ESG+ Newsletter – 29 February 2024

In what has been dubbed by many as the “year of elections”, this week seems to have been the ‘week of regulatory focus.’ While not as catchy, this week’s newsletter covers several developments in regulation, across the EU, the US and Australia. We also examine plans from the UK’s FCA to provide greater detail on investigations, whether China can remain on track to hit its climate goals and look at Climate Action’s response to recent withdrawals from the coalition. Enjoy!

Despite opposition, Nature Restoration Law approved by the EU

In what has been viewed as a seminal moment in efforts to tackle biodiversity loss, this week, the European Parliament adopted the Nature Restoration law, which outlines a roadmap for ecological restoration within the bloc. It mandates that EU countries restore at least 30% of habitats in poor condition by 2030, 60% by 2040 and 90% by 2050. While these targets are binding for Member States rather than industry, the law will lead to national restoration plans in individual countries’ legislation, designed to detail how targets will be achieved and compel society to actively engage.

The law’s impact is particularly pronounced in agriculture, as the sector will be affected by its requirements to measure biodiversity within agricultural ecosystems using multiple indicators. Beyond agriculture, it signals the growing emphasis and priority of biodiversity alongside carbon emissions as key tools in efforts to address climate change. It presents an opportunity for businesses to collaborate with, and support, Member States in reaching their targets by participating in programmes such as restoring peatlands and planting trees. With the growing emphasis on biodiversity and nature from a host of sources, including the TNFD, the latest development is likely to be long-lasting effects on corporate reporting and engagement with stakeholders.

SEC drops certain disclosure requirements from draft climate rules 

The most recent draft of the SEC climate rules no longer requires US listed companies to disclose their Scope 3 emissions, according to Reuters. The revision presents difficulties for President Biden, who has placed addressing climate change as a core element of his policy agenda. In addition, the shift may make global corporate reporting more complicated, since European Union rules require Scope 3 disclosures for large companies starting this year. Companies and trade groups that lobbied for a scaling back of the climate reporting requirement, sought for the SEC to only require Scope 1 and 2 disclosures if they are material to a company’s business. The five SEC commissioners will vote on the rule once the SEC settles on a final draft, so it is possible that the draft is revised before then. 

The primary concern for SEC officials appears to have been that mandating disclosures across markets could have made the climate rule more vulnerable to legal challenges, perhaps opting for a crawl, walk, run approach. The latest developments are noteworthy considering last year, California adopted a law that will require companies active in the state to disclose Scope 3 emissions as early as 2027, pointing to a continued fragmentation of requirements across markets. 

CSDD fails to get approval from EU Council

The EU’s corporate sustainability due diligence directive (CSDDD) suffered a significant setback yesterday, failing to gain final approval by the European Council. An ESG Today article detailed that a number of member states – including Germany and Italy – decided not to support the regulation due to concerns on the onerous reporting requirements and potential legal impact it may have on companies. The article also notes that last ditch efforts made to gain support of the directive failed when France attempted to scale back the scope of the CSDD to companies with only 5,000 employees, significantly more than the intended 500 employee threshold, a move which would have omitted c.80% of businesses from the CSDDD reporting obligations. The failure to get approval follows an arduous four-year process to advance the regulation and can be viewed as a significant setback to the EU’s wider ESG reporting overhaul. Only time will tell if objections from countries at the eleventh hour, despite a provisional agreement on the regulation reached earlier by the Council with the EU Parliament, represents a shift in the political position regarding ESG due to backlash elsewhere in the globe, remains to be seen. 

ISSB needs uniform adoption of disclosure frameworks or risk being undermined  

A long-held critique of ESG reporting frameworks has been the array of disclosure frameworks across the globe, which make it complex to navigate for companies and investors. The International Sustainability Standards Board (ISSB) was given a mandate to tackle this issue, and create a global baseline for ESG disclosures. However, concerns were recently raised that certain regulators will diverge substantially from the goal of growing conformity, prompting the ISSB to publish a guide for jurisdictional convergence. The fear is that, if the baseline is not uniformly adopted by international regulators, then there will be regional inconsistencies in reporting, leading to a lack of trust and transparency and, ultimately, continued fragmentation. In a recent Environmental Finance article, Chair of the ISSB, Emmanuel Faber, stated that anything other than a global standard would be a failure. While there has been evidence of potential adoption of ISSB standards, including in the UK, Australia and New Zealand, among others, the litmus test may be whether ISSB standards are adopted by the world’s largest economies, such as the US. Regardless, if different jurisdictions take a variety of approaches, then perhaps the aims of growing conformity and consistency – a central tenet of ISSB’s role – may be undermined.

Coal power approvals hampering climate progress in China

A recent report from ESG News Asia underscores China’s alarming departure from its 2025 climate targets, primarily due to continued approvals of coal usage and investment. While some goals remain feasible with decisive action, the rapid approval of coal power projects in 2023 remains a significant challenge to China’s commitments to limit coal consumption and boost renewables. Despite a glimmer of hope in the accelerated clean energy deployment, the current trajectory risks damaging China’s credibility on climate action. President Xi’s pledge to curb new coal projects clashes with continued expansion, demonstrating the trade-offs between with economic and environmental consequences. 

Climate Action 100+ looks to potential positives from recent exits 

Climate Action 100+, the investor group aiming to pressurise companies to act on climate change, issued a statement following the recent departures of certain asset managers. While acknowledging its disappointment regarding the departures, the coalition noted that “hundreds of investor signatories remain committed to ensuring 170 of the largest greenhouse gas emitters reduce emissions, improve governance, and strengthen climate-related financial disclosures”, including 60 signatories that have joined the coalition since June 2023, and also coinciding with the launch of its phase two strategy asking that companies implement transition plans. After pushing for enhanced disclosure of climate risks in phase one, the investor group argued that phase two represents a natural progression aimed at ensuring that companies address those risks. As noted in an article from Ignites Europe, the departure of major US asset managers need not weaken the coalition’s efforts. In this regard, Paul Lee, Head of Stewardship and Sustainable Investment Strategy at Redington, said “it is just as possible that a more cohesive remaining group will be able to be more influential at companies by being more focused in their arguments and the suggestions that they make.” 

FCA’s plans to enhance transparency enforcement 

As part of its approach to improve the transparency, the UK Financial Conduct Authority is planning to disclose the names of firms under investigation more regularly and at an earlier stage. The aim of this strategy is to enhance the “deterrence effect”, such investigations can have on the market, and prompt whistleblowers to come forward, as noted in a recent Financial Times article. This shift, targeting firms (and not individuals) due to privacy constraints, seeks to prompt corrective actions sooner. Historically, the FCA divulged little information until cases concluded, citing legal limits, and only commenting exceptionally. The FCA has also been reassessing its whistleblower strategy, exploring incentivisation, potentially aligning with the Serious Fraud Officer’s plans to compensate informants, a practice common in the US. 

Critics, including city lawyers, have raised concerns over the potential for reputational damage to firms, arguing that being “named and shamed” prior to any findings could have lasting repercussions, identified in a City AM article. While transparency and ethical behaviour constitute core tenants of a well-functioning market, the potential impact on company value, its reputation and its employees of these investigations may represent a challenging trade-off to overcome. 

Australian business requests delay to mandatory reporting 

As covered by ESG Today, the Business Council of Australia (BCA) has released a statement on behalf of its public company members, specifically those required to report their financial results to the Australian Securities and Investments Commission, requesting that mandatory climate reporting is pushed back a year to 1 July 2025. The current draft legislation applies to businesses with over 500 employees and revenues over $500 million, or assets over $1 billion. It also applies to asset owners with over $5 billion in assets. The BCA has also requested greater alignment to the International Sustainability Standard Board, given current discrepancies in key areas such as Scope 3 and materiality of risks and opportunities. 

The BCA’s stated rationale is to allow for successful and sustainable implementation, given the need to “develop internal capabilities and capacity.” This has been a common pushback across all major global economies with proposed mandatory reporting mechanisms. Notably, the scope of the Australian legislation differs from the EU’s Corporate Sustainability Reporting Directive (CSRD) in terms of the criteria for being a large business and therefore those obliged to report in the short-term, with CSRD thresholds for inclusion in mandatory reporting set far lower.  

ICYMI 

• Capital Group launches multi-thematic Article 8 funds. Global equity, fixed income and multi-assets will be available to European and Asian investors following Capital Group’s launch of its latest sustainable investment offering. Each fund will be classified as Article 8 under SFDR, and will invest across multiple sustainable themes, including ‘financial inclusion’, ‘energy transition’ and ‘health and wellbeing’.
• ESG AUM set to top $40 trillion by 2030. Recent analysis from Bloomberg Intelligence found that despite slower growth and polarized sentiment, the ESG market is nevertheless predicted to surpass $40 trillion by 2030, anchoring the $140 trillion of projected assets under management globally. Europe is set to remain the most significant contributor, while the US may stagnate amid the election and ESG backlash. 
• Number of FTSE 100 firms referencing Scope 3 jumps almost 30%. FTSE 100 firms are stepping up their net-zero activity despite referring to ‘ESG’ less in their recent annual reports. According to a study by the law firm Irwin Mitchell, there was a 3% reduction in the use of the ‘ESG’ acronym, but a 26.8% increase in the use of environmental terms such as ‘Scope 3’, ‘climate change’, ‘net zero’ and ‘decarbonisation’. At present, 80% of companies in the FTSE 100 refer to Scope 3 emissions, marking a significant rise compared to previous years.