Standards Take Shape

International Standards to Include Scope 3?

This week the International Sustainability Standards Board (ISSB), arguably the global standards setter for ESG disclosure, voted unanimously to include so-called “scope 3” greenhouse gas emissions in its new standard (IFRS S2 - Climate-related Disclosures).?

Scope 3 emissions are from the company’s value chain - upstream in the supply chain and downstream with their products - that are, at once, the hardest to calculate and the most impactful.???

The reason this is an epic decision is because the ISSB also confirmed it will utilize the classic definition of materiality - that is “...could reasonably be expected to influence the decisions of the primary users of...financial statements…”

Decoding all of this jargon - this decision means that scope 3 emissions are financially material disclosures in international standards.??

This settles the divide on whether scope 3 reporting should be mandatory. A Morningstar survey this year revealed the split with BNP Paribas, Capital Group, Legal & General, and Northern Trust in favor; BlackRock, Invesco, State Street, T. Rowe Price, and Vanguard against. The key issue is whether the accounting methods of scope 3 emissions are sufficiently mature.

EU Finalizes ESG Standards

Europe’s Sustainability Reporting Board (SRB) finalized the mandatory disclosure requirements for the European Sustainability Reporting Standards (ESRS). They also finalized how companies will assess the materiality of their disclosures: Companies won't have to justify their reasons for omitting specific data points, but will have to justify omitting a whole topic.

Meanwhile, 37 civil society groups and trade unions wrote to EU commissioner Mairead McGuinness to not to give in to pressures to slow the pace and ambition of the ESRS .

Adding fuel to the EU fire, the European Securities and Markets Authority (ESMA) announced that it has added ESG disclosures to its list of Union Strategic Supervisory Priorities , a key tool to coordinate the EU member state's regulatory authorities.

Credit:?creative soul

Standards Only Work When People Have Standards…

In the run up to next month’s international climate summit in Egypt, the New York Times reported that only 26 of 193 countries that agreed last year to step up their climate actions have followed through with more ambitious plans . The world’s top two polluters, China and the United States, have taken some action but have not pledged more this year.?

Confronted with war, inflation, recession, political tensions, and the pandemic, world leaders have a lot on their plates and climate action is (again) being pushed down the priority list.??

SEC Slows?

What a difference six months makes…back in March the ESG community was breathless when the US Securities and Exchange Commission (SEC) issued a sweeping new proposal to require climate related financial disclosures in financial filings. It looked like mandatory climate disclosure was coming fast.?

Then things slowed down. In response to the massive reaction - pro and con - the SEC extended the comment period . More recently, technical issues forced another delay .??

In the interim, SEC Chair Gary Gensler has been reacting to criticisms of the rule’s possible overreach and burden - recently signaling relief for smaller businesses .

Now, Senate Democrats are privately urging Gensler to slow work and take more time for feedback on a slew of regulations rattling Wall Street, as tensions surrounding the agency’s Biden-era agenda reach a boiling point.

Bloomberg reports that the SEC will miss a self-imposed October deadline for final rules as it sifts through thousands of public comments and considers recent Supreme Court rulings that endanger the agency’s authority to regulate Wall Street

Lightspring / Shutterstock

FCA targets Greenwashing

Greenwashing - or overselling the ESG credentials of products and securities - is rampant. Throughout this year we have reported on the high profile greenwashing enforcement cases - including the police raid on DWS headquarters and the SEC fine of BNY Mellon .?

This week the UK’s financial regulator - the Financial Conduct Authority (FCA) - proposed restrictions on using terms such as “green” and “ESG” in fund marketing and proposed a new set of consumer-friendly labels for sustainable investments. The proposal has three labels for “green” investing and requires firms to back up marketing claims with evidence.

The FCA joins the SEC and other financial regulators in cracking down on greenwashing. Sacha Sadan, FCA’s ESG director said: “Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector.”?

A new global survey from Deloitte found that two-thirds of executives think that greenwashing is a serious concern. On the brighter side, 87% of respondents said that environmentally sustainable practices have long-term economic benefits, and 75% agreed that their organizations can continue to grow as they reduce carbon emissions.

Credit:?Getty Images/iStockphoto

Republicans Introduce Anti-ESG Bill?

Four Republican representatives introduced a bill to stop a proposed rule by the US Department of Labor that allows retirement plan fiduciaries to consider ESG factors .?

Rep. Greg Murphy (R-N.C) said: "The Biden administration's proposed changes to ERISA abandon fiduciary responsibility by allowing 'woke' ESG factors to dictate investment returns — putting Americans' retirement savings at risk."?

E is for Enough!

Politico reported on the Wall Street blowback to the Republicans’ anti-ESG campaign. Mike Bloomberg said: "Critics call it 'woke capitalism.' There’s just one problem: They don’t seem to understand capitalism. And flogging ESG is not only a terrible economic mistake. It will be a political loser, too."

Bloomberg’s Matthew Winkler, added that Florida Governor Ron DeSantis is fighting a strategy proven to reward investors, asking "...why the Ivy League-educated governor of Florida is proud to be ignorant. Getting everyone's attention makes perfect political sense, if only to bolster your position as the preferred Republican successor to Donald Trump."

Less risky and higher returns — what's not to like??

BlackRock has been the target of GOP attacks. The company responded to the 19 state attorneys general alleging that they forgo the best returns for climate goals: "It is our duty to provide clients with our perspective on matters that can affect asset prices and to help them navigate constantly evolving industries and markets. Our commitment to our clients’ financial interests is unwavering and undivided."

But some market watchers are worried about the GOP campaign. Analysts at UBS downgraded BlackRock to “neutral” from “buy” earlier this month, because of risks from the firm’s “ESG positioning.” UBS claimed that BlackRock’s “early and energetic” portrayal of itself as a champion of ESG principles made the firm a political target - reducing its earnings estimates for BlackRock and lowering its price target for the company’s stock.??

At press time BlackRock’s stock is up more than 13% this week…

Bank of England Warns on Climate Risk

The Bank of England sent a letter to finance CEOs warning that firms must demonstrate “further progress” on tackling climate risks. The Bank warns that firms falling short of supervisory expectations will be asked to provide a “roadmap explaining how they intend to overcome the gaps,” and that regulators may use “wider supervisory tools” to ensure climate risks are being appropriately managed.?

Conserve Energy Future

Business Calls for Biodiversity Regulation

More than 330 firms from 56 countries representing $1.5 Trillion signed an open letter calling on Heads of State to require all large businesses and financial institutions to assess and disclose their impacts and dependencies on nature by 2030 .

On the opposite side of the issue, a new study found that industry groups representing some of the world’s largest companies are “opposed to almost all major biodiversity-relevant policies' and are lobbying to block them .

Getty Images

Ending with Optimism

While 5 degrees of warming once seemed possible, scientists now estimate that the Earth is on track to warm by 2 to 3 degrees . That difference might not seem huge, but it translates to fewer record-breaking floods, storms, droughts and heat waves and potentially thousands or millions of lives saved in the coming decades.

The use of coal, which provides about 30 percent of the world’s energy, is declining. The price of solar power has plummeted more than 85 percent, wind more than 55 percent. And the global powers have adopted serious plans to fight climate change - such as the US Inflation Reduction Act - which will drive warming down even more than experts estimate.?

In reality, the most optimistic climate models forecast that extreme weather will get worse. So, it's a mixed picture at best; improving trends show that humanity can make progress on this issue, but more action is needed to avert climate disasters, especially in the most vulnerable places.

Be well and enjoy the weekend.

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