ESG Monthly News Update: September 2023
Breaking News
ESG Today: California Lawmakers Pass Bill Requiring Companies to Disclose Full Value Chain Emissions
A newly proposed California law, SB 253, could require most large U.S. companies to disclose their full value chain greenhouse gas emissions. The law has passed the state's Assembly as well as the Senate and will be headed to Governor Newsom's desk for the final decision on its passage into law.
This legislation would require companies “with revenues greater than 1 billion that do business in California to report their annual emissions from all Scopes. The law would also require companies to obtain third-party assurance for their emissions reporting.”
This ruling differs from the SEC's initial proposal requiring reporting on Scope 3 emissions if they are material as this law applies to all large companies, not just public companies.
Additionally, another bill, SB 261, will also be voted on in the assembly this week and aims to require companies to report on climate-related financial risk and the measures companies have adopted to reduce, adapt, or mitigate those risks.
Reuters: California Senate passes climate bill, governor must decide by Oct 14
California's state Senate approved a bill requiring large companies in the state to report their carbon footprints.
The bill applies to public and private companies earning over $1 billion annually in California.
Some major companies, such as Apple, Ikea, and Microsoft, supported the bill, while the Chamber of Commerce opposed it.
Governor Gavin Newsom has until October 14th to decide whether to sign the bill, which aims to address greenhouse gas emissions disclosure, specifically Scope 3 emissions, ahead of federal regulations from the U.S. Securities and Exchange Commission.
Some anticipated legal challenges are expected if the bill becomes law.
General ESG News
Forbes: The Great ESG Retreat?
August 2023, following the hottest July on record, witnessed significant developments in the ESG landscape.
S&P Global decided to stop providing numeric ratings based on ESG criteria, opting instead to offer analytical narratives about a company's ESG performance in each of the three pillars: Environmental, Social, and Governance.
Some attribute this shift to an anti-ESG backlash in certain parts of the United States, where laws have been passed to restrict ESG considerations in publicly owned investments.
While there is opposition to ESG, major financial players like BlackRock remain committed to principles like decarbonization and corporate governance, even if they are distancing themselves from the term "ESG" itself.
Despite the emergence of "anti-ESG" funds, ESG-focused funds still dominate the market, with significantly higher assets under management, indicating that ESG principles are likely to persist under different labels.
ESG principles, driven by factors like climate change and societal awareness, are expected to remain relevant and influential in investment decisions, even if the terminology evolves.
Reuters: Group judging corporate climate claims overhauls itself after criticism
The Science Based Targets initiative (SBTi) is undergoing significant changes to address conflict of interest concerns and accelerate the assessment of company emissions reduction plans.
SBTi is splitting into two entities, with one handling fee-charging validation of corporate targets and the other responsible for standard setting. A new company has been established in the UK to ensure impartiality.
The group has appointed Francesco Starace as the chair of its board of trustees, along with two independent trustees, to enhance its governance.
SBTi aims to expand its validation capacity due to increased demand, driven by an 87% rise in the number of firms setting climate targets in the previous year.
Critics have raised concerns about SBTi's monopoly in the validation process and transparency of its methods, while supporters argue that the changes will improve impartiality and meet the demand for stronger corporate climate targets.
Forbes: Despite ESG Backlash, Linking ESG Goals To Pay May Help The Planet
From 2011-2021, the number of companies that have incorporated ESG factors into contracts increased from 1% to 38%.
It is more common for European countries to tie compensation to ESG goals. 44% of firms studied in the UK, and 56% of firms in France tied compensation to ESG goals, while only 16% of U.S. firms did so.
The practice of tying ESG goals to compensation is more common in larger firms with higher emissions, like oil producers, utility companies, and automakers.
Future financial performance and potential risks are indicated by ESG metrics, and companies that integrate these metrics are likely to succeed in the future.
Through ESG pay, companies can align their objectives with other stakeholders and internalize environmental externalities. Incorporating ESG targets into executive compensation is a long-term commitment and process.
Bloomberg: Scorching August Sets World on Path Toward One of Hottest Years on Record
August 2023 was the warmest in 174 years and included the highest monthly sea-surface temperature for the fifth month in a row. So far, 2023 is the second warmest year on record.
The El Nino climate pattern has contributed to the heat waves, fueling extreme weather events that have occurred around the world this year.
ESG Today: MSCI Launches New Sustainability Institute
Earlier this month MSCI announced the launch of the MSCI Sustainability Institute which aims to “[enable] collaboration across the capital markets ecosystem on the creation of sustainable value and [address] global challenges such as climate change.”
Some of the initiatives included:
Equipping academic researchers and policymakers with sustainability data
Encouraging innovations on new data and approaches for measurement to provide insights for sustainable finance and capital allocation decision applications
Offering a forum for debate on sustainability risk and opportunity topics for leaders from across the capital market ecosystem
The institute will be led by Linda-Eling Lee who has been appointed as Founding Director and Head of MSCI Sustainability Institute. She most recently served as the Managing Director and Global Head of ESG and Climate Research at MSCI.
GreenBiz: Science Based Targets Initiative Unveils Major Revamp to Keep Up with Growing Corporate Demand
The Science Based Targets initiative (SBTi) has announced changes to its operations amid pressure from companies seeking independent approval of corporate climate goals.
Last year SBTi saw an 87% year-on-year increase in the number of companies seeking to set climate targets. SBTi has stated that it plans to strengthen and publish its standard-setting procedures to improve transparency and increase capacity to validate corporate climate targets.
A spokesperson for SBTi explained that it would operate as two entities moving forward. One entity is the organization focused on standard setting for corporate climate action and the other entity is responsible for validating companies' climate goals against its standards.
Francesco Starace, former CEO of Italian energy giant Enel, Ester Baiget, president and CEO of Danish biotech firm Novozymes, and former Colombian president and anti-deforestation advocate Ivan Duque have all recently joined SBTi’s board of trustees.
Investment Trends
Financial Times: Boom in ‘sustainable’ debt fuels scrutiny of green labels
Trillion-dollar green finance targets set by leading investment banks are driving a boom in “sustainable” debt deals.
As green financing efforts continue, the development of appropriate screening and transparency tools is crucial.
Bank of America has a goal of $1.5 trillion in sustainable finance by 2030 while Goldman Sachs targets $750 billion in sustainable deals between 2019-2030.
In some deals, traders receive a lower cost of capital by achieving sustainability targets related to human rights or direct emissions but exclude emissions reductions related to the consumption of oil and gas traded.
While sustainable finance deals could support oil, gas, coal, and shipping companies to decarbonize, as well as provide funding for conservation, ensuring that this process is transparent is “messy.”
ESG Ratings, Standards, and Reporting
Forbes: As ESG Mandates Begin, Top EU Official Wanta to Ease Reporting Burden on Business
European Commission President Ursula von der Leyen has called for a 25% reduction in reporting obligations for small and medium-sized businesses (SMEs) in her State of the Union address.
This reduction proposal raises concerns from environmental groups as it coincides with the implementation of new sustainability reporting standards (ESRS) in the EU.
Initially, the ESRS will apply to publicly traded and large privately held companies, with plans to eventually include SMEs. However, the timeline for SME inclusion has been delayed.
Von der Leyen's priorities include appointing an EU SME envoy and introducing legislation to reduce reporting obligations by 25% at the European and national levels, sparking concerns about potential impacts on ESRS.
Environmental activists are monitoring the situation, and the timing of legislation introduction, particularly with the upcoming COP28 climate conference, may become a focal point for discussions on ESRS requirements for SMEs.
Forbes: ESG Reporting Is Already Required. Here’s What You Need To Know
ESG reporting has entered a new era, with substantial demands placed on finance groups, including the forthcoming U.S. SEC rules on climate disclosures and the European Union's Corporate Sustainability Reporting Directive (CSRD).
Over 50,000 EU-based companies and around 10,400 non-EU companies, with a significant number from the United States, will be subject to CSRD compliance, making mandatory ESG reporting a reality for them.
CSRD compliance is a complex undertaking, requiring extensive data collection and verification, cross-functional collaboration, and potentially new reporting infrastructure. It will involve reporting on ESG performance based on adherence to 12 European Sustainability Reporting Standards.
CFOs need to close common CSRD knowledge gaps, including understanding double materiality analyses, deciding on the level and scope of reporting, and ensuring rigorous data collection and management for ESG disclosures. Preparatory work should start immediately to comply with CSRD and other emerging ESG disclosure requirements.
Sustainable Brands: Study Shows Stronger ROI for Companies with High ESG Ratings
Kroll conducted a study examining the relationship between ESG ratings and historical returns of over 13,000 publicly traded companies globally. The study found that companies with higher ESG ratings outperformed those with lower ratings in terms of total stock returns over the 2013-2021 period.
Globally, ESG leaders achieved an average annual return of 12.9%, compared to 8.6% for laggard companies, representing a 50% premium for top-rated ESG companies.
In the United States, ESG leaders outperformed laggards with an average annual return of 20.3% versus 13.9%, echoing the global trend.
The positive correlation between ESG leadership and financial performance was consistent across most industries and geographic regions, although some exceptions existed.
The study highlights the growing importance of ESG in investment decisions and the need for a better understanding of the link between ESG ratings and investment performance as sustainable investments continue to rise globally.
ESG Today: EU Commission Considers Requiring Sustainability-Related Disclosures for All Financial Products
Focusing on the Sustainable Finance Disclosure Regulation (SFDR), the EU Commission began a consultation period to discuss the potential of using sustainability-related disclosure requirements even if the products have not made sustainability commitments.
Reporting on Principal Adverse Impact (PAI) is challenging for asset managers because of the broad range of sustainability focus.
The consultation aims to discover the additional benefits to investors if all products had uniform sustainability-related disclosure requirements and a comprehensive understanding of the taxonomy and categorization system used.
Companies and Industries
Sustainable Brands: L’Oréal Launches €15M Climate Emergency Fund
This month, L’Oréal launched a €50 million endowment fund to support vulnerable communities to develop greater resilience in the face of climate disasters titled the L’Oréal Climate Emergency Fund. The fund will reach communities through partnerships with local disaster relief organizations and international NGOs.
Alexandra Palt, the Chief Corporate Responsibility Officer of L’Oréal Group and the CEO of the Foundation L’Oréal stated, “The urgent climate crisis we are facing necessitates action on all fronts and calls for global collaboration at every level. We are expanding on our commitments to help build resilience for vulnerable communities together with organizations deploying innovative solutions on the ground.” The fund will focus its efforts on ‘prepare and repair’ actions.
The first two fund recipients are The Solutions Project, an organization that amplifies climate justice solutions by working towards an equitable and regenerative economy, and Start Network, an alliance of local, national, and international NGOs that work with people on the frontline to provide early and effective responses before and when humanitarian crises strike.
Financial Times: BlackRock Hit by Backlash After Fall in Environmental and Social Votes
Black Rock and other big asset managers have experienced a decrease in support for shareholder proposals at annual meetings due to backtracking on commitments to environmental, social, and governance causes.
Larry Fink, CEO of BlackRock, said earlier this year that he has stopped using the term ESG because it has become too divisive. He has also denied the criticism influenced its voting record. Investor support for shareholder proposals has fallen since a 2021 rule change that made it harder for companies to block their inclusion on proxy ballots.
Reuters: Three-quarters of firms globally are not ready for new ESG rules, KPMG finds
According to a new report from KPMG, three-quarters of companies are not ready for external ESG data audits; this finding comes just months before new disclosure regulations are set to take effect in the U.S., Europe, and other regions.
While not as extensive as financial auditing, the auditing of ESG-related data is crucial for ensuring investors receive accurate decision-making information.
Of the 750 companies surveyed, just over half currently undergo some level of auditing of their ESG disclosures, but only a small percentage are receiving reasonable or limited assurance for their disclosures.
Fast Company: Why is a toxic polluter the main sponsor of Climate Week?
The article discusses the sponsorship of Climate Week NYC by Saint-Gobain, a materials manufacturer that was responsible for contaminating water supplies in several communities, including Hoosick Falls, New York.
Saint-Gobain was involved in a class-action lawsuit and eventually settled for damages and medical monitoring for residents affected by the pollution. They also faced lawsuits in New Hampshire and Vermont.
The article highlights the contradiction of Saint-Gobain sponsoring a climate event while being responsible for environmental harm. It questions whether the corporate sector is truly driving climate action.
Critics argue that Saint-Gobain's sponsorship is inappropriate and a slap in the face to affected communities, while the company maintains its commitment to sustainability and transparency in remediation efforts.
Sustainable Brands: As DOE Invests $1.2B in Direct Air Capture, Climate Justice Groups Decry Business as Usual
The U.S. Department of Energy (DOE) has allocated up to $1.2 billion in funding for two direct air capture (DAC) hubs in Louisiana and Texas as part of the Biden administration's Investing in America agenda.
These regional DAC hub projects are expected to capture, process, and permanently store over two million metric tons of carbon dioxide annually, equivalent to removing nearly half a million cars from the road, and creating more than 5,000 jobs.
DAC is a technology that removes carbon dioxide directly from the air, and the funding is part of a larger effort to develop a nationwide network of carbon-removal projects.
While DAC is considered a necessary tool in addressing climate change, it requires significant energy to operate and is less effective than reducing emissions directly. Some groups, such as the Climate Justice Alliance, oppose DAC, arguing that it distracts from the need to phase out fossil fuels. The DOE projects aim to demonstrate DAC technology and avoid using captured CO2 for enhanced oil recovery.
Government Policy
ESG Today: G20 Targets Tripling of Global Renewable Energy Capacity by 2030
G20 leaders have agreed to triple renewable energy capacity by 2030 and collaborate on clean energy technology development at a summit held in New Delhi.
The summit covered a wide range of topics, including the impact of Russia's war in Ukraine on food and energy security, progress on the Sustainable Development Goals (SDGs), climate, and the environment.
The G20 leaders noted significant off-track progress toward the UN SDGs, with only 12% of the targets on track.
The declaration from the summit includes commitments to accelerate the implementation of the 2030 Agenda for Sustainable Development, pursue low-carbon and climate-resilient development, and scale up financing for SDGs.
The G20 leaders also launched the Global Biofuel Alliance (GBA) to promote the use of sustainable biofuels and advance technology in this field, recognizing the importance of biofuels in the transition to cleaner energy sources.
ESG Today: EU Parliament Votes to Nearly Double Renewable Energy Share by 2030
European Parliament lawmakers voted 470-120 in favor of legislation requiring renewables to make up 42.5% of the EU's energy consumption by 2030.
The legislation also sets more ambitious clean energy targets for various high-emitting sectors and expedites project approvals to accelerate renewable energy deployment.
This new law nearly doubles the share of renewable energy in the EU's energy mix from around 22% in 2021, with an additional aspiration for EU Member States to collectively reach a 45% renewable energy target.
The legislation includes sector-specific targets, such as a 49% renewable energy share in buildings by 2030, and measures to increase renewables in cooling, heating, transport, industry, and hydrogen production. It also promotes the development of innovative renewable energy technology.
GreenBiz (Interview sponsored by EDF): How the IRA is enabling large-scale fleet electrification
As a representative of General Motors’ tech company BrightDrop, the CCO Steve Hornkay, shared the following insights of company actions that supported the Inflation Reduction Act (IRA):
Engaging policymakers to support electric vehicle (EV) adoption could generate jobs, positively impacting the economy.
The inclusion of cost incentives in the IRA helps make EV purchases more realistic for “the average business owner.”
Commercial EV adoption can be expanded by pairing IRA incentives with operational cost savings and thus decrease GHG emissions faster.
By 2030, it is projected that 53% of new vehicle purchases will be EVs. By 2035, California legislation will require 100% of new cars and light trucks sold in the state will be zero-emission vehicles, including plug-in hybrid electric vehicles
Operational savings associated with EV reliance compared to the diesel alternative create value for both the company and shareholders.