ESG round-up: Tropical timber sector ‘unprepared’ for EU deforestation law

The latest developments in sustainable finance: NBIM welcomes European Commission's ESG ratings update; EDHEC warns EIOPA of consequences of climate risk on infrastructure.

The tropical timber sector is “unprepared” for the incoming European Union Deforestation Regulation, according to the Zoological Society of London. Data compiled by the conservation charity found that only 13.3 percent of companies involved in tropical timber production publicly provide evidence of monitoring deforestation within their operations, and less than 5 percent monitor their supplier’s operations. Under the new law, which is due to be implemented in December 2024, EU companies will be required to ensure that any imported material has not caused deforestation after December 2020 or face criminal penalties.

Norges Bank Investment Management (NBIM) has welcomed the European Commission’s proposed regulation on ESG ratings. The manager of Norway’s trillion-dollar sovereign wealth fund praised the commission’s efforts to “improve the transparency on the characteristics of ESG ratings, their methodologies and data sources”, as well as its intention to align the definition of ESG ratings with the International Organisation of Securities Commissions’ recommendations. NBIM also supported the EC’s intention not to standardise ESG ratings and welcomed the proposed requirements for ESG rating providers to disclose information on the methodologies, models and key rating assumptions used in their rating products, including the approach taken to materiality. Instead of reviewing rating methodologies on an annual basis, which it warns could lead to “decreased comparability of ratings”, NBIM has suggested a disclosure requirement for any changes to the methodology for users to understand the impact they may have.

EDHEC’s Infrastructure and Private Assets Research Institute has warned of the consequences of climate risk on infrastructure in an open letter to the European Insurance and Occupational Pensions Authority (EIOPA) chair, Petra Hielkema. The letter calls for the reinforcement of the integration of climate risk in the assessment of the solvency of insurance and pensions institutions, which it says could lose up to 50 percent of the value of their infrastructure portfolio before 2050. The authors also warn that if no serious measures are taken, financial losses from physical risk would be twice as high than in a low-carbon scenario, for all investors. They have called on EIOPA as an advisory body to the European Commission, the European Parliament and the Council of the European Union to draw attention to the impact that a lack of climate action can have on the stability of the pensions and insurance system.

Large financial institutions have been overstating their green stock holdings and consequently ESG investing, according to a study by the Wharton School. As of 2021, the biggest financial institutions collectively had ESG-related tilts in their portfolios of only 6 percent of the $31.3 trillion in assets they managed, according to the paper. Researchers said this has been the average for the industry’s ESG-related tilt since 2012.

Schroders voted against directors at more than 400 companies globally this year due to concerns over gender diversity. More than 50 of the firms were in the UK, Canada and Australia, the manager said in a review of its voting decisions on social issues for the current proxy season. It also voted against directors at five UK companies due to a lack of gender diversity on the executive committee.

New Zealand will require companies with more than 250 employees to report their gender pay gaps under proposed new legislation. This is set to impact around 900 companies, with a view to extend the requirement to companies with more than 100 employees in four years. The current gender pay gap in the public service stands at 7.7 percent, according to data from the Public Service Commission as of June this year. The government will consult on the law, as well as seeking feedback on whether to include ethnicity in pay-gap reporting. It joins Australia, Canada and the UK, which all have mandatory gender pay gap regulation in place.

Gabon has bought back $436 million of its international bonds and switched the debt to a $500 million blue bonds project, which is expected to raise $163 million in new funding for ocean conservation. The government was advised by The Nature Conservancy on the first debt-for-nature swap in sub-Saharan Africa. It is seeking to protect 30 percent of the country’s land and oceans by 2030.