ESG+ Newsletter – 11 July 2024

This week’s newsletter begins by looking at an often-forgotten aspect of the transition to net zero, ensuring attractive labour markets for green workers. Sticking with the topic of labour, we cover a legal challenge against a U.S. Department of Labor’s decision which may have implications for US agency powers as well as the entire concept of ESG investing. This newsletter concludes by covering the ongoing debate on offsets, a busy week of news on the CSRD front, and asset managers’ pleas for greater clarity on UK Sustainable Disclosure Requirements. 

Attracting and transitioning workers critical to achieving net zero 

A key question for the green transition – beyond financing it – is how to attract the workers who are needed to support the transition and what will happen to workers who are displaced from roles or industries which are wound down and replaced. Earlier this week, the OECD published its 2024 Employment Outlook, which includes its annual assessment of labour market trends. The report details that there needs to be an emphasis on making jobs associated with the transition attractive – through both financial and working conditions – to ensure that a net zero economy can be achieved. Additionally, the OECD also outlined that more needs to be done to support workers in carbon intensive sectors who are facing the prospect of a significant career change and/or drop in their income. 

The OECD report comes in the aftermath of the European Parliament Elections in June where the Greens suffered heavy losses, leaving concerns that there could be an unwinding of the previous five years of ambitious climate policy delivery. Given the apparent perception amongst voters that green policies are costly for both consumers and workers, there appears to be a need for green jobs to provide better wages to ensure voters continue to support the net zero transition. 

US challenge to ESG investing risks banning ESG consideration in pension plans 

The U.S. Department of Labor’s allowance of ESG factors as a “tiebreaker” in investment decisions stands as one of the first tests of how courts will uphold federal regulations after the U.S. Supreme Court said they no longer have to defer to the agency’s expertise, Reuters reports. A lawsuit filed by 25 Republican-led states argues that the $12 trillion in capital, via retirement plans, should not be allocated based on “nonpecuniary factors” infused with a political agenda. U.S. District Judge, Matthew Kacsmaryk, in Amarillo, Texas, refused to block the Biden administration’s rule allowing socially conscious investing by employee retirement plans, citing a 40-year-old doctrine known as ‘Chevron deference’. This doctrine directed courts to uphold agencies’ reasonable interpretations of the laws they enforce. However, the Supreme Court overturned it in June, saying judges instead should exercise their independent judgment in evaluating agency rules. 

This decision is expected to impact the government’s ability to adopt new rules such as environmental, securities and labor regulations; and is part of a broader effort by conservative groups to rein in the powers of what they refer to as “the administrative state.” Given that this case will be decided upon by Kacsmaryk, an appointee of Republican former President Donald Trump, whose circuit is considered the most conservative U.S. appeals court, it is predicted that ESG issues will no longer be allowed as a consideration in employee retirement plans. 

Carbon Offsets: Promise or pretence?   

Use of carbon offsets is in focus again in the newsletter, with Bloomberg reporting that research by nonprofit CarbonPlan, deems many offsets “environmentally worthless.” The Integrity Council for the Voluntary Carbon Market’s (ICVCM) Core Carbon Principles (CCP) had aimed to build credibility for the offset market; however, CarbonPlan has found that projects, including those with CCP labels, often fail to achieve additionality — which measures “whether the extra funds they generated resulted in a change that wouldn’t have happened otherwise”. Currently, the CCP label covers just 1.6% of the total offsets market, but ICVCM is evaluating more categories that could encompass 50% of the market, including controversial REDD+ forest-protection credits. Critics argue ICVCM’s standards are too broad to eliminate low-quality offsets. 

Despite scepticism, some companies continue to invest in offsets. Microsoft recently bought 500,000 carbon credits from Occidental Petroleum, which uses direct air capture (DAC) technology to extract CO₂ from the air. While Occidental claims to offer credits cheaper than the $1,000 market rate, critics highlight DAC’s high costs and energy use for the volume of carbon dioxide captured. Occidental, a major US oil and gas producer, has expanded its carbon management business and also signed a deal with Amazon for 250,000 credits over 10 years.

Still, the demand for carbon offsets has dropped amid controversies and lawsuits, and recently companies like Google and EasyJet have halted the mass purchases of inexpensive offsets. The dip in demand also reflects companies concerns with accusations of greenwashing, stricter regulations, and the demise of ‘carbon neutral’ branded products. Technology may be important to reduce environmental impacts, but the debate underscores why both companies and society need transparent ways to evaluate solutions and activities. 

Calls for full transparency on the CSRD

The Corporate Sustainability Reporting Directive (CSRD) has been a hot topic in the news this week, with Responsible Investor covering three separate stories on the regulation. First, it covers calls from the EU’s financial watchdog, the European Securities and Markets Authority (ESMA), for greater transparency on ‘transitional reliefs’. Transitional reliefs are measures that allow companies to take a phased approach to reporting, for example allowing companies with fewer than 750 employees to omit certain information. Through a statement on the application of the European Sustainability Reporting Standards, ESMA has stressed that full transparency is required to ensure companies are appropriately adopting the standards and reporting on material topics.  

In further CSRD-related news, many member states have missed the 6 July deadline to transpose the EU directive into local law. The delays have been criticised as they create uncertainty and may be detrimental to reporting and data quality. However, on the bright side, the Dutch Authority for Financial Markets (AFM) has praised firms who have chosen to disclose their double materiality assessments early, a critical component of preparation for the CSRD. The AFM assessed 29 firms that had disclosed, and praised early disclosers, noting that greater transparency will be required to achieve full CSRD alignment. The CSRD is proving to be a headache for many of the companies in its scope, however feedback from these regulators highlights the importance of accurate data and transparency in driving corporate action on sustainability.   

Asset managers asking for clarity on UK Sustainable Disclosure Requirements 

Less than a month out from its initiation into the market, the UK’s Sustainable Disclosure Requirement (SDR) is the subject of lobbying efforts from asset managers, who are looking for improved clarity of guidance. The Financial Conduct Authority’s landmark regulation, aimed at fighting greenwashing on a fund-level, has left investors struggling given its principle-based approach and the accompanying “ambiguities and complexities” which have emerged at practical implementation. It’s labelling system, covering four separate buckets which align with differing sustainability focuses, can be applied by asset managers from 31 July.

Expected uptake of the SDR framework among fund managers is not of the anticipated level, as has been reported on various occasions over the past six months. Recent Morningstar research suggests this is due a combination of more stringent integration criteria than first thought, and weaker demand. While the scrutiny and debate around the EU’s SFDR equivalent will have certainly impacted asset manager keenness for SDR, the latter point is potentially ambiguous. There is an increasing focus among pension funds and broader asset owners on ESG integration, from a risk mitigation perspective, and this year’s Stewardship Code update is likely to dial in on impactful engagement. The demand issue therefore likely directly correlates with the omission of ETFs from the SDR’s scope.

ICYMI 

• The Australian Competition & Consumer Commission (ACCC) published a draft guide on sustainability collaborations and Australian competition law. The law is designed to help businesses understand the risks that may arise when working to achieve positive environmental outcomes.
• A report from London Stock Exchange Group found that companies focused on reducing carbon emissions would rank as the second-best equity sector over the past decade, behind only the tech industry.
• New research from Oxfam reveals that wealthy nations have significantly underdelivered on their climate finance commitments to low- and middle-income countries, providing less than a third of the pledged amounts in real terms.