ESG+ Newsletter – 04 April 2024

In the latest newsletter, ESG+ details the latest expectations on reporting standards, analyses the interplay of the G and E in ESG, looks at efforts to improve data and reporting on human rights and the challenges facing jurisdictions in making climate disclosure mandatory. We also review the extension of biodiversity legislation in the UK and assess the latest efforts from Saudi Arabia to integrate frameworks on energy transitions. 

ISSB not expected to introduce new topical standards before 2026 

With the International Sustainability Standards Board (ISSB) set to vote on its focus for the next two years at a board meeting in April, according to Responsible Investor, with these priorities unlikely to include writing new standards. This contrasts with certain results of the consultation launched in September, where half of the respondents indicated it was important for the ISSB to develop new standards on a range of sustainability matters. The ISSB appears to have a packed agenda having “tentatively agreed” in March to “begin new research, support the implementation of existing standards, pursue “connectivity” between the IFRS sustainability and accounting standards, ensure interoperability with other standards, and engage with stakeholders.” The March board meeting discussed a potential review of existing standards that could take place as early as 2025; however, several stakeholders considered that such a review would be premature as the standards were only launched two years ago; and are only beginning to be incorporated in certain jurisdictions.

Assessing climate-related corporate governance 

The interplay between the three pillars of ESG (Environmental, Social and Governance) has been a subject of focus over the past two years, with questions as to whether assessing each together is the most effective means of assessing company performance and progress. In a similar vein, as detailed in the Financial Times, the Governance pillar of an ESG rating may not always accurately capture the quality of a company’s management of climate-related risks and opportunities. Indeed, the calculation of this ‘G’ pillar will often consider various indicators, such as pay equity or diversity targets, that are not directly related to climate governance. While these factors include valuable insights for investors, Sustainalytics, the ESG rating agency owned by Morningstar, has begun providing an alternative solution, by issuing a management score for companies based on a number of key E-related factors. One of these relates to the identification of Scope 1, 2 and 3 GHG emissions, noting that many companies still focus on Scope 1 and 2 despite the third type typically accounting for the bulk of corporate emissions. Other factors look at target setting, stress testing, scenario analysis, internal carbon pricing, and the use of climate targets in executive pay. In addition to the management score, Sustainalytics also analyses companies’ alignment with a 2050 net zero target. As the scrutiny on ESG – and its linked but separate pillars – increases from a range of stakeholders, perhaps governance will begin to sit above the E and S pillars, becoming a test of how the myriad of issues are managed, as opposed to having its own list of factors and indicators. 

Investor initiative focuses on human rights in investment decisions

This week, ESG Investor covered the launch of the Investor Initiative on Human Rights Data (II-HRD), which aims to enhance the integration of corporate human rights data into investors’ decision-making. The goal is to ensure universal coverage of listed companies’ human rights due diligence and policies, designed to enable industry alignment on how to assess and address norms breaches. Initially, II-HRD will focus on major ESG data providers and proxy advisors.

Investors face challenges in holding companies accountable, a gap II-HRD aims to bridge. Securing buy-in from data providers is critical and, as II-HRD seeks investor membership and resources by the end of April, it may succeed in expanding its partnerships. It signals the ongoing and increasing importance of human rights for investors, which can represent material risks for investors and companies, particularly as global supply chains become increasingly complex. Initiatives like this will allow stakeholders to track companies’ approaches to societal issues; in response, robust policies, strong governance and clear disclosures are a reasonable foundation for public and private companies.

Free speech and challenges to climate-related disclosure

As covered in a previous edition of the ESG+ Newsletter, the U.S. Appeals Court has forced the SEC to temporarily halt the enforcement of its climate-related disclosure regulation due to litigation brought against its new reporting framework. These legal challenges assert that the SEC rules infringe upon the First Amendment right to free speech, because they force companies to disclose certain information. While the SEC has stated it will “vigorously defend” the rules, a recent Corporate Knights article has looked at whether Canada could face the same pushback against its proposed climate disclosure rules. While Canada has not faced the same level of anti-ESG scrutiny that the US has, the article notes precedent of companies successfully challenging legislation under the freedom-of-expression legislation.  

Whether Canadian companies or free speech activists adopt a similar strategy to their North American counterparts will depend on a number of factors, principally the extent of the reporting requirements of any enacted legislation. Regardless of the potential lawsuits, the earth is 1.36 degrees Celsius warmer than the late 19th-century preindustrial average, and is projected to warm by about 1.5 degrees Celsius by 2050. Meaningful changes in behaviour to reduce emissions and reverse this trend, alongside transparent reporting of companies’ efforts to reduce their emissions is needed. Perhaps the real challenge is ensuring the protection of existing rights while forcing lasting change to avoid harm to the planet and economies from climate change.

Nature-related shareholder proposals on the rise

The number of nature-related shareholder resolutions filed at North America AGMs has surged, with 19 proposals filed so far according to data from the Sustainability NGO, Ceres. Of these proposals, seven have called on companies to align with the recommendations of the Taskforce for Nature-related Financial Disclosures (TNFD) framework, five focus on deforestation and one on pesticide use, across various sectors including pharmaceuticals, retail, and food companies. While some resolutions have been withdrawn due to pre-AGM disclosure commitments, the success of the remaining proposals remains uncertain. 

UK Biodiversity Net Gain legislation extended 

As previously covered in this newsletter, in February, the UK was one of the world’s first countries to introduce legislation requiring all large new developments to create at least a 10% biodiversity net gain (BNG), de facto creating the world’s first mandatory biodiversity credit market. From 2nd April, the legislation has been extended to include small sites with as little as one dwelling, according to Environmental Finance. While larger developers may have been prepared for the legislation, smaller developers may not be ready for the new requirements. The extension of the regulation is likely to increase demand for BNG statutory units. The legislation will again be extended in 2025 to cover national infrastructure projects, with biodiversity net gain impacting almost every material building site within the next two years. 

Saudi Arabia introduces green finance framework

While not free from controversy on the social end of ESG, Saudi Arabia has taken a step to bolster its environmental related efforts. As reported by Arab News, the latest step aims to incentivise public and private involvement in climate financing through the Green Finance Framework, a Ministry of Finance initiative aimed at achieving net-zero emissions by 2060. Aligned with the Paris Agreement, the framework targets a significant reduction in emissions by 2030, fostering a circular carbon economy approach. Notably, the plan focuses on renewable energy deployment as efforts to progress towards environmental goals, while plans for a carbon capture and storage hub are set out as commitments to mitigating climate change impacts. 

ICYMI 

• Australia Injects A$1 Billion to Unlock Domestic Solar Manufacturing. The Australian Government has announced the establishment of the Solar Sunshot program to grow solar PV manufacturing in Australia and provide a pathway for local solar PV innovation to be commercialised. The government will provide AUD$1 billion in new funding to support the programme, which will be delivered by the Australian Renewable Energy Agency.
• Japan issues national impact investing framework. The Japanese Financial Services Agency has published a governing framework for impact investing that sets out standardised definitions and best practices in the domestic market. The framework has been developed over the past year in a bid to establish norms in Japan’s relatively nascent impact investing sector.