ESG+ Newsletter – 18th May 2023

EU and UK find common ground in clamping down on carbon neutral claims

The EU and UK have finally found some common ground with both the bloc and its former member readying new regulations which will clampdown on environmental claims on products. The EU Parliament voted last week to introduce new anti-greenwashing regulations that will clampdown on businesses who label their products as ‘carbon neutral’, but do not have the evidence to back-up the claims. Under the new regulations, businesses that make environmental claims about their products – such as ‘environmentally friendly’, ‘natural’, ‘biodegradable’ or ‘eco’ – will have to verify these assertions through official certification schemes or by regulatory bodies. The new regulation will also aim to ban environmental claims that are based solely on carbon offsetting schemes – such as ‘CO2 neutral’ or ‘carbon neutral’ – which has drawn the ire of many environmental groups who view this as ‘greenwashing’. While in the UK, The Guardian revealed that the UK’s advertising watchdog is set to ban adverts that claim products, which use carbon offsets, are ‘carbon neutral’ unless companies can prove that the carbon offsets really work. The decision by the UK’s advertising watchdog follows on from recent enforcement against a number of national and international companies regarding ‘green claims’ around their products; and an investigation which revealed that 90% of rainforest carbon credits certified by Verra, which operates the world’s leading carbon standard, did not represent genuine carbon reductions – which was very damaging to the reputation of carbon offsets.

The enforcement of these regulations will strengthen the fight against greenwashing by banning practices that mislead consumers on the actual sustainability credentials of products. While a potential knock-on impact from these moves may accelerate the prioritisation of reducing their carbon footprints, rather than offsets, to meet their net zero targets.

ESG ratings regulation likely on the way

As the focus on the role – and impact – of ESG ratings come under scrutiny in a number of jurisdictions, Responsible Investor reports that the UK’s Financial Conduct Authority will publish draft voluntary standards for ESG ratings and data providers. In November, the regulator announced the formation of an independent working group to develop the code, while the UK government is currently consulting on how best to address issues in the ESG rating space, if at all. In another example of harmonised approaches, the European Commission is also examining what regulation should apply to ESG rating providers, with EU guidance likely to be published in mid-June. Generally speaking, the growing sophistication among investors has meant that many leading institutions have their own proprietary approach to valuating investee companies. Nonetheless, there appears to be growing expectations that some sort of regulation will be applied in the not-too-distant future, which may seek to balance the data and assessment needs of investors with the transparency expectations of corporates.

Scope 3 reporting on the rise among listed companies

Reporting of Scope 3 emissions continues to gather pace, with a new study from MCSI revealing how more than one third of public companies are now reporting Scope 3 missions. The MCSI Net-Zero Tracker detailed that 35% of listed companies are now reporting some Scope 3 emissions, up from a figure of 30% seven months ago. The study also detailed a significant increase in decarbonisation pledges, with an increase of 8% year-on-year, and 44% of publicly listed companies now publishing climate commitments. However, the devil is in the detail, and MCSI found that the quality and ambition of these targets varies widely. For example, only 30% of targets include net zero goals and, even where net zero targets are in place, many don’t cover the full scope of supply chain emissions. Some companies are also continuing to rely on carbon offsets which aren’t validated by third parties. Most concerning of all is the lack of impact that companies’ climate commitments are having, with emissions from listed companies projected to stick at their record-high levels. The increase in Scope 3 reporting is likely being influenced by imminent regulation on climate disclosures in the EU and US.  The new European Corporate Sustainability Reporting Directive (CSRD) has a deadline for Scope 3 reporting of January 2024. However, a separate survey of over 800 UK businesses has found that 60% are unlikely to meet this deadline. While reporting and targets are important for keeping companies focused, they are just pieces of the puzzle, with the MCSI report revealing how investment in emissions reduction will need to increase between three- and six-fold to drive some meaningful change.

Only half of companies in the FTSE 350 have public codes of ethics

A recent study by the Institute of Business Ethics (‘IBE’) shows that half the companies on the UK’s FTSE 350 index do not have a publicly available code of ethics, with the number being significantly lower across mid-cap FTSE 250 index companies relative to FTSE 100 firms. A company’s code of ethics constitutes an important document that guides employee action and decision-making in line with the company’s values and mission. As noted in a recent FT article, “businesses without written codes risk the loyalty and support of both staff and customers”. Only 40% of FTSE 250 companies have a publicly disclosed code of ethics compared to 90% in the FTSE 100, a matter that becomes even more important in the context of misconduct in the workplace. According to the study, only half of FTSE 100 businesses “give publicly accessible written assurances that staff will not face retaliation if they report concerns about unethical behaviour”. Only 57% of the codes were deemed to be ‘good’, according to the IBE study, with code updates in the last three years more likely to be rated as being “up to scratch”.

Ensuring the robustness of company policies is a key responsibility of the Board, in line with the principles of the UK Corporate Governance Code. In the FTSE 100, the number of companies with a publicly disclosed code increased from 81 in 2021 to 90 in 2023, and the number of ‘good’ reports increased from 46 to 57. The slow pace of development of these policies raises important questions regarding UK companies’ organisational culture and practices. The shareholder focus on this topic can also be evidenced by the focus on employee wellbeing in engagement, as well as in the number of shareholder proposals addressing mandatory employee arbitration and workplace harassment in the US in recent years.

G7 development raises concern around ISSB adoption

At a G7 meeting of economic leaders in Japan, a rowback on the commitment to using the International Sustainability Standards Board’s (ISSB) disclosure standard has raised concerns. At the meeting, G7 leaders welcomed the work done by the ISSB to create “globally interoperable sustainability disclosure frameworks” but seemed to omit any mention of adopting the frameworks as a global baseline. In 2022 at the meeting of G7 leaders, finance ministers encouraged countries to prepare for usage of the standards as a global baseline in a bid to overcome the lack of integration of ESG reporting. Its omission this time around seems to suggest finance ministers are getting cold feet. The need for standardisation of reporting has long been known as a major stumbling block in ESG reporting, so this latest development does come as a concern. In positive news from the meeting, the G7 encouraged the public and private sectors to use transition plans to help promote investment aligned with net zero. Transition plans are a key driver in meeting global decarbonisation goals, and this is the first time G7 ministers have included it in their official language.

ICYMI

• FTSE Russell has launched the FTSE UK ESG Risk-Adjusted index series to increase ESG and climate index options. The series will rely on product and incorporates exclusions – controversial weapons, thermal coal production, and Arctic oil and gas exploration – and will be weighted towards companies with better ESG characteristics. Fossil fuels will not be completely excluded from the series.
• Asset managers to develop avoided emissions database. A group of financial institutions, including Mirova, AXA IM and Robeco, have partnered in order to launch a global database on avoided emissions, or Scope 4 emissions – emission reductions outside of the life cycle or value chain of a product which occurs as a result of the use of that product. The group have put out a call to academics, consultants, and data providers to help in the creation of this database.
• Emirates creates $200 million aviation sustainability fund. Emirates Airlines has committed $200 million over a three-year period in order to fund R&D projects to reduce the impact of fossil fuels in commercial aviation. There will be a focus on fuel and energy technologies, with the airline looking at creating partnerships with key organisations working on these solutions. The fund will be overseen by Emirates’ Environmental Sustainability Executive Steering Group with support from external experts.

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