In the Loop: ESG month, materiality, and cigars

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(Anti-ESG) bills, bills, bills

Image: Getty

As ESG month winds down, Republicans in the House Financial Services Committee have revealed details of the four bills they aim to pass to address the “threat ESG initiatives pose to the American financial system”.

In the finest tradition of American politics, two of these bills have been given the most tortuous names imaginable to allow for snappy-sounding acronyms.

The Guiding Uniform and Responsible Disclosure Requirements and Information Limits Act – GUARDRAIL, geddit? – contains provisions to protect companies from overzealous disclosure requirements. These include mandating the SEC to establish a public company advisory committee and also to assess the potential impacts of Europe’s corporate sustainability reporting and due diligence rules.

The second bill, which may well have been composed by picking financial terms out of a hat, is the American Financial Institution Regulator Sovereignty and Transparency Act.

The Trumpian-sounding American FIRST Act will (allegedly) put in place measures to increase transparency and congressional oversight of banking regulators in the US.

Creativity appears to have waned after these two bills, as the Protecting Americans’ Retirement Savings from Politics Act and Businesses Over Activists Act, which introduce reforms to the proxy voting and shareholder proposal system, do not have similarly snappy acronyms.

We send our condolences to the Congressional interns who imagined they would be walking the corridors of power but were instead locked in a windowless office with a thesaurus and a dream.

The week in RI

This week RI revealed that three investors have left Climate Action 100+.

Notably, US asset manager Loomis Sayles said the decision was prompted by a desire to ensure its industry commitments “continue to be aligned with our ESG philosophy, which focuses on financial materiality”.

In regulatory news, investors have called on the Australian government to fully align its climate-related financial disclosure standards with the ISSB, and France has adopted a mandatory Say on Climate law.

The PRI’s Nathan Fabian told RI that “there is no anti-trust issue” around sustainability initiatives, while emphasising the need to be clearer about how investors can navigate the road to net zero.

Finally, Gina Gambetta and Dominic Webb did a deep dive into UK asset owners’ efforts to tackle manager inconsistencies on stewardship.

Quote of the week

“ESG is an evil pollutant that must be eradicated from corporations and businesses”

Congressman Ralph Norman on the introduction of measures to “combat the influence of ESG initiatives” in the US financial system

Materiality assessments for all

At the time of writing, the European Commission has yet to publish the final European Sustainability Reporting Rules (ESRS) delegated act, but it is expected at some point today.

A source closely following the process told RI there are hopes that the EC will bring back some mandatory reporting requirements. However, Eurosif said in its newsletter this week that “unfortunately, we do not expect any substantial changes compared to the draft”.

A particular concern for investors is that the draft ESRS, published in June, says reporting that stems from other regulation – such as the indicators relevant to the Sustainable Finance Disclosure Regulation (SFDR) – will be subject to materiality assessments, rather than mandatory as originally proposed by standard setter EFRAG.

Trawling through a selection of the 604 responses to the ESRS consultation, it appears not all financial institutions believe mandatory reporting is the solution.

BNP Paribas said it welcomed efforts to simplify the ESRS, and called on the EC to “broaden this materiality assessment approach to other ESG regulations impacting financial institutions”.

“The materiality assessment spares companies from having to put in place potentially costly and burdensome processes to report ESG information that is not material, while putting the focus on important information linked to relevant impacts on the environment and human rights,” it added.

Flagging disclosure requirements under the SFDR and Pillar III ESG, the French bank added: “We would therefore recommend that these disclosure requirements be amended as soon as possible to align with the ESRS materiality approach and allow the possibility for financial actors to exclude non-material information.”

While it seems unlikely that the EC will take this approach, we’re wondering if it has perhaps opened a can of worms with the materiality debate given the upcoming revision of the SFDR?

Smoke out the social indicators

(Image: Getty)

The EU’s financial regulators will be well used to both criticism from and a constructive exchange of views with the financial sector. But they could be forgiven for not expecting a blasting from the European Cigar Manufacturers Association.

Recently released responses from the ESA consultation on SFDR reforms saw the ECMA (not to be confused with ESMA) ride into battle to defend the honour of the European cigar industry.

The proposed SFDR changes would see exposure to companies involved in the cultivation and production of tobacco added to a list of mandatory disclosures on social issues.

In response, ECMA claimed that the production of mass-market cigarettes does not have the same social or environmental impact as that of cigars or cigarillos, which are “niche, traditional tobacco products consumed only occasionally and overwhelmingly by mature consumers”.

The draft regulation by the ESAs, ECMA continues, “arguably overstepped their mandate, taking upon themselves the task of formulating yet-to-be-established social DNSH principles that should instead be the prerogative of EU legislators”.

The industry body also reminds the ESAs that businesses in the tobacco sector make a broad contribution to society in terms of economic growth jobs and productivity.

The response finishes by making the altogether unexpected recommendation that the ESAs delete the proposed social indicator on tobacco or at the very least remove the cigar industry from its scope.

Today’s letter was prepared by the RI editorial team