ESG+ Newsletter – 11th May 2023

Investors ask EU to delay Taxonomy reporting requirements

According to Environmental Finance, Investors and businesses have pleaded with the EU Commission to delay EU Taxonomy reporting requirements for four environmental topics – water, the circular economy, pollution, and biodiversity. The request for delay came from the Association for Financial Markets in Europe (AFME) which claimed that, without a delay, the quality of disclosures would be poor. In particular, the AFME claims that delays in developing the EU Taxonomy meant that the consultation on expanding the Taxonomy to the four new topics only recently concluded and businesses do not have sufficient time to digest the new requirements ahead of mandatory reporting in 2024 which will be based on 2023 financial year data. The AFME has specifically asked to delay the requirement for financial institutions by a year, meaning that they would begin reporting against the new criteria in 2025. A phased approach could support financial institutions to improve the quality of disclosures as they would be able to access the disclosures of their portfolio companies. It remains to be seen whether the EU Commission will respond to these pleas, or prioritise early disclosures at the cost of quality.

New ‘road map’ for climate action on the cards at COP28

Ahead of COP28, discussions are underway about a new “road map” that could set out a way forward on switching to clean energy and helping vulnerable countries prepare for disasters, as reported in the National news. Specific proposals, such as setting a renewable energy target for the world, are to be negotiated in the coming months. A four-page summary published by Germany and the UAE said the idea of a “transformational road map” was welcomed by diplomats.

Possible solutions include a clean energy target combined with an energy efficiency goal, carbon prices to shift money from fossil fuels to renewables, and levies on polluting sectors such as shipping, oil and gas amongst others. Furthermore, leaders have been urged to reform the international financial system to make it easier for developing countries to raise money with a loss-and-damage fund and levies on international shipping or aviation rising up in the agenda. COP28 will be of particular importance to assess progress towards the operationalization of the fund. With Sustainalytics reporting that only one, single firm it has assessed is genuinely aligned with a 1.5-degree target, it remains to be seen whether the actions around COP28 match the words, something previous iterations of the conference seem to have failed on.

Investors target companies over plastic use

The Financial Times reported this week that a coalition of over 180 investors has called upon companies to reduce their use of plastics, stating that the continued production and use of plastics represents a significant risk to public health, biodiversity, climate and human rights, while also exposing companies to financial risks. The coalition is made up of significant investors, who collectively oversee $10 trillion in assets. In their letter, the coalition states that if companies fail to take action on plastics they will face “financial risks that threaten value creation and investment returns, given the wave of action to tighten legislation around the world, the increasing number of lawsuits against companies, and potential threat to brand value.” The investors are specifically urging businesses to phase out single-use plastics, reduce their overall consumption of plastic material and to also implement methods for packaging reuse. In future, they plan to set specific targets for each company and will engage directly. This action by investors comes at a time when moves to regulate plastic waste are also gathering pace. In the letter, the investors call for companies to stop lobbying against policies such as the Global Plastics Treaty and the EU Packaging and Packaging Waste Regulation. With companies now facing pressure on multiple fronts, plastic use is swiftly climbing to the top of the sustainability agenda.

European Commission to combat rating agency issues reportedly due

According to Responsible Investor, the European Commission is set to publish its proposal on ESG rating agency regulation on 13 June. The sector has been the topic of growing scrutiny for a significant, with the past year especially seeing an amplification of concern over the role in which they play in the broader ESG space and the methodologies behind the scoring. The reported legislative proposal follows the published findings of a consultation by the Commission from last August, which concluded that stakeholders are concerned over transparency and quality of ratings. Identified potential measures to address these issues included the introduction of conflict-of-interest due diligence and minimum disclosure requirements for ratings methodologies.

The upcoming European proposal may be followed by Financial Conduct Authority action in the UK. It stated that due diligence is a necessity for so to address the issue of outdated third-party ratings which influence benchmarks. The house ESG+ view recognises the ongoing issues which rating agencies, specifically around the opaqueness of strategies, but also view the third-party providers as a key tool for investors. The differing approaches allow for focus on different areas and provide a diversity of opinion on the myriad of ESG-related risks and opportunities. Reform is needed, as the EC’s consultation shows, but independent – should it be so – analysis is an essential aspect of evaluating the sector.

ISSB’s request for information on research and work plan priorities

The International Sustainability Standards Board (ISSB) initiated a six-month consultation this week, asking stakeholders to provide feedback on its priorities for the next two years. With a view of enhancing investor-focused sustainability disclosures, the ISSB chair, Emmanuel Faber, said “We reflect on our mission to issue ISSB Standards that meet investors’ needs for globally comparable sustainability-related financial information.” The paper, published a week ago, seeks feedback on three potential sustainability-related research projects: i) biodiversity, ecosystems, and ecosystem services (BEES); ii) human capital; iii) human rights; and one project researching the iv) integration of sustainability-related financial information with other financial information. The latter would “build on the connections that now exist between traditional IFRS financial reporting and sustainability reporting through shared concepts and terminology”, and seek to better understand the synergies that a company’s activities create for all stakeholders, as noted in this recent article.

Alongside the focus on identifying material information for investors on the risks and opportunities of BEES, the board is also looking for views on a potential research project into human capital, including employee wellbeing, diversity, equity and inclusion, training, and development.

ICYMI

• Uzbekistan to hit a 25% renewable power target by 2026. According to the country’s energy minister, Uzbekistan should reach its target of sourcing 25% of its energy from renewables by 2026, ahead of the original 2030 target. In 2020, Uzbekistan was already generating around 10% of its power from renewable sources with a further 15GW of new solar and wind energy due to be introduced by 2026. Beyond wind, solar, and hydropower, the country is also looking at developing nuclear power.
• Decent work in the circular economy: An Overview of the Existing Evidence Base. A joint report by Circle Economy, the International Labour Organization (ILO) and the Solutions for Youth Employment (S4YE) Programme of the World Bank, Decent Work in the Circular Economy is the first output of the broader ‘Jobs in the Circular Economy’ initiative between the three partners. The initiative aims to identify and explore research gaps in the current evidence base for circular jobs through collaboration with a range of research institutions, industry representatives, and public bodies. The report has also put forward calls to action to realise the full potential of the circular economy.

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