ESG+ Newsletter – 16 November

Your weekly updates on ESG and more

We open this week with the latest efforts to produce a gold standard on transition plans, which may nonetheless be hindered by the range of frameworks for companies to follow and their plans to be evaluated. However, while confusion might be growing in that area, there are signs of reporting frameworks slowly producing greater overlap through collaboration to the benefit of companies. We also detail the back and forth over the scope of the EU’s latest regulatory salvo, discuss whether any common ground can be reached by the US and China on climate before COP 28, analyse the latest research in ESG fund ratings and question whether the proliferation of ESG measures in incentive plans is a sign of progress or another inadequate effort to shift company practice. 

Monthly global regulatory review

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 sustainability reporting standards across Brazil, the EU, and Australia. 

Read more on our ESG regulations page here. 

Climate transition plan confusion may be slowing green investment  

The UK Transition Plan Taskforce has launched a consultation on new sector-specific guidance for the UK private sector, but will more transition plan standards help companies in delivering their net zero targets or create confusion and inconsistencies? According to the Climate Bonds Initiative (CBI), the lack of alignment between corporate transition planning frameworks is creating confusion in the market and risks slowing investment into companies showing real promise and progress on transition planning. The CBI undertook a mapping of 13 transition planning frameworks including CA100+ and the UK Transition Plan Taskforce recommendations. While it found a high level of agreement between the standards, there were notable differences including the need for scope 3 emissions, the role of offsets and whether to include ‘just transition’ indicators. Ultimately, climate transition plans are necessary to demonstrate that a company has a credible plan to achieve its net zero goals and that appropriate governance is in place to ensure successful progress and delivery. Perhaps the proliferation of transition planning frameworks we are witnessing could be compared to the proliferation of sustainability accounting standards (more below) over the past few years, and we are likely to see calls for a singular, aligned standard; or, at the very least, greater efforts to ensure more consistency across frameworks. 

Sustainability reporting showing signs of increasing uniformity 

A recurring criticism of ESG and sustainability reporting has not only been the varying reporting frameworks but also the lack of alignment from ESG reporting and data collection agencies. However, recent announcements by key stakeholders indicate that we could be entering a stage of greater interoperability. Earlier this week, EFRAG, the EU’s advisory body on reporting, and CDP announced that they have agreed to collaborate to accelerate the market uptake of the EU’s ESRS. Under the agreement, CDP will align its disclosure system with the ESRS using technical expertise and guidance provided by EFRAG. This collaboration follows on from the GRI’s announcement last week that it would collaborate with the IFRS Foundation to launch the Sustainability Innovation Lab (SIL). The SIL will represent a collaborative effort from key stakeholders – including GRI and ISSB – to identify “emerging sustainability disclosure topics, developing concepts, best practices and data-driven solutions”. 

These are interesting developments and come at a time when the regulatory and reporting landscape for sustainability is undergoing  significant evolution. The objective is clear – enhancing reporting standards by ensuring a level of consistency across new mandatory and voluntary reporting standards. Partnerships should support companies on their disclosure journeys and enable them to meet their evolving sustainability disclosure requirements while ensuring companies that have already put significant effort into aligning with one or more of the frameworks do not have to start over. Eventually, efforts to drive greater overlap should help increase investor and stakeholder confidence in the consistency of the underlying reporting data between companies, arguably the central goal of the frameworks and impending regulations. 

Proposal for financial services CSDDD exclusion tabled 

As reported by Euractiv, in an effort to ensure progress in negotiations over the Corporate Sustainability Due Diligence Directive, the Spanish presidency has put forward a proposal to omit the financial sector from the regulation, which places accountability on large companies for human rights and environmental violations in all parts of their value chain. The inclusion of the industry is a divisive issue, with support on both sides from member states, while NGOs and the European Central Bank are two notable stakeholders that believe financial undertakings should not be treated differently so that sustainability matters are integrated into risk management and broader decision making. The counterargument is predicated on the complexity and breadth of a financial institution’s value chain, which can incorporate thousands of companies in different jurisdictions and industries, potentially making compliance and the risk of civil liability overly burdensome and unworkable. 

The Spanish presidency’s proposal offsets the exclusion of the sector with three concession areas which are broadly supported by EU lawmakers: civil liability, scope and climate change obligations. Specifically, the presidency is suggesting strengthened access to justice for victims of adverse impacts of companies, agreement on some of the Parliament’s demands, such as the inclusion of franchises and more thorough stakeholder engagement, and obligatory transition planning which is also linked to director remuneration. 

Research finds trust in ESG ratings low

While much of the back and forth on ESG ratings has focused on corporate concerns as to their efficacy and transparency around methodologies, a recent survey from the UK’s Association of Investment Companies (AIC) has found less than a fifth of advisers and wealth managers trust ratings of ESG funds. As reported by FT Adviser, a majority surveyed pointed to lack of consistency from providers as harming credibility, with AIC research director, Nick Britton, stating that the survey showed that wealth managers remain “deeply sceptical” about sustainability claims from funds. As jurisdictions across the globe seek to tackle greenwashing from funds and allow capital to flow to genuinely sustainable investment strategies, there clearly remains a long way to go to engender trust along investment value chains.

US and China progress on climate inching forward

The US and China, the world’s top two economies, are facing challenges in climate diplomacy as they aim to align their efforts to slash greenhouse gas emissions ahead of COP28 in Dubai as reported by Bloomberg. Recent talks between their top climate negotiators in California concluded without an immediate breakthrough, amidst growing geopolitical complexities. The relationship is strained by the upcoming US presidential election, Taiwan’s poll, and China’s economic and energy security concerns. The success of COP28 may rely on veteran negotiators like John Kerry (US) and Xie Zhenhua (China), who played pivotal roles in the Paris Agreement, although whether that agreement has a genuine lasting impact on regulators and corporations remains unclear. In discussions, areas of focus have included potential agreements on increasing clean energy production and financing for developing nations, without clear commitments on reductions, the core aspect of addressing climate change. With challenges including trade tensions, China’s coal power capacity, and disputes over climate fund contributions, broader tensions appear to also be hindering substantive engagement and progress.  

The rapid rise and growing pains of sustainability-linked executive pay 

A new report from ISS-Corporate analysed sustainability incentive trends in the U.S. and Europe. The report found there has been a significant increase in sustainability-linked executive compensation, with ESG metrics incorporated into short and long-term incentives. However, scepticism is growing over the transparency and potentially superficial use of these metrics. With little information provided on how environmental and social factors impact pay; the rigour, materiality and relevance of the metrics are coming under scrutiny. As new regulations push for greater links between sustainability strategy and performance, the report finds that the comparable lack of rigour for ESG metrics versus traditional financial targets and measures of performance continues to represent a hurdle in building genuinely challenging sustainability-linked incentives aligned with long-term value. 

ICYMI

• Moody’s Investors Service has launched a Net Zero Assessment (NZA) framework, introducing a scoring system to help investors compare and evaluate companies’ decarbonization plans. The NZAs, rated on a 5-point scale, address challenges related to inconsistent disclosure requirements and varying targets. They assess entities’ strength in decarbonization concerning a Paris Agreement-consistent pathway to achieve global net zero by 2050, considering factors like ambition strength, plan implementation, and governance. Applicable to non-financial corporates, including public sector and non-profit entities with revenue-raising capacity, the NZAs aim to provide an independent and comparable assessment of emissions reduction profiles.  
• The European Union is pushing for a significant reduction in methane emissions by pursuing a deal that could impact major energy importers globally. Negotiations between parliament and member states, set for the final round on Tuesday, will focus on shaping rules to address methane leaks from the energy sector. The objective is to finalize an agreement before the upcoming COP28 climate summit in Dubai. The EU’s efforts in curbing methane emissions could have far-reaching consequences if they extend to influential energy-exporting nations. 
• According to the BNP Paribas Survey, ESG commitments continue to gain momentum for Asia’s institutional investors, but a lack of harmonized data and regulations poses clear barriers. The report revealed that impact investing is a global trend that is set to overtake ESG integration as the most popular ESG strategy. Stronger taxonomies and broader regulations are set to be finalised over the next few years, expecting Asian investors to include more on net zero pledges and coal divestment. However, as some data is submitted voluntarily, investors must be extremely cautious when advancing ESG claims.