ESG+ Newsletter – 21 September

Your weekly updates on ESG and more

In what has been a hectic week for ESG and sustainability developments, our team has put together the most impactful stories from across the globe. Highlights include the final publication of the TNFD framework, an EU ban on climate-neutral claims, California’s emissions reporting bill and a call for greater support of developing nations in transitioning to a more sustainable path. But that’s not all, as we also look at efforts to create genuinely inclusive workforces, investor pressure on transition plans and the potential reignition of a social taxonomy in Europe. 

Tracking Global Regulation

As ESG regulations evolves, FTI Consulting provides periodic summaries of need-to-know updates from around the globe. This month we summarize updates from over the summer, covering new rules on Cybersecurity governance in the U.S., Australia’s efforts to address carbon leakage, the EU’s consultation on the Sustainable Finance Disclosures Regulation, and California’s Climate Accountability Package. Read more on our ESG regulations page.

Final TNFD recommendations launched 

During a New York Climate Week event on 18th September at the New York Stock Exchange, Environmental Finance details the launch of the Taskforce on Nature-related Financial Disclosures (TNFD) final recommendations and disclosure framework. The TNFD is a voluntary disclosure framework, outlining 14 recommended disclosures for corporates and financial institutions to assess and disclose their impacts, dependencies, risks and opportunities related to nature. The TNFD looks set to represent the gold standard in corporate nature-related reporting and its finalisation signals a step change in expectations around nature-related disclosures. The TNFD’s framework builds on the work of the TCFD and is consistent with the approaches of ISSB and GRI, with its developers hoping the similarities will drive a similar level of adoption from issuers globally. Such adoption is designed to allow shareholders and other stakeholders to understand how companies are identifying, assessing, and responding to nature-related issues through comprehensive disclosure. As a sign of positive reaction to the launch, companies have begun coming forward as early adopters of the recommendations, including pharmaceuticals giant, GSK, which plans to issue its first TNFD report in 2026, while its publication was welcomed by French President, Emmanuel Macron, as well as the Chair of the Financial Stability Board, the acting secretary for the Convention on Biological Diversity and the Chair of the International Organization of Securities Commissions board. 

Tackling false green claims to strengthen consumer trust  

In a timely piece, a Bloomberg article has looked at the efforts that legislators and regulators around the world are making to crackdown on false and misleading sustainability claims on products as they try to position themselves as a responsible business. Such practices can be lucrative for businesses, with research indicating that consumers will choose a more environmentally friendly product even if it costs more. However, outside of specific labelling on the packaging, these claims lack any verification or detail regarding their accuracy – creating an opportunity for companies and a significant problem for regulators. While the article details EU, US, UK, Asian and Australian attempts to policing labelling claims, just yesterday, the EU moved to ban “climate neutral” claims on consumer products by 2026, as reported by the Financial Times. Banning ads that are false and misleading can be a slow process and doesn’t stop companies from coming back with an alternative campaign that sidesteps the original issue but, as highlighted by FTI in May, legislating green claims might be a more effective path forward does present one pathway forward and the EU and UK are taking the lead.  

Increasing actions by legislators come at a time when the wider public’s confidence in sustainability credentials of products is becoming more sceptical, with over half stating they would stop buying from a company found to have engaged in greenwashing. In the period ahead, we expect regulators will continue to shine a spotlight on false or misleading claims and, if consumers vote ‘with their feet,’ then – in theory – the popularity of a product will suffer, eventually impact not only companies’ bottom line, but also impact its social license to operate. 

Are Europe’s financial firms change-takers or change-makers?

As set out in a recent note from FTI, this was the question posed by Eric Usher, Head of the United Nations Environment Programme Finance Initiative (UNEP FI), to leading banks and insurers at the initiative’s European Roundtable in Madrid last week. At that event, a range of issues were discussed, including climate, transition finance, just transition, nature and the principles for responsible banking (as covered in this week’s ICYMI). As the pressure on these issues rises across all sectors, the role of those with the keys to capital, financing and underwriting will remain a central focus for progress.

Call to action to finance climate vulnerable nations 

The need for a new global financial architecture to address climate emergencies and global debt crises is growing in developing countries, particularly Africa. It is estimated that Africa requires $2.8 trillion in climate financing between 2020 and 2030, but only receives 3% of global climate finance, with only 14% coming from the private sector as reported by Khaleej Times. Indeed, development-related climate financing and development aid to Africa have decreased. To address this shortfall, developed countries and global financial institutions can provide concessional financing for climate-adaptation policies while reforming multilateral development banks can help meet global development goals and address climate change, energy access, and pandemic preparedness, with a focus on investments in the green transition, particularly renewable energy. Fulfilling the loss and damage fund and supporting vulnerable countries is critical to support energy transition and as committed to at COP27, the expectation is for global leaders to double funding for adaptation efforts and apply the ‘polluter pays’ principle to maritime activities. 

Norway wealth fund raises bar on corporate climate transition plans 

While across a number of jurisdictions, the role of (or limits to) ESG has come under intense scrutiny. Nonetheless, certain large investors and bodies plough on, with Reuters reporting that Norway’s $1.4 trillion sovereign wealth fund, the world’s largest, is the latest to unveil stricter demands for how companies it invests in should handle climate risk. The fund holds stakes in around 9,200 companies globally and has often looked to be a leader on ESG issues. In its latest stance, it is demanding that company boards move from target setting to concrete transition planning to address climate change. Among the fund’s sharpened criteria are the establishment of annual key performance indicators to measure climate transition plan progress, disclosure of net zero strategy progress annually, and details on how executive pay aligns with interim climate targets. The fund also published a policy on using voluntary carbon credits, saying companies should prioritise reducing their own emissions but can use verified credits to signal high climate ambitions, with the caveat that credits should not count towards interim emission targets and companies should be transparent about their use. Ultimately, the fund says carbon removal, not just offset, will be needed for many companies to reach net zero emissions by 2050. 

Caring for the carers in your workforce 

An interesting piece in the Financial Times  delves deeper into the S conundrum facing many businesses, particularly those that are placing significant focus on improving conditions for workers facing differing pressures – both inside and outside the office – including the growing caring burden that many employees are secretly shouldering while also attempting to carry out their day job as normal. As life expectancy increases, workers are having to give up work to care for elderly relatives – in the UK, an estimated 600 people a day, most of them women, are giving up paid work to become carers. However, there is growing anecdotal evidence of workers performing their caring duties “on the sly” for fear of harming their career prospects, with many resorting to using annual leave. Carers frequently end up simply jugging their work demands and caring duties, leaving them exposed to burnout. Unlike other forms of family leave, carers leave is rarely enshrined in law. There has been some progress in the UK with the Carers Leave Act coming into force this year. However, the one-week unpaid leave offered under this legislation is unlikely to make a significant impact on worker well-being. This leaves an opportunity for companies to take the lead by assessing how much of a problem this is within their workforce and offering greater assistance. UK energy firm Centrica has provided some leading research in the area, estimating a saving of £1.8mn a year in unplanned absences by offering additional paid carers leave. While the financial return of this initiative may become clearer over time, the human impact is likely to have long-lasting results for interactions with businesses. Whether companies embrace the growing issues or consider it a sign of “arrogance” from workers, remains to be seen. 

A French investor group seeks to revive the social taxonomy 

According to Responsible Investor, the French Sustainable Investment Forum (SIF), along with a private equity association and a social impact organisation, have set up a working group to resuscitate the idea of creating a comprehensible way to define what a socially sustainable activity or company is after similar plans were abandoned by the European Union (EU). The working group is backed by a number of large investors, including AXA IM, HSBC AM, LBPAM, Mirova, Sycomore AM, and ERAFP, who will all have a representative in the group. Another key participant will be Thierry Philipponnat, a former member of the EU Platform subgroup working on the social taxonomy. The new working group plans to meet monthly and to complete its work by next summer. 

Germany also separately aims to bring the social taxonomy back to life. However, while Germany intends to refine the work previously carried out by the EU Platform, the French working group is said to be considering a new approach. Philipponnat outlined that there is a need to consider potential political obstacles to make proposals that have better chances of being adopted. Given the challenges faced by the green Taxonomy and the wider variance of opinion and data on social issues facing business, there is a long road ahead before something formal is implemented from a regulatory standpoint. 

New research published demonstrates the value created by ESG  

As the debate on ESG rolls on, Financial advisory firm Kroll has published the latest research demonstrating the correlation between strong ESG performance, per ratings leader MSCI, and the historical returns of publicly listed companies. The publication cites its research base of over 13,000 companies globally, across a variety of geographies and industries, and across a period from 2013 to 2021. The central conclusion is that ESG Leaders earned an annual average of 12.9% compared to “Laggards,” as defined by MSCI’s methodology, of 8.6%. The positive correlation between MSCI ratings and relative performance was consistent across all major geographies and all but two major industries, Consumer Staples, and Healthcare. The greatest difference return-wise between Leaders and ‘”Laggards” over the period, was seen in the United States, 20.3% and 13.9% respectively, despite the ongoing debate and criticism surrounding ESG and its politicization. 

While the findings are not revolutionary, and Kroll acknowledges this implicitly by defining ESG in its introduction as simply risk and opportunity modelling with regulatory tailwinds, not least due to the myriad indices and passive capital directly linked to MSCI ratings, the breadth and scale of the research mean its conclusions are valuable. 

ICYMI 

• Proxymity, a Startup solving proxy voting headaches, launches in the U.S. The company, headquartered in London and backed by the biggest custody banks, took a critical step towards its goal of modernizing proxy voting by launching in North America. Proxymity processes shareholder votes in real-time across Europe, Australia and other markets, digitally connecting companies with intermediaries and shareholders in one of the latest developments in financial services. 
• Principles for Responsible Banking hits a critical delivery milestone. CEO,Simone Dettling, speaks with Responsible Investor ahead of the Principles for Responsible Banking (PRB) fourth anniversary, the UN’s sustainability banking programme headed by Dettling. The PRB provides a unique framework for ensuring that banks’ strategies and practices align with the vision society has set out for its future in the Sustainable Development Goals and the Paris Climate Agreement.
• US Treasury: Financiers’ ‘net zero’ pledges must align with temperature limits.  Net-zero financing commitments from banks and asset managers should align with goals to limit the global average temperature increase to 1.5 degrees Celsius and be backed by “credible” metrics and targets, the U.S. Treasury announced this week. The Treasury released new, voluntary principles as world leaders and business moguls converged on Manhattan to focus attention on the climate crisis during the U.N. General Assembly.