EU proposes loosening CSRD rules and more

June 16, 2023

The top five climate risk and disclosure stories this week.

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EU proposes loosening CSRD standards

The European Commission proposed easing climate and environmental, social, and governance disclosure rules that underpin the Corporate Sustainability Reporting Directive (CSRD) amid concerns of the regulatory burden on companies.

On June 9, the Commission published a draft delegated regulation on the European Sustainability Reporting Standards (ESRS), which will be used by firms to disclose climate-related and environmental, social, and governance information under the CSRD. The ESRS were initially drafted by the European Financial Reporting Advisory Group (EFRAG), an independent body that provides technical guidance to the Commission on financial and sustainability disclosure.

The Commission proposes shifting all indicators classified as mandatory under EFRAG’s initial draft of the standards — including greenhouse gas emissions disclosures — into the scope of a materiality assessment. This means they only need to be reported if a company concludes that a sustainability factor is important and relevant to it. The Commission says this would lead to a “significant burden reduction” for reporting companies. 

The draft delegated regulation also proposes turning some mandatory data points, including biodiversity transition plans, into voluntary disclosures. Certain “flexibilities” have also been suggested when it comes to the disclosure of sustainability-related financial impacts and stakeholder engagements. 

In addition, the Commission recommends for some of the requirements to be phased in over time, particularly for smaller companies. For example, it proposes that companies with less than 750 employees do not have to publish their Scope 3 emissions data in their first year of CSRD compliance.

The Commission’s proposed changes drew fire from investor group Eurosif, which warned the revisions could undermine investors’ abilities to meet their own reporting obligations. In particular, the watering down of mandatory indicators “effectively allows companies to leave out entire parts of the sustainability disclosures,” Eurosif says. This hinders investors’ abilities to make informed decisions and comply with their own regulatory requirements under the Sustainable Finance Disclosure Regulation (SFDR).

Once fully implemented, the CSRD is projected to apply to about 50,000 European companies and over 10,000 overseas ones.

The draft delegated regulation is open for public consultation until July 7.

Canada’s carbon pricing policy raises financial risks

Canada’s carbon pricing policy poses heightened risks for financial lenders and borrowers with significant carbon footprints, a new study by the University of Waterloo reveals.

The research, published in the Journal of Management and Sustainability, indicates that CAD$256 billion in assets and almost a quarter of Canadian GDP is exposed to climate risks. It also shows that high-emitting industries — like mining, oil, and gas — face the greatest risk of bankruptcy as carbon prices rise.

Using Toronto Stock Exchange data from 2010 to 2020, the researchers devised scenarios applying the Canadian government’s carbon price regime — ranging from CAD$0 to CAD$170 — to analyze variables for predicting companies’ default risk out to 2030. The results show carbon-intensive corporates and banks face the most risk and that their distress could have painful ramifications for the broader Canadian economy

“Canadian banks are deeply involved in lending to carbon-intensive clients and have increased lending to those companies by billions of dollars despite their public commitments to support global climate goals,” says Adeboye Oyegunle, the paper’s lead author. “If we are not proactive, these investments could create increased costs, default rates and bad debt when you put these investments into context of the changing market and new government regulations.”

Corporate targets won’t limit warming to 1.5°C — CDP

New data from CDP’s Corporate Environmental Action tracker reveals that current corporate targets aren’t strict enough to cap global warming to 1.5°C. However, it also shows the number of 1.5°C-aligned science-based targets is increasing year on year.

Released Tuesday, the tracker aggregates and assesses climate pledges and actions from around 10,000 companies that are responsible for 16% of global emissions. It also includes most FTSE 100 and S&P 500 companies.

According to the tracker, only 24% of disclosing companies — covering 5% of emissions — are on track to meet their climate targets. In addition, just 60% of companies have emissions reduction targets, and only 81 have credible climate transition plans.

However, some progress is evident as the proportion of global emissions covered by companies with a target including Scope 3 has more than doubled since 2019. Additionally, the proportion of emissions coming from companies on track or almost on track to meet their targets has increased from 5% in 2020 to 6% in 2022.

CDP hopes the tool will drive accountability for meaningful climate action and empower investors, companies, and other stakeholders to make informed decisions on their climate strategies.

Investor group launches asset owner stewardship tool

The Institutional Investors Group on Climate Change (IGCC) wants to make it easier for asset owners to ensure their investment managers are aligned with their climate engagement priorities.

On Monday the group unveiled the Asset Owner Stewardship Questionnaire, a tool designed to streamline information exchange between asset owners, asset managers, and consultants on climate engagement and investment stewardship. The questionnaire is intended to help pension funds and other big institutional investors conduct climate-related due diligence when selecting an asset manager. It’s also meant to provide a quantitative framework for ongoing monitoring of their performance and aims to standardize stewardship practice and reporting. 

The questionnaire was developed by the IGCC Asset Owner Working Group, which includes representatives from 10 organizations, such as Aegon UK, Brightwell, Phoenix Group, and Nest. 

Going forward, the IGCC pledges to develop further guidance on best practices in climate stewardship and reporting, including beyond the listed equity space.

Australia regulator urges firms to prepare for ISSB standards

The chair of the Australian Securities and Investments Commission (ASIC) is pushing for companies to get ready for the International Sustainability Standards Board’s (ISSB) climate and sustainability disclosure standards, which are slated to be finalized by the end of June.

In a speech Tuesday, ASIC chair Joe Longo said the Australian Treasury will publish a plan in the next two weeks, outlining when and how the government will begin to introduce the ISSB’s standards. He noted the Australian government would likely introduce the standards in stages, depending on company size.

To meet the international demand for robust climate reporting, Longo said ASIC will also engage with domestic and international regulatory peers. The latter includes those that are members of the International Organisation of Securities Commissions, a global organization of securities regulators that ASIC is also a member of.

“We must maintain high standards of governance and disclosure today,” Longo said. “ASIC will not overlook current misconduct — including greenwashing — because of the continuing developments in ESG. This is obviously non-negotiable.”