ESG+ Newsletter – 7 December

Your weekly updates on ESG and more

The penultimate newsletter of 2023 covers the many debates around ESG, from back and forth on the role of fossil fuels in the climate transition, to the ongoing discussions on whether the three-letter acronym is past its sell by date. We also hear from our own FTI representative on the ground at COP28 and look at how the regulatory landscape is evolving, including updates to the EU SFDR and rules to simultaneously prevent greenwashing and ‘greenhushing’ by asset managers. 

ESG debate roars on

In the latest back and forth on the merits of ESG, the Financial Times reports on what it perceives to be the true impact of the backlash against it. The piece, which sets out a range of differing views on whether ESG has genuine longevity, takes a whistle stop tour around criticisms, fund flows and the views of capital market participants on the merits or not of ESG. The debate is not a new one but has certainly experienced an uptick since a number of US politicians and states have placed the three-letter acronym in their crosshairs. Notable though, is the point that the latest pressure on ESG may actually cause fund managers and advocates to be much more explicit in what genuine ESG practice or investment is, in line with efforts across jurisdictions to clamp down on greenwashing in consumer products, corporate reporting and fund labelling. What perhaps is lost in the debate is the fact that many of the constituent parts of ESG – emissions, diversity and supply chain management – are now core elements of risk management and pre-financial performance. Whether that is enough to save the acronym or there is a need for further evolution, remains to be seen. 

Guidance on the SFDR includes mandatory reporting and targets

Much of the difficulties for companies and investors in ESG and sustainability have, over the years, focused on the challenges associated with target-setting and regulatory guidance. In an effort to address certain of those same challenges, as reported by ESG Today earlier this week, Europe’s three primary financial regulatory agencies, the European Supervisory Authorities (ESAs), announced the publication of proposals for new mandatory reporting. The requirements will force disclosure on social factors such as exposure to tobacco production and inadequate wages, as well as new financial product disclosure of greenhouse gas (GHG) emission reduction targets; all of which relate to disclosures under the Sustainable Finance Disclosure Regulation (SFDR), the disclosure rules for financial products in the EU. The SFDR forms part of the EU’s Action Plan on financing sustainable growth and aims to establish harmonized rules for financial market participants including investors and advisers. The latest development around the regulation should be welcomed, as critics have pointed to a lack of clarity in its guidance blunting its ultimate aim of attracting capital and funding to drive forward the bloc’s goals of decarbonisation and the achievement of net zero. 

2023 set to be record year for fossil fuel emissions

While the debate over ESG rages on, emissions from fossil fuels look set to hit record levels in 2023, as detailed by a report from the Global Carbon Project covered by Bloomberg. Against the backdrop of a much-scrutinised COP28, the planet is on track to overshoot its carbon budget for 1.5C of warming around 2030, and the budget for 1.7C in 15 years. Indeed, at the conference in Dubai, carbon removal has been a major subject of discussion, with some scientists saying it will be necessary to limit global heating, even if not a substitute for curbing greenhouse gas emissions. However, it is not necessarily a zero-sum game, argue authors of the report: “If we plant a bunch of trees, or hack the ocean, to take up more carbon, we have to worry about when that carbon will be released back into the atmosphere” which is “something we don’t have to think about if we never emit that carbon at all.” Across the spectrum, and as clearly set out by the Science Based Target Initiative (SBTI), there seems to be a general acceptance that without significant reductions in emissions, genuinely addressing the impact of climate change seems impossible. Whether there is a willingness to back up words with action on that issue is a discussion that seems set to continue for a long time yet. Hear from our very own Wendy Dobson in this video sent in from COP28 on why it’s unlikely that fossil fuel phasing out will be agreed during this edition.

Greenhushing should be punishable by regulators, according to IOSCO

Forget Greenwashing, an International Organisation of Securities Commissions (IOSCO) report has suggested that financial institutions under reporting on sustainability credentials may be punished under existing regulations. The report reviews the rules and initiatives to tackle greenwashing across financial regulators overseeing 95% of the world’s capital markets, finding that almost all jurisdictions reviewed have mechanisms in place to tackle greenwashing by financial institutions. Perhaps more surprisingly, the report looked at rules to regulate ‘greenhushing’, whereby companies under report sustainability credentials to avoid investor or regulatory scrutiny. IOSCO found that these practices could be punishable under rules to ensure information provided is “clear, fair and not misleading”, despite there being a lack of specific regulation to tackle underreporting of sustainability information. In response, IOSCO sets out a series of recommendations to support financial regulators in tackling greenwashing and greenhushing. While greenwashing and greenhushing sit at opposite ends of the spectrum, what is clear from IOSCO’s findings is the need for transparent, fair and accurate reporting to avoid further mistrust in the contribution of financial institutions to ESG and sustainability goals. 

ICYMI

• Commodity-driven deforestation and peatland loss emits more carbon than Germany. A new report from Trase has analysed the impact of commodity-driven deforestation on climate change, finding that despite a commitment at COP26 to halt and reverse deforestation by 2030, little progress has been made. The report found that deforestation linked to six key commodities, including cocoa and beef, accounts for 444 million tonnes of CO₂ per year.
• The TNFD has updated its nature scenario guidance to be more user friendly. The Taskforce on Nature-related Financial Disclosures (TNFD) has launched a consultation on new guidance which seeks to help companies to understand the specific scenarios of nature loss which drive nature-related risks and opportunities. The consultation is open until 29th March.
• The looming land grab in Africa for carbon credits. As debate at COP28 rages on over the role of carbon markets in solving the climate crisis, the FT reports on a potential land grab in Africa by countries looking to trade emissions reductions with other governments, with experts warning this could lead to exploitation.