ESG+ Newsletter – 13th April 2023

UK Government holds ‘Green Day’

The origins of the UK Government’s ‘Green Day’ can be traced back to last year, when the High Court ruled that the Government’s 2021 Net Zero Strategy was unlawful. The policies within it were found to have failed to meet the Government’s obligations under the Climate Change Act and lacked sufficient detail to meet the UK’s legally binding carbon budgets. The UK Government’s response was to publish its updated strategy earlier this week. The new strategy did not include any significant new funding, with progress instead focusing on delivering some previously announced initiatives. This approach – steady as she goes, sticking to the pre-set course of action – was exemplified by remarks from Chancellor Jeremy Hunt, who described the US’ Inflation Reduction Act (IRA) as “massively distortive” and argued that the UK would not be drawn into a subsidy race. The UK Government has stuck to its guns on this point, with Energy Secretary, Grant Shapps, arguing that the UK does not need to counter the IRA, given that the US was “playing catch-up” on renewable energy. However, this view is hardly in line with the mood music amongst green investors in the UK and further afield, who warn that rather than catching up, other markets may have leapfrogged the UK.

EU Taxonomy updates draw further skepticism

Last week, the long-awaited criteria for the EU Taxonomy’s remaining environmental objectives were published. The EU Taxonomy outlines the criteria for an economic activity to be deemed sustainable, with the new update specifying which activities contribute to the sustainable use of water, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. Organisations in the EU will be required to report the eligibility of their activities in line with criteria for the four new objectives from 2024, with reporting on the extent to which their activities align with these objectives required one year later.

The publication of these updated criteria faced some controversy. In particular, Environmental Finance reports that the inclusion of aviation and shipping as transition activities was the “final nail in the coffin of the EU’s Taxonomy”. This is not the first time the EU Taxonomy has received criticism for deeming controversial activities as ‘sustainable’. During the first iteration of the Taxonomy, there was significant backlash to the inclusion of natural gas and nuclear energy as sustainable, with the Austrian Government filing a lawsuit against the EU Commission challenging the decision. It remains to be seen whether the EU Taxonomy can recover from this reputation and fulfil the EU’s aim of supporting the bloc’s transition towards a more sustainable economy.

EU sustainability reporting requirements outshine SEC’s equivalent

A Refinitiv study, published by the Wall Street Journal, highlights that over 3,000 US companies will be subject to the requirements of the CSRD standards. The current draft CSRD standards are substantially more demanding than the current draft for the SEC’s proposal on climate and emissions disclosures. The proposed CSRD framework extends a company’s responsibility to report on sustainability issues beyond climate change and covers additional topics such as biodiversity, water use, pollution and the circular economy. Often the introduction of EU regulation leads to the adoption of similar proposals in other jurisdictions in a phenomenon referred to as the ‘Brussels Effect’. In the case of the CSRD, it is not the long-term ramifications of other jurisdictions adopting similar regulation that will impact companies located outside the EU, but instead the wide scope of the regulation which will force these companies to comply.

Capital markets specialist discusses the role of ESG ratings and offers a path forward

Former head of equity capital markets at Bank of America, Craig Coben, published an Op-Ed in the Financial Times this week discussing ESG ratings agencies, their role, and possible solutions for what has become an increasingly scrutinised aspect of ESG. Firstly, Coben seeks to clarify a common misconception about ESG ratings – they are a risk assessment tool for investors that should be used to identify ESG risks that will impact a company’s financial performance, not a general measure of ‘corporate goodness’. Second, he discusses the sector’s current pitfalls and potential solutions. Coben highlights the discrepancies in attributed ratings from providers, which can be put down to differing methodologies. To date, the pro-ratings agency argument has been that diversity of opinion is good – with the 2008 financial crash being a common reference point. While the ESG+ team shares this view to an extent and believes that independent third-party analysis is essential, it must be acknowledged that the lack of transparency as to why the providers differ to the degree they do, undoubtably impacts their credibility. Coben poses two possible solutions. The first is described as the current broker research model, where investor’s view ESG ratings and their accompanying research as recommendations or opinions, rather than objective ratings. The second places the onus on regulatory oversight, something which has often been cited as a shortcoming for ESG ratings and where there is already a roadmap in place to implementation with regulation of credit rating agencies. If the sector is to follow this route, it would mean transparency requirements, as well as rules on data collection and methodology. It may also mean a legitimate feedback and input route for stakeholders.

As demand for ESG financial products surges, others find value elsewhere

Last week’s newsletter highlighted some of the concerns associated with green financing – specifically around the ESG performance of sustainability linked financing and the potential for ‘greenwashing’. However, demand for ESG financing would appear to be outpacing these concerns, with data compiled by Bloomberg revealing that global sales of ESG bonds – which incorporates green, social, sustainability and sustainability-linked debt – increasing by 13.9% to $282.5 billion in the first quarter of this year. Despite some volatility in the capital markets due to banking turmoil, sovereign and corporate issuers were able to capitalize on the surging investor demand for ESG linked financing. The dominance of these type of issuances is being driven by investor demand for ESG related financial products, the need for investors to ‘green’ their portfolios, and the requirements by clients for funds to divest from poorer ESG performing companies and sectors. While these demands can leave some investors constrained, a recent Bloomberg article has highlighted that others are viewing it as an opportunity to generate value and returns from companies who are overlooked due to the heavy emitting nature of their sectors. The argument being made for investing in these types of companies and their issuances is that their long-term ESG plans are often dismissed by investors when divesting and that, if the climate transition is to be successful, these types of companies will need the support of the capital markets to help accelerate their decarbonisation pathways.

ISSB focuses on climate and gives an additional year for general disclosures

According to ESG Today, the International Sustainability Standards Board (ISSB) is set to give companies that submit reports in accordance with its new climate disclosure standards an extra year to disclose certain sustainability-related risks. This additional time will allow organisations to first prioritise climate-related reporting. The ISSB was launched at the COP26 climate conference with the aim of creating a universal baseline of disclosure requirements that can be utilised by jurisdictions either on an independent basis or integrated into larger reporting frameworks to provide consistency in reporting. In addition, the ISSB recently revealed transitional relief that offers an additional year for firms to report on Scope 3 emissions. The reasoning behind the announcement this week is to ensure the disclosures meet the needs of investors who are prioritising climate disclosures. This is aligned with the regulatory developments which have seen in the UK, EU and US which are based on the principles of the TCFD framework and place an emphasis the risks and opportunities presented by climate change.

COP28 President-delegate urges partnership and not polarization to tackle climate change

Much of the discussion around COP28 has focused on the appointment of Dr. Sultan al Jaber, CEO of Abu Dhabi National Oil Company, as President-delegate of COP28. While some have argued that – given his role – he will be less inclined to support the energy transition, Dr. al Jaber has sought to reassure his skeptics in a recent interview with The Guardian by outlining his intent to build upon the progress from COP26 & COP27 and ensure actionable ways to limit global warming to 1.5°C. Dr. al Jaber expresses the need for a “business mindset” alongside the importance of a robust public-private partnership to tackle climate change. He also cited the importance of investing in technologies to support the climate transition, including hydrogen and carbon capture and storage, while also identifying the need for continued support from financial institutions if the climate transition is to be successful.

ICYMI

• IOSCO Board Priorities – Work Program 2023-2024. IOSCO, a regulatory body which enhances investor protection and maintains fair, efficient, and transparent markets, has published its priorities for 2023-2024 with one of its five priority workstreams being ‘Addressing New Risks in Sustainability and Fintech’. This work programme calls on IOSCO to continue its efforts in improving the completeness, consistency, and comparability of sustainability reporting under the stewardship of its Board-level Sustainability Taskforce.
• Ageing car parks ‘could collapse‘ under electric car weight. Experts have expressed concern that the increased weight of electric vehicles due to heavy batteries could be a danger for multistorey car parks and that they may collapse if they are in poor condition. According to Green NCAP, a research organisation focusing on car sustainability, the average weight of vehicles sold in Europe is up 9% (or 100kg) in the past 10 years. Charging points located together in car parks could also cause issues as heavier electric vehicles will be concentrated in one area.
• Bottled water sales exceed cost of providing safe water for all, UN Says. A report by the United Nations University Institute for Water, Environment and Health has revealed that the continuing growth of the bottled water industry is undermining international development goals to provide universal access to safe drinking water. The industry grew by 73% between 2010 and 2020 and is predicted to double again to $500 billion by 2030, according to the report.

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