Climate Impact Insights, EFRAGs New Friends and much more...

Welcome to the fourth issue of CSRD Insights. First, we delve into the difficult art of anticipating climate-related physical risks in an interview with one of the leading experts in the field. Then you will get news and updates on CSRD, ESRS, and other sustainability-related topics. Hope you will have an insightful and rewarding read.

The Art of Anticipating the Impact of Climate Change

The surge in sustainability reporting regulations and standards is intensifying the spotlight on climate impact and companies' strategies for transitioning. At the forefront of this movement are insurance companies and financial regulators, pioneering change by proactively addressing climate-related risks on a global scale. With virtually every sector poised to feel the effects, a significant knowledge gap persists between companies' disclosures, investor insights, and insurance assessments. No one wants to be caught unprepared. As the race towards a sustainable future gains momentum, mastering the intricate art of climate modeling emerges as a critical tool for navigating and mitigating future climate risks.

Delve deeper into this pressing issue through our exclusive interview with one of the field's foremost experts.

Dr. Elena Maksimovich, a PhD holder in Geophysics and Climatology, stands as the founder and CEO of Weather Trade Net, a venture launched in 2022. Several years ago, Dr. Maksimovich recognized the imperative for software capable of providing insights into and preempting unrecoverable climate-related physical events. In response, she pioneered an AI-driven platform and software that forecast climate scenarios and physical climate effects worldwide. Today, this platform facilitates the identification of physical climate risks across 11 hazards, including storms, floods, and droughts, offering decade-by-decade, historical, and forward-looking risk assessments.

- We've developed scientific methodologies to translate vast volumes of open-source raw climate data into geolocated, comparable quantitative risk scores, These scores enable the assessment of asset exposure both retrospectively and prospectively" explains Dr. Maksimovich.?She emphasizes that the product aligns with new climate policies such as the Corporate Sustainability Reporting Directive (CSRD) and regulations by the US Securities and Exchange Commission (SEC), driving a surge in demand for tools enabling asset-level physical climate risk assessment.

- The introduction of these regulatory frameworks has indeed spurred an uptick in demand for our solution, affirms Dr. Maksimovich, noting a particularly pronounced interest among financial institutions, pension funds, and asset management firms. Moreover, the CSRD's influence extends to European companies, alongside those subject to Climate-Related Financial Disclosures in the UK, US, Switzerland, and Australia, primarily comprising publicly listed entities and regulated financial institutions. Consequently, assessments of physical climate risk are now integrated into pre-IPO company valuations as part of merger and acquisition processes.

What role do financial organizations play at the moment in your view??

- Over the past four years, financial regulators have encouraged banks, insurance companies, and investors to engage in Climate Stress Testing with Scenario Analysis. Stress tests evaluate a company’s capital adequacy in response to specific short-term and long-term shocks, while scenario analysis assesses business resilience under various climatic conditions.

How will climate change extreme weather impact business society?

- Weather exerts multifaceted impacts on businesses, spanning agriculture, energy, supply chains, and financial markets. As climate-related losses from rare weather events escalate, the imperative for precise weather risk assessment grows ever more urgent. Investors across all sectors require a ten-year forecast of potential weather risks to their businesses and asset valuations.

How mature is business society today regarding climate risks and effects?

- Assessing flood and wildfire risks has become commonplace for insurance companies, accustomed to navigating the complex time series of extreme events and natural disasters. Insurance pricing equations are finely tuned to accommodate these intricacies.

What potential and impact do you see your solution has and will have??

- Democratizing access to data bridges the gap between scientific breakthroughs and decision-making at all levels of administration and business. The potential applications of such data are limitless, spanning population dynamics, national security, economic stability, urban planning, water resource management, power infrastructure resilience, and flood mitigation. Anticipating climate hazards is a crucial step in the journey towards carbon offsetting and achieving Net Zero emissions.

What is your advice to businesses in the scope of CSRD???

- Companies already have extensive information about the cost of interruptions and shut downs. Climate scientists can put these business specific numbers in the context of the extreme weather impacts. Step one is to? start with exposure analysis for each operational site and each facility. If certain assets are exposed to major perils, then next step is to consider the detailed impact assessment for those specific locations. Detailed impact assessment is when you take the time series of droughts, spring frost, storms and heatwaves and you attribute financial value to each event. This workflow is stepwise. You start from the historical impact assessment and after you make this financial loss-and-damage model for the past, only then you can do it for different scenarios in the future. Meaningful means auditable.

Here is an concrete example from Weather Trade Net on how banks can measure exposure to perils and connect climate hazard information with the credit portfolios

The numbers below demonstrate the percentage of a bank's commercial real estate portfolio exposed to specific climate perils. The portfolio was split into three regions: Hong Kong, the UK, and the US. The size of the bubble indicates the weight of the regional portfolio in terms of the number of properties. The identified physical risks include Coastal Inundation (Sea-Level Rise), Cyclones, and Inland Flooding.

According to these results, the majority of commercial real estate in Hong Kong and the US is exposed to Cyclones. About 50% of the US portfolio, 40% of the UK portfolio, and 20% of the Hong Kong portfolio are exposed to Floods.

These physical risks may result in credit losses stemming from repair costs and the consequent changes in property valuations.

In practice: How to ensure comparability and high quality climate risk assessments??

Dr. Elena Maksimovich shares insights in how to perform a state of the art climate risk scenario.??

- Climate risk assessments must be comparable across different geographic regions, climate perils, time horizons, and scenarios. Key considerations when comparing data vendors include the length and frequency of data updates, spatial resolution, hazard definition and calculation methods, and the quantitative or qualitative nature of risk estimates.

- The time frame for conducting physical climate risk assessments is primarily dictated by financial regulators. As per guidelines set by the Network for Greening the Financial System (NGFS), Task Force on Climate-related Financial Disclosures (TCFD), International Sustainability Standards Board (ISSB), and Corporate Sustainability Reporting Directive (CSRD) in the European Union, forward-looking horizons commonly emphasized are 2030, 2040, and 2050.

- Standardized scenarios, such as those provided by the NGFS or IPCC, guide both companies and investors. While NGFS scenarios offer more complexity than IPCC scenarios, the practice typically involves using three scenarios, occasionally expanding to five. Climate scenario analysis, though relatively new, proves invaluable for long-term budget planning, with companies and investors alike viewing it as a vital exercise for assessing climate resilience.

When comparing different data vendors, there are several aspects to consider:

1. Length of Climate Time Series: What is the duration of the underlying climate time series used for risk assessment? For instance, does it span from 1950 to the present day, or is it limited to a period like 2001 to 2015? Professional risk assessment typically relies on extensive historical records.
2. Data Update Frequency: How often is the data updated—annually or monthly? Does the dataset include the most recent flood events, ensuring relevance in the risk assessment process?
3. Spatial Resolution (Granularity): What is the spatial resolution of the data? Is the climate risk assessment representative of fine-scale details, such as a 0.1 x 0.1 km pixel, or does it operate at a coarser resolution like 100 x 100 km?
4. Definition and Calculation of Climate Hazards: How are climate hazards defined and calculated? For example, in the case of heatwaves, there are various methods for calculation, and heatwaves may occur throughout the year. Is the threshold for defining a heatwave set at a maximum temperature of 25 degrees Celsius? Is the "extreme" determined by the upper 10% tail of location-specific temperatures? Additionally, is the definition of "extreme" value specified for each calendar month, or is it based solely on identifying the hottest days of the year using the annual highest absolute daily temperature? Different climate data vendors may employ different algorithms, resulting in varying levels of detail.
5. Quantitative vs. Qualitative Risk Rating Estimate: Is the risk rating estimate provided by the vendor quantitative or qualitative in nature?

- You can effectively compare different climate data vendors only when you have clear answers to all these questions, remarks Elena.

Economic Impact of Climate Change to Reduce Global Income by 19% by 2049

A new study, published in Nature, using empirical data from over 1,600 regions worldwide and spanning 40 years, projects significant economic damages due to climate change at the sub-national level, considering both temperature and precipitation variations. This research provides a robust lower estimate, showing that the world economy will face a 19% reduction in income within the next 26 years, regardless of future emissions scenarios. This figure could range between 11% to 29% due to uncertainties in climate impact projections.

The study highlights that these anticipated economic damages, which stem primarily from changes in average temperatures, are already six times the cost of mitigating global warming to a 2°C increase. Including other climatic factors like daily variability and extreme conditions could increase these estimates by about 50%, with more pronounced effects in different regions. The most significant losses are expected in lower latitude areas, which historically have lower emissions and income levels, whereas regions at very high latitudes might see benefits due to reduced temperature variability.

IFRS Foundation and EFRAG Release Interoperability Guidance

The IFRS Foundation and EFRAG are presenting new guidance material aimed at showcasing the alignment achieved between the International Sustainability Standards Board's (ISSB) IFRS Sustainability Disclosure Standards and the European Sustainability Reporting Standards (ESRS).

The guidance describes the alignment of general requirements including on key concepts such as materiality, presentation and disclosures for sustainability topics other than climate; and provides information about the alignment of climate disclosures and what a company starting with either set of standards needs to know to enable compliance with both sets of standards.

Read the guidance here.

In near future EFRAG is expected also to release the final Materiality and Value Chain Implementation Guidance documents.

Time to Call a Spade a Spade - ESMA Publishes New Guidelines to Curb "Greenwashing" in Fund Names

The European Securities and Markets Authority (ESMA), the principal financial markets regulator and supervisor for the European Union, has released its final report on new guidelines concerning the use of environmental, social, and governance (ESG) or sustainability-related terms in fund names.

The guidelines are designed to protect investors from misleading claims about sustainability and provide asset managers with concrete criteria for naming their funds.

The guidelines stipulate that if a fund wishes to incorporate ESG or other sustainability-related terms in its name, at least 80% of its investments must contribute directly to environmental or social characteristics or meet sustainable investment objectives. The guidelines also define specific exclusions based on the type of terms used: terms like “Environmental,” “Impact,” and “Sustainability” must align with the rules for Paris-aligned Benchmarks (PAB), while “Transition,” “Social,” and “Governance” must adhere to Climate Transition Benchmarks (CTB) criteria.

In addition, the guidelines outline further requirements for funds using a combination of these terms or designating an index as a reference benchmark. This detailed framework ensures that the terms used in fund names accurately reflect the fund’s investment focus and strategies, thus preventing the practice of "greenwashing" - whereby funds claim sustainability credentials that are not substantiated by their actual investments.

The guidelines emerged from a period of consultation in which ESMA engaged with various stakeholders and considered their feedback. This inclusive process helped shape the final set of rules.

The guidelines are set to take effect three months after this publication. Authorities must declare within two months of the publication whether they will comply with the new standards. For existing funds, there will be a six-month transitional period to adjust to the new guidelines, while new funds created after the guidelines' application date must comply immediately.

This initiative marks a significant step in ensuring transparency and honesty in the marketing of sustainable investment products, thereby bolstering investor confidence in ESG and sustainability claims.

A Brief Look at EFRAGs 10 New BFFs

EFRAG has announced that they are "happy to present a group of companies that have officially become “Friends of EFRAG,” demonstrating their commitment to sustainability reporting and supporting EFRAG's mission".

So, who are these new homies? They reasonably should be thought leaders in their fields, and perhaps there are silver bullet solutions for ESRS-data-management?

So here is a brief walkthrough based on their webpages (with some highly personal thoughts!) with focus on knowledge and competence in relation to CSRD and ESRS.

GSES System A Dutch sustainability company with a rating system that “measures, benchmarks, and externally verifies the sustainability performance of organizations, physical products, and assets worldwide.”

I am trying to find information about the management team and staff, but only finding presentations of the advisory board, technical commission, experts, and ambassadors. It seems all fine, but would be nice to read some of the staff. Can not find any information about CSRD or their offer...

Karbonpath Promises a platform that solves “the compliance of your extra-financial reporting, in accordance with the CSRD requirements.” Eleven employees. Forenames are listed on the team. Some links are not functional on the webpage. However, there is a competent and complete description of what CSRD and ESRS entail.

Difficult to make an assessment. But why on earth does the company refer to Directive 2013/34/EU of the European Parliament and of the Council of June 26, 2013 on the website? I am quite confused...

CSRD Auditor A consultancy firm with a very suitable name for the new wave or disclosure regulation that require assurance. Based in Rome, Italy.

So, a qualified guess is that this company is aiming to deliver CSRD assurance as a service. But it's difficult to obtain more information about the company and the concrete services they offer from their homepage. However, they proudly communicate that they are a proud friend of EFRAG, and there are two people presented, a president and vice president.

Baker Hughes - Is an American-British global service company in the petroleum industry, providing various services to petroleum companies in the industry. The company is ranked as the world's second-largest company in service provision.

Go GHG-protocol! Go transition plans!

Code Gaia A sustainability as a service-company that helps companies “meet CSRD requirements, dual materiality analysis, carbon footprint, LkSG and EU taxonomy on one platform with innovative software and personal support”. Seven persons in management team.

The company indeed present a trustworthy company communication. One small detail that is confusing is the company code where they point out “Mindfulness" with?the description: "Trust in every team member, high standards, personal responsibility and ideas are the key to success." I though mindfulness was something else? Perhaps this can be the silver bullet!??

CLEERIT A company that offers the "SaaS solution Cleerit ESG, integrating the basic principles of the CSRD regulatory framework, including digital support for materiality analyses and risk management." It has a few, but significant Swedish customers.

It's difficult to discern the individuals behind the company. Also a bit amusing with their "conviction": "Anything is possible. If you know what you want and have a plan for how to get there." Do you when it comes to CSRD and ESRS implementation? A candidate for the silver bullet?

ROSE Framework Promises to "Gather your data. Extract CSRD compliant reports. Define actions and follow progress. Discover ROSE, the all-in-one sustainability management platform."

The first payoff on the webpage is "Sustainability management doesn't have to be painful." I wonder who their key customers are. Perhaps this is the silver bullet for distressed and confused CFOs?

Integrity Next A German consultancy firm offering a cloud-based supply chain monitoring platform that empowers companies to collect, analyze, and oversee sustainability data from suppliers.

With over 20 employees, they appear to be well-versed in their field, with an pretty impressive advisory board.

Watershed A company offers to "Decarbonize your business. Measure, report, and act on your sustainability data in one complete platform." They have been rated by Forrester Wave in Q2 2024 "achieving the highest score possible in eight criteria, including: Sustainability intelligence, ESG strategy, ROI calculation, Reporting." They also present a large group of well-known companies as customers.

They also promise that "...you can easily repurpose your CSRD data to fulfill other reporting frameworks, like CDP or ISSB. You can also build on past reports you've filed..." Sounds almost too good to be true. Probably a strong candidate for becoming a silver bullet!

SustainSoft A French company offering a software solution, an ESG platform with a dashboard. "SustainSoft is the latest ESG compliance platform. Secure your ESG compliance today. Make sure you're aligned with your stakeholders' ESG expectations." They also offer an Ultimate guide to Ecovadis Certification (!). If facing such a challenge this perhaps can come in handy. And a new "ESG Legal simulator" helping you know if your company is subject of "CSRD, SFDR, Taxonomy or any upcoming CSR regulation". (You should probably already know this by now). A French bullet?

Can I or you become a friend? There is probably a good chance if you are a supporter EFRAGs activities and mission, and are willing to pay an annual fee of 5000 Euro "or a higher amount that corrensponds to your profile and footprint". In the fine print it is stated you should "Not impair the independence of EFRAG or cause conflict of interest". Apply for a friendship via their website or directly at [email protected]. Read more in the "contact ad" here.

Navigating New Waters: Complex Dynamics Between Consultants and EFRAG

The implementation of CSRD poses both opportunities and challenges for consultants in the field. As these regulations take shape, the importance of both knowledge and credibility becomes paramount, particularly for consultants seeking to leverage their expertise to attract clients.

For consultants, affiliating with EFRAG could potentially enhance their credibility and market appeal by positioning them at the forefront of sustainability reporting practices. However, this relationship is not without its pitfalls. As noted by sustainability expert Phillipe Diaz, there is a critical balance to be maintained.?

Diaz highlights a concerning trend in a recent LinkedIn post: some consulting firms may be exploiting their relationship with EFRAG to gain undue influence or market advantage.

“The sustainability reporting pillar of EFRAG is set up to incorporate a range of views from different stakeholder groups. If each of those stakeholders goes out and claims to speak on behalf of EFRAG, then we are in trouble.”

This is a delicate issue, not least because participation in a stakeholder group is not compensated, and participants are expected to cover their own time and expenses. Somehow, the investment in time and effort must yield some form of ROI.

Survey Reveals Strong Corporate Support for EU's CSRD Among Non-Mandated Firms

A recent survey conducted by the ESG platform Workiva has revealed that a significant majority of companies - 81 percent - that are not mandated by the EU's CSRD still intend to voluntarily meet its disclosure requirements. This information was highlighted in an article by IR Magazine.

The survey, which gathered insights from over 2000 professionals in corporate reporting, sustainability, and related roles, underscores the pressing nature of these new regulatory demands. Most respondents view complying with mandates such as the CSRD as the most challenging issue they currently face.

A primary concern among those surveyed is the plethora of different compliance requirements they need to manage. Additionally, 83 percent of respondents acknowledged that collecting precise data to satisfy the CSRD poses a significant organizational challenge.

Despite these difficulties, the consensus among the surveyed professionals is overwhelmingly positive about the benefits of compliance. A notable 88 percent of respondents believe that integrated reporting will have a favorable long-term impact on their organization’s value creation. Similarly, obtaining assurance over ESG data is viewed by the same proportion as increasing the likelihood of achieving their company’s goals.

Read the 2024 ESG Practioneer Survey from Workiva here.?

EFRAG’s Connectivity Project: Bridging the Gap Between Financial Statements and Sustainability Reporting

EFRAG Sustainability Reporting Technical Expert Group is working on a research project on the connection between financial and sustainability reporting. Recently a draft of the report "Connectivity considerations & Boundaries of different Annual Report sections" was presented, according to Marie-Josée Privyk, an ESG-expert based in Canada.

The project is distinct from EFRAG's efforts in setting sustainability reporting standards and should not be seen as guidance for implementing the European ESRS. Instead, the report aims to enhance understanding of the concept of connectivity as reflected in the ESRS and the ISSB standards. It emphasizes the importance of connectivity in ensuring that various sections of annual reports are coherent and complementary.

A key takeaway from the report is the introduction of an "inter-temporal dimension of connectivity," which addresses how different items may migrate across various reports over time due to unfolding events.

Furthermore, the document frequently references the IFRS Foundation, underscoring the inevitable intersection between EFRAG's sustainability reporting initiatives and the financial reporting standards mandated for EU companies by the IFRS.

Open Sustainability Index launched: A New Free Global Database Accessing Corporate Sustainability Data

Open Sustainability Index is a new global and free database of sustainability data aimed at democratizing access to corporate sustainability information and accelerating the shift to a more sustainable and circular economy. This initiative offers an open database that aggregates global corporate sustainability data, enabling businesses, researchers, policymakers, and the public to easily compare and assess sustainability performance. The founders present the project as "a non-governmental and non-profit organization committed to the truth and transparency of sustainability information."

The index is similar to Wikipedia in its structure and functionality, allowing users not only to view information but also to actively contribute by reporting, updating, and editing data. The goal is to enable everyone to benefit from the aggregated information.

The index was created by Swedish Our Commons Foundation, which aims to contribute to securing the future of our planet for future generations and influencing decision-makers to accelerate the transition to a sustainable society.

MEPs have approved the CS3D

Just a quick note in case you missed it - The European Parliament finally approved (a diluted) CS3D at the end of April, with 374 votes against 235 and 19 abstentions.

An interesting, insightful and well-read comment was made by Richard Gardiner, Head EU Public Policy at World Benchmarking Alliance.

CSRD and ESRS Key Insights for CFOs, Management Teams, and Boards: What You Need to Know, Understand, and Act On

Welcome to a seminar with focus on CSRD Implementation, in collaboration with Agenda CFO Network, the 24th of September in Stockholm (in Swedish). Read more here.

Thank you for reading! Please comment, share, or contribute...

And finally, a quote by Allan Watts: "The only way to make sense out of change is to plunge into it, move with it, and join the dance"

/Mikael Salo