Your Week in GRC for 7 November 2022: CFOs plan to boost ESG spending despite impending recession risk, and the tale of Two Americas on ESG

CFOs plan to boost ESG spending despite recession risk

In Brief:

  • Nearly half of CFOs (48%) plan to increase investment in environmental, social and corporate governance (ESG) initiatives in 2023 despite high inflation, persistent supply chain bottlenecks and the risk of recession, according to a survey by software provider OneStream and Hanover Research published on Nov. 2.
  • Nearly two out of five finance leaders (39%) said they will hold ESG budgets next year at the 2022 level, while only 6% plan to invest less, OneStream and Hanover Research found in a survey of 657 finance leaders.
  • The proportion of CFOs gearing up to spend more on ESG dropped from the 60% who said they planned to do so in spring 2022. The decline may indicate that, with the onset of new regulation, CFOs feel pressure to rethink their ESG initiatives, OneStream and Hanover Research said.

Further Reading:

Diversity, equity and inclusion (DEI) strategies also remain on finance leaders’ priority list, with 47% of CFOs planning to invest more in DEI initiatives next year.

Worldwide investment in sustainable mutual funds and exchange-trade funds has reached $2.47 trillion, although ESG initiatives are facing a backlash from critics who decry such investments as “woke capitalism.”

The backlash — combined with the need to address inflation and other pressing macroeconomic concerns — may account for the dip in the proportion of finance leaders planning to increase their ESG spending from the 60% of finance leaders who indicated they would do so last spring.

CFOs also feel inflation and other key challenges are unlikely to dissipate before the middle of next year. Three out of four CFOs expect economic disruptions and supply chain challenges to persist at least until mid-2023, with 72% expecting that inflation won’t recede before mid-year as well, the study found.

Eighty-five percent of businesses and their financial leaders have already adjusted their strategies for a period of economic disruption. Sixty-four percent of businesses also expect to see a recession last until late 2023 as well, according to the survey.

ESG initiatives align with the Biden administration’s regulatory agenda, including a proposal by the Securities and Exchange Commission (SEC). The SEC plans to require publicly-traded companies to include disclosures on carbon emissions and climate risks.

Forty-one percent of CFOs and finance leaders said they have started to implement ESG or sustainability policies at their companies, according to the survey.

Forty-three percent of respondents said they plan to form an internal ESG or sustainability team at their businesses to define policies and oversee disclosures. Only 17% of finance leaders said they have no plans to prepare for a potential ESG rule.

At the same time, a gap remains between sustainability goals and execution — while most financial leaders agree addressing ESG issues is important, most also say their organizations lack the tools to include ESG in their decision-making.

Investors resist efforts to paint ESG as a political issue

Institutional investment firms and activist asset managers are amplifying their message to congressional and state lawmakers: Stop equating environmental, social and governance investing with a political agenda.

Investors of all sizes are doubling down on the importance of ESG considerations ahead of midterm elections that will determine party control of Congress and state legislatures across the country.

At stake is a growing body of legislation and regulations in states such as Texas, Oklahoma and Louisiana aimed at curbing ESG investment and, in some cases, divesting from certain financial institutions over investment policies that incorporate ESG factors such as climate risk and human capital management. 

ESG critics largely argue that such considerations are politically based and immaterial. To date, at least 17 states are proposing rules that would nearly ban the use of ESG factors.

Those sentiments have trickled up to the federal level, where Republicans in both chambers, including Sen. Steve Daines of Montana and Rep. Bill Huizenga of Michigan, are eyeing similar restrictions if their party takes control of Congress in the midterms.

Major financial institutions, however, contend that the consideration of at least some ESG factors is a mainstream and responsible approach to investing, and those issues are often material to thousands of companies in industries they invest in, including utilities, manufacturers, insurers and consumer goods producers.

“It’s not imposing one’s values on how you’re running portfolios,” said Joe Amato, president and chief investment officer of equities at Neuberger Berman Group LLC, which manages approximately $418 billion in assets.

“If you look at General Motors, you’d be irresponsible if you didn’t consider their strategy in electric vehicles,” Amato said. “You just considered an ‘E’ factor, okay? You’d be irresponsible if you didn’t understand what their relationship is with their labor unions. That’s an ‘S’ factor. There, you just had ESG-integrated investment decision-making.”

ESG assets are increasing

Asset managers globally are expected to increase ESG-related assets under management to $33 trillion by 2026, from $18.4 trillion in 2021, according to PricewaterhouseCoopers. The firm’s base-case growth scenario for the U.S. shows ESG-oriented assets under management more than doubling to $10.5 trillion by 2026.

“There is a groundswell of demand that isn’t necessarily reflected in the rhetoric that takes place in statehouse offices around the country,” said Sam Hodas, managing director and head of enterprise ESG strategy at Nuveen, the asset management arm for the Teachers Insurance and Annuity Association of America.

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