ESG+ Newsletter – 4 July 2024

Happy 4th of July to all our US readers! In this week’s newsletter, we cover a range of developments globally, from calls for greater alignment with ISSB in China, to plans for greater CSRD alignment in Switzerland. We also look at whether sustainable aviation fuel can meet demand for flying, review the latest views on offsets, and analyse whether investor stewardship is being undermined by aims for quantity over quality.

Pressure on SBTi continues in the carbon offset market  

This week, more than 80 nonprofit groups joined forces to voice opposition to carbon credits, as reported by Bloomberg. Groups including ClientEarth and ShareAction declared that the use of carbon offsets was undermining climate action, calling on companies to focus on the reduction of emissions over the use of carbon offsets. While these statements weren’t directly focused on the Science Based Targets initiative (SBTi)’s recent controversial statement that it was considering allowing the use of offsets to achieve scope 3 emissions goals, the nonprofit groups claim they are responding to a “growing push” to normalise the use of offsets. Meanwhile on Tuesday, the CEO of the SBTi announced his intention to step down, as reported by the Financial Times. While the CEO stated that his departure was for personal reasons, the shadow of a recent board decision to support the use of offsets still lingers, with the independence of the SBTi’s governance model under particular scrutiny. Ultimately, the conversation about offsets is set to continue, and while we wait for consensus on the validity of the extent of the use of offsets, the fact remains that emissions must be reduced to prevent the worst impacts of climate change. 

CSRD influences new sustainability reporting rules in Switzerland 

In response to the European Union’s CSRD, ESG Today reports that Switzerland has launched a consultation aimed at aligning its sustainability-related corporate governance rules with international standards. The Swiss proposal aims to expand the scope of mandatory sustainability reporting, reducing the thresholds to include companies with 250 employees, CHF 25 million (€26 million) in total assets, and CHF 50 million (€52 million) in sales. This change “would increase the number of reporting companies from around 300 to approximately 3,500”, a similar step-change to the recent expansion of reporting in the EU. 

This Swiss initiative exemplifies the ‘Brussels Effect,’ seen when companies adopt EU regulations across their entire operations to simplify compliance for EU-based operations. In this case though, it is a country aligning its regulations with the EU’s. Switzerland’s Federal Council emphasised the necessity of harmonising with EU laws, noting that many Swiss companies are already directly or indirectly affected due to the close trade relationship and sizeable EU presences. For international companies operating in both jurisdictions, the Swiss initiative could simplify compliance and should not pose an additional burden, in contrast to those smaller companies who are not yet covered by the CSRD. One benefit for businesses is that Switzerland can choose which aspects of EU law to implement and can observe the effects of any legislation before adopting it, as it decided to do with the CSDDD, the EU’s other flagship ESG regulation. With the current consultation underway, now is the time for businesses to engage and discuss what works and where they need additional support. 

The complicated dynamics of SAF demand and production  

With demand for Sustainable Aviation Fuel (SAF) and biodiesel outpacing supply, as noted by a recent The Loadstar article, its production has been dealt a number of blows recently. Major oil and gas companies have announced suspensions and halting of the construction of SAF and biofuel facilities, while another has issued an update citing weaker sales. These decisions come against a backdrop of governments seeking to mandate SAF use, with the eventual aim of effectively forcing airlines to use this product. One of the big issues facing SAF production though, is that the cost dynamics remain a significant barrier for both producers and adopters, something we highlighted here a few months ago. Traditional jet fuel is two to three times cheaper than SAF to use, making it particularly unattractive for a sector like airlines, where costs are so acutely managed. While certain options remain, including ‘cheaper’ biofuels and SAF from China, as The Loadstar article highlights, there are questions about the ingredients used in their production, leaving companies with concerns about the validity of these products.  SAF is a critical component to the near-term decarbonisation of the aviation sector; however, the contraction in SAF production despite growing demand, dictates there is a long way to travel before flying becomes ‘clean’. 

PRI seeks greater ISSB integration in China

The Principles for Responsible Investment (PRI) has advocated for China’s forthcoming sustainability reporting regulations to integrate guidance from the International Sustainability Standards Board (ISSB) and relevant aspects of other ESG frameworks to a greater degree, as reported by Responsible Investor. The Chinese Ministry of Finance introduced a draft ESG reporting framework aligned with ISSB’s IFRS S1 standard in May, aimed at facilitating comprehensive, and decision-useful, sustainability disclosures. However, the current draft lacks direct reference to the ISSB standard and has yet to stipulate mandatory ESG Key Performance Indicators (KPIs) for disclosures, a core tenet of any ESG disclosures and strategies. As there appears to be growing consistency in the adoption of standards on a global basis, the PRI has emphasised the importance of transparency and comparability in China’s sustainability reporting landscape, urging adjustments to achieve broader global alignment and effectiveness. 

Investor calls for meaningful stewardship 

Impact investor WHEB has published its latest Stewardship Report, offering a view on the current engagement priorities for the asset management sector. The investor’s conclusions question the quality of investor engagement, as asset managers increasingly attempt to show high levels of activity, referred to as “an unintentional stewardship stampede,” to meet regulatory pressure from the UK’s Financial Reporting Council (FRC), which launched a review of the Stewardship Code in February. According the WHEB, operating on a quantity over quality basis risks driving down the effectiveness and reporting – moving away from the desired outcome-based approach.  

The report does broadly support and welcome the intensified engagement efforts by managers, but stresses that meaningful stewardship is lost if the sole focus is driven by metrics or box-ticking. It is a view shared by Morningstar Sustainalytics: “If you disclose your volume of activities and present it as being a ‘good thing’, it creates internal pressure to report more of it each year. There are a number of voices in the market who have decided we’ve reached a point where ‘more’ does not necessarily equal ‘better’.” It is true no single metric is an adequate proxy for real-world outcomes, but at the same time, the metrics remain important. The onus is on reporters to ensure what they disclose is truly meaningful.

ICYMI 

• Denmark’s government announces a ‘Green Tripartite’ agreement to address agricultural climate impacts. The agreement will be formed in collaboration with environmental groups, agricultural associations, and unions, ESG Today reports.
• MSCI Inc. and Moody’s Corporation announce a strategic partnership to enhance market transparency on ESG and sustainability. Leveraging their combined strengths, Moody’s will use MSCI’s sustainability data and ESG ratings, while MSCI will access Moody’s Orbis database.  
• The ISO is developing a new international standard on net zero. According to ESG Today, the standard aims to add clarity and credibility to organisations’ net zero targets and strategies, and to guard against greenwashing.