ESG+ Newsletter – 14 November 2024

This week’s newsletter analyses a review of the launch of the UK’s Financial Reporting Council (FRC) public consultation on its proposed revisions to the UK Stewardship Code. We also continue to review the ongoing scrutiny on asset managers, with regulators and industry stakeholder groups continuing to put pressure on ensuring investor claims are legitimate, while developments at COP29 are also under the spotlight, as a change in an approach to climate under a Trump Presidency looms over the event. We also review the alignment between CDP and ESRS as part of analysing the latest trends in sustainability reporting for companies. Before getting into the macro trends effecting ESG and sustainability, FTI Consulting has released its report on navigating tax governance from an ESG perspective. This morning, FTI Consulting also hosted its 9th annual Corporate Governance event in Dublin. Look out for updates on the event in next week’s edition. 

Navigating Tax Sustainability – FTI Consulting Report

Expectations around robust tax governance are rising and the internal tax function can no longer afford to be hidden in the back office. FTI Consulting’s report explores the components of ESG as they relate to tax sustainability and how best to assess the actions required to meet stakeholders’ expectations. Read the report here.

Global carbon trading deal struck despite potential of diminishing climate focus in US

Countries agreed on Monday to launch multibillion-dollar carbon markets governed by UN rules on emissions at the COP29 climate summit. We covered the proposed carbon markets previously and some are reading this as a sign of solidarity in addressing climate change as the world prepares for a second round of a Trump presidency. Though the US is unlikely to boost financial aid to developing countries, a key concern at this year’s COP, John Podesta, Joe Biden’s climate advisor, remarked that the US green energy subsidies which amount to almost $370bn would remain in place.  

Given climate scientists’ warning that global warming will reach a “catastrophic” 3C above pre-industrial times, the return of a Trump administration with its accompanying mantra, “Drill, baby, drill”, may present challenges. However, this global carbon trading deal, criticised by some due to a perceived lack of scrutiny, is viewed by others as demonstrative of co-operation. As a result of the deal, the UN will be charged with overseeing emissions reductions covered by the credits, with the aim of removing 1 tonne of carbon dioxide from the atmosphere. Even if Trump takes the US out of the Paris Agreement, US companies could buy and sell carbon credits under a UN system to achieve climate goals and contribute to climate finance targets, perhaps spurring progress in a space where too little is happening, too slowly. 

Launch of UK Stewardship Code Consultation 

Earlier this week, the UK’s Financial Reporting Council (FRC) launched a public consultation on its proposed revisions to the UK Stewardship Code. The Code is considered to have raised the standards of investment stewardship in the UK and is generally recognised globally as driving best practice in the industry. Proposed revisions stem from engagement between the FRC and more than 1,500 stakeholders during 2024 and considers four years of analysis of companies’ reporting against the 2020 version of the Code. One notable change is the revision of the definition of stewardship, aimed at emphasising the need for investors to generate “long-term sustainable value for clients and beneficiaries,” while removing the reference to the creation of “benefits for the economy, the environment and society.” The FRC argues the new definition will give more flexibility to investors in determining and explaining the factors that they deem material to deliver value to their clients and beneficiaries. With the objective of reducing the burden on investors, another proposal seeks to streamline the process of reporting against the Code by separating policy disclosures, that do not necessarily evolve each year, from annual stewardship activity disclosures. The consultation also considers targeted principles for different types of services providers (proxy advisors and investment consultants), including a specific principle for proxy advisor requiring that “they ensure the quality and accuracy of their research, recommendations and voting implementations.” The consultation will run until 19 February 2025. 

Asset managers remain in the spotlight

One clear theme throughout 2024 has been increased scrutiny on asset managers. This has been largely prompted by regulators who have clamped down on greenwashing and ESG fund names, but also augmented by key industry stakeholder groups that have leveraged this focus to shine light on the work still to be done when it comes to ensuring investor claims are legitimate. As reported by the Financial Times, 2024 to date has seen 79 funds drop the word ‘sustainable’, driven by ESMA’s requirement that products claiming this designation must have at least 80% of investment tied to environmental characteristics. Despite the ongoing politicisation of ESG, fund managers have still looked to capitalise on the interest of asset owners in portfolios which prioritise long-term risk mitigation and the commercial opportunities accompanying the energy transition. However, many of the investments have not met the mark, forcing a shift in fund names.

One such industry group that has been focused on illuminating the gap between claims and credentials is ShareAction. The NGO notes the difference in the state of play from the ESG boom a couple of years ago, to now, including the contemporary absence of “low-hanging fruit” which perhaps defined the previous period. Specifically, ShareAction references the glut of declarations, public commitments, and calls for increased asset-level exposure which ultimately pushed responsibility away from asset managers, temporarily. In 2024, the group evidently feels there should have been a more noticeable impact from the actions of asset managers. 

Climate reporting standards advance, but gaps remain 

CDP and EFRAG have taken a major step towards simplifying corporate sustainability reporting by aligning the CDP questionnaire with the European Sustainability Reporting Standards (ESRS), particularly the climate standard ESRS E1. This initiative, announced at COP29, aims to reduce reporting burdens for companies by creating a more integrated reporting framework.  The alignment will allow companies that report via CDP to meet ESRS climate disclosure requirements simultaneously. The comprehensive mapping document due in early 2025, will provide specific guidance, reinforcing this commitment to efficient reporting. By fostering dual compliance, CDP and EFRAG are advancing global reporting efficiency, making it easier for companies to navigate increasingly complex sustainability standards. While this collaboration represents a significant move towards harmonising standards, challenges remain. A recent IFRS review found that while 82% of companies report some climate data, only 3% meet all 11 Task Force on Climate-related Financial Disclosures (TCFD) recommendations, with gaps particularly evident in disclosures of climate impacts on business strategy and financial planning. Despite high-level alignment efforts, incomplete disclosures hinder stakeholders’ abilities to fully assess climate risks. Furthermore, the Financial Stability Board (FSB) cautions against regulatory fragmentation, which risks undermining efforts for consistent global standards. Although 80% of financial regulators have adopted or are moving toward TCFD and ISSB-aligned standards, local variations risk undermining comparability. 

As disclosure frameworks shift from voluntary to mandatory in many jurisdictions, support for small and emerging-market companies becomes crucial to avoid an uneven compliance landscape. While the CDP-ESRS alignment marks a promising step towards coherent global standards, ongoing efforts are essential to bridge the remaining gaps and ensure comprehensive, comparable climate disclosures worldwide. 

IAASB publishes new standard for Sustainability Assurance

The International Auditing and Assurance Standards Board (IAASB) has launched ISSA 5000, a new global standard for sustainability reporting assurance as reported in ESGtoday, addressing the growing need for reliable ESG disclosures in line with frameworks like the EU’s CSRD and IFRS standards by the ISSB. Designed for flexibility across different jurisdictions, ISSA 5000 supports both limited and reasonable assurance engagements and incorporates traditional and double materiality perspectives. Endorsed by IOSCO, the standard seeks to strengthen confidence in sustainability reporting, providing a consistent approach to verify corporate disclosures as global requirements intensify. IAASB Chair Tom Seidenstein highlighted ISSA 5000 as a “global baseline” that can adapt to diverse regulatory needs.

ICYMI 

• China’s main stock exchanges have proposed draft sustainability disclosure frameworks for large listed companies. If approved, firms on the Shanghai, Shenzhen, and Beijing stock exchanges would report double materiality metrics, potentially including KPIs on workforce diversity and the financial impacts of operations on local communities.
• SS-Corporate announced the findings of an analysis of shareholder proposals submitted at US public companies. The analysis examines investor sentiment around assessing ESG risks and looks at the underlying patterns of corporate behaviour and disclosures driving shareholders’ ESG campaigns.   
• 57% of Latin American companies lag in sustainability reporting standards, RSM finds. The ESG Latin America Landscape 2024 survey reveals that only 46% of companies in the region have a formal sustainability policy or strategy, indicating a significant gap in ESG commitment.