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 world of ESG continues to develop at a rapid pace and keeping up to date can be a challenge. This blog captures some of these. As always, if anything important has been missed, do feel free to contact Sarah, James or Naresh in the Policy & Technical team.
Official announcements
1. The EU Commission presented its Taxonomy Complementary Climate Delegated Act on climate change mitigation and adaptation covering certain gas and nuclear activities. The Delegated Act introduced:
- additional economic activities from the energy sector into the EU Taxonomy, by setting out the conditions subject to which certain nuclear and gas activities can be added as transitional activities to those already covered by the first Delegated Act on climate mitigation and adaptation, applicable since 1 January 2022; and
- specific disclosure requirements for businesses related to their activities in the gas and nuclear energy sectors.
2. The European Securities and Markets Authority (ESMA) launched a call for evidence on environmental, social and governance (ESG) ratings to develop a picture of the size, structure, resourcing, revenues and product offerings of ESG rating providers present or operating in the EU.
3. The European Securities and Markets Authority (ESMA) published its Sustainable Finance Roadmap 2022-2024, setting out its priority areas and related actions in sustainable finance. The aim behind the Roadmap is to:
- ensure that it can take timely and coordinated action to fulfil its mandate in the rapidly evolving area of ESG, with clear priorities directing its work (both at an individual sector level and also across different sectors); and
- have a tool that enables regular stock-taking on progress towards fulfilling the identified priorities (and adjusting the actions envisaged or the priorities themselves, where necessary) in light of developments at the EU or international level (including the work of the EU Platform on Sustainable Finance and IOSCO).
It sets out the three priority areas for ESMA’s sustainable finance work for 2022 – 2024:
- tackling greenwashing and promoting transparency
- building NCAs’ and ESMA’s capacities and
- monitoring, assessing and analysing ESG markets and risks
Within each of the three priority areas, it identifies those sectors where ESG-related risks are considered to have the greatest potential impact on investor protection, orderly markets and financial stability. These are:
• Investment management
• Investment services
• Issuers’ disclosure and governance
• Benchmarks
• Ratings (credit ratings and ESG ratings)
• Trading and post-trading and
• Financial innovation
Resources, Reports and Announcements
1. The International Capital Market Association issued a paper identifying challenges for the financial and corporate sector in providing information on the alignment of their activities with the EU Taxonomy as required by existing and proposed future regulatory reporting. It identified six key areas of focus:
- Requirement for highly granular data for TSC purposes
- Reliance on EU legislation and criteria in an international market
- Inconsistency in the use of estimates and third-party data
- Absence of a proportionality lens for smaller companies and projects
- Dynamic TSC for Substantial Contributions and the need for grandfathering
- The use of an economic activity based classification system (NACE)
2. The recent “flow” report from Deutsche Bank identified the following 8 ESG trends to watch in 2022:
- Managing the transition to net zero becomes key
- Best ownership of bad assets will need to be discussed
- ESG regulation picks up and shapes global markets
- Sustainability reporting is moving from discussion to implementation
- Focus on ESG impact in supply chains will become key
- Greenflation must be tackled
- Carbon markets will become more important than ever
- Biodiversity topics will gain pace
3. The World Business Council for Sustainable Development (WBCSD), a CEO-led organisation of over 200 leading companies published a blog of key developments in 2022. It mentions:
- The US SEC - increasing appetite to intervene in relation to climate disclosures is likely to continue to grow in 2022
- China – Uyghur Forced Labor Prevention Act - guidance and lists of products and entities, is required under the UFLPA to be released by mid-2022, and will hopefully provide further clarity to importers of Chinese goods and those who use such goods in their supply chains as to how the UFLPA will directly impact their business, particularly in sectors such as silica and cotton where the region plays a key role in global supply
- Supply chains – Tracking new legal proposals. In addition to the UFPLA, the EU and Germany, and other countries are expected to implement legislation which will require businesses to use their best efforts to prevent violations of human rights in their own business operations and in their supply chains. These laws may require companies to conduct audits on their direct suppliers and extend risk analyses / risk mitigation measures to indirect suppliers if they obtain substantial knowledge of a possible human rights or environmental violation
- ESG Litigation/Disputes - the pace of ESG-related litigation will continue to grow amid increasing interest in companies’ ESG performance and higher expectations from stakeholders regarding ESG matters
- Taxonomies – This year will see the impact and requirements of the EU Taxonomy-aligned disclosures in practice, and the continuing political and legal developments in relation to nuclear and gas power. The EU is also due to report back on a potential extension of the environmental objectives in the Taxonomy, and the possible creation of a Social Taxonomy in 2022
- Reporting - The newly formed International Sustainability Standards Board (ISSB) will consult on proposed general disclosure requirements in Q1 2022, and the process of attempting to form a globally recognised standard will continue throughout the year
- Scope 3 Reporting – there is currently limited consistency over Scope 3 reporting and this area of reporting is expected to attract increased scrutiny on the methodology which may require revisions to existing frameworks or the role of Scope 3 emissions in mandatory reporting.
4. A report from S&P Global on key trends driving the ESG agenda in 2022 notes the following:
- Total sustainable debt issuance reached a record high in 2021 and is poised for continued growth in 2022. A key challenge for market participants in the coming year will be to manage that growth in a way that combats rising concerns about greenwashing.
- While many large companies set sustainability goals and published ESG-related data in 2021, investors, regulators, and the broader public are exercising greater scrutiny of corporate sustainability efforts.
- In 2022, corporate boards and government leaders will face rising pressure to demonstrate that they are adequately equipped to understand and oversee ESG issues — from climate change to human rights to social unrest.
The report also includes a number of useful infographics:
Upcoming ACT events which include sessions on ESG
Cash Management Conference 29 March - The rise of ESG integration in cash investment
Annual Conference 10-11 May – various sessions
Naresh Aggarwal & James Winterton
