ESG+ Newsletter – 14 December

Your weekly updates on ESG and more

In our last newsletter of 2023, we start with a timely update from the closing stages of COP28, where a deal was finally struck after debate over a small (but important) number of words. We also detail the latest regulatory efforts in the EU, and how they’ll have a global impact, say farewell to the TCFD (kind of…) and analyse whether a global carbon price is the natural next step in the fight against climate change. Finally, we ask whether a framework for improving engagement would serve asset managers and whether stakeholder governance will be embedded in more companies. Enjoy and have a lovely break, wherever and whatever you celebrate!

ESG Regulations: Global Update December 2023

As ESG regulations rapidly develop, FTI Consulting is providing a quick summary of need-to-know updates from around the globe. This month we cover updates to climate disclosure regulations in the U.S. and the UAE, as well as covering sustainability disclosures in the UK. Read more on our ESG regulations page.

COP28 deal: Words matter, but action matters more

As reported by Reuters, a deal was finally struck at COP28 in Dubai on Wednesday. After hard fought negotiations, the final text included a commitment to “transition away” from fossil fuels. The wording was fiercely negotiated, with petrostates hoping to focus wording on emissions rather than fossil fuels, opposing more than 100 countries lobbying for stronger language around the “phase out” of fossil fuels. Regardless, the agreement marks the first time in 30 years that the elephant in the room has been addressed. Fossil fuels are responsible for over 75% of global GHG emissions and yet, until this agreement, a transition away from fossil fuels had not been included in a global agreement. While the agreement marks a step forward in the move away from fossil fuels, the lead negotiator for the Alliance of Small Island States, Anne Rasmussen, contrasted the deal with the backdrop of a need for urgent climate action: “We have made an incremental advancement over business as usual, when what we really need is an exponential step-change in our actions.” While an agreement was reached, questions remain over the effectiveness of the COP process and whether it facilitates decarbonisation. This COP saw record numbers of fossil fuel lobbyists in attendance and a strong attendance from the rest of the private sector. But should COP be a business bonanza? While the private sector plays an important role in implementing any agreement, its presence may prove a distraction for negotiators. Words matter, but, ultimately, action matters more. Perhaps this COP agreement will spur the urgent action required to mitigate the growing impacts of climate change.

CSDDD – and its complexity – a defining moment for EU sustainability rules

The latest EU sustainability regulation, the Corporate Sustainability Due Diligence Directive (CSDDD), has been finalised, also covered by Reuters. The Directive will require large EU companies – and those with significant EU operations – to identify and take action if they find evidence of labour or environmental issues in their supply chains; enforcement of compliance would come through Directors’ duty of care and civil liability on companies. After much back and forth, including direct involvement of member states, financial firms will be temporarily excluded from due diligence on clients and will instead be solely required to check for the same issues in their own operations. EU member states, under pressure from France, decided last month to exclude financial institutions from the framework; however, a number of other members, including Netherlands, Denmark, Finland, Germany and Ireland had pushed for their inclusion. An article in Euronews by representatives from ShareAction and the WWF laid out the importance of including the financial sector, arguing that without due diligence rules the sector “will continue to be allowed to ignore the social and environmental harm they fuel”. The potential impact of the Directive will be analogous to the EU’s CSRD, with its scope going well beyond the borders of the EU’s member states.

TCFD formally integrated into ISSB and IFRS regime 

The Financial Stability Board (FSB) has formally passed the baton to the International Sustainability Standards Board (ISSB) and the International Financial Reporting Standards (IFRS) to oversee climate-related financial reporting in companies from 2024 onwards. The change in oversight was formally announced at COP28 and marks the disbanding of the Task Force on Climate-related Financial Disclosures (TCFD). The ISSB’s new IFRS S1 and S2 standards build directly on the TCFD framework and recommendations, with the transition providing consolidation and simplification of the disclosure landscape for companies. Firms that have already adopted TCFD may continue to use it and, indeed, will still be required to do so in several jurisdictions; however, embracing the broader ISSB standards means future TCFD adoption will no longer be necessary. The ISSB will now monitor corporate progress on climate reporting going forwards rather than the TCFD. The latest step is designed to bring further clarity and consistency for businesses and investors on climate reporting, though work remains to achieve comprehensive adoption. Companies should view this as a convergence, not an endpoint, providing a foundation to shift from TCFD reporting to ISSB alignment.

The absence of global carbon pricing drives voluntary action

An emerging trend across the corporate landscape is companies setting, or charging, their own internal carbon pricing. According to an analysis by CDP covered in a recent Reuters article, 20% of 5,345 companies who are making climate-related disclosures are using an internal carbon price – an increase from 17% on the previous year – with a further 22% planning to implement one in the next two years. The logic behind employing a carbon cost seems simple: it creates an incentive for aspects of a business, which are reliant to a certain extent on fossil fuels, to transition toward renewable sources, helping to reduce long-term costs and cut emissions, while enhancing capital allocation for a transition to net zero. While this trend can be viewed positively, it does highlight one issue with efforts for a global transition – the absence of standardized global carbon pricing. As the article highlights, there is a wide range of carbon prices ranging from under $1 to $1,600 per metric ton, providing a headache for companies when voluntarily setting their own price. Lower prices raise concerns over impact and can bring accusations of greenwashing, while using a high carbon price may prove ineffective in shifting investment decision-making. A robust and universally adopted carbon pricing market could be significant step forward in cutting global emissions, while also forcing companies to plan for the realities of the cost of carbon over the next few decades. As the world tries to “transition away” from fossil fuels as per the latest COP agreement, carbon pricing may be the latest area where voluntary company practice needs to be codified by regulators.

Making the case for CEOs to pursue more than financials

At a time when part of the US is calling for the return of the shareholder primacy model under the banner of the anti-ESG movement, Paul Polman, former CEO of Unilever, strongly advocates for a governance model that puts more emphasis on the interests of all stakeholders. In an interview with Bloomberg, he argues that the shareholder primacy principle does not work and that many firms applying it are now part of the corporate graveyard, which they could have potentially avoided by paying more attention to the concerns of other stakeholders. He notes that having a strong corporate purpose helps with talent attraction and retention and, increasingly, people are looking for more than money in choosing to accept a job and stay with an employer; they value being part of something bigger. Building broad stakeholder support may also provide strategic flexibility navigating activism situations or unsolicited takeover proposals. Having declined a $143 billion takeover offer with a personal pay-out of $110 million, Polman has built a level of credibility as an advocate of the stakeholder governance model. As the clamour for greater action on not just environmental protection, but in the protection of workers and communities grows, increasing sustainability awareness and new regulation may embed similarly thinking across companies and regions.  

Research shows room for growth in engagement quality of investors

ShareAction has called into question the engagement quality of asset managers in its latest Responsible Investment Standards and Expectations publication. The organisation, a charity for responsible investment, specifically notes how there is a lack of evidence for “robust use of escalation” with investee companies, which is in turn in breach of the Financial Reporting Council’s Stewardship Code. The conclusion, based on a review of the sustainability and stewardship reports of 50 investors, has prompted ShareAction to propose a standardised framework for escalation which it believes will allow stakeholders to better understand, assess and compare asset manager practices, and allow companies themselves to understand the impact of strategic choices on investor relationships and access to capital. The framework, says ShareAction, can also help investors and other stakeholders to identify goals and purposes which overlap, and incentivise the asset management industry as a whole to guide companies through stewardship to stronger non-financial and financial performance, and improved de-risking.

ICYMI

• As the debate rages on about how best to avoid the worst impacts of climate change, Bloomberg reports that the US could remove 1 billion tons of carbon from the air. However, while carbon removal at that level would be seen as a positive step, the lack of infrastructure to do it at such scale may prove an inhibitor, with the article estimating costs of up to $130 billion for capture at such large amounts.
• The UK treasury has delayed its green taxonomy consultation until early next year, as reported by Environmental Finance, not the first time the plans for a taxonomy have been pushed back. Investor groups have criticised the delay, which they feel will impact the ability to funnel funds to truly sustainable activities. In response, a government spokesperson argued that developing a “useable and useful taxonomy is a complex and technical exercise” and went on to reiterate the commitment to a green taxonomy that supports the transition to net zero.
• With all eyes firmly on climate COP in Dubai, Business Green details Colombia’s offer to host COP16, its biodiversity counterpart. As one of the world’s most nature-rich countries, hosting the conference that aims to address biodiversity impacts across the globe seems to make sense.