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Take Five: Follow That

A selection of this week’s major stories impacting ESG investors, in five easy pieces. 

This week, ExxonMobil weren’t the only ones consulting their lawyers on ESG-related matters.

Follow that – ExxonMobil’s decision to sue two shareholders sent ripples across the sustainable investment pond, ahead of another fractious annual general meeting (AGM) season. On Sunday, the US oil major filed a complaint with a Texan judge to block a resolution submitted by Dutch campaign group Follow This and Arjuna Capital, a US-based wealth manager. The resolution called for Exxon to “go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its GHG emissions across Scope 1, 2, and 3, and to summarise new plans, targets, and timetables.” It had much in common with previous proposals, which garnered limited support in 2022 (27.1%) and 2023 (10.5%), and one co-filed by 27 large investors, due to be voted at Shell’s AGM in May. In taking their case to a judge, Exxon also took a sideswipe at the US Securities and Exchange Commission, nominally the arbiter of whether a resolution can be omitted for reasons of micro-management. The firm argued that the proxy rule was in its favour, but current staff guidance “can be at odds with the rule itself”. The filing blamed the regulator for a 40% increase in ESG-related shareholder votes at US firms across 2021-2023. Some observers were appalled, including the Interfaith Center on Corporate Responsibility, a US investor group, which called it “especially dangerous for diversified shareholders like pension funds and retirement savers”. Others were less convinced about the wider implications, with law firm Ropes and Gray asserting that Exxon’s action do not open up a new line of attack on ESG investing or “provide a basis to do so”, as it distinguishes between the motives of the defendants and parties, which hold shares primarily to achieve investment returns.

Crime and punishment – Since a report recently warned that investors were not taking sufficient account of climate litigation risks, the need for ESG-related legal advice or representation has seemed all-pervading. Admittedly, Tennessee Attorney General Jonathan Skrmetti had already filed his case against BlackRock – for allegedly misleading investors about the role of ESG considerations in investment decisions – before Christmas. But January has already seen ING sued for breaching its duty of care by financing major GHG emitters, which could lead the bank to reduce its CO2 emissions by 48% by 2030. And new laws could impose custodial sentences, for considering ESG risks when investing in New Hampshire, or for failing to report those risks accurately under France’s incorporation of the Corporate Sustainability Reporting Directive (CSRD). It is perhaps no wonder 73% of lawyers and risk managers at large global organisations told Baker McKenzie’s latest Global Disputes Forecast that they expected ESG disputes to present the biggest litigation risk over the next 12 months.

Election reporting – The aforementioned CSRD reporting jail threat might not be immediate, however. This week MEPs voted for a two-year delay in developing sector-specific sustainability reporting standards and imposing related disclosure requirements on companies from outside the EU – despite the entreaties of investors and corporates. Sector-specific European Sustainability Reporting Standards (ESRS), designed to guide companies in particular industries on disclosing impact on people and planet, will now be introduced in June 2026.  Since reporting obligations for non-EU companies with turnover above €150 million will only start to apply in 2028, the Commission has also proposed to postpone the adoption of the standards by third-country companies to 2026. As if to make up for the delay in generating valuable information to investors, MEPs called for urgent publication of the standards, as well as greater process transparency, flexibility and oversight. “Companies have been putting up with too much bureaucracy in years of crisis, from Covid-19 to inflation,” said Axel Voss, Rapporteur for the JURI Committee, with at least one eye on upcoming European elections.

Banking on transition – Banks’ role in the net zero transition was in the headlines this week, for a number of reasons. Frank Elderson, Vice-Chair of the Supervisory Board of the European Central Bank, warned that banks’ stability was at risk if they did not accurately “identify and measure the risks arising from the transition towards a decarbonised economy”. Elderson’s comments accompanied the release of an ECB assessment of misalignment risks, which identified “elevated” transition risk in the credit portfolios of European banks, due to their continued financing of firms that were either “too slow to phase out their high-carbon production capacities or too slow to build out their renewable energy production capacity”. Tension between regulators and banks is likely to rise, with Bloomberg reporting the preparation of new rules that will use capital adequacy as a lever to accelerate the sector’s transition plans. HSBC also became the latest global bank to issue its transition plan this week, which is likely to be closely assessed by investors ahead of its AGM – perhaps with reference to the guidance of the Transition Plan Taskforce, the Science Based Targets initiative or the Glasgow Financial Alliance for Net Zero.

Stewardship under scrutiny – The role of regulators in ensuring high standards of stewardship has been discussed widely in reaction to French financial regulator Autorité des Marchés Financiers’ decision to list the voting and shareholder engagement policies of asset managers among its supervisory priorities for 2024. In the UK, the Financial Conduct Authority recently consulted on stewardship in light of systemic risks. It remains to be seen, however, whether enhanced regulatory guidance can bring consensus in practice. If only there was a forum for stewardship and sustainable investment professionals to discuss the likely future direction of travel in person…

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