Danesmead ESG 2023 Round-Up

Introduction

If we could pick just one ESG theme for 2023 it would have to be maturity. From developing the sophistication of understanding of key concepts to implementing and embedding more complex ESG frameworks, we’ve seen a steady maturing of knowledge, ambition, and capability. 

ESG regulation continues to evolve, and converge

ISSB: The drive to standardise and operationalise ESG standards continues with new rules emerging at the national and international levels across the globe. The much-anticipated ISSB (International Sustainability Standards Board) launched in June, seeking to provide a one-stop shop for all sustainability-related financial reporting, and a more comparable and consistent approach for investors as a result.

SFDR: SFDR’s Level 2 rules came into force in January, aiming to strengthen reporting requirements for sustainable financial products. Although the industry’s response to SFDR has generally been positive, more detailed discussions are now focusing on the question of interoperability (and potential conflict) with the UK’s SDR, challenges around the PAIs and disclosure requirements, and persistent data gaps. The EU has also initiated a consultation which may see SFDR become an official labelling regime (it originated as a disclosure system) or be rewritten entirely (unlikely we think).

SDR: Meanwhile, the FCA has finally launched its Sustainability Disclosure Requirements (SDR), released in late November, with a narrower scope than expected (rules only apply to UK firms and their UK-domiciled products marketed in the UK, though overseas funds may be added later). This includes a product labelling regime, entity level disclosures, and an anti-greenwashing rule including restrictions on the use of certain sustainability-related terms and images. The FCA promises alignment and interoperability with ISSB and SFDR, so watch this space and we’ll report back on how that goes once they’re all properly up and running.

TCFD: To signal deeper convergence and minimise the reporting burden, TCFD as an organisation has disbanded, and handed oversight of the framework to ISSB. Signatories reporting to ISSB S2 (climate requirements) will now no longer need to produce a separate TCFD report.

SEC: We’re also still waiting on the final SEC’s ESG and Climate Disclosure rules, proposed back in May 2022 but facing ongoing challenges which may result in elements being watered down – specifically in relation to mandatory Scope 3 disclosures, so we wait to see what happens there.

We have been keeping busy navigating clients through this fast-evolving regulatory landscape in 2023 and look forward to continuing this journey into 2024 (and beyond...).

ESG deepens and matures

Data: With the expansion of policy and regulation comes a general maturing of the ESG industry. Data is improving and while still a good way from perfect, the scope, depth and complexity have taken significant leaps this year. Similarly, the way firms are now tackling the more complex aspects of climate reporting (e.g. Scope 3 emissions reporting, scenario analysis, target setting etc.) reflects a collective growth of knowledge and increasing confidence in dealing with technical elements.

Backlash: The ESG backlash can also be seen through the lens of maturity, the attention it has raised offering the opportunity to critically reflect on some of the shortcomings of this nascent sector, iron out early mistakes and clarify a more effective way forward. The reality is somewhat different from the media rhetoric too. Though there have undoubtedly been delays to regulation and some more severe consequences especially in the US, the issue doesn’t seem to be having quite the widespread impact the media might have us believe. Firms are continuing to put in place ESG policies and factor in issues like climate change to their investment processes. And the conversation about classifying, clarifying and communicating the nature of ESG products has contributed to a collective reckoning, a deepening of knowledge and a far more sophisticated and nuanced discussion as a result.

Progress: Amongst our clients, we’ve also seen progress with many moving away from simple ESG policy processes towards more complex assessment frameworks and alignment with standards like SFDR, TCFD, and NZAMI (the Net Zero Asset Managers Initiative). With an updated PRI reporting framework this year, we’ve also helped many clients to take steps to refine their processes and integrate ESG factors more comprehensively.

Looking ahead

ISSB: Getting to grips with ISSB, implementing the brand new SDRs, and adapting to potential changes to SFDR should keep us all busy through 2024. Navigating new regimes is always a challenge at first but we’re hopeful ISSB will genuinely ease the burden in time. And since nearly everyone is now quite familiar with TCFD (which forms the backbone of ISSB), it shouldn’t be too much of a leap.

TNFD: What might present more of a challenge is TNFD. Using the TCFD framework will certainly help to ease us in but get ready for a whole new world of nature-based lingo, from biomes, dependencies and impacts to Species Threat Abatement and Restoration, measuring nature is inherently more complex. But TNFD recommends a start-where-you-are approach so it will be interesting to see how the market gets on with that in 2024. Among our client-base, question from investors on TNFD are only just starting to emerge, with most still focused on TCFD, but we are expecting this to ramp up in 2024.

Human Rights: The PRI have made a big deal of human rights in 2023 and we expect to see more of it next year. This is all about digging deeper and knowing what’s going on in supply chains, and while it remains hard, as always there are tools and methods available so it’s worth starting to think about it soon and getting policies and due diligence processes in place ahead of any regulatory changes, and investor requests. 

PRI: On the topic of the PRI – signatories should be aware of two developments: Progression Pathways Initiative and Reporting Equivalency. The former would be a new, voluntary framework to help signatories demonstrate their progress on defined ESG pathways – consultation currently underway and we welcome discussion on these plans. The latter seeks to simplify PRI reporting for signatories already making certain disclosures such as UK Stewardship Code or TCFD.  

And finally, the regulators have all promised to keep focusing on greenwashing. As we keep saying, say what you do and do what you say!

That’s all for now. Have a great break and we look forward to 2024!