The best cure for greenwashing is regulated disclosures

More details on the recently submitted ESRS

The European Financial Reporting Advisory Group (EFRAG) issued a press release announcing it had submitted its first set of European Sustainability Reporting Standards (ESRS) to the European Commission, something we mentioned in last week’s newsletter. It also provided a useful resource page where one can find the standards and related documents (keep it handy!). Of note is what happens next. First, the European Commission will consult EU bodies and Member States on the draft standards before adopting them as delegated acts in June 2023. Companies subject to sustainability reporting requirements for the first time (i.e., those that were not previously subject to the Non-Financial Reporting Directive) will need to comply starting in 2025 for their 2024 reporting period. Second, EFRAG will now turn its attention to developing the second set of draft ESRS, which are sector-specific standards covering agriculture, coal mining, mining, oil & gas (upstream), oil & gas (mid-to downstream), energy production, road transport, motor vehicle production, food/beverages, and textiles. This second batch will also include the lighter set of standards for small and medium enterprises. It is very interesting to note that sector-specific standards have the immense benefit of answering, at least in part, the foundational question of which material issues companies should address and report on.

2022 Canadian RI Trends Report

The Responsible Investment Association of Canada released its 2022 responsible investment (RI) trends report, which will become an annual (rather than biennial) publication. It’s always a good read to take the pulse of the market. Authors have contextualized the findings, based on a new methodology, as a reliable baseline for RI market share. It estimates assets under management adopting responsible investment strategies at CA$3 trillion, or 47% of total assets under management in Canada. This is down 6.25% from CA$3.2 trillion two years ago, which the authors attribute partly to the new survey methodology, partly to a more robust identification of actual responsible investment practices as investors mature, and partly to more prudence in the face of the recent public (and mainly political) backlash against ESG – something that had surfaced in the Pitchbook Sustainable Investment Survey 2022 as well. The report notes the top three reasons for considering ESG factors in investment decisions are (1) to minimize risk over time, (2) to improve returns over time, and (3) to fulfill fiduciary duty. More interestingly for us, the top three potential deterrents to growing responsible investment practices are (1) mistrust or concerns about greenwashing, (2) a lack of standardized ESG disclosure frameworks/standards, and (3) lack of reliable data. Make no mistake, these three are related.

Codes of conduct coming for ESG data and ratings providers

The UK’s Financial Conduct Authority announced the upcoming development of a voluntary code of conduct for ESG data and ratings providers, which it has initiated as it waits for the Government to consider and act on recommendations to introduce regulatory oversight of these providers. It appears to be following in the footsteps of the Financial Services Agency of Japan, which has done something similar earlier this year, releasing a draft Code of Conduct for ESG Evaluation and Data Providers. This draft was open for public consultation but does not seem to have been finalized yet. It is intended to be a principles-based, voluntary comply-or-explain mechanism. Interesting to note that both initiatives follow recommendations issues by the International Organization of Securities Commissions (IOSCO) on ESG ratings and data products providers. However, voluntary codes of conduct are not regulations. Also, one should keep in mind the distinction between disclosures, or ‘ESG data’, coming directly from companies and providing information about their performance on specific sustainability-related issues, and ESG ratings, or ‘ESG data’, coming from third-party providers and providing an opinion about companies’ performance on one or more (or all!) sustainability-related issues.