EU Parliament advances sustainability due diligence law, and more

June 2, 2023

The top five climate risk and disclosure stories this week.

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EU Parliament approves sustainability due diligence law 

The European Parliament voted to advance new rules that would force corporations to produce wide-ranging climate transition plans and integrate environmental and social factors into their business operations.

The Corporate Sustainability Due Diligence Directive (CSDDD) passed in the European Parliament on Thursday by 366 votes to 225, with 38 abstentions. This clears the way for formal discussions between the Parliament, European Council, and European Commission on the directive’s final shape.

The CSDDD would compel firms to identify and either prevent, end, or mitigate the negative impacts of their activities on human rights and the environment — including pollution, environmental degradation, and biodiversity loss. It would also require companies to create climate transition plans that align their business models and strategies with a 1.5°C global warming pathway. 

If entered into law as currently drafted, the CSDDD would apply to EU companies that employ more than 250 people and generate revenues of more than €40mn (USD$44mn) a year. Directors of companies with over 1,000 employees would be legally responsible for implementing the climate transition plans. CSDDD requirements are expected to take effect beginning 2030.

The version of the directive passed by the Parliament was the product of a cross-party compromise that members of the Committee on Legal Affairs brokered in April. The committee confirmed financial institutions would be included in the directive’s scope — a decision that was welcomed by activist groups.

Reclaim Finance, a France-based climate research and campaigning organization, said the Parliament’s CSDDD position “is definitely a step up compared to the positions of the European Commission and the Council of the EU.” At the same time, the group cautioned that improvements are needed to ensure financial institutions “take responsibility for their actions.” In particular, Reclaim Finance wants the CSDDD’s definition of “value chain” to be reviewed to include all financial institutions and services.

NGFS calls for unified transition plan approach

Financial regulators and other authorities must work together to ensure companies’ climate transition plans yield information that is useful to central banks, supervisors, and government agencies, the Network for Greening the Financial System (NGFS) said.

In a report published Wednesday, the NGFS — a group made up of 125 central banks and financial supervisors — examines the state of financial institutions’ transition plans and lays out steps for improving how useful they are to financial authorities.

The report emphasizes the potential for transition plans to provide “forward-looking visibility” on the real economy’s shift toward net zero. However, it also notes there are multiple definitions of transition plans, which are tailored to meet different purposes. For example, there are strategy-focused transition plans designed to give stakeholders an understanding of a firm’s approach to achieving its climate targets. Risk-focused plans also exist and have a narrower purpose of addressing climate transition risks that may arise in the real economy.

Some transition plans are better suited to meeting regulatory objectives than others. For instance, a strategy-focused transition plan would not be of much use to a financial regulator that is more narrowly focused on specific institutions’ safety and soundness as it would not contain the kind of risk analysis needed to inform regulatory decisions.

The report also says the NGFS would engage with international authorities and standard setters — including the Financial Stability Board, the Basel Committee on Banking Supervision, and the International Organization of Securities Commissions — to harmonize transition plan standards.

“There … needs to be collaboration across supervisory jurisdictions and their institutions to ensure interoperability of transition plans, reduce regulatory fragmentation and related burden on firms and prevent ‘arbitrage’ of different emissions regulations and interpretations of a transition plan amongst different users,” the report says.

Finance firms ask companies to produce CDP disclosures

Financial giants Schroders, Aviva Investors, Manulife and 285 other global institutions are engaging with 1,607 companies in the hope that they will produce environmental data disclosures through CDP, the global environmental reporting non-profit. 

The 2023 Non-Disclosure Campaign, which officially launched Wednesday, targets companies that are currently not reporting to CDP. The nonprofit runs the world’s largest environmental data platform through which over 18,000 entities disclosed climate-, water-, and forest-related data last year. The companies that the campaign is targeting this year include oil and gas giants Saudi Aramco and Exxon Mobil, as well as automakers Tesla and Volvo Group.

Participating financial institutions are most interested in climate change data. Seventy-two per cent of the companies targeted were asked to disclose on this theme, while 28% of companies were requested to report on their water-related impact and 26% on their forest-related issues.

CDP’s analysis of its 2022 Non-Disclose Campaign shows companies were 2.3 times more likely to disclose if directly engaged by financial institutions.

EU regulators warn of greenwashing in financial sector

Potential greenwashing cases across the European Union’s (EU) financial sector are on the rise, regulators say.

The three European Supervisory Authorities (ESA) — the European Banking Authority (EBA), European Securities and Markets Authority (ESMA), and European Insurance and Occupational Pensions Authority (EIOPA) — published separate progress reports in response to a request made by the European Commission to define and identify greenwashing risks in the financial sector.

The EBA’s report includes a quantitative analysis of greenwashing risks in the EU. It says the results show “a clear increase in the total number of potential cases of greenwashing across all sectors, including EU banks.” However, the report also emphasizes “rising climate accountability” due to companies becoming more careful when relaying their environmental policies and climate information in light of greater public awareness of global warming.

The quantitative analysis also shows the claims made by companies that are most susceptible to greenwashing risks are about future environmental, social, and governance (ESG) performance. This is followed by claims of ESG engagement with stakeholders, as well as ESG impact claims made through metrics, labels, and certificates.

Reputational and operational risks, such as litigation, are perceived to be the most impacted by greenwashing, according to market participants and regulatory authorities.The materiality of greenwashing is expected to rise in the future. Currently it’s considered to be low to medium for banks and medium to high for investment firms. 

The EBA report also says the EU’s sustainable finance framework, including the Taxonomy Regulation and ESG disclosure rules, could help address greenwashing risks. However, there’s still challenges when it comes to implementing these tools, including the need for quality data and robust methodologies. The sustainable finance regulatory framework is also still a work in progress, meaning some rules’ benefits haven’t been realized yet.

The ESAs’ final reports on greenwashing are due in May 2024. These will contain final recommendations for the Commission, including possible changes to the EU regulatory framework to better combat greenwashing.

US oil investors reject Paris-aligned targets

Exxon Mobil and Chevron, two of the world’s largest oil and gas companies, beat back efforts by  shareholders to make them set emissions reduction targets that align with the 2015 Paris Climate Agreement. 

At the two companies’ annual general meetings, both held on Wednesday, a majority of investors rejected the climate proposals that were brought forward by green shareholder group Follow This. Just 11% of investors supported the proposal at Exxon, and 10% backed it at Chevron. The same proposals last year garnered 28% and 33% of investors’ support, respectively.

“It’s incomprehensible that most investors still accept these supermajors’ refusal to cut emissions this decade,” said Mark van Baal, the founder of Follow This. “They all know the science: to avoid climate disaster, global emissions must almost halve by 2030. Chevron has no serious target (an intensity target of 5.2% by 2028) and ExxonMobil has no Scope 3 target at all.” 

Both Exxon Mobil and Chevron plan to increase oil and gas production — activities that are at odds with global efforts to limit global warming to 1.5°C, according to authoritative climate scenarios.
Investors in the two companies also rejected proposals demanding that they accurately disclose how asset sales and transfers affect their reported emissions. The proposals, put forward by shareholder advocacy group As You Sow, won just 18% of investor support. Danielle Fugere, president of As You Sow, said although the proposals were defeated, the votes showed a “significant segment” of shareholders “seek clear and accurate reporting from Exxon and Chevron on whether they are meeting their targets and reducing their contribution to climate change.”