ESG+ Newsletter – 14 September

Your weekly updates on ESG and more

As we return from a well-earned late summer break, there is no shortage of developments to detail for readers. Starting with a shift in governance practices for the SBTi, we also look at the overlap (or lack thereof) between voluntary and mandatory reporting requirements, the evolution of rating agencies, green and social bonds and supply chain pressures. France continues to take steps to shift behaviours through taxation, while US regulation presents an opportunity for companies to shift practices, according to our latest research. Welcome back and happy reading!

SBTi structure shifts in response to pressure

The Financial Times has reported that the Science Based Targets Initiative (SBTi), the body responsible for the validation of corporate climate-related targets, is to be split into two. The entity has come under pressure recently around its governance when it received a formal complaint about a potential conflict of interest last year. The primary focus of that complaint was that the body was both setting the criteria for aligning reduction targets with climate goals, while simultaneously charging companies to receive validation. 

In response, SBTi will become a standalone UK company that will examine and validate corporate net zero emission plans, a service for which it charges fees, with a separate non-profit group setting the standards for those plans. The new chair of the SBTi board of trustees, Francesco Starace, former chief executive of Enel, said the changes were necessary to meet the growing demand for net zero verification. While the changes may take time to fully implement, dividing the standard-setting entity from the process of validation should have the double impact of removing perceived conflicts of interest as well as freeing up greater capacity for the standalone company to process the growing demand for validation.

Interoperability between ESG reporting standards comes into focus 

Over the last few weeks, the European Financial Reporting Advisory Group (EFRAG), which continues to develop the European Sustainability Reporting Standards (ESRS) as part of the Corporate Sustainability Reporting Directive (CSRD), has disclosed its alignment with the GRI and ISSB standards. EFRAG notes a high level of alignment between the ESRS and GRI standards, meaning that existing GRI reporters will be well-prepared for disclosures under the CSRD. In particular, the GRI and ESRS use the same definition of impact materiality (with the CSRD also implementing financial materiality through its double materiality lens), with the ESRS adopting many GRI definitions, concepts, and disclosures. 

There seems to be less alignment between the ISSB and ESRS standards though, owing to differing views on the definition of impact materiality. Despite the differences, the ESRS is working closely with both ISSB and the GRI to develop interoperability guidance which would assist entities in disclosing against multiple standards.  

While improvements to interoperability between standards seem like a positive step, there has been some criticism of the ISSB’s priorities. ShareAction, a coalition of responsible investors with over $1tn in assets under management, has written to the ISSB to advocate for the development of joint human rights and human capital disclosure standards as a priority. ShareAction argues that investors are demanding improved workforce data and that the issues of human rights and human capital are inherently linked. Efforts to consolidate ESG and sustainability reporting standards have been ongoing for some time, with the ISSB hoping to create a leading non-mandatory framework which aligns with investor requirements for non-financial data. Clearly, collaboration between mandatory and non-mandatory standards will be needed to make ESG and sustainability disclosures decision useful.  

What is the next step for ratings agencies 

The criticism of ratings agencies has been a high-profile theme throughout 2023, with critics citing opacity in methodologies and data inconsistencies among their deemed issues. As reported by Ignites Europe, the CFA Institute’s managing director for research, advocacy and standards, Paul Andrews, has now also joined the debate, offering the view that combined ESG ratings have “outlived their usefulness”. While he notes the ongoing politicisation of the term in the US, which has seen it become “toxic”, he primarily focuses on how data quality and accessibility have improved across E, S and G factors, with it, therefore, being more valuable to assess and provide scores on those distinct buckets rather than to combine. One issue (discussed further below) with this approach, however, may be that it misses the clear link between performance under each of the constituent parts – if a company is performing very poorly on environmental issues, then clearly its societal performance will be impacted.  

Third-party assessment and analysis of ESG issues can, in our view, play an essential role in ensuring corporate performance is understood by different stakeholder groups, not least through aiding the market in understanding investment risks and opportunities. That is not to say that there are no improvements to be made in process and transparency, and efforts in the UK and EU to enhance these areas are welcome. But, as the expectations of rigour around ratings rise, and mandatory sustainability reporting becomes a factor, ratings providers will need to adapt, or else risk no longer being fit for purpose. 

Green bonds as a source for social impact  

Historically, green bond issuances have dominated the ESG-related bond market, with social bonds far less popular. That is reflected in data compiled by Bloomberg which revealed that, while green and social bond issuances are both up in the first half of this year compared to last – 22.2% and 16.7%, respectively – green issuances have totalled $351.9 billion, while only $79.5 billion in social bonds have been issued. However, the FT Adviser argues that these green bonds can fulfil social objectives for ESG investors as, ultimately, the purpose of green bonds is to allocate capital towards projects that will have a positive impact on the environment and, in turn, wider society. The article also cites the fact that 11 of the 17 UN Sustainable Development Goals related to social outcomes can be addressed by the Global Green Bond Index, despite the latter primarily being focused on addressing environmental themes. For example, green capital used to finance the growth of energy projects, such as solar or wind farms, will reduce the reliance on fossil fuels, combat climate change and contribute to improving the environment in local communities. The bond market has continued to gain attention in the ESG space, with the potential to spur action from companies due to clarity around the financial impact of action. The impact of green bonds on social outcomes is the latest proof of the interplay between the variety of ESG and sustainability-related themes, with positive outcomes on the E having a demonstrable impact on S considerations. 

The GC and ESG: from great risk comes great opportunity 

This year, the SEC has or will make strides in three key areas: cybersecurity guidance from July, upcoming regulations for greenhouse gas emissions disclosures, and possible changes to 2020 human capital management rules. This article by FTI experts looks at the increasing pressure put on General Counsels (GCs) to keep up with ESG regulatory reporting requirements and address ESG risks. Using the supply chain as an example, this piece shows how within many E, S, and G risks and evolving regulatory reporting requirements, there lies an opportunity for companies to develop best practices and growth opportunities that align with business strategies while meeting higher regulatory standards.

For managing future ESG risk and keeping up with ESG standards, external counsel can be instrumental in helping internal groups uncover hidden risks and turn ESG initiatives into business opportunities. Ultimately, having an internal cross-functional ESG team with accurate and verifiable data can alleviate the pressures faced by today’s GCs to report metrics with integrity. 

New taxes in France to finance the environmental transition

According to Bloomberg, France is looking to increase taxes on the operators of toll roads and airport concessions to raise €2.5 billion through 2030, using increases to reduce debt and fund the environmental transition. After periods of massive spending due to the Covid pandemic and energy crisis, the Government is looking to tighten its budget to reduce its debt and deficit, with the Finance Minister announcing last month that “billions of euros of promised tax cuts would be introduced more slowly than previously planned.” The Government is also expecting to generate an additional €100 million as early as next year by increasing taxes on airline tickets, and redirecting money towards greener rail transport, reaffirming its commitment to shift transport behaviours in the economy. Additional taxes on private large vehicles and business fleet vehicles are also in the plans for next year’s budget.

Larger businesses continue to look for ESG compliance in the supply chain

Data analytics firm, Onestream, has published research on the expectations FTSE 100 companies are placing on their suppliers. Based on a review of  2022 Annual Reports, the research indicates that almost all large businesses are now demanding that suppliers align with their own ESG commitments. As regulatory and stakeholder expectations of supply chain responsibility grow, it’s unsurprising that adherence to human rights practices, reducing their carbon impact and encouraging diversity in the workplace are the issues most frequently asked of their suppliers.

ICYMI 

• Biden bans drilling in Alaska wildlife refuge due to climate crisis. President Joe Biden released a statement on Tuesday confirming that he would cancel all remaining oil and gas leases issued under the Trump administration in the Arctic National Wildlife Refuge, noting that “we have a responsibility to protect this treasured region for all ages”, as the climate crisis continues to warm the Arctic more than twice as fast as the rest of the world. 
• UAE commits $4.5 billion to develop 15GW of clean power in Africa by 2030. The first-of-its-kind initiative between the UAE and Africa seeks to unlock Africa’s capacity for sustainable prosperity. Dr Sultan Al Jaber, the COP28 President-Designate, explained that the partnership will “demonstrate the commercial case for clean investment” across Africa and “act as a scalable model that can and should be replicated…it is designed to work with Africa, for Africa.” 
• Just 16% of Irish consumers avoid leisure flights to help the climate, a survey A new study by Deloitte has revealed that despite 49% of Irish respondents making changes to their behaviour to help the climate, more than 8 in 10 are yet to embrace more sustainable modes of transport. 
• Apple Backs California’s Proposed Emissions Reporting Rules. Apple has expressed its support for proposed legislation in California that would require most large U.S. companies to disclose their full value chain greenhouse gas emissions. Apple has been a long-time proponent of mandatory climate disclosure and highlighted that this bill “would encourage others to speed up their efforts towards carbon neutrality.”