ESG+ Newsletter – 20th October 2022

Progress on TCFD, but still opportunities for improvement

In its 2022 status report, the Taskforce on Climate-related Financial Disclosure (TCFD) analysed progress made globally by companies reporting against its 2017 flagship recommendations. While identifying encouraging signs of progress, the report finds that greater urgency may be needed to improve transparency. Of the sample of companies assessed for the report, only 4% aligned with all 11 recommended TCFD disclosures. European companies have been leading the way with 60% of companies reporting some information in 2022. Overall, while companies do a relatively good job in identifying risks and opportunities, translating risk and opportunity identification into action remains a stumbling block. The report also highlights how defining science-aligned targets using climate scenario analysis remains a challenge across industries. Adoption of the TCFD recommendations is widely seen as a key step for companies in evaluating climate-related financial risks within long-term strategic planning and risk management. However, and perhaps surprisingly to some, there are signs of underperformance against governance recommendations, meaning companies will need to integrate the governance of climate-related risks into risk management structures to a greater degree to reduce the likelihood of climate-related financial risks materialising, whilst simultaneously maximising opportunities.

Green-hushing phenomenon demonstrates corporate fear of anti-sustainability allegations

Despite the progress outlined by the TCFD above, climate consultancy South Pole has discovered that one in four companies do not plan on publicly disclosing their science-aligned climate targets for fear of allegations of greenwashing. The findings, published in South Pole’s annual report for 2022, are based on the results of a survey of more than 1,200 businesses, across 12 different geographies, which have net zero targets in place. In many cases, these companies are not just setting targets but also making concerted efforts to achieve them. The consultancy’s CEO, Renat Heuberger, referred to the phenomenon as “green-hushing” in an accompanying press statement. He emphasised his concerns about the possible impact of the trend, commenting that given the rate of global temperature rises, companies should be leading by example and setting benchmarks for their peers to follow. In its coverage of the research, the Financial Times noted both the growing number of lawsuits against perceived greenwashing and the broader increase in scrutiny of corporate behaviour. It seems that increased scrutiny might be damaging transparency, or – perhaps given the widespread adoption of these targets, companies no longer see an advantage in publicising them.

Developing nations call for joint action to deal with the impacts of climate change

The World Bank estimates that approximately 58% of the world’s poorest nations are at risk of or currently in “debt distress” as a result of the climate crisis. Last week, 20 countries most vulnerable to climate change indicated that they are considering halting their debt repayments, a collective total of $685 billion. Developed nations, who have historically been responsible for the bulk of emissions, have opposed the creation of an international fund to compensate the most vulnerable nations for the loss and damage caused by the climate crisis, as it would imply liability for significant disaster costs. An alternative solution being researched by the World Bank and the IMF is a debt swap, which would allow these vulnerable nations to use part of the debt repayment for conservation projects. As we approach COP 27, the role of wealthy nations and their responsibility towards developing nations in the context of the climate crisis is likely to generate much debate, with the role of organisations such as the World Bank and the IMF under particular scrutiny.

Growth in CCS facilities may not mitigate annual CO₂ emissions

Earlier this week, the Global CCS Institute published its annual survey of the carbon capture and storage (CCS) sector which highlighted that the number of CCS projects is up to 153, an increase of 61 over the previous year. While the development of CCS facilities grew to record levels, the existing and proposed projects would be able to store just 244 million tonnes of CO₂ a year – which represents less than 1% of the 36 billion tonnes of CO₂ that the International Energy Agency (IEA) estimates were added to the atmosphere last year.

CCS has proved a controversial topic, with detractors arguing that it is an expensive and ineffective technology that only serves to prolong the life of fossil fuels and delays addressing the reliance on it as an energy source. Proponents believe that CCS plays an important role in meeting global energy needs and climate goals. However, with the deepening energy crisis forcing countries to retreat on certain commitments due to immediate energy needs, the importance of CCS to energy transition may increase, but it will need to meet the scale required for the world to meet its net zero ambitions which, according to IEA, includes capturing 7.6 billion tonnes of CCS capacity by 2050.

Investors call on the TNFD to encourage nature restoration

Investors have asked the Taskforce on Nature-related Financial Disclosure (TNFD) to enhance its proposed framework by encouraging the financing of nature restoration. The TNFD has released two draft versions of its disclosure framework which so far focuses on locating interfaces with nature, evaluating dependencies, and assessing nature-related risks and opportunities. According to James d’Ath, data and analytics technical lead at the TNFD, the draft framework currently focuses on reducing negative impacts on nature, but investors want to see an increased focus on opportunities to invest in biodiversity restoration. While there may be increasing interest from investors to engage in nature restoration, it seems that there are limited opportunities to invest in companies in this space. ASN Impact Investors revealed that after analysing 43,000 listed companies, just three were deemed suitable to receive investment from its biodiversity fund. While ASN is confident it will find more listed companies to invest in, they cited continuing damage to biodiversity caused by listed companies as the main reason for the small list of eligible investees. As the finance community become more vocal about its interest to invest in companies working towards nature restoration, perhaps companies will begin to transition their approach from minimising negative impacts on biodiversity towards actively restoring nature. Indeed, there is growing pressure for all actors to move into this space, with French financial institutions reporting for the first time on their biodiversity risks and strategies this week.

New gender balance rules approved for listed companies

The EU Council has approved new rules aimed at improving the gender balance on boards of public companies, bringing the proposals a step closer to being legally enforced. The new rules set targets for listed companies to have women holding 40% of non-executive director positions by 2026, or 33% of all director positions in member states that apply the rules to both executive and non-executive directors. When faced with two equal candidates, companies are encouraged to give priority to the under-represented gender. There have been growing concerns regarding the diversity of boards globally, while diversity and inclusion as a broader theme have exploded in importance since the pandemic – a subject covered extensively in this Newsletter. A recent survey by the European Institute for Gender Equality (EIGE) revealed women account for approximately 60% of university graduates, yet they are underrepresented on corporate boards with only 31.5% of board members and 8% of board chairs. While investors and other stakeholders have been pushing for greater gender balance on boards, these new rules will hopefully accelerate progress.

US and European asset managers divided on double materiality

While it continues to be widely shunned in the US, double materiality is growing in popularity among major European fund managers and financial institutions. Double materiality refers to the strategy of examining the impact of ESG risks, not just on specific investments, but their broader impact on society. The concept has failed to gain traction among the US regulator, however major investors and institutions in Europe are all applying double materiality concepts across their assets, claiming that the approach allows them to take a longer-term view of the risks to their portfolios. This division across the Atlantic suggests a rocky road ahead for attempts to ensure consistency across regulations.

In Case You Missed It

• Alaskan officials have decided to suspend the upcoming snow crab season, due to population decline in the Bering Sea. The US Environmental Protection Agency (EPA) believes that predatory behaviour and stress from warmer water may have caused the crabs to migrate away from coasts. The Fish and Game Department (ADF&G) is assessing possibilities for rebuilding, including the potential for sustainable fishing during times of low abundance, with input from the crab industry.
• A survey conducted by the Australasian Investor Relations Association (AIRA) among ESG professionals in the Australia Securities Exchange and New Zealand Stock Exchange companies revealed that climate change is the most urgent concern among ESG issues, with 52% of investors citing short and medium-term emissions reduction objectives as the most significant climate-related disclosure in the upcoming financial year.

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