This blog is part of a regular series of blogs on the wide topic of Environmental, Social and Governance and covers items that have caught my attention.
The latest blog on ESG includes updates from the International Sustainability Standards Board (including an update on Scope 3 reporting), important news on the EU’s carbon border tax and a useful tool from MSCI that provides peer comparisons.
In addition, it features a discussion paper from the FCA which includes a series of commissioned articles from experts, including industry practitioners, academics and other thought leaders, with relevant and interesting perspectives on firms’ sustainability-related governance, incentives, competence and stewardship arrangements to help stimulate debate and dialogue.
Official announcements
As part of the series of guidance and reliefs set out at its December meeting, the ISSB:
Agreed to a temporary exemption of a minimum of 1 year from the implementation of the climate standard to give time for companies to implement processes;
Indicated that the standard will allow companies to include information not aligned with its reporting cycle if the information is collected from value chain companies with different reporting cycles;
Reported that it agreed to refine proposed requirements for financed emissions, which typically represent the bulk of financial institutions' Scope 3 emissions, to support financial sector preparers with the measurement and disclosure of portfolio emissions.
In January 2023, the ISSB met to redeliberate some of the proposals in its exposure drafts IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (draft IFRS S1) and IFRS S2 Climate-related Disclosures (draft IFRS S2). The ISSB discussed:
The proposed objective for disclosing metrics and targets in draft IFRS S1 and draft IFRS S2 (Agenda Paper 3A);
the proposed requirements in draft IFRS S1 for an entity to disclose its judgements, assumptions and estimates (Agenda Paper 3B);
The concept of 'reasonable and supportable information that is available at the reporting date without undue cost or effort' and whether and how to introduce this concept in IFRS S1 and IFRS S2 (Agenda Papers 3C and 4D);
The proposed requirement in draft IFRS S1 for an entity to disclose information about sustainability-related opportunities in circumstances when that information may be commercially sensitive (Agenda Paper 3D);
The proposed requirements in draft IFRS S1 and draft IFRS S2 for an entity to disclose current and anticipated financial effects of sustainability-related risks and opportunities (Agenda Papers 3E and 4E);
the proposed requirements in draft IFRS S1 on connected information (Agenda Papers 3E and 4E);
the proposed requirement in draft IFRS S2 for an entity to use scenario analysis to assess its climate resilience (Agenda Paper 4A);
the proposed requirement in draft IFRS S2 for an entity to disclose its greenhouse gas emissions and a potential reporting relief (Agenda Paper 4B); and
The proposed requirement in draft IFRS S2 for an entity to disclose its climate-related targets (Agenda Paper 4C).
Podcasts from the ISSB following their monthly meetings can be accessed here.
The Bank of England's Climate Financial Risk Forum (CFRF) published its third round of guides to help the financial sector develop its approach to addressing climate-related financial risks and opportunities. The guides focus on three areas: (1) the transition to net zero; (2) scenario analysis; and (3) climate disclosure, data and metrics. This reflects the focus of the CFRF in Session 3, continuing the forum's work on scenario analysis and climate disclosure, data and metrics and introducing a new CFRF working group to focus on the transition to net zero.
In response to a letter from the UK's Chancellor of the Exchequer, the FCA has issued a discussion paper focused on the financial sector that aims to encourage an industry-wide dialogue on firms' sustainability-related governance, incentives, and competencies. The report also includes a collection of 10 commissioned articles from experts, including industry practitioners, academics and other thought leaders, with relevant and interesting perspectives on firms' sustainability-related governance, incentives, competence and stewardship arrangements:
Joining the dots – taking a holistic and purpose‑led approach to net zero by Tom Tayler, Senior Manager, Aviva Investors Sustainable Finance Centre for Excellence
Using pay to create accountability for ESG goals by Tom Gosling, Executive Fellow London Business School and European Corporate Governance Institute
Transitioning to net zero: increasing investor confidence in corporate carbon commitments by Jaakko Kooroshy, Global Head SI Research, Felix Fouret, Senior SI Research Analyst Billie Schlich, SI Research Analyst, of London Stock Exchange Group
Adding purpose to principles and products by Robert G. Eccles, Visiting Professor of Management Practice of Saïd Business School, University of Oxford
How to build an effective culture to support climate‑ and sustainability‑related objectives in the financial sector by Rosalind Fergusson, Senior Manager, David Strachan, Partner, Natasha de Soysa, Partner of Deloitte
Board‑level governance of climate‑related matters by Julie Baddeley, Chair, The Directors' Climate Forum Chapter Zero
How a Chief Sustainability Officer can most effectively support a firm in achieving its climate‑ and sustainability‑related objectives by Will Martindale, Co‑Head of Sustainability Cardano Group
Governing climate transition implementation at banks by Konstantina (Tina) Mavraki, Portfolio non‑executive director and adviser Ingenios Ltd.
Looking ahead, the FRC's key areas of focus on ESG reporting during 2023 will include the following:
Materiality disclosures – what should be considered when determining what are material issues?
Support for FRS 102 preparers
What are the ESG reporting requirements of the Corporate Governance Code?
The link between investors and ESG reporting
In December 2022, the Council of the EU and the European Parliament reached a provisional agreement on CBAM. The agreement needs to be confirmed and formally adopted by both institutions before it becomes final. Some aspects of CBAM, such as the length of the transitional period and its full phase-in, have been agreed upon on 17 December 2022 in the parallel legislative process on the reform of the EU Emissions Trading System.
While the text of the CBAM legislation is still being finalised, several important details of the provisional agreement have been released:
The CBAM transitional period is to begin on 1 October 2023.
The full go-live of CBAM is now planned for 2026. Over a period of 8 years, CBAM will be phased-in in parallel with the gradual phase-out of free allowances granted under the EU ETS.
The initial product scope of CBAM will include the groups of products proposed by the European Commission (namely: iron, steel, cement, fertilisers, aluminium, and electricity), as well as hydrogen, some precursors and a limited number of downstream products. Indirect emissions will, under certain conditions, also be covered.
Other products previously proposed for inclusion by the European Parliament, such as chemicals and polymers, are currently not included in the product scope. The expansion of CBAM to cover such products is to be assessed by the European Commission by the end of the transitional period.
The governance of CBAM will be centralised, with the European Commission directing most of the tasks pertaining to its implementation.
Europe's three primary financial regulatory agencies announced the release of their opinions on the first set of draft European Sustainability Reporting Standards (ESRS), which set out the rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU's upcoming Corporate Sustainable Reporting Directive (CSRD).
Each broadly supported the standards while highlighting several areas of improvement for the European Commission to consider, including the need to maintain consistency with other global sustainability reporting standards and improved definitions to help reporters assess materiality.
The ESRS was developed by the European Financial Reporting Advisory Group (EFRAG), which was mandated by the European Commission in June 2020 to prepare for new EU sustainability reporting standards for the CSRD. The CSRD, on track to begin applying from the beginning of 2024, is aimed as a major update to the 2014 Non-Financial Reporting Directive (NFRD), the current EU sustainability reporting framework, significantly expanding the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000 currently, and introducing more detailed reporting requirements on company impacts on the environment, human rights and social standards and sustainability-related risk.
Resources, Reports and Announcements
MSCI has launched its Corporate Sustainability Insights to enable sustainability executives at listed companies to set ESG and climate goals, track progress and compare their sustainability data against peers. It includes visualisations of MSCI ESG Research risk and performance data, including company ESG Ratings, ESG Controversies, and Sustainable Development Goals Net Alignment profiles, to provide insights supporting strategic planning and investor engagement, as well as access to tools such as MSCI ESG Research's Climate Value-at-Risk and Implied Temperature Rise solutions, providing views into risk exposure and alignment with global climate goals.
The solution also helps identify potential disclosure gaps in carbon-related commitments through the MSCI Target Explorer tool and provides views into climate-related risks and opportunities compared with industry peers based on TCFD reporting recommendations.
A report from CDP (Carbon Disclosure Project) found that in assessing the state of climate-related reporting from more than 18,600 companies, only 0.4% of companies had disclosed credible climate transition plans. Whilst 4,100 organisations reported that they had developed a 1.5°C-aligned climate transition plan, fewer than half of them reported that the plan was publicly available with a mechanism in place to collect shareholder feedback.
The report found that the strongest reporting areas included disclosure of climate risks and opportunities and having governance structures in place to manage climate transition plans, with around 33% and 24% disclosing sufficiently on these. Weaker areas included disclosures on relevant, forward-looking financial details to support a climate transition, with only 3% providing these details, while only 7% disclosed a sufficient strategy to achieve net zero.
By sector, power generation and financial services were found to have the strongest disclosure rates, with 38% and 35%, respectively, reporting across at least two-thirds of the key indicators. In contrast, the poorest disclosure rates were found in the apparel, fossil fuels and hospitality sectors.
Naresh Aggarwal
Associate Director, Policy & Technical