ESG+ Newsletter – 1st December 2022

CSRD set to come into force

While this newsletter has covered the Corporate Sustainability Reporting Directive (CSRD) at length, this week it was formally adopted by the European Council. The CSRD is intended to revise and strengthen existing rules by promoting relevant, comparable, reliable, and accessible sustainability information for investors and stakeholders. The CSRD reporting requirements will be aligned with the Sustainable Finance Disclosure Regulation (“SFDR”) and the EU Taxonomy Regulation. The Directive heralds a new dawn in sustainability reporting and will materially broaden the scope of sustainability information disclosed to stakeholders and increase the number of entities required to report such information. By introducing assurance requirements, the new EU rules raise the bar significantly in terms of internal reporting processes and external communications. Draft EU Sustainability Reporting Standards were also approved this week, representing a good place to start in preparing for a substantial increase in reporting burdens over the coming year.

Biodiversity reporting may become mandatory following COP15

With COP15 kicking off in less than a week, there has been a flurry of announcements and predictions from businesses and NGOs. The Partnership for Biodiversity Accounting Financials (PBAF) has predicted that there is a high chance that the reporting of nature impacts and dependencies will become mandatory for financial institutions and large businesses by 2030 if a global agreement for nature can be reached at COP15 in Montreal. To some this may seem like a huge leap forward, however, financial market participants in the EU should already be prepared to report on biodiversity under the Sustainable Finance Disclosure Regulation (SFDR) from 2023, reflecting 2022 data. The momentum for mandatory disclosure is building, through regulations like the SFDR in the EU, mandatory reporting already in place in France, and even statements from financial institutions calling on governments to make biodiversity disclosures mandatory.

This comes as CDP announced that businesses are failing to turn voluntary biodiversity commitments into action. An analysis of data disclosed by companies to CDP showed that just 31% of companies have made a public commitment or endorsed biodiversity-related initiatives. However, these commitments are not yet being turned into action, with CDP finding that 55% of those with a public commitment have not taken actions to progress against objectives in the past year. Much like in other areas of sustainability, the disconnect between words and actions may be the spur for mandatory reporting and regulation.

As COP15 approaches, the spotlight is on biodiversity and how companies can contribute to nature restoration. For more information on COP15, check out our overview of what to expect from the conference and how businesses should be preparing.

Net zero the battleground of commitment versus delivery

In the words of Brad Pitt’s ‘Wardaddy’ character from Fury – ideals are peaceful, history is violent. While perhaps hyperbolic, parallels can be drawn with efforts on the climate transition; commitments are easy; delivery is challenging. This sentiment has been apparent in the aftermath of COP27, with lingering frustration at the lack of material progress made on the climate transition, particularly in relation to corporate net zero pledges. More than a third of the largest companies in the world have made net zero pledges; however, UN secretary-general António Guterres slammed companies for effectively speaking out both sides of their mouth – pledging net zero, while simultaneously not focusing on absolute emissions reductions and still being involved in, or using, fossil fuels. Commitments, he argues, are again meaningless without reductions.

As we have highlighted throughout our COP27 coverage, there has been a clear shift in expectations on the private sector to make good on their commitments – either financially or in terms of reducing their emissions. Companies are facing increased pressure from officials, regulators, and investors regarding the specific actions they are taking on their pathway to net zero and the disclosure of their progress. While some companies view the increase in reporting requirements as onerous, the expectations for companies to transition from talking to walking are rising.

Hong Kong exchange to enhance climate reporting requirements

On the back of publishing a review of 400 ESG reports, ESG Today reports that the Hong Kong Stock Exchange has “encouraged” companies to be prepared for further reporting requirements. The review highlighted that “good progress” had been made across ESG governance and climate-related disclosures since 2020 reporting requirements were enhanced. Despite that progress, the report detailed how the exchange is currently reviewing its ESG framework with the aim of enhancing its climate disclosures to align with the requirements of the Task Force on Climate-related Financial Disclosures (TCFD) and the climate standards as part of the new International Sustainability Board (ISSB), much like many of its counterparts globally. As a means of helping issuers prepare, the exchange also revealed it will be publishing guidance and training materials to help issuers manage the uptick in reporting. Across the globe, the TCFD framework has largely become the gold standard for climate-related reporting while the further integration of ISSB standards means companies in all jurisdictions would do well to – at the very least – use 2022 reporting as a trial run for mandatory disclosure in future years.

Carbon sinks can boost climate ambitions

The EU will increase its greenhouse gas reduction target by 2030 thanks to a new law aimed at increasing the amount of carbon held by European nature. Earlier this month, EU lawmakers agreed to revise the land use, land-use change and forestry (LULUCF) bloc rules to increase the amount of carbon sequestered by these sectors, thereby increasing carbon reduction from the current target of 55%, to 57%.

The regulation covers the use of soil, trees, plants, biomass and wood, which are responsible for the emission and absorption of CO2 from the atmosphere. According to the agreed text, the amount of CO2 absorbed by Europe’s so-called ‘carbon sink’ should rise to 310 million tons by 2030, effectively returning it to the levels recorded a decade ago.

To reach the 310 million tons goal and make a 57% reduction in emissions a reality, EU countries need to change their land use practices. Indeed, with warnings about nature destruction released almost daily, one might wonder whether the progress needed on the one side – the carbon sink – will genuinely allow for greater reduction on the other – greenhouse gas reductions.

Turning Black Friday Green

Despite initial reports of record Black Friday online sales, many retailers and environmental groups have used this year’s festival of overconsumption to promote more sustainable shopping practices. With claims that 80% of Black Friday purchases end up as waste within a year, the alternative “Green Friday” has been gaining traction, with many retailers opting out of offering promotions. The Green Friday movement has been gathering pace in Belgium where some retailers elected not to open their stores at all this year and instead encouraged their customers to go for nature work or volunteer with an environmental group. This year, online auction site eBay UK opted to only promote pre-owned or refurbished deals stating that they want to break the cycle of “buying for buying’s sake”, citing research that found that 52% of people intend to give at least one-second hand gift this year. Similarly, activist clothing retailer Patagonia once again used the day to promote their repair and buy-used services. As Black Friday increasingly becomes a symbol of overconsumption and magnifies the disposable nature of many consumer goods, we may soon reach a tipping point where the association with the day will in fact become a reputational risk for businesses, with environmentally conscious consumers opting for more sustainable alternatives.

The rising importance of cybersecurity expertise on boards

In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed rules that would require publicly traded companies to annually disclose information regarding cybersecurity risk management, strategy, governance, and incident reporting, including whether board directors have expertise in cybersecurity. According to WSJ Pro, out of 4,621 Board Directors representing S&P 500 companies, only 86 (1.9%) had relevant professional experience in cybersecurity in the last 10 years. While the rule does not require cybersecurity expertise on Boards, investors may feel that being a laggard on this front represents a negative indicator of overall risk management capabilities.

To prepare for the SEC guidelines, Boards will need to take action to either enhance cybersecurity expertise in the Boardroom or demonstrate how the Board receives sufficient information to discharge its responsibility to oversee cyber risk. For instance, corporate Boards can incorporate cyber resiliency into meeting agendas, and create greater connectivity between Board members and cybersecurity executives. While Board members may not necessarily be expected to be cyber experts, they are increasingly expected to be able to lead on this front by working with management, external experts and stakeholders about existing processes, with clear disclosure explaining those same actions in annual filings.

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