ESG+ Newsletter – 29 June 2023

IFRS Releases Global Sustainability and Climate Reporting Standards

As reported by ESG Today, the International Sustainability Standards Board (ISSB) this week released its inaugural International Financial Reporting Standards, IFRS S1 and IFRS S2, launching the much-anticipated set of global sustainability-related disclosure standards for capital markets participants. Rather than simply bringing in a suite of ESG metrics and disclosures, the new standards aim to provide a comprehensive and common language for large companies to disclose the effect of sustainability-related risks and opportunities on a company’s prospects.

Specifically, IFRS S1 provides a set of disclosure requirements for companies to use to communicate to investors the forward-looking, sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures, such as those pertaining to climate mitigation and climate adaptation, and is designed to be used in combination with IFRS S1. Notably, both standards cover Scope 3 emissions, are designed to fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and are also compatible with GAAP accounting standards.

The standards will apply for reporting periods commencing on or after January 2024, with the first disclosures against the standards to be published in 2025; however, it remains up to individual jurisdictions on how, or even if, they will implement mandatory reporting. Regulators in the UK, China, Australia, Canada, Hong Kong and Singapore have already indicated they are likely to do so, with the impact of the latest effort at uniformity in sustainability reporting likely to increase over the period ahead.

Despite pledges, progress in halting biodiversity loss appears to be floundering

In late 2022, when a Global Biodiversity Framework was agreed at COP15 in Montreal there was cause for celebration. Hailed as the Paris moment for biodiversity, it was hoped that the framework would spur immediate action from governments and the private sector to halt and reverse biodiversity loss.  This week it was reported that despite a pledge at COP26 from more than 100 world leaders to halt and reverse deforestation by 2030, an area of pristine rainforest the size of Switzerland was lost in 2022. This represents 4.1m hectares of rainforest, an increase of 10% versus 2021. More bad news came for nature this week as the EU failed to secure a majority for its nature restoration law. The law which seeks to rehabilitate the EU’s degraded land and sea areas has become an object of political contention, representing a stark ideological divide.

Despite the lack of progress in some areas, some potential good news came last week, as the UK and France launched a joint Global Biodiversity Credits Roadmap at the Summit for a New Financial Pact in Paris. This new roadmap sets out a plan for scaling up global efforts to support the purchase of biodiversity credits with the intention that these will positively contribute to nature recovery. While this represents a potentially positive step for nature, controversies around offsetting systems that have plagued voluntary carbon markets are likely to cause contention in the natural space, particularly given the very localised impacts of nature loss.

While progress is mixed, it is clear that not enough is being done to avoid the worst impacts of nature loss. As Heather Grabbe, a leading political scientist, wrote in an opinion piece for the FT “There are still no market mechanisms to protect the oceans and forests, which are profitable to destroy but not to keep as carbon sinks and biodiversity reserves”. Perhaps to protect and restore nature, we need to begin to truly understand its value.

Clothing resale programmes deliver on circularity but not profits

Fashion brands are increasingly adopting “resale” initiatives as a means of boosting their sustainability credentials. However, poor uptake from consumers has meant that these initiatives are failing to be profitable for retailers, according to Bloomberg. Over 100 retailers, including big-name brands, have established proprietary resale platforms as they attempt to carve out a share of the $28.1 billion second-hand market for themselves. On paper, the resale model is a win-win for retailers – not only can they make money from the resale of their garments, but they can also reduce their environmental footprint by avoiding the emissions generated during the production process. However, according to current estimates, resale only accounts for around 5% of overall revenue for those with second-hand offerings. Experts say that lack of consumer awareness is a primary reason for this and that brands will need to invest in their resale programmes in order to make them scale. However, poor financial incentives mean that securing executive buy-in can be difficult. Circularity advocates believe that funding from investors and even governments may be needed in order to build the infrastructure needed to support a resale industry. Right now, luxury brands are seeing the greatest success in the resale market. However, the success of the model will hinge on making resale a viable circular solution for the lower-price fast fashion brands whose products are major contributors to landfill.

What’s in a (ESG) name?

On Sunday, Black Rock CEO Larry Fink stated that he no longer uses the term “ESG,” Investment Week reports. Fink said the acronym has been “…entirely weaponized … by the far left and by the far right.” While his terminology has changed, his stance on investors being privy to non-financial disclosures has not. This comes after growing political backlash in the US against voluntary and mandatory ESG disclosures, framing them as a liberal agenda and politicised. The Blackrock CEO added that asset managers are not seeking to “engineer” a particular outcome, but instead to better inform investors of the material risks associated with an investment. As ESG disclosures become compulsory across several jurisdictions though, simply dropping a term may well be academic, as the pressure on companies to respond to the constituent parts of E, S and G remain high – from regulators, investors and other stakeholders.

UK investors watch ESG events in the US

Speaking of scrutiny, Bloomberg reports on the growing concern in the UK regarding the anti-ESG movement gaining traction in the US. In a call for guidance, the UK Sustainable Investment and Finance Association is looking for clarity regarding disclosure expectations. As the movement grows in parts of the US, it has less of a foothold in UK markets. Despite this, some anti-ESG rhetoric has popped up in UK politics, and UK companies can be somewhat reluctant to disclose ESG metrics without regulatory support from the government.

The UK investment landscape remains fickle on the issue. Surveys show two-thirds of pension schemes developing TCFD reports and three-quarters setting net-zero targets. At the same time, Investment Week reports that UK investors who prioritise ESG have waned slightly. Just as the industry’s impacts are not limited to national boarders, neither are the sentiments and backlash associated with their disclosures.

Employees and executives disagree on whether workforce well-being is improving

CNBC reports that many employees are struggling with low or worsening levels of well-being. However, according to the same study, executives believe that their workforce’s well-being is improving.  Most survey respondents indicated that improving their mental, physical, and financial health was a top priority, and was more important than advancing their careers. A number of respondents indicated that they would consider leaving their job for one that would better support their well-being, demonstrating the importance to companies in tackling this issue.

Looking at potential solutions, Dan Schwabel, managing partner at Workplace Intelligence told CNBC that companies should work towards building “human sustainability”, which would involve “giving workers opportunities to develop their skills and progress their careers and adopt new practices that support workforce health such as ensuring equitable pay and piloting four-day work weeks.” 

ICYMI

• How an SEC rule change has opened more doors for activists. Following a rule change introduced by the Securities and Exchange Commission to make it easier for shareholder activists to elect board nominees, 88 board seats were won by activists to 31 May this year, compared with 77 at the same point last year. Concerns were raised by companies that the new universal proxy rules would make it easier for activists’ proxy campaigns and there were fears of a rise in activism which has led to many companies rewriting bylaws, although these changes may be defeated in court.
• UK Regulator targets green claims that don’t Include context on companies’ broader impact. The UK Advertising Standards Authority (ASA) has updated its guidance on environment-related advertising aiming to prevent green claims by companies that do not provide any context of their wider environmental impact. This follows a series of recent rulings by the ASA against adverts by companies that did not give information on their overall environmental impact. The new guidance specifies that environmental claims about a specific product should make it clear that this is not representative of the whole business.
• Global ESG regulation increases by 155 per cent over the past decade. ESG Book released a new analysis this week showing the rapid growth of sustainability-based policy interventions, as global ESG regulations have increased by 155 per cent over the past decade. According to the research, 1,255 ESG regulations have been introduced worldwide since 2011, compared to 493 regulations published between 2001 and 2010. As the global reporting landscape is becoming ever more complex for companies and investors, understanding what and how to report sustainability information is proving increasingly challenging and time-consuming. The sharp rise in ESG regulation is likely to only continue.

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