ESG Backlash Hits Europe, Fails. Standards Clash

Has the ESG backlash hit Europe? After spearheading the climate and sustainability agenda for years, a proposal to block Europe's ESG reporting rules was narrowly defeated, and another proposal to delay its implementation is moving ahead.?

A cross-party group of 44 rightwing and liberal MEPs attempted to block the adoption of new sustainability reporting standards . The move was rejected with 359 votes for adopting the standards and 261 against. The vote means that the European Sustainability Reporting Standards (ESRS) has its final approval, and an estimated 50,000 companies will have to start gathering ESG data in 2024.

The motion to block the reporting standards was put forth by lawmakers mainly representing the EU Parliament’s largest party , the center-right European People's Party (EPP), which said the rule would put a "high administrative burden" on companies and go against the EU’s goal of reducing reporting obligations and cutting red tape.?

The Commission had already watered down the proposal initially drafted by the EU accounting advisory body EFRAG, but that did not stop the move to block the standards. (A separate draft EU law, the corporate sustainability due diligence directive (CSDDD), is also facing EPP opposition).

Also this week, the Commission proposed delaying key parts of the EU’s Corporate Sustainability Reporting Directive (CSRD). Industry sector-specific reports and non-EU company reporting will both be delayed two years.? The announcement was made as part of the EU’s 2024 Work Program .?

Mairead McGuinness , the European commissioner responsible for the ESRS (To clarify, the ESRS are the reporting standards companies will use to report to the CSRD), said, "I did listen carefully (to concern among businesses), and what we have at the moment are very proportionate standards .”

While conservative interests in many European countries are pushing back , the bulk of the European reporting scheme is moving ahead as planned.?

Standards?War?

With the final approval of the EU standards, companies are in a difficult spot. The EU reporting standards are far more extensive than those proposed by the International Sustainability Standards Board (ISSB) because they are based on “double materiality” - the combination of issues that are economically important to the company and those that are important to stakeholders outside the company.? The tens of thousands of companies reporting under both standards face potential duplication and confusion.?

This point was made clear by ISSB chair Emmanuel Faber in a Le Monde Op-Ed (we covered last week ) originally titled “The war of standards will not happen.”? Despite that peaceful title, his quotes are getting a lot of attention - here is a version edited for length and highlighted for emphasis

“Europe has made an ambitious normative choice, by requiring that materiality extend beyond the economic domain: in addition to its financial backers, for the company it is a question of counting everything that matters to all its stakeholders... Having become the rallying cry of those who wholesale reject the ordinary materiality of financial markets, now deemed “simple”, it maintains a triple illusion and carries a dangerous blind spot. The first illusion is that "materiality" is equally applicable outside of an economic setting.?Seductive, but a trap. The materiality of market information is sanctioned by an immediate, clear and powerful decision: to buy or to sell. However, the non-economic aspect of a "double" materiality does not motivate any immediate, clear or strong sanction…. In short, there is no common denominator of concerns, and therefore no stable materiality. We are left with a myriad of piecemeal uses of information, the strength of which is miniscule compared to the power of the materiality that drives the flows of financial markets.???The second illusion is that double materiality would enable an exhaustive account of a company's impacts. This is unrealistic.??The third illusion is that double materiality forces the hand of companies. This is inaccurate: just as an accounting standard cannot get a company to increase its profit by 10%, a sustainability disclosure standard, even with double materiality, cannot get it to reduce its emissions by 10%. Double materiality is not the Holy Grail and must not obscure the need for political ambition in the transition.”

EU Prepares for COP 28

The EU scrapped its plan to reduce emissions by 57% (up from 55%) by 2030 after a veto by Hungary, Italy, and Poland .?

The disagreement came as the EU prepared its agenda for the upcoming global climate meeting (COP 28). The negotiators were criticized for backing off the pledge and other perceived weakening of the EU stance. ? Nonetheless, the bloc will be one of the most ambitious parties at COP 28, with goals to triple the production of renewable energy and halt the building of coal power plants.

However, some believe the difficulties are a foreshadowing of things to come at COP 28. Belize negotiator Carlos Fuller said, "I am not very hopeful ," - referring to a phase-out of fossil fuels supported by Belize.?

SEC Drops ESG as a Compliance Priority

The US Securities and Exchange Commission (SEC) removed ESG from its list of compliance priorities for 2024. The list made no direct reference to ESG, which has been included since 2020.?

This ESG about-face from the SEC comes as Chair Gensler received an open letter from more than 20 California lawmakers asking that the regulator push for a California-style disclosure rule. Specifically, one that includes Scope 3 reporting, the letter reads, “Without consistent and reliable Scope 3 data, investors will be limited in evaluating the management’s performance with respect to those risks and opportunities .”

TCFD Final Report

As it prepares to integrate into the ISSB at the start of 2024, the Taskforce on Climate-related Financial Disclosures (TCFD) released its final progress report.?

The report showed how far climate disclosures have come since the TCFD’s 2015 launch, revealing that 97 of 100 of the world’s largest corporations are willing to report under the guidance of the TCFD. Companies reported an average of 5.3 of the Task Force's 11 recommended disclosures, up from an average of 3.2 in 2020 . However, there is still a long way to go, with only 4% of companies reporting in line with all 11 recommended disclosures.?

The TCFD has been a revolutionary tool for companies disclosing climate risks and opportunities. As it passes the baton to ISSB, hopefully, they can continue the great progress seen under the TCFD. Graeme Pitkethly , TCFD vice chair and CFO of Unilever said, “The TCFD has emerged as a beacon of clarity in an era of unprecedented environmental challenges .”

CDP and ISSB Align in 2024

CDP announced that 23,000 companies reported to their platform - a 24% jump from 2022 - and confirmed that they will align their questionnaire with the new ISSB climate disclosure standard (IFRS S2) starting in 2024.

Emmanuel Faber, Chair of the ISSB, said: “CDP’s work towards alignment with the IFRS S2 is incredibly welcome and timely, as it will further ease the reporting burden for thousands of companies, moving us one step closer to a common language for disclosures, while improving the consistency of climate-related information for investors and accelerating their access to this data .”

The CDP also announced it would integrate the new framework from the Taskforce on Nature-related Financial Disclosures (TNFD), the SEC’s climate disclosure requirements (when finalized), and the EU climate reporting standards.

The Amazon on the Brink

Source of a fifth of the world's freshwater and the world's largest river and rainforest - the Amazon -? is suffering an epic drought. Deforestation, lack of rain, and extreme heat all combine to bring a perfect storm of drying rivers and wildfires. Some rivers are at their lowest in over 100 years, while others are at record-breaking lows.

Hydro plants have had to be shut down, some river-dwelling communities have been stranded, and the famous endangered pink dolphins have been further threatened .??

“This is a catastrophe of lasting consequences ,” said Luciana Vanni Gatti of Brazil’s National Institute of Space Research, who has been documenting changes in the Amazon. “The more forest loss we have, the less resilience it (the Amazon river) has.”

The views expressed on this website/weblog are mine alone and do not necessarily reflect the views of my employer.?

Other Notable News:

• Once an area of huge investment, climate tech investment fell by 40% in 2023 amid economic uncertainty . Despite the downturn in absolute terms, climate tech investments as a proportion of start-up investments continued to rise.
• Developing countries need $1 trillion per year to enable a quick and just climate transition. Unfortunately, they currently only receive around one-quarter of that (27%). This study from BCG and The Rockefeller Foundation shows how blended finance - capital from philanthropic or public sources mixed with return-seeking private investments could fill this funding shortfall.?
• Some environmentalists are unhappy with Biden's $7 billion investment in hydrogen hubs . They fear it may support the use of "blue hydrogen," which is made from natural gas and still emits carbon dioxide, rather than focusing on cleaner "green hydrogen" produced with renewable energy sources.?
• The Net Zero Asset Owner Alliance (NZAOA) released its most recent progress report this week . Although it showed great growth in investments and the number of companies setting near-term emissions reduction goals, it did reveal a lack of member alignment on coal.
• Greta busted again . This time, she got on the wrong side of the law at a protest outside a London hotel where an oil and gas conference was taking place. The protests shouted slogans like "oily money out" and "cancel the conference" outside an event called the Energy Intelligence Forum - formerly the Oil and Money Conference.
• What areas of #climatefinance are gaining traction?What geographies are about to take off???Boston Consulting Group (BCG) and The Rockefeller Foundation are writing a report on the latest in climate finance and collecting perspectives from practitioners across the ecosystem.? We’d love to hear from #investors , fund managers, asset managers and others involved at the frontline of climate finance transactions across all asset types and geographies in a 10 min survey :https://lnkd.in/ePS_qeXA ? Respondents will receive priority invitations to our launch event at COP28 and additional unpublished analysis from the survey.

Notable Podcasts:?

• This week’s episode of the BBC’s The Climate Question featured an interview with Bill Gates . Gates shares how he remains optimistic about climate and why he believes the power of human ingenuity will win out with a technology-driven approach in both mitigation and adaptation.
• In the final episode of this season’s The Climate Rising podcast from the Harvard Business Review , MBA students Nabig Chaudhry , Mitsushiro “Mitch” Hirai , and Kamya Jagadish describe how they spent the summer interning in climate-related businesses, from impact investing to climate tech incubator and climate risk analytics. They also discuss what sparked their interest in the field and how they stay current on information and trends to explore career opportunities in climate change.
• In this week’s episode of TILClimate , host Laur Hesse Fisher is joined by? Prof. Ronald Prinn , an expert in the physics and chemistry of our climate system. Together, they discuss the past, present, and future of refrigerants and how they affect the climate.