Welcome to Teneo's UK ESG Insights. Each fortnight, we’ll help you to cut through the noise around ESG by exploring some key market developments and the implications for companies.
Disclosure Standards Alignment
Last Week, the International Sustainability Standards Board (ISSB) – a constituent of the International Financial Reporting Standards Foundation (IFRS) – released its first exposure draft of proposed standards for company sustainability and climate related disclosures. The new standards aim to address the demand by global capital markets for a consistent global set of sustainability information – acting as a baseline for disclosures.
The proposed IFRS S1 would ensure that companies disclose exposure to all significant sustainability related risks, while proposals under IFRS S2 require that sustainability related information must be disclosed across a company’s value chain, including resources and relationships across a company’s supply, marketing, and distribution channels. Additionally, the climate-related standard would require companies to disclose absolute Scope 1, 2, and 3 information, calculated using the GHG protocol. This requirement goes beyond the SEC’s recently proposed climate disclosure rules, which would require only “material” Scope 3 information, or if the company has formally announced a Scope 3 target. The news follows a previous announcement by the IFRS Foundation and Global Reporting Initiative (GRI) about a new agreement to align their capital market and multi-stakeholder standards for sustainability disclosure.
- Teneo takeaway: The landscape of reporting frameworks continues to evolve, with key reporting frameworks for environmental factors crystallising more rapidly than for social factors. The exposure draft addresses a number of key areas including disclosure on Scope 1,2, and 3 emissions and the increasingly controversial use of carbon offsets, suggesting that companies should explain if they intend to use offsets in their decarbonsation plans.
This week the IPCC released their third and final report. The focus of the report was mitigation and potential solutions to climate change, distinguishing itself from the previous two IPCC reports which examined the physical science of climate change and countries that could be exposed to further warming. The report highlights the central role of the fossil fuel industry, emphasising that fossil fuels are noticeably absent from the ‘Summary for Policymakers’.
Soaring energy prices and the war in Ukraine have prompted governments to rethink their energy policies. Many countries – including the US, the UK and those in the EU – are considering ramping up the use of fossil fuels as part of their response, but the IPCC report made clear that doing so would put the 1.5⁰C target beyond reach. In addition to the focus on fossil fuels the report is a call to action, noting that without immediate intervention the world is on course for a 3.2⁰C rise in temperature by the end of the century. Recommendations to remove carbon include additional tree planting and carbon capture and storage.
- Teneo takeaway : The IPCC report highlights that climate change will continue to be a point of focus with climate risks set to materialise with increasing rapidity, adding pressure to already strained supply chains and food systems. Governments and financial authorities around the world will likely continue to push, as the SEC intends to do with its climate disclosure policy, for further climate actions from companies and financial institutions. Both from a regulatory and a risk management perspective, incorporating climate resiliency into strategy, operations and business models will be a key element of corporate strategy as investors look for increased transparency on carbon emissions.
UK Government Fracking Review
This week, the UK government and Business and Energy Secretary, Kwasi Kwarteng, wrote to the British Geographical Survey to ask them to investigate potential new fracking techniques suitable for use in the UK, in addition to the size of tremors caused by extracting shale gas in comparison to other types of underground energy production. The decision to explore alternative domestic energy sources has been exacerbated by spiraling prices of imported energy in the UK and the invasion of Ukraine, highlighting the UK’s reliance of global energy sources. This has caused tension within the Conservative party with politicians divided as to whether domestic fracking would be beneficial in reducing energy prices or instead lead to electoral repercussions in areas identified for shale fracking. Additionally, the Conservative Party’s 2019 manifesto committed to not supporting shale gas extraction unless science shows it can be conducted safely.
- Teneo takeaway : Governments and energy supplies have sustained continual challenges with sanctions on Russia highlighting the UK’s extreme dependence on their energy supplies. The renewed interest in domestic energy sources marks a direct move away from Russian energy supplies and has significant implications for the future of fracking and energy production in the UK.
EU Launches Consultation for ESG and Credit Ratings
The EU has launched a consultation for ESG and credit ratings following global worries over transparency and comparability in the EU ESG ratings market. The European Commission has proposed the introduction of conflict-of-interest rules, as well as minimum disclosure requirements for ratings methodologies in an effort to centralise and streamline ESG data and ratings. More broadly, global regulatory body, IOSCO, has pushed for ESG ratings to be placed under the remit of securities regulators to address areas including a lack of transparency.
- Teneo takeaway: ESG ratings providers are not generally subject to regulatory oversight, despite wielding enormous influence over investment allocation decisions. This problem has been climbing up regulators’ agendas as companies are held to greater account over greenwashing claims. We can anticipate much more movement in this area from regulators across the globe as ESG ratings become a fundamental part of companies’ relationships with investors.
Looking Ahead: Upcoming ESG Events & Happenings
- COP15- Biological diversity summit- Kunming, China- 25 April - 08 May 2022
- Bloomberg Green Summit- New York/Online- 27 April 2022