Reporting Rules

Reporting Rules

On Monday of this week the European Council gave its final approval to the corporate sustainability reporting directive (CSRD).

You can be forgiven for confusion over the alphabet soup of rules and standards in the ESG reporting space, but it’s worth learning about this one as it will have an outsized impact.?

First - the regulations will cover a large swath of business. The EU is the world’s largest trading block and the directive covers both public and private companies. It also covers non-EU companies if they generate more than 150€ million revenue in Europe. Current estimates are that 50,000 companies will be covered.?

EU companies are covered if:?

• Over 250 employees
• More than 40€ million in annual revenue
• More than 20€ million in total assets
• Publicly-listed equities and have more than 10 employees or 20€ million revenue

Non-EU companies are covered if:

• More than 150€ million annual revenue within the EU and which have at least one subsidiary or branch in the EU exceeding certain thresholds

Second - the standards are different. The European Financial Reporting Advisory Group (EFRAG) is authorized to issue the EU Sustainability Reporting Standards (ESRS). This means that the 50,000+ companies covered by this regulation must use these standards. Given this sweeping coverage, these standards will have a global impact for ESG reporting.?

As many readers know, the new International Sustainability Standards Board (ISSB) was created by the International Financial Reporting Standards (IFRS) Foundation to harmonize ESG reporting globally. The new EU standards are different and will likely create confusion:?

“If Europe follows ESRS and the rest of the world aligns with IFRS, we've got two competing standards instead of one - particularly for international companies operating in the EU and other jurisdictions. EFRAG recognizes this problem, and, while it doesn't propose a full solution, at least shares a detailed comparison guide between ESRS and IFRS.”

Third - ESG reports must be assured by a third party, and digitally tagged. While 96% of the S&P 500 companies and 81% of the Russell 1000 currently report sustainability information, only about half of these reports are assured and even fewer are integrated into financial statements.?

This means that 50,000+ companies will soon be required to publish detailed information on sustainability matters including:?

• Strategy and business model?
• Governance and organization?
• Material ESG topics, risks, and opportunities?
• ESG policies, targets, actions, plans and allocation of resources
• Performance metrics

Fourth - the timelines are tight:?

• January 2024 for companies already subject to the non-financial reporting directive (reporting in 2025 for the financial year 2024).
• January 2025 for large companies that are not presently subject to the non-financial reporting directive (reporting in 2026 for the financial year 2025).
• January 2026 for listed small and medium enterprises (reporting in 2027 for the financial year 2026).

The bottom line: The EU Corporate Sustainability Reporting Directive will have sweeping impacts in the ESG world for years to come.??

Carbon for Debt

Last week we reported on the “Loss and Damage” fund that was the headline accomplishment of the UN Climate meeting - COP27 - in Egypt. The real headline should have been The Bridgetown Initiative.?

Never heard of the Bridgetown initiative? Me too…listen to this Podcast - it’s a clear and compelling story of how Barbadian Prime Minister Mia Mottley and her climate finance envoy, Avinash Persaud have garnered international support for a plan that could change the international finance system and harness trillions in private finance to help tackle climate change. The plan would break the cycle of debt and disaster by:

1. Providing more money for resilience and response;
2. Changing the terms for debt of countries hit with climate disasters;
3. Leveraging private sector capital to help developing countries wean themselves off fossil fuel.??

Connel Fullenkamp of Duke University penned a terrific article related to this topic, revealing that International Monetary Fund (IMF) Director Kristalina Georgieva suggested that countries should use carbon credits to pay off their sovereign debts, and instructed governments to “keep pressuring us to find the solution.”

If this idea gains strength the IMF and World Bank could create a single, liquid platform for exchanging carbon credits becoming carbon market-makers. This would create the carbon markets desperately needed to connect private-sector investment to the fight against climate change.

Carbon Removal Gets a Boost

The European Commission adopted a proposal aimed at promoting carbon removal technology. The new framework is part of the EU’s strategy to achieve climate neutrality by 2050.?

Commission VP Frans Timmermans said: “... it is impossible to bring all of our emissions down to zero. So we will need carbon removals as well, through technology or natural carbon sinks.”

SEC Comments Mixed

Harvard published a fascinating analysis of the comments on the SEC’s climate disclosure proposal. Investors and NGOs are strongly in favor, trade associations and politicians are strongly against, and companies - who would be subject to the requirements - are split.??

Notably, Coca Cola - which had signed the business roundtable letter against requiring scope 3 emissions reporting, came out in favor of the rule.? CSO Bea Perez said: “It’s about making sure we’re looking at fairness and consistency, and also length of time for implementation. So we’re absolutely for the disclosure.”

Sustainability Spend Rising

A new Gartner survey revealed that 87% of business leaders expect to increase their organization’s investment in sustainability over the next two years.

Gartner’s Kristin Moyer said: “Sustainability enables businesses to cope with disruption..progress on environmental, social and governance (ESG) goals creates new opportunities for enterprises to grow while mitigating cost and risk.”

ESG Advocates Push Back?

A new campaign aims to counter the well-funded anti-ESG attack from the state and congressional Republicans. Last week 17 state attorneys general sent a letter to House and Senate financial committees in support of considering ESG in financial decisions.??

David Wallack of the NGO - For the Long Term, said “The kryptonite that we will use against the anti-ESG push is stories about how ESG data is being used by companies in a way that creates value for investors.”?

Josh Zinner - CEO of the Interfaith Center for Corporate Responsibility (ICCR) added: “The problem is that few people outside of the investment space know what ESG is, so the challenge is explaining…that it’s not this wild conspiracy.”?

Meanwhile, John Hoeppner of Legal & General Investment Management took a dimmer view.? He commented that last week’s final rule allowing ESG to be considered in US pension investing would not be enough to overcome the backlash:? “I don’t think it actually mattered what the wording was - it’s the political climate.”?

Florida Dumps BlackRock

But, this fight is just getting started. Florida announced this week that it will divest $2 billion of assets managed by BlackRock over its ESG stance by the end of the year.?

Florida's Chief Financial Officer Jimmy Patronis commented on ESG saying “it’s got nothing to do with maximizing returns and is the opposite of what an asset manager is paid to do” and calling BlackRock’s support for ESG a “social engineering project.”?

BlackRock shot back that they have delivered strong returns for Florida over five years and “neither the CFO nor his staff have raised any performance concerns. As a fiduciary, everything we do is with the sole goal of driving returns for our clients.”

EU Mandates Sustainable Packaging by 2030

If you need more proof of Europe’s sustainability leadership, look no further than the new requirement that all packaging must be sustainable by 2030 - just seven years from now.?

The new rules aim to reduce packaging waste 15% per capita by 2040 through reuse and recycling. Companies are required to offer a certain percentage of their products to consumers in reusable or refillable packaging, standardize labeling, and require all packages to be fully recyclable by 2030

Frans Timmermans said the rules will “reduce packaging waste, promote reuse and refill, increase the use of recycled plastics, and make it easier to recycle packaging.”

Rob Kaplan - Founder and CEO of Circulate Capital - makes the point we need a circular economy to achieve the Paris climate goals.?

Love is Love

Pre-empting the conservative super-majority on the Supreme Court, the US Senate passed landmark legislation to protect same-sex marriage by a stunning bi-partisan 61-to-36 margin. The bill will be approved by the House next week and signed into law by President Biden soon thereafter. President Biden said the vote reaffirmed “a fundamental truth: Love is love, and Americans should have the right to marry the person they love.”

PLEASE LIKE SHARE AND SUBSCRIBE?

NOTABLE NEWS

• History made! For the first time, a men's World Cup match was officiated by an all-female crew.
• Companies not doing enough to protect nature, environmental non-profit says
• US Electricity Generation from Renewables Grows in 2022
• Rolls-Royce, EasyJet Perform First Ever Run of an Aircraft Engine on Green Hydrogen
• 73% of global asset managers have no net zero targets, says Mercer
• Reusable cup startup that's toured with U2, Rolling Stones raises $3.6M for wider buildout

NOTABLE PODCASTS

• He Sold a Message of Climate Doom. He Has Regrets.
• Who Pays the Bill for Climate Change?

EVENTS

Ceres published a terrific list of upcoming ESG events here?