This spotlight explores key ESG-related market developments and their implications for corporates and investors.
ESG in the News
The Science Based Target Network (SBTN) has released the first science-based targets for nature, providing a framework for companies to holistically assess their environmental impacts. The new targets include guidance for companies to measure how they contribute to land degradation, the use and pollution of freshwater, alongside the Science Based Targets initiative existing climate structure. Erin Billman, Executive Director of SBTN, said, “Building science-based targets for nature into business strategies will not only be vital to helping secure a healthy, resilient and equitable world, but to driving long-term resilience for businesses.” The initial pilot of the framework will begin with select companies, with a full roll-out to all companies in early 2024.
- Teneo Takeaway: Biodiversity has quickly moved up the priorities list for some investors. SBTN’s initial nature framework aims to help businesses build resilient operations – balancing feasibility with scientific rigor. It remains unclear as to how the Task-force on Nature-related Financial Disclosure, a similar initiative, will fit in with the SBTN.
The European Parliament voted to adopt a suite of new rules requiring companies to identify and address the impact of their activities and value chains on human rights and the environment, as well as a new requirement to adopt and implement climate transition plans. The new climate transition requirement directs companies to implement plans aligned with the Paris Agreement objective to limit global warming to 1.5°C, encompassing Scope 1, 2 and 3 emissions. Companies will also be required to perform due diligence on climate impacts, also aligned with Paris Agreement goals. The rule would also require companies with more than 1,000 employees to tie performance on the plan’s targets to directors’ variable compensation. The new rules are part of the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), with negotiations beginning between the commission and EU states later this month.
- Teneo Takeaway: The European Commission’s new proposal could also apply to non-EU companies over certain revenue thresholds. CSDDD will likely face opposition before its planned launch in 2030, particularly on the new climate transition requirement, the scope of the new rules, and when they will come into force.
One of Germany’s wealthiest states, Baden-Württemberg, has blacklisted U.S. treasuries following passage of a law that prioritizes investing sustainably. U.S. treasuries landed on the blacklist related to the U.S. abstaining from some international treaties, including some related to women’s rights and global weapon agreements. The law establishes the United Nations Sustainable Development Goals, the European Union’s Taxonomy Regulation and the Paris Agreement on climate change as the basis for future investment decisions.
- Teneo Takeaway: While Germany’s holdings of U.S. treasuries are minimal – just $85 billion of the $24 trillion in outstanding debt – the Baden-Württemberg law highlights the large gap on ESG investing between the U.S. and Europe.
The European Commission is expected to announce news rules for agencies that rate businesses and investment funds of ESG credentials. ESG data providers and ratings agencies will face fines for conflicts of interest and be required to divest from any conflicting activities. The rules follow the International Organization of Securities Commissions call in 2021 for regulators to focus attention towards ESG data providers and their environmental and social claims. The draft proposal noted that the current “ESG rating market suffers from deficiencies and is not functioning properly … (and) confidence in ratings is being undermined.”
- Teneo Takeaway: The regulation, which will likely be amended by the European Parliament, aims to bolster confidence in ESG ratings and crackdown on greenwashing.
California state senate lawmakers voted to approve two bills that would require companies with substantial business in the state to report their annual greenhouse gas emissions and issue yearly reports on their climate-related financial risks. If passed, the bills effectively mean mandatory emissions and climate-risk disclosure for major U.S. companies, regardless of the status of the SEC’s climate disclosure regulations. Supporters of the bill say it would expose greenwashing, while opponents suggest that including Scope 3 emissions could force larger businesses to stop doing business with small and medium sized business that may struggle to accurately measure carbon emissions. California’s Democratic Governor Gavin Newsom hasn’t taken a public position on the proposal.
- Teneo Takeaway: If passed, the California proposal would likely face similar legal challenges to the SEC’s climate disclosure regulations. A similar bill failed narrowly in California’s Assembly last year.
They Said It: ESG Influencers Speak Out
An article from Fortune magazine highlighted the recent challenges facing “anti-ESG” asset manager Strive Asset Management : “All the evidence, out in the open, shows that Strive has had a hard time attracting additional investor inflows beyond its original anchor investors after the launch of its ETFs last year. Its assets under management appear to have stagnated. For example, its largest flagship ETF, the Strive US Energy ETF (DRLL), has almost the same amount of assets under management (AUM) as of June 1, $320 million, that it did when it was launched in August/September 2022, and its AUM is down nearly 25% from the start of this year.”
Looking Ahead: Upcoming ESG Events
