Regulators weigh in on ISSB priorities, and more.

September 1, 2023

The top five climate risk and disclosure stories this week.

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Regulators weigh in on ISSB priorities

The International Sustainability Standards Board (ISSB) has been urged to expand its sustainability-related disclosure requirements beyond climate by financial regulators and accounting bodies.

A consultation on the ISSB’s agenda priorities closed on September 1, receiving over 300 responses — many from accounting standard-setters, financial regulators, and asset owners.

In its comment letter, the UK’s Financial Conduct Authority encouraged the ISSB to “build out its suite of sustainability reporting standards” to consider “the specific matters related to each key category of sustainability-related risks and opportunities.” The European Securities and Markets Authority (ESMA) also argued in favor of expanding the ISSB standards “so as to respond to the growing information needs from investors on sustainability issues beyond climate.” In addition, the watchdog called on the ISSB to support implementation of the existing standards by producing additional guidance.

Standard-setters also had their say. EFRAG, the body that advises the European Commission on corporate disclosure rules, said the ISSB should emphasize “a clear direction of travel with a definition of the universe of sustainability-related information to be ultimately covered.” As part of this, the ISSB should “expand its set of topical standards as soon as possible.” 

The Canadian Sustainability Standards Board took a different stance. It recommended the ISSB focus on providing “interpretive guidance and examples” for reporting entities, tackle potential implementation challenges, and work on ensuring the interoperability of its standards with different jurisdictions. However, its comment letter also stated that a group of Canadian respondents wanted to see a “beyond-climate” roadmap for disclosure standards development.

Other respondents pressed the ISSB to enhance its existing climate disclosure standard. For example, the secretariat for the Glasgow Financial Alliance for Net Zero (GFANZ), the world’s largest climate finance coalition, said the ISSB could play a critical role in “forging needed comparability in transition plan disclosures across sectors” by building out its transition plan-related guidelines.

UK investors call for policy certainty on net zero

Aegon Asset Management, Scottish Widows, Railpen, and 33 other UK institutional investors have warned Prime Minister Rishi Sunak that his government is complicating the financial industry’s efforts to facilitate a low-carbon transition.

In an open letter published Monday, the investors — organized by trade group UKSIF — highlight the importance of “regulatory visibility” when it comes to facilitating the large-scale, transformative investments needed to achieve net-zero emissions.

“As investors and financial institutions, we need confidence in the government’s long-term commitment to this [climate] agenda to allow us and our investee companies to make multi-billion-pound investments in the UK’s sustainable economy of the future. We have concerns that recent events and signals risk eroding this trust, potentially delaying net zero-related investment,” the letter says.

The investors cite recent debates that appear to contradict the UK’s promised phase-out of new petrol and diesel cars by 2030 and gas boilers by 2035. Pledged reforms to the country’s carbon markets, energy efficiency standards for the private rented sector, as well as plans to issue new oil and gas licenses in the North Sea, have also cast doubt on the government’s commitment to its climate targets, they say.

The letter goes on to urge the UK government to “provide long-term policy certainty” by ensuring important measures — including predictable carbon pricing mechanisms, the transition to zero-emissions vehicles, and improved energy efficiency standards — are implemented.  “Purposeful and predictable policy at home can position the UK financial services sector as a global leader in green investment, driving further prosperity and growth, including in emerging financial services centres outside London.” 

Investors demand enhanced climate voting guidance

Thirty-six financial institutions belonging to the Institutional Investors Group on Climate Change have called on a major proxy advisory firm to better integrate climate concerns into its voting recommendations.

Institutional Shareholder Services (ISS) advises thousands of pension funds, asset owners, and other firms on how to vote on proposals filed at their investees’ shareholder meetings. In a letter sent August 31, members of the IIGCC urged ISS to draft a tailored net-zero policy for the 2024 proxy season and to enhance its policies around board accountability, transition plans, shareholder resolutions, and Climate Action 100+ Net Zero Benchmark alignment.

Many investors have already committed to aligning their portfolios with the Paris Climate Agreement, and are therefore looking to use their voting rights to achieve this objective, the letter says. “We are keen to work with ISS to develop a policy with explicit links to net zero alignment and robust voting recommendations without delay,” it states.

“More and more investors are setting net zero commitments and pursuing alignment with the Paris Agreement,” said Stephanie Pfeifer, CEO at IIGCC. “Their fiduciary duty is driving them to factor in financial risk, including transition and physical risks associated with climate change. As clients of ISS they need support from their proxy advisor when making stewardship and voting decisions so they can achieve their goals.”

Carbon credits body updates standards

Voluntary carbon markets body Verra has enhanced its Verified Carbon Standard (VCS) Program to improve usability, transparency, and integrity. 

The VCS program is the world’s most widely-used carbon crediting program. Version 4.5 of the program explicitly aligns with major carbon market initiatives, namely the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Carbon Offsetting Reduction Scheme for International Aviation (CORSIA). The ICVCM unveiled its Core Carbon Principles and associated assessment benchmark earlier this year with the objective of “maximizing the ability of the voluntary carbon market to support delivery of global climate targets.”

To increase transparency, Verra has introduced two new market labels for Verified Carbon Units (VCUs), which will differentiate between VCUs based on greenhouse gas emission reductions and carbon dioxide removals, as well as identify credits authorized under Article 6 of the Paris Agreement.

In addition to these improvements, version 4.5 includes several measures to strengthen the program’s integrity. These include improved environmental and social safeguards and measures to ensure that projects’ carbon removal or offsetting effects are long-lasting.

Verra was at the center of a media firestorm in January following an investigation by The Guardian, Die Zeit, and SourceMaterial which claimed that more than 90% of Verra-certified rainforest carbon offsets do not represent real-world carbon reductions. Verra contested the findings.

Investors take aim at sovereign climate risk

The Collaborative Sovereign Engagement on Climate Change, a global initiative of institutional investors aimed at addressing climate risks and opportunities, is set to expand its reach. Launched in September last year with a pilot focus on Australia, the collaboration will grow to include 25 organizations, representing approximately USD$8 trillion in assets under management.

The collaboration, orchestrated by the UN-supported Principles for Responsible Investment (PRI), aims to help governments take steps to align their policies with the Paris Agreement, thereby reducing their climate transition risks. These risks could impact the value of sovereign bonds issued by governments, which could hobble national finances.

New members joining the engagement include Achmea, Fidelity International, Jupiter Asset Management, Morgan Stanley Investment Management, Munich Re, and Sumitomo Mitsui Trust Asset Management. They will join existing members of the engagement’s Advisory Committee, such as Aviva Investors and BNP Paribas Asset Management.

The collaboration will pressure sovereign issuers to establish “detailed, credible, and economy-wide net zero transition plans with supporting policy mechanisms, budget expenditure and investment structures” and also “[b]uild greater climate adaptation and resilience” economy-wide. The initiative will also urge issuers to improve their disclosure of climate risks and opportunities in line with global standards.

“Investors are using increasingly sophisticated measures to assess sovereign climate risk in their investments. Over time this may affect capital costs for sovereign and other issuers in relevant markets,” said PRI CEO David Atkin. “Genuine, sustained and two-way engagement can help policymakers better understand the growing practice and expectations of international investors on climate change response.”