In the Loop: UK due diligence bill, heard at PLSA, and PCAF progress

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Push for UK due diligence rules

Image: Getty

In recent weeks, the investor community has been closely following updates from Brussels on the much-anticipated Corporate Sustainability Due Diligence Directive (CSDDD) – in particular whether or not finance will be included.

Meanwhile in the UK, a private member’s bill was put forward this week that would introduce similar mandatory environmental and human rights due diligence for businesses.

The bill – put before the House of Lords by Baroness Young of Hornsey – also seeks to introduce a requirement for firms to publish a report setting out due diligence plans for the next 12 months, as well as an assessment of the effectiveness of the actions taken in the past year.

It also outlines plans for the establishment of a regulatory authority to oversee compliance.

Calls for mandatory due diligence rules in the UK have been ramping up in recent years. Indeed, 47 companies, investors and business associations released a joint statement to that effect in September last year.

It is too early to determine the likely fate of Baroness Young’s bill, according to lawyers at Herbert Smith Freehills. Since 1983, just 60 private members’ bills raised in the House of Lords have been successful, only one of which came in the last five years.

The lawyers noted, however, that even private members’ bills that fail to pass “can be successful in raising the profile of a particular issue, garnering the support of MPs and indirectly influencing the government’s legislative agenda”.

The week in RI

To mark the start of COP28 in Dubai, we took a deep dive into the vexed question of whether it makes sense for investors to continue engaging with companies on limiting global warming to 1.5C.

The feature was also the lead story in RI’s COP28 report, which was prepared by our special projects team at PEI Group.

Our other big story of the week looked at EFRAG’s development of the recently adopted ESRS. The result of extensive research by our deputy editor Elza Holmstedt Pell and features writer Paul Verney, the article shone a light on the many challenges faced by individuals involved in the process.

In other EU news, we revealed that Czech Republic could be on a collision course with the European Commission over potential delays in transposing CSRD into local law.

And in the UK, the FCA added a fourth sustainable fund label in the long-awaited final version of the SDR rules.

Elsewhere, global banking supervisors published a preliminary paper exploring draft Basel rules for climate disclosures; Bloomberg announced plans to use data from the UK’s Natural History Museum to create a biodiversity tool; and a survey revealed that just 8 percent of pension funds rate managers as “excellent” on ESG.

Finally, Responsible Investment Association Australasia’s outgoing CEO, Simon O’Connor, spoke to our reporter Fiona McNally about the evolution of and outlook for sustainable finance in Australia.

Quote of the week

“This is the ‘Volkswagen 2015’ moment for COP28”

Former UN climate head Christiana Figueres likens reports that COP28 president Sultan al-Jaber is planning to discuss fossil fuel deals at the conference to Volkswagen’s emissions scandal. Al-Jaber denies the accusations.

PCAF progress

Carbon accounting initiative PCAF has finally published its long-awaited “financed emissions” standard, following reports of infighting among banks, some of which have argued for a less stringent measure.

The first-of-its-kind standard requires signatory banks to report facilitated emissions using a 33 percent weighting factor and account for capital markets transactions in the year they occur.

It received a lukewarm response from civil society. ShareAction welcomed PCAF’s efforts but saw the methodology as “further proof that voluntary climate initiatives cannot deliver what is needed for people and planet”.

RI is keen to hear from investors on the topic and will be reaching out next week. Stay tuned.

Heard at the PLSA ESG conference

Earlier this week, RI attended the Pensions and Lifetime Savings Association’s one-day ESG conference, hosted by PwC.

Attendees heard from a range of speakers including trustees, pension scheme investment teams and consultants on hot-button issues including stewardship, biodiversity and the reporting burden.

The following selection of quotes from panellists and attendees sums up how many delegates were feeling.

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“I’ve been both inside and outside Climate Action 100+. There are some brilliant contributors to it and some people who are part of it and leveraging on the back of others”
Adam Gillett, senior investment manager, sustainable ownership team, Railpen

“Reporting should be what happens at the end of the year to say what you did. There’s a risk that reporting ends up being what you did during that year”
Tegs Harding, trustee director and head of sustainability at IGG

“Short of telling consultants what I want the output to be and to fudge the numbers until they get there, where can I go? All consultants use the same models”
One trustee shares their frustration with the options available to them on climate scenario analysis

“Scenarios are a prediction for the future, therefore they are wrong like all predictions. The ones we use are definitely wrong – but they are the best ones that are out there”
But a consultant is there to defend their industry

“When engaging with Shell I had to use statistics about value-at-risk to justify it. I don’t care if Shell’s share price is doing well or not, I care about my entire investment portfolio”
The head of responsible investment at one pension fund reminds us that climate is a systemic risk

“When the tide goes out, we’ll see who has lost their swimming trunks. Those who have been allocating in line with how they say they will, will be able to evidence that”
One portfolio manager is confident that the UK’s SDR will increase transparency

“It can be really challenging to do… but I do think litigation is something more investors should consider if companies aren’t living up to their legal obligations in the way that you expect them to… it’s a really good alternative to divestment as well”
Laura Hillis, director of climate and environment, Church of England Pensions Board 

“One thing schemes tell me is that they need regulatory certainty and not flip-flopping… so yes it doesn’t help if you have those rollbacks”
Mark Hill, climate and sustainability lead at the Pensions Regulator, is not quite on board with the UK government weakening its green stance

Standards co-operation

In last week’s In the Loop, we flagged that Patrick de Cambourg, chair of the sustainability reporting board of EFRAG, revealed on a webinar that the EU standards body was working on a new MoU with the GRI “to continue to co-operate closely”.

The new co-operation agreement was announced on Thursday, and a first tangible outcome of it is a GRI-ESRS interoperability index.

A published draft version, submitted for approval for the December meetings of the EFRAG standard setting groups, outlines how disclosure requirements and data points in each standard relate to each other.

The standards bodies said there is already a “high degree of commonality” and the foundations to “build a reciprocal digital taxonomy”.

It comes as RI is expecting an update at COP28 about ISSB support for a global baseline. We’ve previously reported that the global standards setter has reached out to a wide range of organisations to “champion” its climate standards ahead of the UN conference.

Fiduciary duty guidance in sight

Despite frequent calls from UK pension schemes for reform, or at the very least clarifications, to their fiduciary duty to allow them to invest in climate solutions and deal with climate risk, there has so far been no decisive policy action.

A number of respondents to a recent consultation by the Department of Work and Pensions and HM Treasury on trustee skills and capability suggested that there is a lack of clarity around how fiduciary duty interacts with sustainability and climate change considerations.

However, the government said respondents also agreed “that any policy intervention from government to change fiduciary duty would be undesirable”.

Schemes looking for reassurance are likely to welcome guidance being developed by the Financial Markets Law Committee, which was charged by the government with looking into the issue.

Paul Lee, head of stewardship and sustainable investment strategy at Redington, let slip at the PLSA ESG conference this week that its report is due to be published before the new year.

“It’s actually practical and helpful and will hopefully help trustees understand things,” he said.


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