ESG+ Newsletter – 27 June 2024

This week’s newsletter opens with a discussion on the lasting impact the pandemic has had on work habits. We look into France’s recommendations for enhancing transparency in fossil fuel engagement; how Scope 3 emissions continue to be overlooked by corporates; and discuss EU’s new regulation on deforestation. Finally, we look at Australia’s plans to introduce stringent ESG labeling to combat greenwashing and ISSB’s updated strategy aimed at improving the cohesion of non-financial reporting.

Ever changing world of work  

One of the long-term behavioural legacies of the COVID-19 pandemic has been its impact on how (and where) the world works. Hybrid working has become a mainstay across many companies, while there is a growing trend of trialling four-day weeks. Both, however, have become ideological battlegrounds, potentially pitting employees from different generations against each other. Proponents argue that the evolution in how we work improves company productivity and employee satisfaction, while opponents cite lack of team connectivity and a drag on operations as barriers for adoption. Emerging evidence now indicates that these new ways of working are here to stay though. Stanford University and the University of Hong Kong in Shenzhen recently published findings from their study of a six-month trial on how hybrid working affected productivity, employee satisfaction and retention at a Chinese technology company. The study found that hybrid workers reported higher job satisfaction than their full-time office counterparts, with no difference in performance grades. Hybrid workers were also less likely to quit, improving retention and reducing costs associated with staff turnover. Additionally, a recent WSJ article explored the performance of a number of companies who have implemented a four-day work week. The lived experience from executives was that the four-day work week had not affected operational delivery or output, while also reporting that their employees were happier and performing more efficiently. Often a forgotten aspect of the ESG paradigm, working policies have a clear impact on the ‘S’, and should focus on enhancing employee satisfaction which, in turn, should lead to improvements in productivity and retention. 

Transparency on shareholder engagements in France under the spotlight 

In 2022, the French Financial Markets Authority issued recommendations on fossil fuel engagement, related to the “transparency of the dialogue and engagement procedures put in place with issuers in sector exclusion policies.” However, as highlighted in Responsible Investor, the latest assessment by the regulator, covering 17 French assets managers representing two thirds of the market’s assets under management, revealed that not a single one of them indicated compliance with these recommendations. These recommendations included “setting out timeframes and objectives for engagements, keeping records of the stakeholders present at meetings, and the methods of exchange and disclosing escalation pathways.” In January, the French regulator also announced a set of inspections, to be launched in third quarter of 2024, which would focus on the governance in place for voting and engagement, including related human and technical resources, as well as the reliance on external service providers. Between a potential increase in investor pressure, heightened litigation risks stemming from the creation of the chamber for emerging dispute within the Paris Court of Appeal, and the need to provide CSRD-compliant reports in 2025, the bar for French companies – much like companies globally – on governance and ESG appears to be continuously rising.  

Going beyond scopes 1 and 2 emissions 

A new report from CDP has found that Scope 3 emissions continue to be overlooked by corporates. According to Sustainability Beat, only 15% of business reporting climate data through the CDP have set a target to reduce scope 3 emissions. Scope 3 emissions are harder to accurately calculate than scope 1 and 2 data, given that scope 3 covers emissions outside the operational control of the business, including supply chain emissions. Claire Elsdon, Director of Capital Markets at CDP, uses the report to warn that investors are not adequately pricing scope 3 emissions and in doing so “are exposing themselves to unknown financial risk”.  

Meanwhile, it seems that some financial institutions are expanding their thinking to cover ‘scope 4’ emissions. This week, the World Business Council for Sustainable Development (WBCSD) published guidance on how to account for avoided emissions, otherwise known as scope 4 emissions. Avoided emissions refer to emissions avoided when a product is substituted for another with lower carbon intensity. The WBCSD has urged investors not to use avoided emissions to claim carbon neutrality and to clearly disclose any unfavourable side effects. Guidance for calculating these emissions is currently under development, with investors keen to demonstrate the impacts of their green investments leading to a patchwork of calculation methods. Ultimately, while avoided emissions are an important aspect of decarbonisation, preference should be given to understanding overall portfolio impacts and opportunities to decarbonise. 

US exporters raise concerns about the EU’s deforestation legislation  

The EU’s recent product regulation aims to guarantee that states in the EU are not contributing to deforestation and forest degradation by mandating the importation of “deforestation-free” products. Specifically, the regulation bans cocoa, timber, and sanitary products that have caused deforestation. Thus, traders must explicitly state their products are deforestation-free. In response to this ban, as reported by the Financial Times, the United States contacted the European Commission in late May, requesting a delay in the product embargo. The U.S. Secretaries of Commerce and Agriculture argued that American producers would experience severe difficulties complying with the EU law, with, the American Forest and Paper Association claiming that much of the pulp currently used to create products was processed before 2020. This conflicts with the requirement that products be entirely developed on deforestation-free land post-2020. Other internal opposers, including EU agriculture ministers and the International Trade Centre (ITC), support the United States’ stance. The ITC insists that small producers cannot technologically verify the origin of their goods along the supply chain. The European Commission intends to respond to the U.S. Administration’s delay request “in due course.” If the deforestation regulation is not postponed, US companies that are not ready to comply with the EU regulation will need to conduct in-depth analysis of their production lines to evaluate the costs of the regulation and ensure processes allow for export to the world’s largest single market.

Australia to introduce stringent ESG ‘Labelling Requirements’

The Australian government plans to introduce ESG labeling requirements to combat greenwashing and direct more capital into genuine sustainable activities, as reported by Bloomberg. Following a public consultation in early 2025, authorities will establish labels and disclosures for investment products marketed as “sustainable,” including superannuation funds. Large businesses and financial firms will incorporate climate disclosures based on Australian Accounting Standards Board guidelines, to be finalised in August. This move aligns Australia with Asian financial hubs like Singapore and Hong Kong in ESG requirements, as well as moves in the EU and the UK. The government aims to roll out these rules by 2027, incorporating a taxonomy and best-practice guidelines for companies’ transition plans, setting a high benchmark for the APAC region. 

ISSB issues key updates to progress climate and transition reporting 

This week, the International Sustainability Standards Board (ISSB) published a number of updates to their strategy aimed at improving the cohesion of non-financial reporting, specifically transition planning and value-chain wide greenhouse gas emissions. Key to the latter is partnering with the GHG Protocol, in continuation with the organisation’s broader remit of consolidating disclosure reporting frameworks – ISSB recently announced alignments with leading climate-focused ratings agency the Carbon Disclosure Project (CDP), and independent standards organisation the Global Reporting Initiative. Regarding climate transition roadmaps, the ISSB has announced that its overseeing body, the International Financial Reporting Standards Foundation, will assume primary responsibility for the Transition Task Force disclosure framework, first announced in October 2023 following the task force establishment in April 2022, which aims to provide corporates which a “gold standard” in transition planning guidance.

The increasing onus on transition planning from regulators and industry bodies is proving effective, with recent research from CDP showing that the number of companies with 1.5 degree Celsius aligned roadmap rose by 44% this year (in contrast to findings below on Scope 3 emissions). The study, based on survey responses, noted that 26% currently have a plan in place, while a further 34% stated their intention for completion by 2025. This, in combination, with the IFRS’s assumption of responsibility, is illustrative of the growing understanding that transition planning is fundamentally a financially material issue to companies. 

ICYMI 

• Eelco van der Enden, the CEO of the Global Reporting Initiative steps down. After seven years of working with GRI, Eelco van der Enden will step down at end of his current three-year fixed term contract, PA Future  
• Bloomberg launches a data solution which will allow financial firms to access data from the first companies that will have to comply with the European Union’s Corporate Sustainability Reporting Directive. 
• Greenwashing is a growing risk in the Chinese fund management sector, a new report by Greenpeace has found. Chinese asset managers are improving ESG awareness, but weak regulation means green claims often don’t match reality.