ESG+ Newsletter – 17 October 2024

This week’s ESG+ begins with ESMA’s plans to amend naming rules in response to investor concerns, followed by a call from a Dutch governance body for shareholders to ‘have their say’ on CSRD. We also explore an analysis of greenwashing claims across Europe and the US; a report on the 2024 AGM season in the UK, Ireland, France and Germany; and, the hesitation among US investors and banks around biodiversity. Finally, we look at the growing concerns over businesses’ lack of preparedness to comply with the CSDDD.

ESMA to reevaluate naming rules amid investor concerns  

Following feedback from investors, the European Securities and Markets Authority (ESMA) is looking at amendments to its upcoming naming rules, which are aimed at addressing greenwashing in the fund market, by requiring products to adhere to sector exclusion criteria. As Reuters reports, investor concerns relate to increased cost of capital for high emitting companies, meaning that businesses with decarbonisation goals will struggle to finance their energy transition strategies, and that any guidelines may contradict existing frameworks which currently allow investors more freedom. A specific framework of concern is the EU Green Bond Standard, “which allows investors to assess the sustainability credentials of a bond on a purely project basis”. ESMA, according to the report, is considering how its naming rules will have a practical impact on green bonds specifically, which may restrict sources of finance for individuals projects – the implication being the overarching delay in progressing the energy transition.  

Notably, the performance of certain sectors – defence and energy – in recent years has resulted in exclusion strategies being harder to justify for investors, especially those with an ESG slant that have underperformed versus expectations. In the wake of difficulties around fund labelling in the UK, covered here previously, it’s clear that efforts to make ESG black and white remains difficult.

Dutch governance body calls for shareholder votes on CSRD

This week, Responsible Investor reported that Eumedion, a Dutch corporate governance body supported by institutional investors, has called on domestic listed companies to present their statements under the EU’s Corporate Sustainability Reporting Directive (CSRD) for a non-binding shareholder vote. This move aligns with the Directive’s goal of increasing transparency on sustainability issues across 50,000 companies. The CSRD, Europe’s most comprehensive sustainability disclosure regulation, will first affect 11,000 large EU firms that previously reported under the Non-Financial Reporting Directive (NFRD), with initial reports due in 2025. In a recently published letter, Eumedion emphasised the importance of double materiality analysis (DMA), which evaluates how corporate activities impact both society and financial performance, as key to producing high-quality sustainability disclosures. Eumedion’s letter, released as part of their annual “focus letter” to Dutch companies, called for shareholder votes on sustainability reports to enhance the quality of disclosures and hold boards accountable for sustainability performance. Eumedion’s executive director, Rients Abma, advocated for these votes to receive legal recognition, similar to financial statement approvals at annual general meetings. As the CSRD is transposed across member states (with the EU pressurising those dragging their heels), nuances to local implementation are likely to spring up, added complexity to companies operating in multiple markets. 

Greenwashing drops in Europe, but hurdles remain in the US and in certain sectors 

A new report by data science firm RepRisk shows a 12% drop in companies linked to misleading environmental claims — the first decrease in six years, potentially attributed to improved practice due to regulatory pressure and growing scrutiny from investors and the public. Despite overall improvement, more severe cases of greenwashing continue to rise. Regional differences are also notable: the EU experienced a significant 20% drop in cases, while the US saw a slight increase — despite a 10% reduction the previous year. By industry, the Oil and Gas sector continues to account for the majority of greenwashing cases, followed by Food and Beverage and Financial Services. Interestingly, the Financial Services sector reported the largest decrease, down 27% from the previous year, with stricter regulatory oversight changing practice, reporting and communications. However, it may not be a one way street, as fears of legal repercussions may lead companies to disclose less information about their sustainability efforts, ultimately reducing transparency and detail on genuine efforts, often referred to as “greenhushing”. Misalignment between sustainability and communications teams, sometimes working in silos, is one of the more common drivers of unintentional greenwashing. To address this, companies must ensure that internal and external messaging is developed with the appropriate expertise and backed by evidence or science-based claims. As a result, we may see increased reliance on third-party validation agencies to help companies build credibility in their environmental commitments, and protect against potential Greenwashing cases.

2024 AGM voting trends in Europe    

The 2024 AGM season was marked by a net reduction in instances of significant shareholder dissent (20% or more of votes cast against management recommendations), as highlighted in FTI Consulting’s latest report on voting trends across France, Germany, Ireland and the UK. Strong market performance, decreasing inflation rates and recurring conversations on the competitiveness of European capital markets relative to the US were all conducive to a more favourable voting environment on remuneration in 2024. Shareholders have nonetheless continued to press companies to appoint independent, diverse and effective directors and to provide full transparency on executive remuneration. In 2024, this trend has been most visible in the voting results of German companies, where opposition was more pronounced than the other markets. Investors have also continued to refine their voting policies on an expanding range of ESG issues – a trend likely to accelerate with the publication of the first nonfinancial reports under the Corporate Sustainability Reporting Directive (CSRD) in 2025. As investors continue to raise their expectations on ESG, while allowing more flexibility on remuneration structures, the importance of strong engagement and reporting practices will remain key to secure positive voting outcomes at AGMs in 2025.  

Biodiversity continues to lag climate and baffle bankers  

Biodiversity discussions among investors and large corporates have long come second to conversations around carbon and emissions. Despite the The Taskforce on Nature-related Financial Disclosures (TNFD) following in the footsteps of the The Task Force on Climate-related Financial Disclosures (TCFD), investors continue to struggle somewhat in funding biodiversity to the same degree as carbon solutions, particularly in the US. Environmental Finance cites research from Morningstar revealing that US-based investors have “no interest” in launching biodiversity funds, with all funds based in Europe. The research shows that biodiversity has not been clearly identified as a material investment issue in the US, and beyond these funds, bankers are also showing hesitation. An article from Bloomberg shows that bankers are unsure how to measure biodiversity impact on a company’s operations, or as importantly, capitalise on opportunities. Biodiversity doesn’t come with metrics like scope 1, 2 and 3 emissions, and while a company’s footprint can be measured in size, measuring the actual impact on biodiversity and ecosystems remains challenging. A company who wants to be known for their biodiversity efforts must stand out, and in doing so, connect directly – and educate – investors who are yet to have a specific focus on the topic.  

Gaps in preparation for the CSDDD  

In light of the Corporate Sustainability Due Diligence Directive (CSDDD) coming into force from 2027, the ESQ Group conducted a survey of 400 European companies, with the results identifying exposures in businesses’ preparedness strategies to comply with the complex regulation. Much like its counter part, the CSRD, lack of staff and financial resources were cited as the biggest challenges organisations are facing in relation to the Directive. Furthermore, European companies pointed to documentation and reporting requirements, as well as supply chain visibility, as other potential problem areas. While 84% of companies identify low risk of human rights and environmental violations in their direct operations, over half of the surveyed businesses rate this risk as high or very high when it comes to their indirect suppliers, and 41% rate this as medium risk. 

Despite these concerns, only 30% of businesses have plans to allocate additional resources to tackle these challenges and meet CSDDD requirements. 

The survey also highlights how in Germany, organisations have faced similar issues with the Supply Chain Due Diligence Act (LkSG), which has been in effect in Germany since 2023. 89% of German businesses cite a lack of staff as the biggest obstacle. As the raft of EU regulations come into force over the next 12-24 months, investors and stakeholders – for the first time – will be able to from compare, contrast and criticise reporting, representing significant risks and opportunities for companies, depending on the rigour of compliance.  

ICYMI 

• Nordea Asset Management will not change its environmental requirements despite being blacklisted by certain US states. According to AM watch, ESG resistance could become a business advantage for the Nordic asset manager.
• The Canadian Government is introducing a sustainable investment taxonomy to categorise economic activities aligned reaching sustainability goals. According to ESG Today, the guidelines are designed to facilitate the financial flows and investments necessary to achieve sustainability targets.
• Retail Economics conducted an analysis on food and drink packaging in the UK. The study, which was commissioned by DS Smith, found that 51% of food and drink items in UK supermarkets are packaged in unnecessary plastic that can be safely replaced with alternatives