No excuse

IPCC’s AR6 Synthesis Report: Climate Change 2023

The Intergovernmental Panel on Climate Change (IPCC) has released the synthesis report for its Sixth Assessment Report, based on the content of the three Working Groups Assessment Reports: WGI – The Physical Science Basis (August 2021), WGII – Impacts, Adaptation and Vulnerability (February 2022), WGIII – Mitigation of Climate Change (April 2022), and the three Special Reports: Global Warming of 1.5°C, Climate Change and Land, The Ocean and Cryosphere in a Changing Climate. It doesn’t really provide any new information, except that there is an even greater urgency to act – mainly because we haven’t done enough yet, despite having all the information we need. Anyone who thinks the IPCC produces only dry, hard-to-consume scientific materials should check out the presentation made during the press conference and their headline statements. If we’re supposed to listen to the scientists, their message to us is very clear. We have no excuse.

European Commission proposal for a Directive on Green Claims

The European Commission announced its proposed Directive on substantiation and communication of explicit environmental claims (“Green Claims Directive”), which seeks to “ensure that consumers are empowered to make better informed choices and play an active role in the ecological transition.” It’s also part of the European Green Deal’s commitment to tackle false environmental claims by ensuring that buyers receive reliable, comparable, and verifiable information to enable them to make more sustainable decisions and to reduce the risk of ‘green washing’. The EC has prepared a very helpful Q&A resource to get the gist of it. The key objectives of the proposed directive are to:

-??????“Increase the level of environmental protection and contribute to accelerating the green transition towards a circular, clean and climate neutral economy in the EU;

-??????Protect consumers and companies from greenwashing and enable consumers to contribute to accelerating the green transition by making informed purchasing decisions based on credible environmental claims and labels;

-??????Improve the legal certainty as regards environmental claims and the level playing fields on the internal market, boost the competitiveness of economic operators that make efforts to increase the environmental sustainability of their products and activities, and create cost saving opportunities for such operators that are trading across borders.”

Article 3 (on page 44) describes what companies seeking to make environmental claims about their products or themselves will have to address, including whether improving the environmental credentials leads to significant harm “in relation to environmental impacts on climate change, resource consumption and circularity, sustainable use and protection of water and marine resources, pollution, biodiversity, animal welfare and ecosystem”, in essence baking the concept of double materiality into product and behaviour claims. Impressive. Also noteworthy is that the proposed directive applies to all companies except microenterprises (those with fewer than 10 employees and EUR2 million in revenues). As individual countries transpose the directive into law, they will need to develop enforcement mechanisms, but the directive already specifies that non-compliance may result in fines up to 4% of annual revenues, as well as exclusion from government procurement contracts. Ideally, this directive should drive an increase in impact assessments and life-cycle analyses, which would be fantastic. However, it will be interesting to see if the number of environmental product and corporate-level environmental claims changes significantly once this regulation takes effect.

ERM’s Rate the Raters 2023 report

ERM’s Rate the Raters 2023 report makes for an interesting read for anyone looking to catch up on their understanding of what ESG ratings are and why they exist. It also gives an indication of those ranked highest by both investors – those who use the ratings – and corporates – those who get rated. To be clear, ESG ratings are opinions. I would add that if ESG ratings are indeed “essential’, as the report states, it is because they offer capital markets an analysis and assessment of companies’ (or investment products’) absolute and relative ESG performance. The need for such analysis and assessment has exploded in tandem with expectations for investors to take ESG performance into consideration in making their investment decisions. Unlike financial performance, for which there exists i) widely available, comparable, and reliable information directly from companies and ii) widely known and trusted processes and methodologies for investors to analyze this information to assess investment opportunities and make investment decisions, sustainability performance has suffered from a deficit of both. The upcoming changes to corporate sustainability reporting regulations and standards (are intended to and) should address the availability of information deficit. This will enable investors to directly access quality ESG performance data and narrative, at which point there would still be a need for third-party opinions but there should no longer be a need for ESG raters to resort to questionnaires to “actively” source information from companies. Over time, investors’ ESG integration practices will mature, and they will develop the knowledge and skills to use corporate disclosures to analyze and assess companies’ ESG performance themselves, which should address the skills deficit. This will take a while, and it won’t be easy because sustainability-related issues are numerous, varied, and complex. However, I am confident capital market practitioners are up to the task. And once they do, their need to purchase third-party opinions will change.