ESG+ Newsletter – 05 October

Your weekly updates on ESG and more

As we enter the fourth quarter of 2023, COP28 is where we start, looking at the potential agenda items that may arise at the conference. We also detail potential growing divides on the expectations for ESG ratings in the US and Europe, carbon ‘insetting’ versus ‘offsetting’, how prepared businesses are for impending EU regulation and the latest decarbonization developments in the UK.

COP28 teasers from industry meetings and tax proposals

As COP28 draws closer, indicators are emerging of the likely key agenda items. Meetings have taken place this week between key suppliers and consumers of fossil fuels as they attempt to reach an agreement on possible emission reductions ahead of the UN’s key climate event. The gathering in Abu Dhabi on Sunday saw 50 CEOs from both oil and gas and heavy industrial companies come together with the aim of laying out commitments on decarbonisation before the start of COP28. With many countries still divided on fossil fuels, COP28 organisers hope that getting agreements in place with the major players ahead of the summit will lead to more productive debates at the event itself. There are also hopes of a breakthrough on a “loss and damage” fund for developing countries impacted by carbon pollution. In order to finance this fund, the EU nominee for climate chief, Wopke Hoekstra, this week proposed implementing a global fossil fuel tax to EU lawmakers that would include the airline and shipping industries. The concept of such a fund was first agreed at COP27, but progress has been hampered by a failure to establish a structure for its implementation. Officials are hoping that a structure can be agreed upon before COP28 starts; however, with divisions persisting on how the fund should be overseen, never mind the likely pushback on widening fossil fuel taxes, there’s still some groundwork needed ahead of 30 November. 

Political backlash causing US/EU ESG ratings divide 

Earlier this week, the Financial Times published a long read on the ESG ratings sector, covering many headwinds that it’s facing, including the growing scrutiny of the sector, the encroaching regulation and oversight, the demand for transparency and the perception of conflict of interests. Many of these have been covered previously by ESG+, such as EU regulation and tackling perceived conflicts of interest, but one aspect highlight was the potential for a transatlantic divide between the US and EU. The ESG sector in the US has faced a significant backlash over the last 18 months. It would appear now that this political turmoil may be impacting the ESG rating sector, with the article detailing that one rating provider is considering potentially transitioning away from social issues,  in response to the hostile political climate surrounding ESG. However, this move could draw the ire of European clients, who operate in a market where there is a growing focus by investors and regulators on risks to society and the planet, rather than to business, including ideas of double materiality. One suspects that the ESG rating agencies are probably hoping it can avoid becoming embroiled in the fallout in the US over ESG investing by highlighting that they do not have the final say in any investment decision-making; rather just providing information and recommendations, just like credit rating agencies.  

Ready, Set, Report: The race to CSRD preparedness   

The Corporate Sustainability Reporting Directive (CSRD) marks the biggest push for mandatory, wide-ranging sustainability disclosures seen to date, with more than 50,000 companies set to be covered. Yet the past six months have not been a time of discussion on how to prepare for this complete rethink in corporate reporting. Instead, much of the dialogue has been dominated by last-minute lobbying efforts, complaints from industry participants, and grumbles from the general public. Despite elements of pushback, the CSRD is firmly in place, and therefore so is the inevitable question – are companies ready for it, as covered by Responsible Investor? A new study by KPMG has found that 75% of companies are still only in the early stages of ESG assurance preparedness, with even the top 25% of identified “Leaders” having significant work ahead to become ESG assurance ready. While regulatory pressure is the principal driver that pushes companies to obtain assurance over their ESG disclosures, the survey found that executives are aware of the many advantages of having their sustainability data assured: more than half expect improved profitability and decision-making, greater innovation, and stronger reputation. All is to say, while there are clear challenges around complying with the CSRD if done right, a number of doors can be opened for those taking it on in spirit, and not just by letter. 

Is ‘insetting’ the new offsetting? 

This week, Moral Money covered the rise in ‘insetting’ practices as sentiment towards voluntary carbon markets sours. Insetting is the practice of financing carbon reduction or sequestration projects within the value chain. This differs from traditional offsetting in one important characteristic, insetting brings these projects within the company’s own value chain rather than financing unrelated carbon offsetting projects. Voluntary carbon markets have been plagued with accusations that impacts are overstated, with the Commodity Futures Trading Commission even issuing a whistle-blower alert asking people to come forward with accusations of potential fraud in carbon markets. The World Economic Forum has previously described insetting as “doing more good rather than doing less bad within a value chain”, alluding to a larger piece of the ESG conundrum: impact. With the conversation about insetting gaining traction, it is important to ensure that it can be implemented effectively to create actual emissions reductions, rather than perhaps creating another means of offsetting, which in its current form has been somewhat ineffective.  

UK Carbon Market a casualty of recent policy changes 

Amid the increasing presence of carbon markets globally, the UK’s Emissions Trading System is set to be a significant casualty of the recent re-alignment of the country’s climate policies. As covered by the Financial Times this week, pricing dropped to an all-time low last week of £33 per tonne, a third of the £100 seen last year. In the context of the EU’s Carbon Border Adjustment Mechanism, due to come into play in 2026, this ultimately means less funding to the UK Treasury through taxation but increased levies, payable to Brussels, on UK industry for the privilege of exporting to Europe. The Office for Budget Responsibility had in March forecasted that revenues from the mechanism could total £6 billion per year between 2022 and 2026. Given the price collapse, however, this is likely to decrease drastically, as therefore will green investment.  

Although plenty can change between now and 2026, the rolling back of decarbonisation on the public agenda could be worrying. While addressing rising consumer costs is in need of immediate address, and has clear social implications, the change may impact economic stability over the long term. Worldwide trading frameworks for emissions are picking up steam, with Indonesia and Japan two large economies to initiate equivalents this year. They are by no means the single solution to climate change; however, the trend away from previously occupying a position of strength for the UK may result in stilted progress economically, as well as majorly impacting the country’s ambitions for decarbonisation. 

ICYMI 

• Banks behind 70% jump in greenwashing incidents in 2023. A report has revealed that the number of instances of greenwashing by banks and financial services companies around the world rose 70% in the past 12 months compared to the previous 12 months. The banking and financial services industry came second after oil and gas when talking about greenwashing incidents, however, European financial institutions have accounted for most instances.  
• Agriculture industry to face biodiversity lawsuits warns ClientEarth. The increase in biodiversity loss exposes companies and investors in the food system to litigation risk. The agriculture and seafood industries are more vulnerable to lawsuits linked to biodiversity loss owing to their land and sea use, overexploitation of species and pollution. According to ClientEarth’s report, “the global pace of species extinction is ten to hundreds of times higher than it has averaged over the past 10 years”, and this rate is accelerating.   
• Biodiversity: Regulators drive the latest craze in ESG ETFs. Nature-related disclosures are taking centre stage in the regulatory landscape and have developed in the last year more than ever before. The past September has marked the end of a two-year development phase for the Taskforce on Nature-related Financial Disclosures (TNFD) which was unveiled at Climate Week in New York. However, even though the TNFD is great progress towards the UN goals, there is a lot of new data and knowledge to digest, and still improving.