The increasing ESG Regulation minefield
Confession — as somebody who is is active in promoting ESG and in particular through my platform — ESG3.0 where I provide practical solutions for — ESG Accounting. ESG Data Management. ESG Measurement. ESG Reporting. CO2 Reduction. Net Zero — the new regulations by the EU, SEC, the race to standardized reporting is all very cumbersome and confusing.
These Announcements will require :
1. A new mindset of Risk and Investment by Companies Boards
2. Disclosure in the Financial Statements
3. Disclosure on the Website
4. Disclosure of the Product
Not only that, but Companies also need to address the 3 key ESG Issues, namely
1. ESG Data Management & ESG Reporting
2. CO2 Reduction — Net zero
3. ESG in their Supply Chain / Investment Portfolio
So, if you are CEO or CFO are confused, scratching your head about how to deal with this, you are in good company.
Let’s just look at these Headline Announcements.
“The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA, and ESMA — ESAs) delivered today to the European Commission (EC) the Final Report, including the draft Regulatory Technical Standards (RTS), on the content, methodologies, and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR).
The proposed RTS aims to strengthen protection for end-investors by improving Environmental, Social, and Governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. This will help to respond to investor demands for sustainable products and reduce the risk of greenwashing.
The EU Taxonomy regulation went into effect at the beginning of this year, following the approval of the EU Taxonomy Climate Delegated Act (CDA), starting with the first two objectives, climate change mitigation, climate change adaptation, although the assessment of gas and nuclear energy as eligible areas for green investment remained ongoing.
Consolidation of reporting frameworks IIRC and SASB merge to form the Value Reporting Foundation and will be providing a comprehensive suite of tools to assess, manage and communicate value in ESG Reporting
SEC — Implication of the Sample Letter to the CEO — The SEC and Climate Change
Furthermore, in a new letter to clients, investment giant BlackRock pledged to guide and advise investors through the net-zero transition, outlining a broad approach to protect portfolios from climate-related risks and to identify and invest in opportunities arising from the multi-decade global decarbonization drive.
So, where can you as CEO, CFO start, re-start, upgrade your ESG journey.
While the first step is to discuss this with (or google) one of the Big 4 Accounting Firms, Leading Consultancy Firms such as Mckinsey who have great online resources, I would suggest a more practical approach.
My Company Persofi https://www.persofi.com though the ESG3.0 Platform is working together GCX DASH- GCX is a leader in ESG with a specialty in Real Estate, Hotel, and Food sectors with a leading-edge data-driven, digital platform with ESG monitoring and reporting capabilities. GCX also have a track record of energy savings and waste recycling for their clients
The ESG Solution includes:
1. Data Management, Dashboard, KPIs
2. Real Solutions for Net Zero — CO2 Reduction and Waste Management
3. ESG Grades — Full supply chain/ Portfolio Dashboard & view
These solutions are based on bona fide experience with leading blue-chip companies.
To learn more or receive a copy of our whitepaper, please reach out to me by e-mail at Jeffrey@persofi.com
Diving a little deeper into the EU Product level disclosures
The sustainability characteristics or objectives of financial products are to be disclosed in an annex to the respective sectoral pre-contractual and periodic documentation in mandatory templates and on providers’ websites.
Proposals relate to:
- Pre-contractual information should include details on how a product with environmental or social characteristics/ sustainable investment objective/ meets those/ that characteristics/ objective.
- Information on the entity’s website on the environmental or social characteristics of financial products/ sustainable investment objective of the product and the methodologies used.
- Information in periodic reports specifying: (I) the extent to which products met the environmental and/or social characteristics by means of relevant indicators; and (II) for products with sustainable investment objectives, including products whose objective is a reduction in carbon emissions.
- Information in relation to the ‘do not significantly harm’ principle: specifying the details for how sustainable investments do not significantly harm sustainable investment objectives.
As the ESAs were not empowered to differentiate the disclosures between financial market participants and products, the RTS contain a harmonised approach to all financial products. Therefore, the same disclosures are required for a very broad range of products attached as annexes to existing sectoral disclosure documents that have different levels of granularity and length.
Letter to the CEO — The SEC and Climate Change
We have reviewed your filing and have the following comments regarding compliance with the topics addressed in the Commission’s 2010 Guidance Regarding Disclosure Related to Climate Change, Release №33–9106 (Feb. 2, 2010). In some of our comments, we may ask you to provide us with information so we may better understand your disclosure. Please respond to these comments by providing the requested information and/or revising or updating your disclosure as applicable. If you do not believe our comments apply to your facts and circumstances, please tell us why in your response.
We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.
Disclose the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes.
Disclose any material litigation risks related to climate change and explain the potential impact to the company.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
There have been significant developments in federal and state legislation and regulation and international accords regarding climate change that you have not discussed in your filing. Please revise your disclosure to identify material pending or existing climate change-related legislation, regulations, and international accords and describe any material effect on your business, financial condition, and results of operations.
Revise your disclosure to identify any material past and/or future capital expenditures for climate-related projects. If material, please quantify these expenditures.
To the extent material, discuss the indirect consequences of climate-related regulation or business trends, such as the following:
decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources.
increased demand for goods that result in lower emissions than competing products.
increased competition to develop innovative new products that result in lower emissions.
increased demand for generation and transmission of energy from alternative energy sources; and
any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.
If material, discuss the physical effects of climate change on your operations and results. This disclosure may include the following:
severity of weather, such as floods, hurricanes, sea levels, arability of farmland, extreme fires, and water availability and quality.
quantification of material weather-related damages to your property or operations.
potential for indirect weather-related impacts that have affected or may affect your major customers or suppliers.
decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
any weather-related impacts on the cost or availability of insurance.
Quantify any material increased compliance costs related to climate change.
If material, provide disclosure about your purchase or sale of carbon credits or offsets and any material effects on your business, financial condition, and results of operations.
We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.
Division of Corporation Finance
Blackrock letter to its clients
We are writing to you as a client who has expressed interest in the net zero transition. As the transition becomes increasingly pivotal to your long-term investment goals, it is our responsibility to help provide you with the answers and the tools you need to help address it in your portfolio. The choice of how to approach the transition, as always, remains with you, and as your fiduciary, we commit to helping guide and advise you as it unfolds.
We are hearing a range of questions about the transition from clients — how do I safeguard my portfolio against physical risk and transition risk? How do I measure and implement my net zero commitments? Which companies will thrive in the transition, and which won’t? How do I capitalize on the promise of new technologies? How will different hydrocarbon companies adapt to the transition and how will that impact my portfolio? These questions are of growing importance to long-term investors — but also difficult to answer as the economy undergoes such a profound transformation.
Decarbonization is proceeding at different speeds across different parts of the economy and the world. The shocks we see in the energy sector today are one example of the challenges the transition poses. Increased investment in the supply of renewables outpaced the reduced investment in fossil fuels. Now, increased demand for fossil fuels in the restart of economic activity and impaired supply have driven up the price and use of gas, oil, and coal. There will be periods like this when traditional energy performs well — periods that should not be seen as counter to the transition, but as part of it.
At the same time, the net zero transition is also advancing. The share of countries committed to net zero has swelled from less than 10 percent to 95 percent of global emissions. In the beginnings of a tectonic shift1 of capital, investors have moved their money into sustainable investments at six times the growth rate of traditional investments, with assets globally now totaling $4 trillion across all ESG categories.2 And there has been striking change across carbon-intensive industries, from energy to heavy industry to agriculture, to decarbonize and remake their businesses.
The speed and shape of the transition are deeply uncertain, and it will take decades to play out. It is essential that governments, businesses, and finance work together to manage the transition in an orderly fashion, ensuring reliable energy supply and cost along the way.
The ambition and effectiveness of government policy will be a major factor in determining the future role for hydrocarbons. Effective, long-term planning is necessary to deliver cost-efficient clean energy alternatives at scale. Without it, hydrocarbons will continue to play a central role in the global economy for a much longer time. To date, public policy has primarily focused on limiting hydrocarbon supply but has not done enough to address demand — for example, by retooling energy-intensive industries or accelerating adoption of zero-carbon energy sources — resulting in higher energy prices in some instances. And as we have seen in emerging markets, rising natural gas prices can also drive increased use of coal.
Today there is a significant degree of uncertainty about the transition. The issue, however, is no longer whether the net zero transition will happen but how — and what that means for your portfolio. Our focus on understanding the how of the net zero transition is driven, as always, by our role as a fiduciary. It is based on our abiding conviction that long-term investors must consider the implications on their portfolios of both physical climate risk and the transition to net zero in the real economy, and that by taking these factors into account, they can more effectively manage risk, seize new investment opportunities, and achieve better long-term returns. We delve deeper into these topics in a new paper from the BlackRock Investment Institute, “Managing the net zero transition.”
We hope to answer your questions about the transition and offer you a comprehensive set of options to help you address them — whether it’s tilting your broad market strategies to be more climate-aware, investing in carbon-intensive companies that are transforming their businesses, or gaining exposure to the new technologies and business models of a net zero world. We are committed to providing the full range of investment choices to help you find the best path for you and your stakeholders, and regardless of which approach you choose, we are profoundly excited to help you navigate this transformation.