In this month’s ESG Market Alert, we cover:

• Newsflash – UK government withdraws new corporate reporting requirements as part of the Government’s corporate governance and audit reforms after consultation with companies. We will be covering this update in more detail in our November ESG Alert.

• Investor coalition urges ISSB to prioritise reporting on human and worker rights

• Investor advisory body concerned about subjective ESG metrics being used to increase bonuses

• European and global reporting groups release joint statement of interoperability between their standards reducing reporting burden for companies

• Blue bonds – Guidance for bonds to finance the Sustainable Blue Economy published

• Market practice update: Big banks gear up for California law requiring emissions disclosure.

Investor coalition urges ISSB to prioritise reporting on human and worker rights

21 investment firms with over US$1 trillion in assets under management – including Impax Asset Management, EQ Investors, Rathbone Greenbank, and Tribe Impact Investment – have sent a letter to the International Sustainability Standards Board (ISSB) urging it to prioritise human capital and human rights in its next set of global reporting standards. This action was coordinated by the responsible investment NGO, ShareAction.

The letter highlights increasing investor demand for improved workforce data and calls for the ISSB to develop globally accepted reporting standards to address labour and human rights abuses, emphasising the interconnectedness of these issues.

The signatories argue that businesses prioritising human wellbeing are more likely to succeed in the long term, making comprehensive social data crucial for informed investment decisions.

Investor advisory body concerned about subjective ESG metrics being used to increase bonuses

There has been a large increase in the number of companies including ESG metrics to defined performance-related executive pay. Institutional Shareholder Services (ISS) state this practice has surged at more than 13,000 global companies since 2015, while performance factors tied to profitability have declined. Bonuses are increasingly being determined by reference to metrics such as employee engagement, environmental footprint, workforce diversity and inclusion, and many executives are eligible to receive ESG-linked bonuses despite not meeting their financial objectives. Compensation increases further where the company has performed above target-level across those areas.

This has been welcomed by some asset managers who wish this could go a step further and think that long-term executive pay should be linked to achieving net-zero carbon emissions. Nevertheless, the practice has drawn criticism from other asset managers and researchers given the limitations of such metrics which can be easily manipulated to boost executive pay.

More broadly, unlike financial metrics tied to share price performance, ESG performance indicators can be difficult to measure and subjective. This makes it difficult to tell whether the ESG metrics are valuable or simply a way to boost executive pay when companies are financially under-performing.

European and global reporting groups publish joint statement of interoperability between their reporting standards

The European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) confirmed a high level of interoperability between the European Sustainability Reporting Standards (ESRS) and the GRI Standards on 4 September 2023.

The ESRS set out how and what information and ESG metrics companies need to report to European regulators under the Corporate Sustainability Reporting Directive (CSRD) (if they fall within the eligibility criteria) . In force since 5 January 2023, the CSRD is expected to affect over 50,000 companies, including large EU companies as well as non-EU incorporated companies that meet certain criteria such as a combination of 250+ employees, more than €40 million in annual revenue and more than €20 million in total assets. GRI Standards are one of the most widely accepted standards for sustainability reporting by companies.

One of the key areas of alignment highlighted between the standards is the requirement to adopt a double materiality approach to sustainability reporting i.e. companies should judge materiality of the issues they are reporting on from two perspectives: (i) the extent necessary for an understanding of the impact on the company’s value and performance and (ii) environmental and social impact of the company’s activities on a broad range of stakeholders. The concept also implies the need to assess the interconnectivity of the two. This is often a key source of operational challenges when it comes to preparing for ESG disclosures due to the complexity and cost of collecting and analysing more data.

While a detailed breakdown of equivalent disclosures for both sets of standards is not yet available, the statement will be a welcome development for companies that fall within the scope of CSRD in a rapidly developing regulatory arena, reducing the need for double reporting. Companies already reporting in line with the GRI Standards will be well-positioned to disclose their sustainability information under the ESRS.

Blue Bonds – Guidance for bonds to finance the Sustainable Blue Economy published

The Blue Economy refers to economic activities that rely or impact on the use of coastal and marine resources, and forms part of the broader Green Economy. The guidance on financing the Sustainable Blue Economy (SBE) highlights the importance of transitioning to SBE investments on account of the rising risks associated with traditional marine investments, including physical, regulatory and reputational risks. Specifically, the guidance emphasises the role of 'blue bonds' in catalysing SBE investments.

The guidance assists various stakeholders, including issuers, investors and underwriters, in understanding the key components of launching credible blue bonds. It aligns with existing global market standards for sustainable bonds, such as the Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines, provided by the International Capital Market Association (ICMA).

Overall, the document provides guidance on the issuance process for bonds financing the SBE, covering aspects such as bond framework creation, project categorisation, external reviews, management of proceeds, allocation and impact reporting, and the importance of addressing social issues in SBE projects.

Market practice update: Big banks gear up for California law requiring emissions disclosure

California’s legislature has recently approved Senate Bill 253 (SB 253), also known as the Climate Corporate Data Accountability Act, which would require the California Air Resources Board to adopt regulations requiring companies to publicly disclose their greenhouse gas (GHG) emissions. The bill applies to all public and private companies with annual revenues over US$1 billion doing business in California. Under the proposed regulations, companies must report Scope 1 and 2 GHG emissions from 2026 onward, and Scope 3 GHG emissions from 2027.

For banks, the proposed Scope 3 reporting obligations include “financed emissions” i.e. carbon pollution produced by their borrowers. The American Bankers Association has expressed concerns that it will be difficult to accurately measure and report on Scope 3 emissions without a standardised calculation methodology. Notably, SB 253 also goes further than the U.S. Securities and Exchange Commission’s proposed climate disclosure rules, which would only require disclosure of Scope 3 emissions if they are “material” to the reporting company or if the company has set a GHG emissions target including Scope 3 emissions. For many banks the new legislation will therefore require significantly more information than is currently disclosed.