ESG+ Newsletter – 30th March 2023

TNFD releases final draft framework including 14 disclosure metrics

The Taskforce on Nature-related Financial Disclosures (TNFD) released its fourth and final draft framework on Tuesday. Unlike previous drafts, this version includes 14 disclosure metrics, which the taskforce suggest should be disclosed and tracked by organisations in order to understand their impacts, dependencies, risks and opportunities relating to nature. Measuring data relating to biodiversity and nature is one of the key challenges in implementing biodiversity targets and strategies. Unlike climate change, which has been boiled down to one key metric – GHG emissions – impacts on nature and biodiversity have not yet been expressed so simply. The TNFD has addressed this by outlining 14 ‘core global metrics’ covering climate change, water, pollution, resource use, and nature-related risks and opportunities. The TNFD has chosen a set of leading indicators across these areas to provide meaningful disclosure across impacts, risks, and opportunities.

In terms of maturity, biodiversity remains behind climate. However, the topic is currently riding a wave of momentum on the back of the Global Biodiversity Framework agreed at COP15, with disclosure mechanisms such as TNFD and the Science Based Targets for Nature methodology nearing completion. The final TNFD framework is due to be published in September and trials of the framework are already underway. As the frameworks and standards establish expectations on companies will increase to have robust strategies in place which support the transition towards a nature positive economy.

IPCC report lays bare the pressing needs on climate

Last week, after eight years of work, the Intergovernmental Panel on Climate Change (IPCC) published the final part of its comprehensive assessment of climate change. Unsurprisingly, the report found that humans have been the driving force behind climate change which has a disproportionate impact on the most vulnerable, while also setting out certain steps to take to begin to redress the negative impact we’re having. One of the more alarming notes struct by the research was that, based on current policies, temperature rises would likely be approximately 3.2C by 2100. Losses and damage will “escalate with every increment” of temperature rises. In digging deeper, The Guardian sets out the eight most pressing issues to address in the fight against climate change. On a more positive note, the report shows that many options for tackling climate change – from wind and solar power to tackling food waste and greening cities – are already cost effective, enjoy public support, and have the material benefits of protecting human health and nature. With the Coalition of Finance Ministers for Climate Action meeting in Washington D.C. next week, we may get a sense well in advance of COP 28 of how serious the report will be taken by leading governments.

As ‘greenwashing’ concerns grow, criticism of ESG ratings sharpens

Frequent readers of this newsletter will be aware of ongoing criticisms regarding ESG ratings, particularly in relation to inconsistencies. Regulators have also long been making sounds that they want to implement some form of oversight of the sector, while others have argued for the standardisation of ratings across the ESG ratings sector to provide greater transparency. As regulatory scrutiny heightens on ratings, a report covered by the Financial Times noted that MSCI is about to downgrade hundreds of funds ESG ratings. The decision is a result of a regulatory pressure on the index providers to clampdown on ‘greenwashing’ in their funds by tightening the criteria for what qualifies as an ESG-compliant fund, much like the impact we’ve seen from Europe’s SFDR regulation. While a Reuters report has revealed that there is growing dissatisfaction and confidence issues amongst investors and companies with the ESG ratings. They have criticised the accuracy of the ratings, as well errors by the ESG rating agency’s analysis of company supplied data.

The two reports come at an interesting juncture for the ESG rating industry, as the ratings sector grapples with external headwinds that are not uncommon with a new and emerging space. While the future makeup of ESG ratings sector remains unknown, lingering concerns about ‘greenwashing’ of financial products and investor’s trust in the ratings accuracy may highlight a lack of confidence in the ratings space generally.

Investor and standards groups in push for improved climate plans and disclosures

The International Accounting Standards Board (IASB) has announced a new project aimed at improving the disclosure of climate-related risks in financial statements. The project is expected to propose small amendments to existing IASB standards and is intended to complement the broader work being undertaken by its sister organisation, the International Sustainability Standards Board (ISSB). Two sustainability disclosure standards – one to address general sustainability standards and another on climate – are expected to be published by the ISSB by the end of June. While this latest update is likely to be small in scope, any provision for climate-specific disclosures in a widely accepted accounting standard will be a major step forward. The IASB will also consider whether climate risk should be factored into the measurements of assets and liabilities – something investors have long been pushing for.

The IASB announcement comes in the same week that the Institutional Investors Group on Climate Change (IIGCC) announced a new initiative to improve corporate engagement on climate-related issues. The Net Zero Engagement Initiative (NZEI) builds on similar initiatives, such as Climate Action 100+, but is focused on more structured engagement with target companies. The group of 93 investors has sent letters to over 100 companies setting out their expectations for net zero transition plans, including emissions targets, emissions performance tracking, and decarbonisation strategies. The investors will then use the responses to build out engagement strategies for each company.

As companies feel increased pressure from multiple fronts to demonstrate focus and transparency on climate matters, it seems that concrete net zero plans combined with specific climate risk disclosures will soon be non-negotiables. Despite certain statements that a focus on climate was driving financial crises, the pressure continues to mount.

Double materiality is the new expectation for corporate sustainability

The EU’s Corporate Sustainability Reporting Directive (CSRD) is reaffirming the drive toward double materiality. Financial materiality is a concept that has been widely used and understood in business reporting and was replicated in non-financial reporting for companies to understand which ESG issues pose the greatest risk to their business. Thanks to the latest push from the CSRD, the new trend around materiality is now a more detailed view called ‘double materiality’. Double materiality acknowledges the impact of both internal and external factors on a company’s financial performance: that a company’s financial performance is not only impacted by internal factors such as its own management and operations, but also by its impact on social and environmental conditions. Interestingly, academics and politicians have recently proposed measuring ‘triple materiality’ which looks at ESG issues even more widely, looking at impacts across the entire value chain.

Companies responding to shareholder requests before the vote

This year’s proxy season is set to be marked by the “increasingly blurred lines between politics and business”, as noted by As You Sow’s Proxy Preview report. So far, at least 542 shareholder proposals have been filed this year on a range of ESG issues, a number that is set to be on track with the final total (record number) of 627 ESG proposals last year. There has already been what some have characterized as “ESG wins”, with a number of companies agreeing to shareholder requests to prevent a vote at their AGM, as noted in a recent IPE Magazine article. In 2022, the number of shareholder proposals put forward at US companies had increased, particularly as a result of the changes to SEC guidance, but average support dropped. The article points to the increase in the absolute number of shareholder proposals, companies’ responsiveness to address shareholder concerns that investors are likely to endorse before they make it to vote, as some of the reasons for lower support. The growing (and politicised) anti-ESG movement, and recent regulatory developments as factors, may also be causing investors to “shy away from public gestures of support for environmental and social issues in 2023”. 

While some, such as the Head of Active Stewardship at the Principles of Responsible Investment, believe that “much of the low hanging fruit has been picked”, leaving a smaller number of companies to be targeted, others such the Executive Director of the Sustainable Investments Institute, believe that “Complex environmental and social challenges” will continue to require investor action, adding that requests for improved disclosure “make capital markets better”.

ICYMI

• UK sustainability regulation must get tougher. The Financial Inclusion Centre recently published a report which concluded that the UK needs a much firmer system of financial regulation to meet the Paris climate goals, including revised fund labels, full FCA regulation of rating agencies, and a climate-data based system for companies, markets, and funds, to drive comprehensive, significant change..
• Singapore’s data centres have become more green, but their sustainability efforts face obstacles. Singapore is home to more than 70 data centres which have become increasingly sustainable over the past few years. However, to significantly reduce their carbon footprint, they will need to overcome several challenges – first and foremost, the fact that Singapore continues to rely heavily on fossil fuels.
• How investing 1.3 per cent of GDP could decarbonise the global economy. A major new report released by the Energy Transition Commission has addressed the question of how much it will cost to build a net zero emission economy, revealing that the net zero investment gap is not only a “manageable macroeconomic challenge”, but that bridging the gap could unlock considerable financial savings.

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