ESG transforming CFO role

Veteran nonprofit finance leader Keith Olson is taking The Rockefeller Foundation’s finance reins this month — less than a year after the philanthropic powerhouse kicked off a new initiative to invest over $1 billion to address climate change.

Olson most recently served as CFO of the Council on Foreign Relations, a nonpartisan foreign-policy think tank that publishes Foreign Affairs magazine, according to his LinkedIn profile. Prior to that he spent seven years at the Bill & Melinda Gates Foundation, where he was director of financial planning and analysis and also served as interim CFO. He also has experience in the corporate world at such companies as KPMG, Citibank and Prudential Capital Group.

Before starting at the 111-year-old Rockfeller Foundation, Olson recently spoke with CFO Dive about his career, the CFO role and climate change. He cited several reasons for his decision to join RF, including his earlier ties to and long-held respect for the foundation, as well as the pull of its new climate initiative.

“One of the things CFR does is look at...what the defining challenges of the next generation [are going to be]. I think anybody would say that the climate crisis is a big part of that,” Olson said in the interview. “It’s definitely a big motivator to feel like someone like me — even in more of an administrative back-office function — can contribute to something like that.” 

Editor’s note: The following interview has been edited for clarity and brevity. 

CFO Dive: What role do you expect to play as CFO, especially in relation to the climate initiative?

Keith Olson: I’ve always been a team player and I’ll take on whatever challenge the institution needs me to do. From the sort of big picture classical function, I think of the CFO role as being three things. One, institutionally there is a sort of this operational finance piece that needs to be flawless. You need to have great compliance, you need to have all the audit task compliance functions in order and operating efficiency. Second, you need to have analytic capabilities and the ability to see longer-term. Then third, I always think about things in terms of the partnership model. It’s my job to facilitate the strategic desires of the institution and figure out the best ways to meet those needs.

CFO Dive: Have you been hired with a specific directive in mind?

Keith Olson: I’m coming to an institution that’s already in a really strong place. The financial footing is there. The existing team, I’ve had a chance to meet them, and I’m really impressed. I think I’m coming in to just try and facilitate more of this partnership model. I know institutionally there’s a focus on partnership and bringing others into the mission. The resources that it’ll take to tackle an issue as broad as climate — even with a $1 billion investment from Rockefeller — it’s probably going to require more.

CFO Dive: You talked about facilitating the partnership model. As CFO what partners do you see yourself working with?

Keith Olson: Sometimes at foundations you’ve got to manage in two directions. When you make a new grant in a given year you’re also spending future year dollars, but then you’re also managing toward a budget in a given year. My goal is to help people think through that. And in some instances, you may have people that are very adept at this right away who may not need much partnership from somebody like me, but you have some other folks where I might be able to leverage their time by being available as a resource. It’s our job as a finance team to leverage people’s time, be efficient in our required budget process so the program team can be focused on the mission and minimize the time that some of the internal stuff takes. 

CFO Dive:  Was there any ‘aha’ moment at Gates that has shaped your views as you’ve gone forward?

Keith Olson: I was leading the FP&A team and when I joined I was the third person. We built that team out to 24 or 25 folks. A seminal moment would probably be I got to work on the team that helped structure the receipt of the [Warren] Buffett gift. That entailed making sure we had budget processes at scale, reporting processes at scale and systems that gave people the information they needed. I always feel privileged to have been part of that. 

CFO Dive:  Are you optimistic about the propsects for solving the climate crisis?

Keith Olson: I should lead with the fact that I’m not a climate expert and there’s much smarter people to answer that question than me. The issue is this is the only planet we have and so if you don’t solve it what happens? We’re all going to have grandchildren and what are we going to leave for them? The shame of it would be not trying to do anything about it.

The Securities and Exchange Commission passed its long-awaited climate-risk disclosure rule Wednesday, adopting the rule by a 3-2 vote. Chair Gary Gensler said the agency received more than 24,000 comments on the rule since it was first proposed in March 2022, including “a flurry of additional comments in the last 72 hours."

Gensler was joined in voting to approve the rule by Commissioners Caroline Crenshaw and Jaime Lizárraga, while Commissioners Hester Peirce and Mark Uyeda voted no. The 886-page rule was posted on the SEC’s site Wednesday and is headed to the Federal Register.

The tight vote count — compared to the unanimous approval of the Commission’s only other agenda item for the day — came as the rule was criticized by both its supporters and detractors for not going far enough and going too far, respectively. The rule will take effect 60 days after it is posted on the register.

Approval of the final rule came down to the SEC’s newest commissioner, Lizárraga, who cast the deciding vote. Gensler said while the agency does not have a climate remit, a range of investors have indicated they are using climate-related risks to make decisions and relying on companies’ disclosures as part of that process.

SEC Chief Economist Jessica Wachter, also director of the Division of Economic and Risk Analysis, said at the hearing that while as much as 90% of large companies release sustainability reports, much of the information is conveyed outside of SEC filings.

“The lack of a common reporting framework makes all of these climate related disclosures difficult to compare,” Wachter said. “Given this situation, we anticipate that the final rules will bring a number of benefits.”

Gensler said at Wednesday’s hearing he was “pleased” to support the adoption because it will provide investors with “consistent, comparable, decision-useful information” and issuers with “clear reporting requirements.”

The Securities and Exchange Commission is voting Wednesday morning on a final version of its climate disclosure rule. Requirements for public companies to disclose scope 3 emissions are out, and requirements for companies to report scope 1 and scope 2 have been scaled back, according to the SEC’s fact sheet on the finalized rule seen by ESG Dive.

The agency also flipped the order of its agenda for Wednesday’s meeting and will take up consideration of the climate disclosure rule first. Scope 1 and scope 2 emissions reporting requirements will also now be “phased-in” and only apply to large accelerated filers and accelerated filers, the SEC told reporters Tuesday afternoon.

An SEC spokesperson said scope 3 was removed from the final rule due to a large number of comments it received concerning the cost of compliance, as well as the consistency and reliability of scope 3 data. The agency previously said it had received more than 16,000 comments since releasing its proposal, leading many experts and corporations to have doubts about scope 3 making the final cut in the rule.

As laid out in the March 2022 proposal, the SEC will require companies to disclose climate-related risks that “have had or are reasonable likely to have” material impacts for companies; any mitigation or climate adaptations they have undertaken “as part of its strategy;” the use, if any, of internal carbon prices, transition plans or scenario analysis; and processes related to oversight and management of climate risks. The rule, however, only applies to large accelerated filers and accelerated filers now.

The SEC defines large accelerated filers as companies with at least $700 million in shares held by public investors — as opposed to company representatives or stakeholders with a controlling interest — as of the most recently completed second fiscal quarter. Accelerated filers have more than $75 million but less than $700 million of shares held by the public as of the most recently completed second fiscal quarter. Such filers have been subject to reporting requirements for a calendar year, filed one annual report and are past revenue thresholds to be considered a smaller reporting company, as defined by the agency. Smaller reporting companies and emerging growth companies are both exempt from greenhouse gas emissions reporting, according to the fact sheet.

The SEC estimates 7,000 domestic companies will be required to report climate-related disclosures under the rule, as well as 900 foreign private issuers, according to an agency spokesperson. However, among those the agency estimated, around 40% of that domestic estimate and 60% of estimated foreign entities are large accelerated filers or accelerated filers. That smaller subset of companies in each group will then have to do a materiality assessment to determine whether its scope 1 and scope 2 emissions are deemed material to investors, the agency said.

The agency used the U.S. Supreme Court’s definition of materiality, which held in the 1976 case TSC Industries v. Northway, Inc. that a fact is “material” if there is “a substantial likelihood that the ... fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

While reporting disclosures for all companies will have different start dates depending on the size of the company, companies that are required to disclose their greenhouse gas emissions will also have a phased timetable to, first, report scope 1 and scope 2 emissions, then be able to receive limited assurance from an audit firm or other service provider before, ultimately, being expected to receive “reasonable assurance,” the fact sheet said.

The change is a notable departure from the agency’s original proposal in March 2022, which would have required all public companies to report their scope 1 and scope 2 emissions in their registrations and annual reports to the SEC. The agency’s fact sheet said the final rule continues its efforts to provide investors with “consistent, comparable, and reliable information” about the financial impacts of climate risks.

“The importance of climate-related disclosures for investors has grown as investors, companies, and the markets have recognized that climate-related risks can affect a company’s business and its current and longer-term financial performance and position,” the SEC’s fact sheet said.

The first year large accelerated filers will have to report scope 1 and scope 2 emissions — given they fall under the purview of materiality requirements — will be for the fiscal year beginning in 2026, with accelerated filers making their first disclosures for the fiscal year beginning in 2028. Limited assurance will be required beginning in 2029’s fiscal year for large accelerated filers and 2031 for accelerated filers. That is the highest level of assurance accelerated filers will need for their emissions reporting, while large accelerated filers will also need to get reasonable assurance on their emissions reporting starting the fiscal year that begins in 2033.

The bill will also create “a safe harbor from private liability” for climate-related disclosures, shielding companies from legal challenges over the transition plans, scenario analysis, use of an internal carbon price, targets and goals they submit to the SEC. The liability shield will not extend to historical facts and will only shield companies from litigation pertaining to future disclosures.

Additionally, the final rule removes requirements from the proposal for companies to describe board members’ climate expertise and delineate the impact of severe weather, other natural conditions and transition activity on each line item of a company’s consolidated financial statements.

The rule’s exclusion of scope 3 could prove complicated for companies from a compliance perspective. Domestically, California passed its own set of climate disclosure laws last year, including SB 253, which would require companies to report scope 3 emissions by 2027. While the SEC’s rule only applies to publicly traded companies by remit, California’s will apply to all businesses — public or private — that operate in the state and is expected to impact more than 5,300 companies. The European Union also passed its own set of reporting regulations — the Corporate Sustainability Reporting Directive — with more extensive scope 3 reporting and a double materiality component, which impacts large U.S. companies with EU subsidiaries.

Prior to the release of the final rule, Morgan Lewis partners Erin Martin and Celia Soehner, who both previously worked for the SEC, said in a statement to ESG Dive that without scope 3 in the rule, “companies also will need to consider how to comply with other, more stringent regulatory requirements.”

An SEC spokesperson said that while the agency can’t speak to the requirements of California’s disclosure rules or the CSRD, the effect of the other rules could lower compliance costs for companies.

If the SEC, which began considering the final rule at 9:45 am Eastern time, adopts the rule during Wednesday’s meeting, it will go into effect 60 days after it is entered into the Federal Register.

Shareholders filed more environmental, social and governance proposals to company boards in 2023 than ever before, with the Sustainable Investments Institute tallying 630 ESG proposals as of August. That record number of filings led to record number of votes on ESG topics, as Diligent Marketplace Intelligence reported companies had topped the prior year’s total by June.

However, that increase in votes was met with shrinking support from companies’ shareholders. Support for environmental and social proposals fell to 21.7% and 17.7%, respectively, from 34.2% and 24.5% support in 2022, according to Diligent.

Helping drive the decline, the political discourse around ESG has led to a rise in anti-ESG proposals coming before companies, which are counted as ESG proposals. Add subpoenas from Republicans in the House of Representatives and statewide offices to the environment, and major asset managers have also started to back off of their support for environmental and social-related shareholder proposals. 

Approval rates for shareholder proposals dropped across the board, falling from 31% in 2022 to 23% in 2023, The Conference Board reported in October. The dip didn’t just hit ESG, with drops in approvals for executive compensation and human capital management proposals as well.

In the same report, Merel Spierings, senior researcher for The Conference Board, warned companies to prepare to see even more proposals on “hot-button social and environmental topics” in 2024 than 2023’s record year, even ones that are unlikely to garner support. 

"Despite the decline in support for shareholder proposals in the 2023 proxy season, companies must prepare for more politically motivated proposals next year as the country heads into federal elections," Spierings said.

Major asset managers are driving the dip

The sign of a shareholder proposal’s success is not always simply passing, especially considering all proposals are non-binding. Proposals that don’t pass, but garner significant support can send a broader sign to the company of investor interest. In fact, a proxy vote itself is often a sign investors or advocates have approached a company on a topic, and the company has refused to take action, Heidi Welsh, executive director of the Sustainable Investments Institute told CFO Dive sister publication ESG Dive. 

When assessing the decline in ESG approval rates, experts say a good place to start is proxy voting decisions made by the Big Three asset managers.

Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, told ESG Dive there’s been a regression in proxy voting patterns from the largest asset managers and said he thinks the political pressure is having an impact on environmental and social proxy voting patterns.

“Based on their philosophies — understanding climate risk, understanding other systemic risks that are out there — and their track record and proxy voting, it’s noteworthy that there has been this retrenchment. And it may be that all of the political pressure is creating a reluctance to show support for ESG resolutions,” Zinner said.

As the largest asset managers in the nation, BlackRock and Vanguard also hold outsized power during the proxy vote season. Simply put, “they vote more than anybody else, because they own so many assets,” Julie Gorte, SVP of sustainable investing for Impax Asset Management, told ESG Dive. 

Support from BlackRock and Vanguard for environmental and social proposals dropped dramatically in 2023, to 7% and 2% from 20% and 12%, respectively. At the time, both firms attributed their declining support to overly prescriptive proposals, however, Zinner and Welsh have both contested that claim, saying the proposals last year were either similar or the same as those put forward previously. 

“Our focus remains on identifying proposals that address financially material risks at a given company, supporting proposals that may fill gaps in the company’s current practices (while not intruding on company strategy and operations) and providing sufficient latitude to the company on implementation,” Vanguard’s investment stewardship report said in August.

A BlackRock spokesperson pointed to the asset manager’s own report, which said many proposals had requests that had already been “substantively met” by companies, and “the number of single-issue proposals where the request made did not have economic merit also increased.”

Taken together, the declining support for environmental and social proposals from these asset managers depressed the overall support for resolutions. The Harvard Law School Forum on Corporate Governance estimated that without their votes, more than double the amount of proposals — 59 from 28 — would have received over 40% support, the threshold to be considered a key resolution. Additionally, the report estimates average support for “near-miss” resolutions, or those that receive more than 30% but less than 40% of the vote, would jump from 34% to 44%, without the Big Three’s votes.

“If you take them out of the mix, the voting hasn't really changed that much,” Gorte said. 

Anti-ESG proposals rise, but support doesn’t

While the impact of major asset managers regarding ESG proposals has received a lot of attention, the subsequent rise in proposals that seek companies to take measures against ESG principles has been less noticed. The number of anti-ESG proposals have tripled in the past three years, as 79 were submitted to companies in 2023, up from 30 in 2021, according to the Sustainable Investments Institute.

Most of those proposals — two-thirds — were on the topic of eschewing diversity, equity and inclusion practices and anti-racism initiatives. Another 25% were related to corporations’ political involvement and just over 10% were about the environment. The report said at least 52 of those would reach a vote. None broached the level of support needed for resubmission within a year, averaging 2.4% support.

Welsh said a “constellation” of different groups have begun filing these resolutions, but they all emanate from the far right of the U.S. political spectrum. 

“These are political groups. They're pushing a political agenda. They're not investors, and the capital markets don't think much of these proposals,” Welsh said.

The proposals and the parties that have submitted them have taken cues from elected Republican officials who have used their positions in the House of Representatives, state legislatures and statewide offices to make ESG investing and the use of ESG principles more onerous. That has come in the form of subpoenas from the House Judiciary or laws that boycott companies that use ESG — including one recently introduced in New Hampshire that would make knowingly using state funds for ESG purposes a felony punishable by up to 20 years in jail.

Politics and AI to take center-stage in proxy arena

With an expectation that even more ESG-related proposals and anti-ESG proposals are on the way, several topics have already begun to emerge as ongoing themes for the 2024 proxy season. 

One is the inextricable link between the political environment surrounding the ESG landscape during this election year. Though both Florida Gov. Ron DeSantis and businessman Vivek Ramaswamy — the former having a track record of anti-ESG bills and the latter promoting an “anti-woke” investment philosophy disregarding ESG initiatives — have dropped out of contention for the Republican presidential nomination, they have thrown their support behind frontrunner and former President Donald Trump.

According to Gorte, political discourse is expected to get louder before it quiets down.

“I don't think this political discourse is with us forever. I think it's been chosen as a campaign issue, which is gonna ramp up this year, and is being driven by some people with big warchests,” Gorte said. “So it's not going to disappear any time soon, but I don't think it's a permanent feature of the financial industry.”

Another is the expectation that artificial intelligence will be a major topic of discussion for boardrooms this year, after the explosion of ChatGPT and other AI models. Votes on AI guidelines and practices are already assured to take place at Disney and Apple, after the Securities and Exchange Commission ruled this month they couldn’t exclude a proposal the American Federation of Labor and Congress of Industrial Organizations submitted to each board.

Welsh and Gorte expect more AI-proposals to prop up this year. Welsh said AFL-CIO — the nation’s largest federation of unions — had submitted similar proposals at half a dozen companies.

However, the technology also raises potential social issues with data privacy, misinformation and discrimination risks.

“AI has a huge potential to be both helpful and disruptive,” Gorte said. “Using it in the ways that make businesses better is going to be increasingly tough unless you're really careful with how you train your model.”

Gorte said shareholder proposals typically are a year behind national discussion, and beyond expects issues of how companies approach biodiversity to be the next frontier of proposals on executives’ desks.

Vanguard and State Street did not respond to requests for comment for this article

Seventy-six percent of Standard & Poor’s 500 companies used at least one metric for environmental, social and governance performance when creating executive incentive plans last year, a jump of 14 percentage points since 2020, Willis Towers Watson said.

The share of U.S. companies using climate and environmental metrics in incentive plans has surged to 44% from 12% during the past three years, WTW said, noting regulations requiring climate risk disclosure enacted in Europe and California, and planned by the Securities and Exchange Commission.

The new and pending rules have spurred more use of ESG in pay incentives, Ken Kuk, WTW’s work and rewards senior director, said in an email response to questions. “But I would also argue that some of the regulatory pressure was already ‘baked in’ over time.”

The biggest U.S. companies are weaving ESG into pay incentives despite a backlash against the use of sustainability as a metric for corporate performance. The opponents — including Republicans such as former Vice President Mike Pence — have labeled the focus on ESG a cornerstone of “woke capitalism.”

Investors have cooled to ESG goal setting, with the flow of capital into sustainable funds worldwide waning during several quarters. Such inflows fell to $13.7 billion during the third quarter from $23.6 billion during Q2, according to Morningstar. Investors during Q3 pulled $2.7 billion from U.S.-based sustainable funds.

U.S. company use of ESG metrics in pay incentives “has probably got to a point where we will see some plateauing going forward,” Kuk said, adding that “it’s hard to make sweeping comments about this, as every organization is likely making their own calculation as to how they would react to these market sentiments.”

At the same time, “for companies that already have ESG metrics in place — and some have put them in not too long ago — removing them presents bad optics,” he said.

Also, “many companies still believe that these factors are important business priorities: keeping employees safe, engaged and productive; better customer satisfaction; maintaining a good relationship with the community that is their customer base; stronger governance of risk; creating more sustainable products for their customers.”

Companies in the U.S. and elsewhere rely on a mix of empirical ESG goals and qualitative metrics, WTW said, with those in the U.S. favoring qualitative assessments.

Regulators in the U.S., U.K., Europe, Japan and other jurisdictions are either ramping up or considering mandatory ESG reporting rules with the aim of providing investors with consistent and comparable company disclosures.

Currently, investors must choose from a jumble of often conflicting frameworks and measurements for corporate reporting on ESG performance.

WTW expects “that we will continue to see a shift to more quantitative measurement primarily because that’s what investors will be pushing for,” Kuk said.

“Oftentimes, qualitative assessments are scrutinized as soft targets and investors’ view would be that if a company puts in a non-financial metric, there needs to be transparency in how achievement is measured,” he said.

Seven out of 10 S&P 500 companies report metrics on so-called human capital, the most widely used ESG category, WTW said.

Companies most commonly track the human capital subcategories of employee engagement, or the measurement of employee sentiments, and the proportion of women and ethnic/racial representation in the workforce and management, WTW said.

“In some cases,” Kuk said, “the notion of ‘diversity’ in representation may extend beyond gender and race, such as disability, veteran status and neuro-diversity.”

WTW derived its data on U.S. companies from proxies filed from October 2022 through September 2023.

Sixty-one percent of U.S. companies expect the backlash against environmental, social and governance best practices to persist or intensify during the next two years, yet most firms do not plan to retreat from their ESG commitments, the Conference Board said.

Thirty-one percent of companies deem state-level officials and political candidates as the most outspoken ESG critics, the Conference Board found in a survey of 125 companies, half of which generate annual revenue exceeding $10 billion. One out of five companies (21%) view officials and political candidates at the federal level as the sharpest ESG opponents.

About half of the companies have faced a backlash, and 63% of those firms have more closely linked ESG to shareholder value, the Conference Board said.

Democratic lawmakers, Biden administration regulators and ESG activists have called in recent years for more transparency on climate risk and other points of sustainability, triggering opposition from Republican legislators, business organizations and several state governors.

ESG critics have primarily targeted financial services companies, the Conference Board said, noting that “asset managers in particular have been perceived as the gatekeepers of ESG investing.”

State officials in conservative states have directed capital away from asset management firms that promote sustainable investing. Florida, Oklahoma, Texas, West Virginia and several other GOP-controlled states have said some asset managers are pushing an ESG agenda at the expense of investor returns.

State officials say ESG principles are not relevant to investment decisions and have barred BlackRock and other asset managers that use ESG benchmarks from handling state pension funds.

Governors from 19 states pledged in March to use “state pension funds to force change in how major asset managers invest the money of hard-working Americans, ensuring corporations are focused on maximizing shareholder value rather than the proliferation of woke ideology.”

“The proliferation of ESG throughout America is a direct threat to the American economy, individual economic freedom and our way of life, putting investment decisions in the hands of the woke mob to bypass the ballot box and inject political ideology into investment decisions, corporate governance and the everyday economy,” the governors said in a joint statement.

Republican lawmakers in Washington stepped up their opposition to ESG activism last month, saying such pressure harms Main Street investors and thwarts company efforts to increase shareholder value.

In six hearings, the Republican-controlled House Financial Services Committee probed the relationship of proxy advisory firms to shareholder activism, how environmental and social policy may influence financial regulation and whether ESG activism drives up the costs for insurance and housing.

Responding to criticism, companies have focused on value creation and changed the terms they use when communicating about ESG, the Conference Board said.

For example, in an annual letter to shareholders, BlackRock CEO Larry Fink trimmed his use of the terms “climate,” “ESG,” “sustainability” and “purpose” to four this year from 32 in 2020, the Conference Board said.

“It is important for companies to avoid dramatic shifts in how they talk about ESG issues,” the Conference Board said. “Abrupt changes can create the perception that the company is either succumbing to political pressure or was not genuinely committed in the first place.”

Companies should consider handling opposition to ESG, the Conference Board said, by taking six steps:

1. Align ESG with business strategy. “The most effective response is to ensure the company’s ESG positions align with the company’s core business strategy, are supported by empirical data and serve the long-term welfare of the company, its stakeholders and society,” Paul Washington, executive director of the board’s ESG Center, said in a statement.

2. Reach out to policymakers. Companies should privately meet with state and federal policymakers to describe how their ESG strategies benefit constituents and advance business objectives.

3. Stay involved in the public conversation. Nearly one out of three companies that have faced an ESG backlash have muted external communication on environmental and social issues. “This runs the risk of forfeiting the opportunity of telling the company’s story to stakeholders who are focusing on ESG for the first time,” the Conference Board said.

4. Avoid big shifts in ESG messaging, explaining any changes. Nearly half (48%) of companies that have faced a backlash have altered their terminology, with many switching from ESG to “sustainability.”

5. Join forces with other companies to make the case for ESG. Cooperative efforts increase the volume and reach of ESG messaging.

6. Keep in mind that ESG principles remain valid. “There are strong forces in capital, labor, business-to-business and consumer markets that justify a continued focus on ESG,” the Conference Board said. Emerging disclosure and compliance obligations in the U.S. and Europe also require companies to devote resources to tracking ESG performance.