ESG+ Newsletter – 03 October 2024

In this week’s newsletter, we look at regulatory updates, through ESMA’s sustainability-related priorities for 2025, California’s final imposition of climate-related laws and the European Commission’s steps to tackle delayed transposition of the CSRD. We also analyse the impact of the SDR in the UK, as well as the focus on social factors among asset managers engagement with investee companies.

Sustainable finance initiatives among ESMA’s priorities for 2025

This week, Environmental Finance reviewed the 2025 Annual Work Program released by the European Securities and Markets Authority (ESMA). In 2025, the institution will sharpen its focus on implementing the sustainable finance regulatory framework, tackling greenwashing, and enhancing transparency in sustainable investments. ESMA aims to build on the significant progress made between 2022 and 2024 on greenwashing risks by further clarifying supervisory expectations, developing tools to help regulators effectively address these risks, and improving the quality and effectiveness of ESG disclosures. In addition, ESMA will create technical standards for the registration and supervision of external reviewers of green bonds. Similarly, the upcoming ESG ratings regulation, expected at the end of 2024, will give ESMA the authority to establish new standards for any third party rater of ESG performance. While anti-ESG proposals continue to make the headlines in the US, ESMA’s priorities appear to indicate it is full steam ahead on improving transparency around companies’ sustainability claims, green financial products, and ESG ratings to ultimately boost the financing of the climate transition. 

California climate bill signed into law

Following discussion and debate over – primarily – timelines for disclosure and scope 3 emissions, Governor Gavin Newsom has signed the new climate bill into law. As detailed by ESG Today, the bill will require a significant number of companies operating in the US’ most populous state to disclose emissions from their own operations, as well as those from their value chains. Despite raising concerns about the “feasibility” of the original reporting deadlines, companies will be required to commence reporting in 2026, the originally slated timeline.

Under the bill, companies with revenues greater than $1 billion that do business in California will be required to report annually on their emissions from all scopes, including those associated with supply chains, business travel, employee commuting, procurement, waste, and water usage i.e., scope 3. Separately, U.S. companies that do business in California and with revenues greater than $500 million will be required to prepare a report disclosing their climate-related financial risk, as well as measures to reduce and adapt to that risk. While there has been much discussion regarding the potential gap between regulatory demands in Europe versus the US, the latest regulatory development is likely to have far-reaching consequences, given the size of the Californian economy and the number of large businesses operating there. Across the globe, there remains momentum behind ensuring companies disclose not only the emissions it is directly responsible for, but also those throughout their supply and value chains, where the vast majority of emissions reside. 

European Commission takes action against Member States on CSRD

ESG Today reports that the European Commission has initiated infringement procedures against 17 EU member states for failing to fully transpose the CSRD into national law by the 6th of July 2024 deadline. The Commission is also cracking down on 26 member states by opening infringement procedures against them for failing to implement the Renewable Energy Directive, which requires renewable energy to comprise 42.5% of the EU’s total energy consumption by 2030. With renewable energy accounting for only 22% of the energy mix in 2021, the lack of adoption risks the achievement of the EU’s climate goals. The European Commission’s decision to initiate infringement procedures highlights the tension between the EU’s ambitious sustainability agenda and the implementation challenges faced by member states. The delay in transposing the CSRD complicates efforts to establish uniform sustainability reporting standards, which are crucial for fostering transparency, corporate accountability and informed investment decisions. Without harmonised rules, companies with subsidiaries operating across different jurisdictions might encounter fragmented requirements, increasing administrative burdens and compliance risks. Additionally, the Commission’s actions concerning the Renewable Energy Directive underscore the difficulties in aligning national policies with the EU’s broader climate goals. While the 2030 renewable energy target is essential for meeting the EU’s sustainability ambitions, the current pace of national transposition suggests that member states may struggle to meet these targets, potentially jeopardising the EU’s leadership in global climate action. Ultimately, the Commission’s tough stance on enforcement suggests that it sees legal action as necessary to maintain momentum toward its green objectives. 

FCA sees surge in sustainability label applications following slow start

The UK’s Financial Conduct Authority (FCA) saw a surge in applications for its sustainability labels for funds ahead of the October 1 deadline according to an article by Environmental Finance. This follows a slow start, which saw only three funds announce their applications to the FCA to use its ‘Sustainability Impact’ label had been successful since the scheme’s July launch, which requires managers using ESG-related terms in their fund names to either apply for a sustainability label or rename their fund to ensure greater clarity for investors. Sacha Sadan, the FCA’s director of sustainable finance, highlighted the increase in applications, which now spans all four labels: ‘Sustainability Impact,’ ‘Sustainability Focus,’ ‘Sustainability Mixed Goals,’ and ‘Sustainability Improvers.’ While early feedback pointed to challenges with the application process, Sadan provided assurances that the FCA had taken steps to make the process easier, including giving managers more time to meet the requirements around naming. Despite some fund managers’ reluctance to change, the FCA is emphasising its long-term goal, rather than simply seeking quick approval numbers. A growing issue in the sector is “greenhushing,” where companies downplay sustainability efforts to evade investor scrutiny or regulatory requirements. Sadan emphasised that transparency rather than overinflated claims, is key to building trust in sustainability initiatives. Separately, the FCA has said it will consult on expectations for listed companies’ transition plan disclosures in line with guidance from the Transition Plan Taskforce, at the same time as it consults on adopting disclosure standards in line with those by the International Sustainability Standards Board (ISSB) – a busy period ahead.

New taskforce reflects growth in social factors focus

The newly launched Taskforce in Inequality and Social-related Financial Disclosures has expanded its backing to comprise a growing group of asset managers, including Amundi and Mirova, to join its 20 founding partners – including the UN’s Principles for Responsible Investment . The taskforce’s remit is the development of a framework for companies to disclose their impacts and risks related to the social aspect of ESG, in particular inequality and the various aspects of diversity.  

The founding of the taskforce reflects the increasing focus that has developed throughout 2024 on the financial impact of factors outside of those related to the Environment, with social factors often seen as harder to identify, analyse and measure. A relatively early adopter institution is BNP Paribas, which has now finalised its own specific “equality roadmap” framework aimed at addressing portfolio risk and opportunities, and therefore the generation of sustainable “long-term returns”. It does so by assessing key corporate actions which impact internal and external stakeholders, such as workforce compensation and healthcare and benefits, political lobbying, and community engagement efforts. For companies, breadth and granularity of non-financial disclosures is key, with mapped KPIs central to demonstrating impact, as well as performance improvement (or deterioration) from year to year. While the TISFD frameworks is only in the works, BNP’s published indicators largely consist of elements to company strategy which are fairly commonplace – so while a new framework might appear daunting, much of the work may be already in place and simply need fine tuning for companies to effectively communicate to investors. 

ICYMI 

• The UK’s last coal-fired power station, Ratcliffe-on-Soar, closed its doors on Monday, making Britain the first G7 nation to end its reliance on coal for electricity production, as reported by ESG News. 
• Health centre property developer Assura becomes first B Corp on the FTSE 250 as part of ESG push, reports Proactive Investors. 
• ESG funds in Southeast Asia saw a second straight quarter of net outflows in 2024, while non-ESG funds gained. The Business Times attributes this to investors favouring EU-based fixed-income funds.
• Japan’s comply-or-explain code of conduct for ESG ratings providers has resulted in improved processes compared to mandatory regulation. According to the FSA, mandatory regulation ‘can create a need to backtrack’.