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Sustainable Finance Newsletter - Dropping the "ESG" term but not the mission

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By Ross Kerber

May 1 (Reuters) -A nagging question as companies move away from using the term "ESG" is whether they are actually scaling back on their efforts or just changing the label. It's more like thelatter, according to a recent report from Farient that I wrote up below.

You'll also find some strong words from Capital Group, the parent of American Funds, filed in an ongoing review about the role that index funds have come to play in the U.S. utility industry.

I welcome connections on LinkedIn. If you have a news tip, potential content, or general thoughts you can also email me at ross.kerber@thomsonreuters.com

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Dropping a term but not the mission

Many companies have dialed back use of the term "ESG," a reference to environmental, social and governance considerations, in the face of criticism from U.S. conservative politicians.

But in the weeds of their financial statements many corporations continue to refine their ESG practices at least for executive pay, according to a recent study by executive compensation and corporate governance consulting firm Farient Advisors.

"In short, our analysis reveals there is no evidence that companies and their boards are turning back—ESG has established itself as a strategic value driver for companies in all industries, of all sizes, and around the globe," writes Farient CEO Robin Ferracone.

The report cites changes like companies substituting the word "sustainability" in lieu of "ESG," or making environmental goals more targeted like reducing energy costs.

Among U.S. large-cap companies, 52% tie executive pay to environmental incentive measures as of their proxies filed last year, up from 34% in 2022 and 15% in 2021, according to Brian Bueno, Farient ESG Practice Lead.

In an interview, Bueno said the trend seemed surprising the given the ferocity of criticism on many ESG matters. He cautioned that trends could still change with more recent proxies now being filed.

But so far, he said, "The anti-ESG push hasn't been as strong, consistent or long-term as the push for companies to consider climate in their strategies," a common concern from investors. "It's too hard to put the toothpaste back in the tube," he said.

The report cites the case of materials science company Dow, DOW.N which Farient said is among the less than 12% of U.S. companies with ESG measures in a long-term incentive plan. In last year's proxy the company disclosed more specificity to the measures and labeled them "carbon emissions reduction" measures rather than ESG.

At the same time the report noted a sharp decline in the number of mentions of "ESG" in Dow's proxy statement. I counted just seven mentions in Dow's latest proxy, ahead of its April 11 shareholder meeting, down from 14 last year and 130 in the 2022 statement.

I shared the report with Dow, where a representative said its metrics and timelines "are aligned to achieving the Company’s carbon emissions reduction target goals by positively influencing leadership behaviors, creating organizational alignment and accelerating our efforts aligned to our sustainability commitments."

Farient's review matched the findings of a similar study from compensation consulting firm Semler Brossy of last year's proxies. It found 72% of S&P 500 companies used ESG factors in incentive plans according to their disclosures from April 2022 through March of 2023, up from 70% and 57% in the prior two 12-month periods respectively.

"ESG metric prevalence in incentives continues to increase among S&P 500 companies but at a slower rate than prior years, as market focus shifts to refining existing ESG metric types and structures rather than increasing adoption," Semler Brossy's report states.

Company News

State Street STT.Nsettled its lawsuit against the creator of the "Fearless Girl" statue that promoted gender diversity on Wall Street, which had sought to stop her from selling replicas. Terms of the settlement were not disclosed.

Apple's AAPL.O operating system for iPads has been designated as a gatekeeper by EU antitrust regulators because of its importance to business users.

Proxy advisor Glass Lewis on April 24 named Bob Mann as its new chief executive. Mann had led the Sustainalytics business of Morningstar MORN.O after its purchase of the business in 2020.

Capital Group tells FERC: hands off!

Readers of this newsletter will know about the ongoing review of investment company holdings by the U.S. Federal Energy Regulatory Commission, the hardest scrub of fund firms' size by a federal regulator to date.

Last week brought a new round of comments including one dated April 25from American Funds parent Capital Group. The asset manager voiced concerns about the idea that fund firms could be limited to owning no more than 10% or 5% of public utilities' outstanding shares.

Those limits would force the firm to divest from public utilities at least $12 billion or $39 billion, respectively, Capital Group said in a filing. Other firms would also be forced to divest, Capital Groupsaid, adding that "This would deprive public utilities of a stable source of capital from investors like Capital Group, which do not invest for control and which seek to invest for the long-term."

Capital Groupalso was not impressed with suggestions from Vanguard Group to limit passive funds' stewardship powers in return for being able to own big utility stakes. Capital Group noted it files 13G forms, which means it does not invest to change or influence the control of portfolio companies, and that its casting of proxy votes "is fundamental to fulfilling our obligations to investors."

Chart of the Week

On my radar

Starbucks SBUX.O and the Workers United union held talks in Atlanta, both sides said, and they plan to talk again in late May. In a joint statement the parties mentioned talks around "a foundational framework" to guide union organizing and bargaining.

In a report on Monday Citi C.N shared that it has financed $441 billion toward its goal of putting up $1 trillion for sustainable finance activities by 2030, up from $349 billion last year. Transactions include things like green buildings, water conservation and affordable housing, Citi said.

A new survey by ESG software maker Workiva found 81% of companies not subject to the European Union's sustainability reporting requirements still intend to comply, likely because of market expectations.

Say-on-Pay support steady https://reut.rs/44l1QkQ

Reporting by Ross Kerber in Boston; Editing by David Gregorio


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