ESG investment funds unlikely to comply with sustainable investing rules

16 05 2023

A lack of standardised regulatory regimes for non-financial disclosures and the naming of environmental, social, and governance (ESG) funds across the US, UK and Europe will mean that a lot of self-proclaimed “sustainable” funds will be unable to comply with proposed legislation. From edie.net • Reposted: May 16, 2023

Analysis of more than 18,000 investment funds across Europe has found that less than 4% would be able to comply with naming laws for ESG funds across key markets.

The research, from technology platform Clarity AI, found that many would have to rename their ESG funds if they wanted to sell across the UK, US and Europe, all of which have different definitions and naming laws for non-financial disclosures and sustainability funds.

“When looking at funds with all three investment fund regimes – the US’, UK’s, and EU’s – we found that over 95% of funds with the word ‘sustainable’, or similar term, would require renaming or restructuring in order to be sold across all three markets,” Clarity AI’s head of product research and innovation Patricia Pina.

“This is not only an added cost in terms of compliance, but also underscores how different actors – in this case regulators – are interpreting the meaning of core concepts like ESG and sustainability.”

In November 2022 the European Securities and Markets Authority (ESMA) ran a consultation to place minimum thresholds on Article 8 – which is for “light green” funds that use ESG-related terms in their names. ESMA proposed that these funds would need to ensure that 100% of the assets in each portfolio adhered to minimum safeguard thresholds that were aligned with the Paris Agreement.

It also suggested that 80% of the assets it invests in are used to meet the ESG-related characteristics that it promotes. Additionally, 50% of the assets would need to be defined as sustainable under the Sustainable Finance Disclosure Regulation (SFDR).

Clarity AI’s research found that only 20% of Article 8 funds using the term “sustainable” had current plans to comply with the recommendations of the consultation. The research suggests that the recommendations from the consultation would not closely align with investing proposals in the UK or US.

ESG down the agenda

Earlier this year, separate research found that investing in sustainable assets is less important to them now than it was in 2019.

The poll was conducted by British law firm Michelmores, covering 1,500 people in the UK with a minimum of £25,000 of investable assets each. 23% of respondents said they found investing in sustainable assets less important than they did in 2019, with the cost-of-living crisis cited as the key reason for this decrease in importance.

Research from EY found that the total amount of assets under management covered by specific ESG funds reached $2.7trn in 2021, marking a 53% year-on-year increase. But as the movement’s support grows, the perception that ESG is ineffective is also becoming more widespread.

EY acknowledges that many companies, ratings agencies and investors are using different definitions of ESG and different methodologies to assess performance across each of the three pillars. Some of these methodologies are based on historic data, some on future predictions. Some assign more importance to issues that are less material to a particular sector or project than those which materiality assessments have proven to be key. Some assign more weight to the ‘E’ and/or the ‘S’ than the ‘G’.

These discrepancies have led to rating agencies assigning scores that have caused controversy. Many of these controversies are now making mainstream news. For example, MSCI and Sustainalytics both provided high ratings to care home operator Opera Group, which this year was accused of mistreating residents and faced insider trading allegations. To give another example, in 2020, fast fashion retailer Boohoo was revealed to have the backing of 20 ESG-focused funds, despite persistent and credible allegations of supply chain workers being paid illegally low wages.

To see the original post, follow this link: https://www.edie.net/esg-investment-funds-unlikely-to-comply-with-sustainable-investing-rules/


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ISSB to launch first two sustainability standards by June

22 02 2023

Photo: ISSB.

The International Sustainability Standards Board (ISSB) has confirmed that it will issue its first two finalised frameworks by the end of June, with an expectation that the first corporate reports aligned with these frameworks will be issued in 2025. From edie.net • Reposted: February 22, 2023

Members of the ISSB gathered in Montreal, Canada, last week, to agree on the technical content of its initial standards following consultations in 2022. The Board is focusing on climate-related reporting in the first instance but its first two standards – IFRS S1 and S2 – will also cover other sustainability-related risks and opportunities.

IFRS S1 is designed to apply globally, to corporates in all sectors. It has been described as the “core baseline” of sustainability reporting, attempting to better unify disclosures on factors such as waste and emissions. It also sets out how companies can integrate reporting, linking sustainability-related and financial information.

IFRS S1 also sets out plans for companies to disclose all material sustainability-related risks and opportunities.

IFRS S2, meanwhile, is more detaied in regard to specific topics – particularly climate mitigation and climate adaptation. It is designed to build on existing disclosure frameworks in this field, chiefly the Taskforce on Climate-Related Financial Disclosures (TCFD).  

While the EU is proposing mandatory “double materiality” impact reporting for big businesses – imploring them to report on their impacts on people and the environment, plus the risks and opportunities that external changes could bring – the ISSB is taking a different approach. Its chief focus at present is enterprise value, which entails getting a deeper understanding of the link between sustainability and company valuation.

“We responded to capital market and G20 demand for a common language of investor-focussed, sustainability-related disclosure, working diligently to deliver standards that fulfil the global baseline,” said ISSB chair Emmanuel Faber.

The ISSB is expected to issue IFRS S1 and S1 by the end of the second quarter, making June the likely issuance date. It is intending to make the standards effective from January 2024, meaning that we will likely see the first corporate reports aligned with the standards in 2025.

Voluntary adoption will be likely in the first case, and some nations and regions may opt for mandatory disclosures in time.

“Given [that] sustainability disclosure is new for many companies globally, the ISSB will introduce programmes that support those applying its Standards as market infrastructure and capacity is built,” the Board said in a statement. But it acknowledged that, in some markets like the EU, disclosure is less new – so there is a need to align with and streamline existing standards.

Commenting on the news, KPMG’s global head of audit Larry Bradley said: “The proposed effective date of 1 January 2024 is ambitious, but – importantly – it’s aligned with the EU timetable, so some companies may adopt on this date regardless of local requirements. It still remains for jurisdictions to decide whether to enforce this date. But the transition provisions, such as not requiring Scope 3 GHG emissions reporting in the first year of adoption, should smooth the path for companies.

“The good news is that companies are going to be explicitly allowed (but not required) to use metrics from GRI and ESRSs where they are useful to investors and there is no equivalent IFRS sustainability standard. This demonstrates a level of pragmatism and a keen awareness of the need to balance cost and benefit for as many companies as possible. However, companies already reporting under GRI won’t be able to simply cut and paste swathes of disclosures, because they will need to apply the ISSB’s investor-focused materiality lens. For companies reporting under multiple frameworks, this will make reporting less challenging.”

The ISSB was first proposed by the not-for-profit International Financial Reporting Standards Foundation (IFRS Foundation) in early 2021, and launched later that year. Its aim is to unify disclosures from corporates, helping investors and other stakeholders to properly compare their sustainability performance and related risks. One year on from its formal launch, in November 2022, CDP confirmed that it will incorporate IFRS S2 into its platform.

To see the original post, follow this link: https://www.edie.net/issb-to-launch-first-two-sustainability-standards-by-june/


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New Taxonomy Released to Combat Greenwashing in Investments

27 01 2023

Image credit: Alexander Tsang/Unsplash

By Mary Riddle from Triple Pundit. Posted: January 27, 2023

Investors, insurers, and financial institutions in the EU have a new method for assessing the sustainability of their investments. Last week, the Observatory Against Greenwashing launched its independent Science-Based Taxonomy, in direct response to the EU Taxonomy system that some say is ineffective. 

The EU Taxonomy is a classification system that claims to give investors, businesses, and financial institutions a common language for identifying the degree to which a specific investment, financial product, or economic activity can be considered sustainable.

However, critics have said the draft guidance is not sufficiently science-based and certain aspects, such as classifying gas-fired power, tree-burning, logging and nuclear energy as sustainable, could do more harm than good.

To create a more sustainable system for classifying investments, a coalition of experts and NGOs including WWF, BirdLife International, and Transport and Environment, formed the Observatory Against Greenwashing (OAG). The group aims to improve on the EU Taxonomy and provide investors with better, science-based guidance on the sustainability of their investments. 

What is the independent Science-Based Taxonomy?

The independent Science-Based Taxonomy is based on the EU Taxonomy, but it only keeps the portions of the text that researchers found to be environmentally sound. It also makes more robust criteria for the parts of the EU Taxonomy that the OAG deemed unscientific or harmful to the environment.

“The EU Taxonomy was originally designed to eliminate greenwashing but instead has become another tool to deceive consumers,” Vedran Kordić, EU Taxonomy coordinator from WWF Adria, said in a statement. “The science-based Taxonomy wants to succeed where the original Taxonomy failed: It will create rigorous criteria which financial institutions can use to properly assess what is green and what is not.” According to the OAG, 1 in 3 activities deemed sustainable in the EU Taxonomy actually cause planetary harm. 

The EU Taxonomy was established in 2018 with a mission to inject capital into projects that would help the EU meet objectives laid out in its Green New Deal, including carbon neutrality by 2050. But critics argue the EU Taxonomy is disingenuous and fundamentally flawed due to the inclusion of natural gas and nuclear energy sources on its list of sustainable investment options.

“This isn’t good enough. We need a better taxonomy, one based on science,” said Luca Bonaccorsi, sustainable finance director at Transport and Environment, a coalition of European NGOs working on transportation issues, in a statement. “Now the investor community has it.”

ESG regulations are expanding in the EU and beyond

While controversy continues to surround ESG regulation for financial products in the EU Taxonomy, the EU Commission is calling for an increase in regulation of other consumer goods and services in an attempt to respond to claims of bogus greenwashing. The EU has drafted a legal proposal that would require companies to provide scientific evidence to justify sustainability claims such as “carbon neutral” or “contains recycled materials.” The draft rule also calls on EU countries to develop systems for evaluating the environmental claims of companies, including issuing penalties for businesses that do not comply. 

The expansion of ESG (environmental, social and governance) regulation is not limited to Europe. In the United States, the Inflation Reduction Act is expected to channel over $400 billion into clean tech companies over the next 10 years. Additionally, the U.S. Securities and Exchange Commission is expected to finally issue its climate disclosure regulations in April, several months later than planned. The new SEC rules, if issued, would require companies to make disclosures surrounding their climate-related risks, as well as their greenhouse gas emissions and those of their supply chains. 


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