This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The United Nations Climate Conference, COP28, concluded with a historic agreement to transition away from fossil fuels and rein in climate change. Representatives from nearly 200 countries agreed to take actions towards achieving, on a global scale, a tripling of renewable energy capacity and doubling energy efficiency improvements by 2030. The deal faced criticism from small climate vulnerable island states, with lead negotiator for Samoa, Anne Rasmussen, saying, “We have made an incremental advancement over business as usual, when what we really need is an exponential step change in our actions.” United States Special Presidential Envoy for Climate John Kerry said, “For the very first time at COP, fossil fuels have been on the table as a major part of our negotiations. The decision that came out of this clearly embraces transitioning away from fossil fuels in energy systems to achieve net-zero by 2050. That is a clear, unambiguous message on one of the most complicated issues we face.”
- Teneo Takeaway: The deal aims to keep the Paris Agreement 1.5°C goal within reach and recognizes the need to transition away from (but not “phase-out”) fossil fuels. It is now up to individual countries to implement policies to achieve these goals, and for stakeholders to hold countries accountable for doing so.
The European Parliament reached a provisional agreement on the EU’s proposed corporate sustainability due diligence directive (CSDDD), outlining rules for companies requiring large businesses to assess and address adverse human rights and environmental impacts in their value chains. The new rules will apply to EU companies with more than 500 employees and over €150 million in global revenues and will also apply to non-EU companies with more than €300 million net revenue generated in the EU. The directive requires companies to adopt climate transition plans that confirm that their business models and strategy are aligned with the Paris Agreement. The requirements will need formal approval by the EU council and Parliament before entering force. Notably, the CSDDD excludes financial firms from due diligence of clients who take out loans or make investments, only required to check for forced labor or environmental harms within their own operations.
- Teneo Takeaway: The CSDDD adds to an evolving set of global ESG disclosure requirements. Thousands of U.S. companies are likely to be subject to the new EU directive, with first disclosures for U.S. companies due 3 years after the rules are finalized.
The SEC released its 2024 rulemaking agenda, which highlighted that the final climate disclosure (April) and proposed human capital management disclosure (October) are both slated to be released sometime in 2024. The rules have faced significant pushback from Republicans since the SEC proposed them in March 2022. If Republicans take control of the Senate in 2024, Congress could revoke the regulations issued after the first few months of 2024 under the Congressional Review Act. In November, SEC officials suggested scaling back some of the Scope 3 emissions disclosure requirements, which would be a significant deviation from EU rules that mandate Scope 3 disclosures if deemed material.
- Teneo Takeaway: Chair Gensler also argued that an SEC climate disclosure rule may ultimately serve as an exemption to the EU disclosure rules that many US companies will be subject to – perhaps his best argument for those against the SEC implementing a final rule.
The European Union agreed to a new A.I Act that regulates artificial intelligence, setting a global benchmark for countries seeking to harness the potential benefits of the technology, while attempting to protect against its possible risks. The law places controls on systems such as OpenAI’s ChatGPT and Google’s Bard, including transparency requirements and fines for companies that violate the rules. It would also dictate how law enforcement can use AI-powered surveillance, how it can be deployed in critical infrastructure, bans social scoring and AI used to manipulate or exploit user vulnerabilities, and affirms the right of consumers to launch complaints and receive meaningful explanations. The A.I Act still requires formal approval from EU members states and Parliament. The EU action follows the Biden Administration’s Executive Order on AI, which was also broadly designed to harness A.I’s benefits, while mitigating the risks.
- Teneo Takeaway: Similar to global climate disclosures, AI guardrails will require global standards alignment and will take time to develop. Generative AI governance has faced criticism that regulators have been overly reactive to ‘worst-case’ scenarios and not proactively limiting AI bias.
The Global Reporting Initiative and the European Sustainability Reporting Standards signed a memorandum that substantiates the benefits of the alignment achieved between the two organizations and commits them to continued collaboration. As part of the memorandum, a GRI-ESRS Interoperability Index has been made publicly available today as it is submitted for approval to the December meetings of EFRAG standard setting bodies. The tool sets out how the disclosure requirements and datapoints in each set of standards relate to each other, emphasizing the high degree of commonality already achieved and laying down solid foundations to build a reciprocal digital taxonomy. The agreement also outlines common foundation principles and areas for further collaboration.
- Teneo Takeaway: “Interoperability” continues to be the buzzword for the remaining ESG disclosure frameworks, with the GRI and EU CSRD in solid partnership on a “double materiality” disclosure standard. Meanwhile, the IFRS/ISSB ESG disclosure standard is maintaining its “single materiality” standard for its disclosure framework, creating a clear distinction for companies to consider as part of its ESG disclosure strategy.
On a similar vein, nearly 400 organizations have advanced the adoption or use of the International Sustainability Standards Board’s climate-related reporting at a global level. Corporate membership groups representing thousands of companies globally have signed the statement, joined by more than 140 companies preparing public disclosures who also chose to demonstrate support directly. More than 25 stock exchanges have also directly signaled their support, as well the African Securities Exchanges Association which represents 27 securities exchanges and the Arab Federation of Capital Markets, representing 17 stock exchanges. ISSB Chair Emmanuel Faber said, “Signatories to this declaration represent organizations of all sizes from every continent. We recognize this as a signal of the urgency behind our work and confirmation that the ISSB Standards can deliver a vital global solution in the need for better information about the risks posed by climate.”
- Teneo Takeaway: Supporting institutional investors include Neuberger Berman, Legal & General, Fidelity International, UBS, CalSTRS and CalPERS. After years of debate about having too many ESG disclosure standards, ESRS and ISSB (with SASB, TCFD, CDP and TNFD under the ISSB umbrella) are emerging as the two dominant (albeit competing) frameworks that are being widely adopted across the globe.
They Said It: ESG Influencers Speak Out
Following the conclusion of COP28, President Biden said, “Today, at COP28, world leaders reached another historic milestone – committing, for the first time, to transition away from the fossil fuels that jeopardize our planet and our people, agreeing to triple renewable energy globally by 2030, and more. While there is still substantial work ahead of us to keep the 1.5 degree C goal within reach, today’s outcome puts us one significant step closer … The climate crisis is the existential threat of our time. But as America has always done, we will turn crisis into opportunity – creating clean energy jobs, revitalizing communities, and improving quality of life.”