General ESG News
Forbes: Will ESG Prevent The Next Enron?
Enron’s destructive business practices were enabled by its elaborate accounting fraud and manipulation of accruals. Its scheme could have been caught sooner if there had been more stakeholder demand for transparency and oversight, but there is also an opportunity for a larger analogy – ESG accruals. Leaders can weigh long-term strategic actions against short-term benefits.
For example, if traditional coal companies don’t consider transitioning to alternative types of power generation, their business models will likely become less valuable over time. The same can happen for pharmaceutical companies that drastically increase drug prices and prioritize profits over customer health.
Left unchecked, financially material ESG issues can follow a similar path as Enron’s manipulating its mark-to-market method.
Increasingly, ESG is becoming an indicator of long-term business success. In 2020, 81% of a globally-representative selection of sustainable indexes outperformed their parent benchmarks, according to BlackRock.
Investors want environmental data, net zero strategies, and risk assessments. Employees want inclusivity and engagement.
Companies should determine issue materiality, report both qualitative and quantitative information, provide substantial evidence for claims, and set clear and measurable goals.
Fast Company: 5 ways to separate real ESG leadership from greenwashing
When it comes to greenwashing, there are several “shades of green.” Companies can be taking visible actions and disclosing information while still failing to make real ESG progress.
When looking to separate greenwashing from impactful action, it is worth considering the following:
ESG is strategic
ESG is integrated
ESG is cash rich
ESG is included in audited financial reporting
ESG is made specific
Public and private regulators will continue to push for effective corporate leadership, but the public, the media, investors, and consumers all also have responsibilities to hold businesses accountable.
Kellogg Insight: Does Positive ESG News Help a Company’s Stock Price?
A recent study found that stock value does tend to rise after positive ESG news emerges, but only if the news is found to be financially material. Investors especially responded to news about how products affect customers, as well as improving labor practices and lowering products’ environmental footprints.
While making ESG improvements is the right thing to do ethically, it is difficult to pinpoint which issues investors choose to focus on and reward progress.
After analyzing stock prices for thousands of companies over nearly a decade, researchers found that social capital issues eld to the strongest investor responses. Additionally, for news about natural capital, stock prices fell in response to negative news but did not significantly increase in response to positive news. There was little stock value change in response to governance and leadership news.
The events of recent years have intensified discussions about the importance of addressing social justice in America and the role of corporations in society. Industry leaders and stakeholders have been pushing to advance ESG initiatives, and in response, companies are increasing their ESG disclosure efforts.
Various institutions are creating metrics and standards to integrate ESG into the investment process, including Nasdaq’s new ESG reporting guide.
The Biden Administration has established “The Biden Agenda for Women” promising to pursue an “aggressive plan to further women’s economic and physical security,” as well as a new Gender Policy Council.
However, a group of Senate Republicans on the Senate Banking Committee called on the SEC to reject Nasdaq’s proposal to require companies listed on its exchange to include women, racial minorities, and LGBTQ individuals on their boards or explain why they are not doing so, citing that it is not the role of Nasdaq to act as an arbiter of social policy.
First, support for proposals related to the environment and DE&I has been increasing, with some proposals receiving 80-90% support. Major asset managers like BlackRock, Vanguard, and State Street are backing an unprecedented number of shareholder resolutions.
With the rate that ESG and materiality concepts and definitions are evolving, it will be important for issuers to engage with their shareholders during the offseason.
While ESG engagement was previously viewed as risk mitigation, it is increasingly being recognized as a differentiator and a strategy for actively targeting investors.
Companies are increasingly being expected to accurately report on ESG topics that impact their business and that reflect their business’s impact on society, the environment, and the economy – also known as double materiality.
Yahoo Finance: How Teams Can Tackle the Two Biggest ESG Challenges Head On
Workiva conducted a wide-ranging survey of individual investors in the U.S., U.K., Germany, and France to learn exactly how ESG is impacting investment decisions. Over half of surveyed investors feel strongly their moral beliefs must align with the company before they're willing to invest, but about the same percentage actually find it difficult to judge or even trust a company's actions and what they say when it comes to environmental and social metrics.
Trust in ESG data will become the make or break factor for the reputations of organizations,” Steve Soter said. “Data connectivity is your ESG superpower that's going to drive competitive advantage today and tomorrow for your companies.”
Credible ESG conviction depends on two-way communication. While your stakeholders need trusted real-time outputs, you and your organization are going to need real-time stakeholder input for collecting, assessing, and reflecting on.
Environmental, social and governance (ESG) factors should be key considerations for CTOs and technology leaders scaling next generation companies from day one. Investors are increasingly prioritizing startups that focus on ESG, with the growth of sustainable investing skyrocketing
CTOs and technology leaders can have significant, direct and meaningful impact when it comes to carbon reduction, responsible AI practices and diversity.
ABA Risk and Compliance: What Banks Can Learn from the IFC’s Approach to ESG
With many regulatory and industry initiatives still underway, some banks have decided to forge their own path to ESG. To do so, banks refer to existing frameworks to gain insights and knowledge for creating a customized approach of their own. However, with a multitude of ESG-related frameworks in place, it can easily become an overwhelming task. Nevertheless, understanding the structure of various frameworks will allow banks to gain valuable perspective into the subject to carve their own paths.
Regardless of a company’s size and budget, there are ways to develop and implement an informed ESG strategy that addresses stakeholder expectations and delivers meaningful outcomes. Middle market companies have a critical role to play not only in the future viability of their business but in delivering on the promise of stakeholder capitalism.
The most critical component of any ESG strategy is understanding stakeholder perspectives. Businesses should assess and rank issues that are important to employees, customers, supplies, investors and other stakeholders. As you identify core priorities, keep in mind that some issues—for example, COVID-19, racial equality and climate change—transcend a specific business or industry and apply to all companies committed to systemic change.
ESG initiatives should be deeply integrated across the company to deliver meaningful results. Every business unit can support ESG initiatives, whether it’s making a fair labor supplier strategy, investing in sustainable and climate-resilient infrastructure, sourcing sustainable energy, or revamping HR policies to increase diverse recruiting, hiring and retention.
It can be a challenge to know where to turn for counsel as companies assess risk and set ESG strategy using the best science to navigate uncertainty.
A day does not pass without another article on the Environmental, Social, and Governance (“ESG”) trend accelerating around the world, and climate change is at the forefront of the ESG movement. Virtually every part of the complex, global economy is potentially impacted by some aspect of climate change.
Recent extreme heat events and flash flooding have a direct connection to climate change: there has been about two degrees Fahrenheit of warming so far worldwide.
The number sounds small, but it's enough to "profoundly shift the statistics of extreme heat events," according to Dr. Radley Horton, a climate scientist at Columbia University. He says these "dangerous thresholds of really high temperature and high humidity" could potentially happen twice as often as they have in the past.
Scientists are working hard to predict how common these disasters will be in the years to come.
ESG Disclosures, Standards, Rankings, and Reporting
Triple Pundit: New ESG Regulation Out of Europe Redefines Investment Risk
The EU Sustainable Finance Disclosure Regulation (SFDR) is designed to drive capital toward sustainably oriented investments, and it can help U.S. firms struggling to keep up with evolving ESG requirements.
The SFDR requires all EU asset managers to publicly disclose their approach to incorporating sustainability considerations their investment decisions; any “adverse impacts'' investments may have on environmental or social factors; and, any sustainability risks that may impact investment performance. Financial advisers will also be required to counsel their clients on the sustainability impacts of their investments.
The regulations follow a “comply or explain” approach, meaning any managers and advisors who choose not to comply with the disclosure rules must instead provide a clear explanation of why sustainability considerations are not relevant.
The SFDR has one direct impact on U.S. firms: Non-EU managers and advisors that market financial products into the EU or provide advice to EU firms are also covered. This typically applies to large firms like BlackRock.
Perhaps the most significant impact of the SFDR will be its implications on global corporate reporting, and large data providers are already tailoring their ESG data toward SFDR requirements.
McKinsey and Company highlights five ways that ESG creates value: cutting costs, reducing legal and regulatory interventions, boosting employee motivation, optimizing long-term investments, and offering top-line growth opportunities.
ESG reporting is changing in that financial and nonfinancial data are going to become inextricably linked. For businesses, this means the CFO and their team will need to:
Establish end-to-end process coverage
Collect and connect data from disparate sources
Build collaborative workflows
The UK is sufficiently concerned about what’s marketed under ESG investment labels to have released in July 2021 a set of disclosure requirements and principles designed to clean up this rapidly growing, and evolving, domain of investment.
TQM, or Total Quality Management (lean manufacturing in today’s vernacular) recognizes that to produce a quality product requires a continuous and ever-changing process, which is not easily captured as an “outcome” or metric. It’s the same with the pursuit of trust, or sustainability, or equity: You are never done.
The International Organization of Securities Commissions (IOSCO), which groups market regulators from the United States, Europe, and Asia, argued that ESG raters and data providers are unregulated, lack transparency in their methodology, offer uneven coverage, and harbor potential conflicts of interest, Reuters reports.
IOSCO warned that since asset managers running ESG focused funds rely on about 160 different raters globally to help categorize stocks and bonds, the disparate methodologies raise investor protection questions. Meanwhile, users don’t even conduct any formal verification of the ratings, with some observers calling the process a “black box.”
“Financial market participants could consider conducting due diligence on the ESG ratings and data products that they use in their internal processes,” IOSCO.
RIMES has strengthened its market leading Environmental, Social and Governance (ESG) Data Management service with Fitch Ratings ESG Relevance Scores Data
Clients can access more than 10,000 entities and transactions and over 140,000 ESG data points to support credit risk assessments
This collaboration between RIMES and Fitch Solutions provides a powerful tool for investment firms looking to make sense of the fast-growing ESG market.
Observer Research Foundation: It’s high time for global ESG standards
The growing apprehension and an even greater sensibility amongst stakeholders regarding the overwhelming perils of decentralized and dubious ESG reporting practices has led to a call for action on globally accepted and standardized ESG reporting.
In setting common ESG reporting standards which are relevant and comprehensive, we need to ensure they look beyond the conventional domain of financial materiality.
However, in a world where irreversible climate change, economic disparities, and social divergence are real, there should be little place for ineptitude and complacency.
Today, there is a desperate need to propagate the ideals of common and harmonized ESG principles with the same zeal and fortitude that the world once manifested in embracing the Universal Declaration of Human Rights.
The U.S. Securities and Exchange Commission (“SEC”) is pursuing new disclosure rules regarding climate change
The SEC has also created the “Climate and ESG Task Force” in the Division of Enforcement
The task force is responsible for "develop[ing] initiatives to proactively identify ESG-related misconduct," including the use of "sophisticated data analysis to mine and assess information across registrants, to identify potential violations.”
Corporate policyholders should review how their insurance program will respond to these emerging ESG risks by considering the following three steps:
First, before reviewing the insurance program, identify the company's ESG risks, including as they relate to climate change disclosure.
Second, review the insurance program to see how it will respond to the ESG risks.
Third, beyond policy terms, corporate policyholders should continuously assess their policy limits.
Both demand and issuance of ESG-related bonds is expected to increase in the coming years.
As the infrastructure around fossil fuels is affected by the global transition to lower-emitting energy sources, the associated companies will become more vulnerable to climate-related financial risk. Climate change mitigation will also require further significant investments.
The reallocation of bond capital towards sustainable investments can help meet requirements under new climate-focused financial regulations.
The shift to hydrogen is expected to be a long-term trend due to its used in heavy transportation and industry. Solar and wind power are also increasingly being incorporated into the grid.
Clean living is expected to join clean energy as a top theme in 2021 as people become more interested in ESG investing.
In particular, many money managers are citing issues around defining the “S” pillar of ESG, and the social criteria are often seen as confusing.
A recent IIA study found that while 85% of participants consider ESG a high priority, 56% are having difficulty keeping up with new proposals steering assets toward ESG investments.
Investors are concerned about the lack of quantitative social data, and in some parts of the world, things like gender diversity and board participation mean different things.
Mergers & Acquisitions: ESG Metric Standardization Still 3 Years Away
A recent survey found that private equity is the asset class currently most ready for ESG investment in the next three years; however, the lack of standardized reporting data remains a key challenge.
Experts see most ESG metrics as quantifiable and believe this will facilitate widespread adoption, especially when accompanied by industry association efforts.
The hope is that investor demand will drive change across private equity and other asset classes.
Environment + Energy Leader: Emerging Markets Offer Big Investment Opps for ESG-Focused Investors, Report Says
A recent report found that better environmental stewardship can unlock value in private equity, and that emerging markets provide some of the most significant global ESG investment opportunities, specifically with regard to climate and social risks.
Emerging markets currently rival their developed-market counterparts in sustainability sophistication, and they are moving to the forefront of the clean energy movement.
Businesses that don’t respond to the growing demand for responsible environmental and social stewardship are likely to lose their competitive advantages. Sustainability is a priority for investors both for altruistic reasons and because ESG is increasingly being recognized as a value driver.
Sustainability related financing has tripled since 2015, and the increased use of ESG principles in equity and debt investing has led to increased concerns from both investors and regulators about greenwashing.
According to Moody’s, firmer regulation will set a better foundation for sustainable bond investing. The International Capital Market Association (ICMA) updated its guidance for sustainable debt markets in June with the aim of supporting market growth and standardization.
Bamboo Capital’s commitment is focused on delivering against the United Nations Sustainable Development Goals.
In 2020, Bamboo entered a strategic partnership to become the asset management arm for Palladium, and the companies have combined to mobilize more than $2 billion in impact investing in the past five years.
European fund managers are gradually having to acknowledge that claims of sustainability across their portfolios may be inflated, as new regulations force the industry to take a more measured approach.
Europe’s Sustainable Finance Disclosure Regulation, which took effect in March, requires asset managers to document claims of sustainability in their portfolios, as policy makers in the region set the world’s most ambitious agenda to drive capital away from carbon emitters.
Europe’s asset management industry had to remove the ESG label from an estimated $2 trillion in assets between 2018 and 2020, as the tougher regulations were gradually put in place.
Demand for ESG assets seems insatiable, providing a lucrative source of business for fund managers. The market is set to exceed $50 trillion by 2025, which would be well over a third of the global total in assets under management, according to Bloomberg Intelligence
Investment Week: Climate Change Dominates ESG Agenda for Investors and Intermediaries
Environmental issues are top ESG issues for retail investors and intermediaries when assessing how these factors will affect their portfolios, according to a report by Research in Finance.
“Ordinary Americans invest in the whole economy, not just one company,” he said, noting that almost everyone’s main stake in the economy is through a job, particularly low-wage and middle-class earners. When we lift those workers, they will spend and invest, and it will broaden the whole economy, Leo Strine Jr., former chief justice of the Delaware Supreme Court.
“Companies that pay low wages or send their workforces offshore externalize long-term costs on to the markets and taxpayers,” he said. These moves don’t grow the economy, instead they just shift costs while taxpayers, workers and creditors often are left to “pick up the wreckage,” Strine said.
Wall Street Journal: Climate-Conscious Banks Stick With Distressed Polluters
ESG can be difficult to clearly define and “we need to be realistic about fossil fuel and even coal usage for applications where there is no substitute,” said Barry Kupferberg, managing partner of Barkers Point Capital Advisors, an investment banking and advisory firm focused on energy transition companies. “This inevitably leads to decisions and positions that can appear inconsistent with stated goals,” he said.
CityWire Selector: Think about ESG as you would about credit risk: Schroders' research head
Many investors expect stocks with low levels of sustainability to outperform as there are little-to-no limitations on where they can make their money – but this is an oversimplification.
Analysis by Schroders’ Duncan Lamont, who is head of research and analytics, looked at why companies with stronger ESG credentials are often expected to underperform their peers, but largely don’t.
One of the main barriers to ascertaining what works and what doesn’t is the lack of commonality around ratings of ESG funds or indices. This means there can be huge variations in the way sectors perform depending on who you follow.
Investors should look at ESG in the same way they do credit risk. ‘It is a risk (or a set of risks) that could influence the long-term sustainability of a business.’
The National Law Review: ESG Investing Guidance from the U.S. Securities and Exchange Commission
ESG investing goes beyond a three-letter acronym to ask how a business serves all of its stakeholders: employees, customers, shareholders, communities, and the environment. As ESG investing becomes a stronger force in the market, investors are seeking assistance from law firms in navigating the confusing landscape of various standards and frameworks.
On April 9, 2021, the SEC’s Division of Examinations (the Division) published its first risk alert detailing effective and deficient practices among investment advisers, registered investment companies, and private funds offering ESG investing strategies. In particular, the Division noted that its examinations would focus on portfolio management, performance advertising and marketing, and compliance programs, among other matters.
Labor-management relations are drawing the attention of environmental, social and governance investors, who are urging companies toward more transparency on topics such as executive-to-worker compensation ratios, racial and gender pay disparities, and the treatment of all workers.
This year’s proxy voting season, which wrapped up this month, saw a slight dip in the number of workforce proposals related to fair pay and conditions. Instead, there was a greater focus on diversity and inclusion policies in the wake of the 2020 murder of George Floyd by a Minneapolis police officer that prompted a renewed national conversation on race, according to the Proxy Preview report, which Welsh co-authors.
The latest push for more transparency around the handling of employee legal disputes and settlements originated in the #MeToo and Black Lives Matter movements, Meredith Benton (workplace equity program manager for the shareholder activist group As You Sow) said.
President Joe Biden issued an executive order this month that instructed the Federal Trade Commission to explore limits on the use of noncompetition agreements, which can limit job mobility and depress wage levels, according to the White House.
Investors managing $14 trillion in assets on Friday said they wanted all companies to set a climate transition plan and allow them to vote on it, ahead of next year's season for annual general meetings.
The investor group's statement, through the Institutional Investors Group on Climate Change, calls for all companies to produce a net-zero transition plan in line with the Taskforce on Climate Related Financial Disclosures reporting framework.
Companies and Industries
Corporations are no longer being measured solely by their ability to generate returns – the way they generate those returns is also coming under scrutiny. There are a few actions companies should be adopting now to ensure accountability:
Preparing for formal ESG data audits
Collecting and reporting all ESG impact data (especially greenhouse gas emissions)
Tying ESG into digitalization efforts (especially by incorporating AI and the Internet of Things)
Design Build Network: Understanding perceptions and opinions on ESG in construction
A recent GlobalData survey of ESG in construction found that health and safety is by far the most significant current concern in the industry, followed by ethical behavior and eliminating corruption and bribery.
When asked about the biggest areas of focus for their business, respondents chose improving health and safety on the construction. In the same vein, respondents rated on-site worker safety as a well-developed ESG practice. Improving risk management and protecting workers’ rights was also a main focus, and minimizing the impact of construction activities on local communities was found to have minimal focus.
Only 40% of respondents felt that reducing greenhouse gas emissions was a well-developed practice, though architects and designers were found to place more focus on energy-efficient buildings.
When asked about the main barriers to investing in ESG activities, 64% said cost, and 46% cited a lack of return on investment. However, 61% said they had experienced increasing client demand for sustainable construction methods.
Moody’s has acquired RMS from Daily Mail and General Trust plc. RMS provides climate and natural disaster risk modeling for property and casualty insurance industries.
The acquisition comes as stakeholders and regulators are demanding that companies manage a broader range of risks; this combination aims to accelerate the company’s integrated risk management strategy for customers beyond the insurance industry.
Deloitte launched a new climate learning program, developed in collaboration with WWF, for all of its 330,000 employees worldwide. The program aims to engage employees on the impacts of climate change and inform them about how Deloitte is responding to the climate crisis.
The program will be rolled out over the next six months and will feature videos, interactive data visualizations, personal testimonials, and a global learning platform with climate content in a variety of mediums.
As part of its 2050 net zero commitment, Fiera will set a target to be updated every five years that outlines the portion of its assets to be managed in line with achieving net zero emissions (with the goal of all assets being included by 2050).
As part of its membership, ING will shift the alignment of its loan book toward a maximum global temperature increase of 1.5 degrees Celsius. Over the next year, the company will determine the appropriate steps needed to pursue the goal.
ING stated that it will use its “Terra approach” to steer its portfolio. The approach assesses the technology shifts needed across various sectors to achieve its climate target, relative to the technology banks currently use.
Moody’s launched its Global Compact Screening tool to enable investors to evaluate how companies align with UNGC principles.
The new tool provides assessments for about 5,000 companies across 36 data points. According to Moody’s, the screening will provide financial institutions with data for portfolio and risk management.
Janus Henderson launched goals and initiatives for diversity and inclusion and recruitment. The goals aim to increase the representation of women in senior positions to 30% by 2030 and increase the number of racially/ethnically diverse senior managers to 16%.
The company has also partnered with several diversity-and-inclusion-focused organizations that offer training, mentoring, scholarships, and internships to encourage corporate diversity. Partners include the Greenwood Project, 10,000 Black Interns, Girls Who Invest, College Track, INROADS, and Investment20/20.
Fidelity has accelerated its emissions reduction goals, aiming to reach net zero in its operations by 2030. It also announced several environmental, diversity, and supply chain sustainability commitments.
The new net zero goal came with the release of Fidelity’s Corporate Sustainability Report, and it also includes 2024 targets for the company, including energy consumption and waste reduction, recycling increases, supplier monitoring, and increasing employee volunteer hours and charities supported.
As a burgeoning industry, Cannabis related companies have a unique opportunity to take preemptive steps to ensure effective marketing standards are put in place to better protect youth.
Taking a public stance of this nature is critical as it invites customers, policymakers, regulators, and even critics to hold cannabis companies to account. Cannabis companies should create their own standards, or make public principles they already follow.
Cannabis companies need to come together to foster a responsible industry. The recently launched U.S. Cannabis Council has the potential to play an important role in creating shared standards. The council’s members include top cannabis businesses, associations, and advocacy groups, which presents a rare opportunity to have key stakeholders at the table.
Packaging Strategies: The Business Benefits of Switching to Sustainable Packaging
Not only does switching to sustainable packaging help the environment, it can also attract new customers and help you to retain existing customers. Research has clearly shown that consumers are more likely to spend their money on sustainable brands — one-third have stopped purchasing certain products and brands due to sustainability-related concerns. Sustainable packaging was also labelled as one of the top five most important practices they value from a company.
One of the main benefits of switching to sustainable packaging (and the most obvious) is the positive impact it has on the environment. Sustainable packaging reduces your overall carbon consumption, further strengthening your reputation as a company that cares about the planet.
Cannabis Business Times: How Cannabis Companies Can Turn Valuation Discounts Into Transparency Premiums with ESG Frameworks
Given increased demand for ESG action from businesses, many cannabis companies are uniquely positioned to benefit from highlighting their current ESG efforts and incorporating additional ESG practices.
Because the nascent legal cannabis industry often finds itself needing to overcome public and policymaker misperceptions and abide by strict regulations, many cannabis companies have already incorporated ESG-like policies and good governance into their business model.
If a cannabis company accurately markets its ESG framework, it can attract affordable capital or enter new markets that are looking for socially conscious businesses.
As more opportunities become available to compete for local licenses, those companies already boasting systematized and certified ESG disclosures will have a substantial competitive advantage.
Employers, younger consumers, and even the “older” Gen X demand more transparency from employer
Shamina Singh, Executive Vice President of Corporate Sustainability at Mastercard and Founder & President of the Center for Inclusive Growth (the philanthropic hub of Mastercard) emphasized tangible steps for companies to take towards ESG commitments:
Playing to your strengths
Mobilizing your network
Approaching ESG holistically
Seeking guidance internally and externally
Being proactive in how you use your assets
Per the Intergovernmental Panel on Climate Change (IPCC), over the next century, temperatures are set to rise from 2.5 to 10 degrees Fahrenheit unless mankind takes decisive action to curb greenhouse gas emissions.
The traditional ‘linear model’ of industrial production – take, make, use, and dispose – has caused environmental damage for decades. In contrast, a ‘circular model’ targets zero waste.
Now, environmental, social and corporate governance (ESG) and the pursuit of the United Nations’ Sustainable Development Goals (SDGs).
The objective for organizations, therefore, should be to define and implement the next business practices to make sustainability a part of their day-to-day operations and business agenda.
The SEC plans to release new rules on mandatory climate reporting, but according to some, the complete statutory picture shows that the SEC does not currently have the power to impose mandatory climate-change disclosures.
The two main securities acts currently limit the SEC’s power to issue disclosure rules to specific types of information closely related to the disclosing company’s value and prospects for financial success. Congress did not want the SEC to have the “unconfined authority to elicit any information whatsoever.”
Additionally, the new SEC requirements would aim to use the securities disclosure system to advance a public policy goal extraneous to the federal securities laws.
Some make the argument that current disclosure requirements cover the areas of company information of interest to investors; when environmental issues affect the operations or financial performance of a specific company, many of the existing disclosure rules require discussion of the effects.
National Law Review: How Will the SEC Drive Progress? First, We Measure
SEC Chair Gary Gensler noted that the agency is considering changes in how ESG risks are measured, emphasizing the widespread investor demand for increased transparency. New mandatory climate risk disclosure rules may require more information such as:
How ESG issues are managed
Greenhouse gas emissions
Financial impacts of climate change
Progress toward climate-related goals
Strategies for meeting future ESG requirements
The SEC is also considering a “Names Rule” to standardize criteria for claims around funds labeled as “green,” “sustainable,” or “low carbon.”
Unanswered questions remain around how disclosure requirements will be put into effect and enforced, how disclosures will be filed, and whether content should contain subjective, qualitative data.
SEC Chairman Gensler has asked his staff to consider whether impending mandatory climate disclosures, which will include scenario analysis, should be filed in the Form 10-K. The staff will also consider whether to mandate specific metrics.
Sustainability related financing has tripled since 2015, leading to increased concerns about corporate greenwashing, and other U.S. regulators are supporting the SEC’s push for mandatory disclosure.
President Biden is expected to sign an executive order mandating the initiation of long-term fuel efficiency and emissions standards, as well as setting a new target for zero emissions vehicles to make up half of new vehicle sales by 2030.
The new rules will help facilitate the Administration’s climate goals, specifically reducing greenhouse gas emissions by 50-52% by 2030. The new rules should put the U.S. on track to reduce emissions by 60% in that time frame.
The new rules are also meant to secure the country’s position in the global supply chain for electric vehicles and batteries.
Listen as Tom Fox and Karen Woody, Associate Professor of Law at Washington and Lee University discuss how the SEC views its role in advancing ESG and how ESG can impact potential investment opportunities.
Although investors have been indicating their desire for uniform metrics for environmental, social, and governance (“ESG”) reporting to inform investment decisions, official government-sanctioned ESG disclosure requirements remain unestablished in the United States.
On June 16, 2021, by a vote of 215-214 (with no Republican support), the House passed H.R.1187, the “Corporate Governance Improvement and Investor Protection Act.” The legislative package combines five bills on ESG issues that the House Financial Services Committee approved earlier this year:
The "environmental" aspect of ESG considers the quantitative and qualitative performance of companies as they manage their environmental impacts, for the purpose of helping investors distinguish between companies that may present differing financial risks as a result of environmental management practices.
On June 16, 2021, by a vote of 215-214 (with no Republican support), the House passed H.R.1187, the "Corporate Governance Improvement and Investor Protection Act."
Specifically, the Climate Risk Disclosure Act (Title IV of H.R. 1187) requires public companies to make annual disclosures related to their greenhouse gas emissions (direct and indirect) and their fossil fuel related assets.
Notably, the SEC has already signaled its intent to regulate climate risk disclosure, aiming to propose new corporate disclosures on climate risks by October of this year.
Publicly traded companies should monitor these bills-as well as pending SEC action- in order to prepare for potential new climate risk disclosure requirements