Ahead of the highly anticipated International Financial Reporting Standards’ (IFRS) S1 and S2 sustainability standards that will be published at the end of June, a panel of reporting experts discussed today’s reporting landscape and how these new standards are likely to impact it. They shared that companies in Europe as well as Hong Kong and Singapore are unlikely to be significantly affected by the new standards as there are already a number of reporting standards in place. However, organisations who do not have ESG reporting practices in place will face pressure to begin doing so, including in parts of the world where ESG reporting is still a fairly new practice such as South America and South Africa.
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1. The complicated dynamics of divestment. Divestment is a complex issue with many factors to consider, but European pension funds and asset managers have come up with mechanisms to guide them. ABP, a Dutch pension fund, is divesting from fossil fuel related organisations but creates exceptions for companies who are heavily investing in clean energy while putting a net-zero transition plan in place. In Norway, pension fund KLP uses three categories for exclusions: behaviour, product, and due diligence based exclusions. Behavioural exclusions focus on companies that violate human rights or do significant environmental harm, while product exclusions involve specific goods such as tobacco and alcohol. Finally, KLP considers country, industry, and organisational risk when making due diligence exclusions. Divestment can be complicated, but with an appropriate strategy in place companies can navigate the process smoothly.
2. Impacts of the European Union’s new carbon border tax. Carbon taxes are an increasingly common mechanism governments employ to incentivise companies to reduce carbon emissions. Approximately a quarter of all carbon emissions today are regulated by some form of price on carbon, but most jurisdictions set the price too low for any meaningful impact. The European Union’s (EU) new Carbon Border Adjustment Mechanism (CBAM) seeks to address that by requiring importers of goods to buy and surrender carbon certificates, and if the goods came from a country that already has a carbon tax in place then no certificates need to be surrendered upon import. This will incentivise countries around the world to implement carbon market schemes of their own. Organisations should expect the development of such carbon markets and begin planning proactively to avoid running afoul of the new CBAM.
3. ESG frameworks in the EU: An explainer. ESG reporting is often referred to as alphabet soup, with new frameworks with new complicated acronyms frequently being introduced. As a global sustainability and climate leader, the EU and companies that operate there feel this acutely. Here is a rundown of the most widely-referred ESG frameworks in the EU at the moment:
- Corporate Sustainability Due Diligence Directive: The CSRD will replace the EU’s previous sustainability reporting standards, and applies to EU companies with over 40 million euros in revenue and 250 employees, as well as those with revenue of 150 million euros and 500 employees. Non EU companies that generate those amounts of revenue in the EU regardless of company size must also comply. The CSRD will require companies in those categories to report on environmental and human rights risks, mitigate said risks, and complete due diligence once a year.
- Corporate Sustainability Reporting Directive: This directive requires that companies create third-party audited reports on any sustainability issues that affect the company including a net-zero transition plan and sustainability risk management strategies. It applies to EU companies that meet two out of three of these requirements: 40 million euros in revenue, more than 250 employees, and 20 million euros in assets.
- European Sustainability Reporting Standards: The ESRS will apply to the same groups of companies as the CSSD, and it mandates the topics that companies have to disclose in their ESG reports such as climate change, resource usage, modern slavery, and more.
4. Non-ESG products losing investors. ESG investing is set to surge in the coming years, as more and more asset managers prioritise ESG metrics when making investment decisions. A new report by PwC found that the growth rate of ESG funds will continue to increase, with the value of ESG assets under management set to jump to almost US $3 trillion by 2026, up from US $1.1 trillion in 2021. Nearly 90% of surveyed limited partnership investors planned on increasing their ESG investments, and 86% of asset managers are saying the same. Finally, over three quarters of the private market investors surveyed intended to end all non-ESG investments.
5. Effective workplace wellbeing policies. Mental health awareness and employee’s expectations of their organisations regarding workplace wellbeing are both growing, with a survey by the Executive Development Network finding that over 80% of workers prefer working at organisations with a “progressive company culture”. In order to meet these expectations, companies must understand that a blanket one size fits all approach will not be sufficient as every employee faces their own challenges and stressors. Women and ethnic minorities in particular are the hardest hit by the current global cost of living crisis, while the negative impacts of the pandemic on women in the workplace has been well documented as well. Employee wellness should not be a perk or side benefit, rather it should be integrated into the organisational culture as a whole. Happy and healthy employees are more productive, boost workplace morale, and reduce turnover rates.
Ira Srivastava is Competent Boards’ Program Coordinator. Follow Competent Boards on LinkedIn.
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