ESG Update May 2023

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. 

Official announcements

• The UK Government published a revised Green Finance Strategy setting out its policy framework for managing the risks and opportunities associated with climate change and supporting the transition to net zero. The 2023 Strategy, which follows the 2019 Strategy, covers the UK's approach to green finance and how it intends to align the regulatory framework with its climate and environmental goals and create green investment opportunities. It also sets out the Government's commitments over the next year, such as:
  • consulting on a UK Green Taxonomy
  • launching a formal mechanism for assessing UK adoption of the forthcoming disclosure requirements being developed by the International Sustainability Standards Board (ISSB)
  • providing further detail on the Sustainability Disclosure Requirements (SDR) implementation timeline to reflect international standards
  • launching a call for evidence on scope 3 emissions reporting
  • consulting on introducing a requirement for large private companies to disclose transition plans
  • reviewing the regulatory framework for effective stewardship, including the operation of the Stewardship Code.
• In its February meeting, the ISSB decided to require that both IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024.
• On April 4, 2023, the ISSB voted to delay non-climate sustainability disclosures by one year. This follows its decision in February to make its standards available for regulators around the world to incorporate into their national reporting requirements starting in 2024. (If regulators were to adopt the measures by next year, companies would have been required to disclose certain non-climate sustainability metrics – such as packaging waste, employee diversity, and human-rights policies in supply chains – as soon as 2025. The delay means companies now will be required to make these disclosures by 2026. The delay does not affect S1 (general requirements) – which sets out overall requirements for an entity to disclose sustainability-related financial information – and S2 (climate-related disclosures) – which sets out specific disclosure requirements about an entity’s exposure to significant climate-related risks and opportunities.)

Podcasts from the ISSB following their monthly meetings can be accessed here.

• The Bank of England’s Climate Financial Risk Forum (CFRF) published the second tranche of its third round of guides to help the financial sector develop its approach to addressing climate-related financial risks and opportunities. The following are now available and include webinar discussions:
  • Transition to Net Zero – Mobilising Investment into Climate Solutions: Phase 1 Report 
  • Transition to Net Zero – Disclosures: Managing Legal Risks 
  • Transition to Net Zero – A Carbon Budget Primer for Financial Institutions
  • Scenario Analysis – Physical Risk Underwriting Guide
  • Scenario Analysis – Scenario Analysis Guide for Banks 
  • Scenario Analysis – Scenario Analysis in Financial Firms 
  • Scenario Analysis – Climate Litigation Risk Chapter
  • Disclosure, Data and Metrics – Industry Frameworks and Metrics in Relation to Green & Transition Finance 
  • Disclosure, Data and Metrics – CFRF Climate Disclosures Dashboard
  • Disclosure, Data and Metrics – Webinar 1 – The limitations of portfolio climate data 
  • Disclosure, Data and Metrics – Webinar 2 - Forward-looking portfolio climate metrics 
  • Disclosure, Data and Metrics – Webinar 3 - Climate data coverage 
  • Disclosure, Data and Metrics – Supporting content for Webinars 
  • Scenario Analysis - Online climate scenario analysis narrative tool (updated version March 2023) 
  • Scenario Analysis - Asset Management Guide 
  • Scenario Analysis - Learning from the 2021/22 Climate Biennial Exploratory Scenario (CBES) 

• The International Organisation of Securities Commissions’ (IOSCO) work on assurance and ethics (including independence) standards over sustainability-related corporate reporting issued its Report on International Work to Develop a Global Assurance Framework for Sustainability-related Corporate Reporting. Key observations and findings included:
  • some issuers voluntarily seek independent assurance over sustainability-related reporting, often for a subset of information, such as greenhouse gas (GHG) emissions or reporting under the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Larger issuers are more likely to seek assurance on their sustainability-related reporting and this is most often limited assurance.
  • Independent assurance may be provided by either audit firm or non-audit firm assurance providers. Non-audit firm assurance providers are often engaged to assure more specialised information, such as sustainability-related metrics. Different standards are also used. For example, the ISAE 3000 (Revised) is typically used for assurance engagements on general purpose sustainability-related reporting, while others, such as ISO 14064-3, are used by some non-audit firm assurance providers for assurance over more targeted information.
  • the regulatory landscape today is mixed. Some jurisdictions have indicated an intention to consider voluntary or mandatory assurance over sustainability-related information in future, while others have set requirements for limited assurance on (at least some) sustainability-related information (e.g., New Zealand) or indicated a gradual approach towards reasonable assurance (e.g., the European Union (EU)).
  • growing demand among investors for high-quality assurance over some sustainability-related information to enhance the reliability of corporate reporting. Investors typically see reasonable assurance as the long-term target, especially in respect of metrics such as those related to GHG emissions. However, many think that limited assurance may be the more realistic objective in the short term. Investors see consistent and comparable application of assurance and ethics (including independence) standards for sustainability-related information as key to supporting high-quality assurance engagements. 
  • standard setters are developing profession-agnostic standards for assurance and ethics (including independence) to support assurance over sustainability-related corporate reporting. The emerging standards will be designed to apply across all reporting frameworks (i.e. ‘framework-neutral’), and irrespective of whether reporting is investor-focused or directed to the information needs of wider stakeholders. The IAASB is developing an overarching standard for assurance on sustainability-related reporting – the International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. ISSA 5000 is developed as a stand-alone standard that leverages existing standards and guidance of the IAASB, such as ISAE 3000 (Revised) and ISAE 3410. The standard will address all the elements of an assurance engagement for both limited and reasonable assurance, including providing more specificity for certain priority areas. The IESBA is developing ethics (including independence) standards to support trustworthy assurance over sustainability-related information, regardless of whether such assurance is delivered by professional accountant or non-professional accountant assurance providers.

• The Transition Plan Taskforce announced:
  • a call to action to the market to publish transition plans this year
  • new members and observers to the TPT Delivery Group
  • the next phase of the TPT Sandbox to accelerate new capabilities to support preparers and users of transition plans.
  • new TPT Working Groups, including on nature, adaptation and just transition.

• The European Central Bank (ECB) published its third review of the disclosure of climate-related and environmental (C&E) risks among significant institutions (SIs) and a selected number of less significant institutions (LSIs). The assessment covered the existence, substantiation and soundness of disclosures across key areas of the expectations, including materiality assessment, business model and strategy, governance, risk management, and metrics and targets. The review covered 103 SIs and 28 LSIs. In addition, the disclosures of 12 global systematically important banks (G-SIBs) established outside the EU were benchmarked against the disclosures of the EU banks within the scope of the assessment. It found that:
  • the majority of SIs now disclose at least basic information for most of the expectations
  • most banks have now improved their public disclosures to address C&E risks, having clearly built up their capabilities in 2022
  • most banks disclose basic information on materiality assessments and governance, and more than half of the banks disclose basic information on business strategy, risk management, and metrics and targets. However, banks still need to close remaining gaps to disclose all relevant C&E risk information as only 34% of the banks disclose information on all categories
  • the data quality remains low and is unlikely to provide market participants with insights on which they can act. While significant progress could be observed as regards the existence of disclosures for all categories, most of the additional information available to users remains qualitative and often generic. Overall, for three-quarters of the institutions the level of substantiation of the disclosures was deemed insufficient.
  • even where metrics and targets are disclosed, banks often provide limited information on portfolio coverage and definitions and methodologies used to produce the respective information. For example, for banks that disclose their financed emissions, there is very rarely a reference to the reporting date of the underlying data, and when there is one, it is often outdated. Furthermore, most banks failed to disclose how their metrics have informed their strategy-setting and risk management. 

Resources, Reports and Announcements

• Global professional services firm Deloitte launched of three new solutions aimed at assisting organisations with ESG reporting, including tools to calculate Scope 3 emissions, support continuous control monitoring, and simplify sustainability reporting on its “ESG accelerators”.
• Issuance volumes of green, social, sustainability and sustainability-linked (GSSS) bonds rebounded strongly in Q1 2023, resuming double-digit growth trends after falling 18% in 2022, according to a new report from Moody’s Investors Service. The increase was led by a sharp growth in green bonds, with an increasing number of sovereign issuers joining the market, and as European issuers continue to gain share of issuance volumes, with the North American market remaining relatively dormant.
• According to a special report from Fitch Ratings the share of Article 8 (A8) funds is expected to moderately increase in 2023 as regulatory technical standards, which became effective in January 2023, provide greater clarify for fund managers. Nevertheless, the shifting regulations introduce stricter requirements for managers of A8 funds, with a higher hurdle for this classification. The proportion of A8-classified assets under management (AUM) in money market funds (MMFs) increased to 56% from 47% of total European MMF AUM in 2H22. The rise reflects investor demand and reclassification of funds from A6 to A8. A8-classified AUM totalled EUR913 billion at end-2022, up 38% in 2H22 vs the overall MMF market increase of 9%.
• Morningstar Sustainalytics launched its Low Carbon Transition Ratings, aimed at providing investors with an assessment of a company’s alignment with a net zero pathway, based on an evaluation of its strategy and actions as well as scenario analysis. The new ratings indicate a company’s exposure to low carbon transition risks and opportunities, based on an analysis of its business model, emissions and management performance.
• Eversheds Sutherland has launched its UK Sustainable Finance App to provide up to date information in an accessible format to help navigating a constantly-changing environment. The App is sector-agnostic, providing information on multiple sustainable finance products and guidance for those moving forward with their sustainability journey as well as those just starting out. It is available for Apple and Android devices.

Naresh Aggarwal

Associate Director, Policy & Technical