In the Loop: Market responds to EU ESRS, TCFD passes the torch to ISSB, and could the anti-ESG backlash reach the UK?

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EU sees deluge of ESRS responses

The European Commission received a whopping 604 responses to its consultation on the first set of European sustainability reporting standards (ESRS), which closed last Friday.

This included a joint response from the PRI, Eurosif and other investor associations slamming the decision to make almost all disclosure requirements under the ESRS subject to materiality assessments.

Indeed, this was the key point of contention for many respondents, particularly financial institutions, which said that a shift away from mandatory disclosures will harm their ability to meet reporting requirements under SFDR.

While almost 100 investors signed the joint investor association response, few financial institutions submitted their own responses to the consultation: we’ve counted eight asset owners, six asset managers and six banks.

RI has trawled through their feedback, as well as other noteworthy responses from business associations and service providers. In addition to the call for SFDR indicators to be mandatory, key feedback falls broadly into four categories:

Don’t mess with materiality
A raft of respondents flagged that EU standards body EFRAG and the International Sustainability Standards Board (ISSB) do not define financial materiality in the same way. “The addition of the words ‘but not limited to’ in [EFRAG’s definition] could imply that the financial materiality assessment under the ESRS is expected to be broader than the one used by the ISSB,” said S&P.

The only way is interoperability
It is clear that for some investors the ISSB is the only way to go – Canada’s CPPIB reiterated a call on EFRAG to adopt the ISSB standards in full. Surprisingly, even some of the investors calling for the ESRS to be stricter in some aspects said that interoperability between the two is key.

Sustainability-focused asset manager Candriam called for more mandatory indicators on climate, biodiversity and social issues, and said it strongly supports the EU’s double materiality principle. “However,” the firm continued, “the urgency to improve the consistency, comparability and reliability of sustainability reporting for investors make the interoperability between reporting frameworks a priority.”

Fellow sustainable investing house Impax said inconsistencies between the two frameworks would add “reporting burden for corporates, reducing the comparability and decision usefulness of sustainability metrics” and urged the ESRS to seek as much “consistency” with the ISSB standards as possible.

Don’t leave nature and social behind
French investment giant Amundi was among those criticising the move to make some biodiversity indicators voluntary, saying biodiversity transition plans should be mandatory, at least for sectors defined as high risk by the TNFD.

Norway’s sovereign wealth fund NBIM also called for the commission to reconsider its decision to make voluntary some disclosures and metrics regarding non-employees, echoed by Dutch bank ABN Amro as it said “non-employees are at greater risks of negative human rights impacts than direct employees”.

Insurance giant Allianz said that “weakening” SFDR-related obligations in the CSRD increases greenwashing risks for financial institutions, “reducing their support of the EU sustainable finance agenda”.

UK sustainability-focused bank Triodos did not hold back: “The proposal opens a loophole by allowing companies to leave out important details of their greenhouse gas emissions, biodiversity and workforce data. That would contradict anything the EU has achieved in the past five years with the Sustainable Finance Action Plan.”

This week in RI

Government policy engagement emerged as a key theme of our coverage this week. It began with investors calling on the European Commission to include third-party lobbying disclosures, particularly trade bodies, in its upcoming corporate sustainability reporting regime.

In Japan, we reported that local financial regulator the FSA has formed a working group to investigate whether acting-in-concert rules need to be revised to support collaborative investor engagement.

We also noted the growing cross-party support in France for a bill that would require listed companies to put their climate plans to a shareholder vote, after it was rejected by a parliamentary committee last week.

Elsewhere, Europe’s largest investor, Amundi, revealed a crackdown on oil and gas company directors, having voted against the appointment of more than 500 directors and 89 executive pay packets over climate issues.

Quote of the week

“What you’re proposing paradoxically is giving the power to international shareholders. The CSRD [the EU’s sustainability disclosure regime] is much more effective, so I would advise you to vote against the amendments and let the CSRD requirements come into effect – and leave BlackRock out of it”

French minister delegate for industry Roland Lescure on why he opposes a domestic Say on Climate law for listed companies

Straining the ‘alphabet soup’ further

This week saw the handing over of the torch between the TCFD and ISSB, with the announcement that from 2024 the global sustainability standards body would take over the mantle of tracking corporate climate disclosures.

The TCFD – Task Force on Climate-related Financial Disclosure – framework was published in 2017 under the auspices of the Financial Stability Board. A pioneering piece of work, the voluntary reporting framework has since become a touchstone for climate disclosure regimes that have followed, including those developed by the ISSB, which fully incorporated the TCFD requirements.

ISSB’s chair Emmanuel Faber hailed the TCFD as a “trailblazer” and welcomed the opportunity to build on its legacy.

The move further reduces the number of sustainability reporting standards in the market, with observers speculating whether further consolidation might occur with the impact-focused Global Reporting Initiative (GRI).

Speaking with RI earlier this year GRI’s CEO, Eelco van der Enden, spoke of his desire to work even more closely with the ISSB in future, stating: “There is no inch of movement from our strategic direction towards supporting the ISSB and the whole concept of a global comprehensive baseline.”

ESG backlash in the UK? Let’s keep calm and carry on

A combination of factors in the UK, including a more supportive policy environment and broad investor consensus, have so far prevented anti-ESG movements from gaining much traction beyond a few newspaper columns and a speech by former Prime Minister Liz Truss to the Heritage Foundation.

That said, a number of policy moves are worth keeping an eye on.

In June, the government introduced the Economic Activity of Public Bodies (Overseas Matters), which, if passed, will forbid local authorities in the UK from taking into account “political or moral disapproval of foreign state conduct”. This could have implications for the ability of local authority pension funds to integrate ESG into their investments.

A legal opinion by Richard Hermer KC commissioned by the Labour Party notes that in its current form parts of the bill are “appallingly badly drafted – so bad, that it is far from clear what the ambit of the prohibited conduct actually is”.

“Although the Bill will have general application to all material decisions made by public bodies, it is clear that the driving force behind the Bill is to address the ‘Boycott, Divestment and Sanctions’ campaign directed against Israel.”

Turning to the defence sector, the Ministry of Defence has launched a probe into how far ESG rules are undermining UK aerospace and defence firms, and restricting their access to capital and banking services.

In a statement to RI, minister for defence procurement James Cartlidge said, “Russia’s illegal invasion has highlighted why we must advocate for a strong defence industry, without which we could not have supplied Ukraine with the means to defend its freedom.

“Defence businesses large and small have told me that ESG rules have undermined them, from facing more expensive finance to being denied basic banking facilities. We are currently investigating the extent of this challenge.”

RI team news

Next week, the RI editorial team will be attending the Oxford Sustainable Finance Summit on 19-20 July. We hope it will spark stories on cutting edge issues (and newsletter gossip) in the coming weeks. Unfortunately, it also means we may put out fewer stories, but we will be back at our desks on Friday.

Please come say hi if you are there!

And finally, our reporter Gina Gambetta was awarded Sustainable Investment Journalist of the Year at the WTW Media Awards, making this the second year running RI has claimed the prize.

She was commended for her coverage of the anti-ESG backlash movement in the US, with particular praise for her piece revealing the sponsors of Republican lobby group the State Financial Officers Foundation (SFOF) last year.

Today’s letter was prepared by the RI editorial team.