ESG+ Newsletter – 12 September 2024

This week’s newsletter begins by looking at pressure from investors on their investees to assess and mitigate nature-related risks and dependencies, an especially timely topic given the fast-approaching biodiversity COP, COP16, in Colombia at the end of October. We also cover a busy week for the FCA, which announced it is halting work on measuring stewardship effectiveness and extending its Sustainable Disclosure Regulation deadline. Finally, we look at a proposed 20-year delay to aviation fuel taxes.

Investors come together to pressure companies to assess nature impacts 

The Nature Collective Impact Coalition (CIC), led by the World Benchmarking Alliance (WBA), which represents €1.26trn in assets under management has signed a statement calling for companies to urgently assess and disclose their impacts and dependencies on nature. The calls for greater assessment and disclosure come following the results of the WBA’s Nature Benchmark, which found that of the 800 companies reviewed, only 5% had assessed their impacts on nature and less than 1% assessed their dependencies on nature. This led to what Investments & Pensions Europe describe as a “blind spot” for company action. The creation of the CIC, and its calls for greater focus on nature, come at a time when nature is rapidly declining, and investors are becoming increasingly aware of the major financial risk that nature-related inaction poses for companies. With the next biodiversity COP kicking off at the end of October, companies and financial institutions will need to play an important role in delivering and financially supporting already agreed global biodiversity goals. It seems that the CIC, alongside a host of other nature-related initiatives, is hoping to hold companies accountable for their actions (or inaction). 

FCA halts its work on developing measures of investor stewardship effectiveness 

In November 2021, the UK’ Financial Conduct Authority (FCA) set out an ESG Strategy with the aim to “improve climate and sustainability disclosures for markets and consumers” and the ambition to achieve “(i) better market decisions; (ii) increased consumer confidence; and (iii) stronger investor stewardship.” The FCA has been working on key performance indicators to track its progress against each of these objectives. These workstreams include the development of indicators to measure the effectiveness of investors’ stewardship practices. Yet, in an update to its ESG priorities last week, on 5 September, the FCA announced that there were “significant challenges” in developing such metrics because “there are many factors that affect sustainability, including social and legal factors, so isolating the effect of stewardship activities is challenging.” This led the FCA to halt this project. Discussing the matter with PAfuture, Louisiana Salge from EQ Investors and Lindsey Stewart from Morningstar Sustainalytics confirmed that it is generally difficult to attribute a company’s progress on ESG to stewardship alone, and that the indicators’ focus might need to be shifted from outcomes to inputs (e.g. voting behaviour, number of engagements, stewardship resources, etc). However, a box-ticking risk exists with input metrics. Stewardship effectiveness measures will likely be part of the forthcoming consultation of the FRC Stewardship Code and its future revision will be closely scrutinised by investors and issuers. 

Industry welcomes extended FCA SDR deadline 

In another development at the FCA, their decision to extend the deadline for investors to subscribe to the Sustainable Disclosure Regulation (SDR) framework has been met with positivity by the market. The extension will give funds until April to apply one of the four SDR labels, while maintaining the terms “impact” or “sustainable” or similar. The condition is for fund managers to have registered with the FCA by the beginning of October. The amendment follows a combination of industry feedback and that there are currently only six products which have been approved by the FCA for the label. As reported by Responsible Investor, investors have welcomed the greater flexibility – in no small part due to the “complex” nature of the application and approval process which has seen managers working on their approaches for a substantial period of time. 

The need for effective two-way engagement between regulators and investors has been illuminated by the EU’s Sustainable Finance Disclosure Regulation process which, while undoubtedly groundbreaking in the re-alignment of the fund market, has not been without its struggles in terms of integration, clarity and mutually beneficial impact. This is a primary driver in the initial lower take up of the SDR in the UK, with investors very cognisant of falling foul of equivalent issues and broader compliance procedures which subsequently require reputation and inflow damaging re-classification, as has been the case in the EU. 

EU weighs 20-year delay on aviation fuel taxes amidst stalled reforms 

EU countries are considering delaying the introduction of taxes on aviation fuels by 20 years, according to a draft document seen by Reuters. The proposal comes amid stalled negotiations over energy tax reforms aimed at making the EU’s tax policies more climate-friendly. In 2021, the European Commission proposed taxing fuels used for intra-EU flights, starting in 2028, to push the aviation sector toward Sustainable Aviation Fuel (SAF). However, disagreements have led to a new compromise: exempting aviation and maritime fuels from EU-wide taxes for 20 more years. The draft, prepared by Hungary, argues there is not enough SAF on the market, meaning fuel taxes would likely increase ticket prices without driving a shift from fossil fuels to greener alternatives. Only small aircraft and private boats would face minimum EU taxes during this period, while countries could impose national taxes if they choose. EU nations would reassess the situation after 15 years to decide whether to introduce taxes once the 20-year exemption ends. Climate advocates, however, warn that this delay undermines the EU’s goal to reach net-zero emissions by 2050. Jo Dardenne from Transport & Environment criticised the plan, noting that by the time these taxes take effect, the world should be nearing climate neutrality. The proposal highlights the difficulty of achieving unanimous approval for EU tax reforms, a key hurdle in implementing climate policies. 

ICYMI 

• Euronext has launched a series of ESG initiatives to support sustainable finance and corporate transparency as part of Euronext’s broader “Fit For 1.5°” commitment and “Growth for Impact 2024” strategy, ESG news reports.
• The Global Reporting Initiative (GRI) and the International Foundation for Valuing Impacts (IFVI) have partnered to promote sustainability reporting. According to Environmental Finance, the collaboration aims promote each other’s standards, research and events.