,” said Kristina Wyatt, deputy general counsel and chief sustainability officer at climate data disclosure software company Persefoni. …

The level of frustration about the regulatory paralysis is “not as significant as you might think,” she added. By and large, companies know that they will need to share more ESG disclosures in the near future and many are even relieved that the fractured regulatory landscape is becoming more harmonized.

In the states

States divest from China, citing fears of Pacific tension

Over the past year, several state pension funds have joined a growing movement to divest from the People’s Republic of China, citing fears of potential tension in the Pacific and not ESG factors:

A growing number of states are forcing public employee pension funds to divest from China, pulling out of the world’s second-largest economy because of hostility toward Beijing and fear that U.S. assets could be frozen if conflict breaks out in the Indo-Pacific.

Five states — Indiana, Florida, Missouri, Oklahoma and Kansas — have directed state fund administrators to begin the divestment process over the past year. And more are considering doing so — the latest sign of deteriorating relations between the U.S. and China.

While the states that have taken such steps are heavily Republican, the trend reflects a souring in the perception of China in the U.S that goes beyond political parties. For years, pension funds clamored alongside U.S. companies to invest in a growing economy that many once believed would become less authoritarian as it modernized. Now the states are looking at China and seeing a pile-up of risks.

On Wall Street and in the private sector

Investors pull record amounts out of ESG funds

Investors continued to pull record amounts of money out of ESG investment funds in the first half of 2024:

H1 of 2024 has been the worst period yet for ESG funds and ETFs, with more outflows and fund closures so far this year than any period since Morningstar began tracking their flows in 2018.

US sustainable funds shed $13.5bn in H1, more than double the approximately $5.5bn it shed in the first half of 2023, according to data from Morningstar.

Outflows persisted in both active (-8.3bn) and passive (-$5.1bn) ESG funds. Equity ESG funds suffered the greatest outflows (-14.5bn) followed by allocation funds (-$220m) and commodities (-$97m). Fixed income is the only category that has had continued inflows since the market selloff in 2022. For H1, fixed income ESG funds took in $1.1bn.

In the spotlight

Former BlackRock adviser argues ESG is self-defeating

Terrence Keeley—an ESG critic and former Blackrock senior adviser—argued that ESG investments were self-defeating in a recent interview at RealClear’s 2024 Energy Future Forum:

I think peak ESG was actually a couple of years ago. That’s true in shareholder resolutions, which are now coming down. But the worst performing year for ESG stocks, that sector I described that’s about $35 trillion, was 2022 when energy stocks went up about 25%. And the rest of the market, including Nasdaq and some of the tech-heavy stocks, went down a similar amount. But the second worst year of performance for ESG stocks was 2023. Interestingly, what happened because of the mad rush into clean energy shares before last year is that clean energy stocks fell about 60%.

At the same time the stock market was up 22%, clean energy stocks last year fell almost 60%. So there you are with a portfolio full of Sunrun and Enphase, and you’re taking on water. You may be able to say that that’s in line with your principles, but it’s not a very good way to build a healthy retirement.

So, you really need to look at the extent to which you’ve taken a decision with portions of your portfolio to be ethically invested or you’re willing to take lower returns. That’s all well and good. But one would think that taking lower returns in your portfolio should be accompanied by some type of advancement of a social or environmental cause. And that is simply not the case with ESG. I’ll quote Bill Gates, he of much fame, saying that so far ESG investment—that multitrillion-dollar market I’ve spoken about—has not taken one ton of carbon out of the air.