Hope springs eternal

CDP Scores

The CDP announced the release of its 2022 disclosure scores , including its “A list” of companies recognized as leaders based on their climate, forest, and water disclosures. Notably, only 12 companies achieved a triple A rating, proof that managing sustainability-related issues well is extremely challenging and takes time. For corporates, what is relevant to remember about the CDP is that its questionnaires are sent to companies on behalf of its clients: “more than 680 investors with over US$130 trillion in assets, and 280+ large purchasers with US$6.4 trillion in buying power”. It therefore targets both public and private companies, large and small. This year, more than 18,700 companies responded, a 42% increase over last year and a 233% increase since 2015 when the Paris Agreement was signed. While these numbers are impressive, equally impressive is that these companies represent only 39% of those asked to respond (since “more than 29,500 companies scored an F for failing to respond to disclosure requests from their investors and clients or providing insufficient information in their responses”), and of those that did respond, 59% were “at the start of their disclosure journey”, scoring between D- and C. Also notable is the visibly large gap between disclosures on climate and those on other natural capitals – we can expect this to change based on some of the items mentioned below, as mobilization to address biodiversity loss grows in the wake of COP15 (at least, we hope it does). All this to say, while there is indeed still a long way to go in corporate sustainability-related disclosures, we’re going in the right direction.

US SIF Trends Report 2022

Speaking of going in the right direction, you might not think so at first glance of the US Forum for Sustainable and Responsible Investment’s (US SIF) latest Report on US Sustainable Investing Trends . This biennial trends report provides extensive data on the number of US institutional asset owners, money management firms, and investment vehicles using sustainable investment strategies and highlights the range of specific environmental, social, and governance (ESG) issues that investors consider. It’s closely followed because many people perceive the US as reticent to adopt sustainable investment practices, so they’re curious to see if it’s happening there, too. The 2022 edition finds that US$8.4 trillion of investments apply various ESG criteria in their investment decision-making and portfolio construction, or lead or co-lead shareholder resolutions on ESG issues. This represents 12% of the US$66.6 trillion in total US assets under professional management. The 51% drop from the previous (2020) figures – of US$17.1 trillion or 33% of the US$51.4 trillion in total US assets under professional management – is shocking. What’s going on? The drop can be explained at least in part by the US SIF’s change in methodology “in response to the rapid growth of the field and the lack of information from a growing number of institutions on the specific ESG criteria applied in firm-wide ESG integration. Thus, the methodology required more granular information regarding the incorporation of ESG issues in order to be included in the tally of sustainable investment assets.” In other words, they made it harder for asset managers to declare their investment strategies as “ESG” based. Another partial explanation may be that asset managers are themselves course-correcting and being more conservative in what they label as ESG funds in anticipation of the US Securities and Exchange Commission’s upcoming Amendments to the Fund “Names Rule” and its ?ESG Disclosures for Investment Advisers and Investment Companies . Finally, the very public, politically partisan polarization of all things ESG-related in the US is causing many in the investment industry to take pause. In the end, anyone who realizes that climate change, biodiversity loss, employee wellbeing, equity and inclusion, fair wages, human rights, cybersecurity, and ethical behaviour (should) have nothing to do with political ideology will understand that this latest US SIF report is actually good news, as it contributes to the reduction in investor greenwashing. The phenomenal growth in responsible investments was and is driven by market demand. If this demand remains strong, investors will deliver. This demand comes from the ultimate beneficiaries of those investments: you and me.

Charting the future of Canadian corporate governance

TMX Group and the Institute of Corporate Directors (ICD) formed a committee two years ago to assess the state of corporate governance in Canada and outline recommendations for practical guidance to ensure Canadian boards are well-equipped to meet new geopolitical, environmental, and social challenges and rising expectations from a diverse group of stakeholders. The product of this committee’s work is a report titled Charting the Future of Canadian Governance: A Principled Approach to Navigating Rising Expectations for Boards of Directors . It provides recommendations for advancing the state of corporate governance in Canada, applicable to companies and organizations of all types and sizes across the country. Interestingly, nested within the eight sets of principles, we recognize the foundations of the TCFD (Task Force on Climate-related Financial Disclosures) recommendations, with ‘principles for the board’s role in strategy’ (chap. 3), ‘principles for improved oversight of risk management’ (chap. 4), and ‘principles for better oversight of performance measurement and reporting’ (chap. 5). We also find explicit ‘principles for board oversight of ESG’ and ‘principles for board oversight of climate change’ (chap. 2). Perhaps most noteworthy is that this work has been long in the making as a deliberate follow up to the 1994 Dey Report “Where Were the Directors” , which came about in the wake of the 1990-91 economic recession and set the foundation for corporate governance best practices in Canada. It also makes reference to – and hopefully finds inspiration from – another report that Peter Dey and Sarah Kaplan co-authored in 2021in the face of compounding issues of climate change, rising economic inequality, systemic racism, and the Covid-19 pandemic, called 360o Governance Where Are The Directors In A World In Crisis? . For anyone looking to put flesh on the bone of “tone at the top”, these reports make for insightful reading.

Biodiversity Risk: Legal Implications for Companies and their Directors

Speaking of corporate governance… The Commonwealth Climate and Law Initiative (CCLI) is a research, education, and outreach project examining the legal basis for directors and trustees to take account of physical climate change risk and societal responses to climate change under prevailing statutory and common (judge-made) laws, and assessing the materiality of these considerations and the potential implications for company and investor decision-making. It has now expanded its scope to biodiversity risk and released a report called Biodiversity Risk: Legal Implications for Companies and their Directors . It does a good job of explaining biodiversity in the context of corporate governance, risks and opportunities, and disclosure obligations. Much as it had for climate change, the study concludes that “the risk of biodiversity loss can present foreseeable and material financial risks and opportunities to individual companies and the wider economic and financial systems” and that “directors may face the risk of liability for a failure to consider biodiversity risks in governance and disclosure if this breaches the duties of care or loyalty.” The work of the CCLI has been foundational in capturing the attention of corporate boards and bringing a legal (read compulsory) dimension to mobilization on the systemic issue of climate change, and we can now hope it will do the same for biodiversity loss. It also signals that, much like what we are witnessing for climate change, we can expect a rise in biodiversity litigation and a growing body of legal precedents substantiating the need for governments, investors, and companies to play their part. Yet another tool in the toolbox.

Nature Action 100+

During COP15, a group of institutional investors announced , as anticipated, the creation of Nature Action 100+ , a global investor engagement initiative focused on driving greater corporate ambition and action to reduce nature and biodiversity loss. This initiative is expected to launch formally next year. It’s an offshoot of the Climate Action 100+ initiative, which has targeted the 169 largest GHG-emitting companies to engage with them on addressing climate change. What will be useful to follow is the creation of a benchmark (similar to the existing Net Zero Company Benchmark) highlighting the measures investors will expect companies to take in addressing biodiversity loss. The more clarity corporates can have on what’s expected of them, the better, whether these expectations are driven by market (read investor) demands or by law, as the previous item explains.

ISSB announcements pertaining to its standard-setting work

The IFRS Foundation’s International Sustainability Standards Board held another series of meetings last week, during which it progressed on its standard-setting work with some noteworthy announcements. First, the ISSB announced it would deepen its engagement with Global South jurisdictions to advance adoption of IFRS Sustainability Disclosure Standards , more specifically on articulating a strategy to build capacity within these markets to enable the effective disclosure, and use, of sustainability-related information, and to build into the standards reliefs for companies that need time to apply them. This follows an earlier announcement during COP27 on climate of a Partnership Framework to ensure accelerated readiness for jurisdictions to adopt IFRS Sustainability Disclosure Standards.

Second, the ISSB announced guidance and reliefs to support Scope 3 GHG emission disclosures , such that its ?Climate-related Disclosures Standard (S2) will:

• set out a framework in S2 for the measurement of Scope 3 GHG emissions that will require the use of reasonable and supportable information that is available without undue cost or effort and incorporates the use of estimations
• offer a temporary exemption for a minimum of one year (following effective date of the S2 climate standard) to give time for companies to implement their processes
• allow for a company to include information that is not aligned with its reporting period, when that information is obtained from companies in its value chain with a different reporting cycle
• require using the location-based method (reflecting the average emissions intensity of its local grid) in calculating Scope 2 emissions
• confirm and refine proposed requirements for financed emissions (i.e., those of the portfolios of financial entities)

These are very welcome specifications that clarify implementation requirements for companies. In a similar vein, the ISSB also specified that it would seek to enhance its S2 standard to include the relationship between climate and natural ecosystems and the human capital aspects of the climate resilience transition (just transition).

Third, the ISSB more specifically described the concept of sustainability and its articulation with financial value creation . More specifically, in trying to reduce the misalignment of concepts and vocabulary in sustainability-related disclosures, the ISSB had decided that sustainability will be described in the ISSB’s General Sustainability-related Disclosures Standard (S1) as “the ability for a company to sustainably maintain resources and relationships with and manage its dependencies and impacts within its whole business ecosystem over the short, medium and long term. Sustainability is a condition for a company to access over time the resources and relationships needed (such as financial, human, and natural), ensuring their proper preservation, development and regeneration, to achieve its goals.” It is worth underlining that this definition builds on concepts from the Integrated Reporting Framework, which helps companies articulate how they use and effect resources and relationships for creating, preserving, and eroding value over time, especially considering one of the priorities of work mentioned below. This definition serves to bridge the gap between ‘ESG’ issues and ‘sustainability’, and between ‘financial materiality’ and ‘impact materiality’. It also points to the integration of financial and sustainability considerations in the narrative on strategy and business performance, not only in content but in location (the Management Discussion & Analysis, in my opinion). To be clear, the language of the initial Exposure Draft on IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information already contained quite a bit of language about ‘impacts’ and ‘dependencies’, and ‘resources’ and ‘relationships’. I don’t think this announcement represents a significant shift or departure for the ISSB, but rather a necessary and welcome clarification of its intentions and scope of work.

Furthermore, the ISSB gave an indication of its future priorities of work:

• biodiversity, ecosystems, and ecosystem services (presumably incorporating the work of the Taskforce on Nature-related Financial Disclosures (TNFD))
• human capital
• human rights
• connectivity in reporting with the IASB, i.e., to build on the management commentary (MD&A) and the Integrated Reporting Framework

The first three items will undoubtedly feed new topic-specific standards; they certainly provide us with a clear indication of topics that may be deemed universally material to all companies, in all markets. The fourth item speaks to the integration of sustainability disclosures in general purpose financial statements in support of explicit requirements found in its General Requirements for Disclosure of Sustainability-related Financial Information (S1).

As the frenzy of activity at COP15 closes out another exhilaratingly eventful year in corporate sustainability reporting, these announcements by the ISSB leave no doubt that the new year will bring (even) more change. And that’s a good thing.