ESG+ Newsletter – 27th October 2022

NZBA a blow for GFANZ, but may drive higher accountability

In the wake of tougher guidance issued earlier this year by UN backed campaign Race to Zero, the Chair of the Net Zero Banking Alliance (NZBA), Tracey McDermott, this week penned an open letter to the organisation’s members. The letter highlights NZBA’s autonomy in structure and decision making. GFANZ is a global coalition of leading financial institutions committed to accelerating the decarbonization of the economy and works as an umbrella group which is made up of sector specific alliances, such as NZAB. In order to gain membership to GFANZ, alliances and the firms that make them up are supposed to partner with the ‘Race to Zero’ campaign.

The letter follows on from last month’s well-publicised speculation that GFANZ members were considering quitting the group, potentially in response to the concern that a failure to meet the new requirements could result in legal vulnerability. Race to Zero’s new criteria, which were laid out in June and then updated in September, include alignment to 1.5-degree Celsius scenarios, as well the phasing out of fossil fuel related projects. The letter stated that the alliance will consider the update and then decide whether it would make any changes to its own guidance specifically.

With net-zero goals coming under increasing scrutiny, accountability to commitments should end up being a positive in the round, as stakeholders expect a shift among companies from commitment to delivery.

Contrasting updates from the SEC and ISSB

The SEC is at least months away from finalizing its new climate disclosure requirements, as the agency continues to balance challenges associated with demands for greater transparency, technological difficulties, and legal threats. The SEC also must consider the Supreme Court’s ruling in West Virginia v. Environmental Protection Agency (EPA), which ruled that agencies need clear permission from Congress to create regulations that have major economic or political effects – effectively raising the bar for the SEC to require any corporate climate disclosures.

While legal requirements and efficacy may end up being diluted, voluntary frameworks are posed to ramp up, with confirmation earlier this month that the International Sustainability Standards Boards (ISSB) voted unanimously to require company disclosures on Scope 1, Scope 2, and Scope 3 greenhouse gas emissions.  This also includes developing “relief provisions” in order to help companies apply the Scope 3 requirements, which will be decided at a later date.

Social topics as important as environmental topics

Environmental topics – such as climate change and water – have regularly dominated ESG discussions and the regulatory landscape, while the ‘softer’ social topics have often been deemed less important. One of the reasons for this may be the greater availability of data on environmental issues, perhaps leading to less ability to conceptualise what good performance on social issues looks like. However, as Thomson Reuters points out, there are social topics which are extremely important are increasingly easy to measure, such as human rights and diversity, equity, and inclusion. Supply chain audits, which account for 40% of corporate ESG impacts, can uncover human rights failings, while strong grievance mechanisms represent robust protections. On diversity, equity and inclusion, a common area is the internal representation at higher levels of those individuals with underrepresented identities or backgrounds. As strong governance and progress on environmental criteria become the minimum expected of companies, a proactive and positive approach to the S offers an opportunity for companies to meet investor expectations while differentiating their impact from peers.

The FCA fund labelling to help build trust in ESG

With the growth in the number and scope of funds being billed as green, and the use of ‘ESG’ and ‘sustainability’ in fund marketing, the Financial Conduct Authority (‘FCA’) has stated its concerns that some claims may be misleading and difficult for consumers to navigate. In response, and in line with its aim of clamping down on greenwashing, the FCA has proposed a new set of measures, which include investment product sustainability labels to distinguish the shades of “green” investing, and ensure that these claims are underpinned by objective criteria. These rules will likely be implemented in the middle of next year, and funds will have a year to update their approach to meet the standards.

This topic has been a priority for other regulators around the world, such as the EU and the US, where the SEC is working on the development of a similar set of rules.

Regulator demands for boardroom oversight of cybersecurity

As highlighted in our recent paper, regulators and investors are increasingly pushing for greater Board oversight of cybersecurity. SEC proposed rules lay out how the regulator wants public companies to enhance and standardise their disclosures regarding the governance of cybersecurity, including evidence of Board cybersecurity expertise and oversight of cyber risk. The World Economic Forum and National Association of Corporate Directors have laid out guidelines for how Boards can prepare themselves for this increased scrutiny and ensure effective engagement between security leaders and the Board.

Firstly, boards must align their practices with the SEC’s view, which is that cybersecurity is a material business risk. The Board must therefore challenge their cybersecurity leaders to ensure that cyber resiliency plans consider the financial impact of a cybersecurity incident. Similarly, budgets and strategies must be aligned so that appropriate investments are made to mitigate cyber risk exposure. To achieve this alignment, it’s critical that cybersecurity discussions are conducted not just with the Chief Information Officer or Chief Information Security Officer, but also with other members of the leadership team such as the CFO or General Counsel. This will prevent discussions on cybersecurity from getting bogged down in technical details and, instead, will elevate them to broader boardroom discussions that look at how investments can be directed towards the cyber risks that are most likely to materially impact the company.

In Case You Missed It

• This week, Apple announced new clean energy investments to set up solar and wind projects in Europe, while also called on its suppliers to decarbonize operations related to the production of iPhones and other products. The iPhone maker will now require its supply partners to report on progress on carbon neutrality goals, specifically Scope 1 and Scope 2 emissions reductions, related to the production of Apple products and will audit their progress annually.
• Research by the ECB has revealed that Banks with a greater female representation in the boardroom lend less to more polluting firms. This hypothesis stems from the understanding that women appear more community-minded, altruistic, and caring than men; while they also reported to show more concern and assume more pro-environmental behaviours than males. These considerations support the positive association between a greater female representation in the boardroom and a bank’s environmental policy.
• Tinned fish, such as Anchovies and Sardines, are among the lowest-carbon animal protein available and have the potential to curb the world’s enormous emissions from food. Relative to the global impact of all agriculture and livestock production, catching wild fish represents just 4% of the overall emissions. And the type of fish that go into cans account for a relatively negligible 2% share of the small emissions associated with catching wild fish.

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