The European Union (EU) is widely recognised as a global leader in environmental, social, and governance (ESG) regulation. However, that regulatory initiative does not always translate into EU companies actually complying with the regulations. New anti-greenwashing legislation has resulted in increased scrutiny on the EU’s financial institutions, and the European Commission has found that inaccurate sustainability claims are still a huge problem. Since 2012, greenwashing has been steadily rising as investors pay more and more attention to ESG factors when making their investment decisions. The most common forms of greenwashing are “cherry-picking, omission, ambiguity, empty claims, [and] misleading use of ESG terminology” according to the European Securities and Markets Authority.
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1. Value creation and ESG. Last week, McKinsey published the findings of a survey the company conducted regarding ESG topics. Over 1,000 individuals from almost 100 countries around the world responded, and over 66% shared that their companies have developed ESG strategies that have real impact and avoid greenwashing. Almost half of respondents shared that their companies have received financial returns on ESG investments in the past three years as well. McKinsey identified seven core organisational traits that lead to successful ESG strategies:
- Focusing on a growth perspective when developing ESG priorities and strategies.
- Strong stakeholder engagement and accountability to stakeholders.
- Identifying stakeholder priorities that the company already does well in and focusing on those.
- Naming an individual C-suite executive to collaborate with the CEO to develop ESG targets.
- Putting together a strong ESG department with members from all aspects of the organisation.
- Prioritising purpose and communicating that clearly with stakeholders and executives.
- Connecting compensation packages to achieving ESG targets.
2. Europe is more exposed to biodiversity risk. A biodiversity database launched by Impact Cubed found that companies in Europe are at a greater level of biodiversity loss-related risk than their counterparts in the United States and other developing nations. About US $28 trillion of market cap is at risk as the biodiversity crisis worsens, with about ⅔ of that amount at risk in developed countries. The algorithm developed by Impact Cubed takes climate change, pollution, resource extraction, and land use change into account. It found that Europe’s biodiversity impact is almost twice as large as the United State’s impact on biodiversity, despite Europe often being seen as a leader in climate change and environmental action. European companies are particularly at risk from land use change.
3. New EU climate transition laws passed. Last week, members of the European Parliament passed the Corporate Sustainability Due Diligence Directive (CSDDD) with a vote of 366-225 in favour. The CSDDD replaces the EU’s older corporate sustainability legislation. The updated directive includes a multitude of new rules that require organisations operating in the EU to include human rights and environmental impact due diligence in their policies and strategies and require them to take actions to address such issues in their supply chains, subsidiaries, and operations. Additionally, companies must now create transition plans to address their Scope 1, 2, and 3 emissions that align with the 2015 Paris Agreement’s goal of limiting warming to 1.5 degrees Celsius. Companies with over 1,000 employees must also connect the variable compensation of board directors to ESG targets. New penalties were also introduced for companies who do not comply with the new regulation.
4. COP26 financial alliances under attack. Last week, several large insurance companies pulled out of the Net-Zero Insurance Alliance (NZIA) that was launched at COP26 in Glasgow. According to Paddy McCully, Senior Analyst of the Energy Transition at Reclaim Finance, this was largely due to political pressure in the United States where the anti-ESG movement continues to grow. Five of the eight founding members have dropped out of the NZIA since attorney-generals of republican states reached informed them that they may be in breach of U.S. antitrust laws. This campaign has been hugely successful for opponents of ESG, and McCully believes the next target is the Glasgow Financial Alliance for Net Zero (GFANZ), the larger alliance that the NZIA falls under.
5. KPMG partnership streamlines emissions measurements. KPMG has partnered with Watershed, a software company that specialises in programs to help companies track and reduce their CO2 emissions, to help customers of KPMG’s advisory services gain deeper insight into their climate impacts. The groundbreaking technology can measure and analyse emissions from scopes 1, 2, and 3, and emissions from each scope can be broken down in great detail so that organisations know exactly where the emissions come from. With this wealth of data, companies will be able to develop more effective emission mitigation strategies. Watershed’s software also allows users to compare themselves to industry leaders and peers, so companies can focus on the benchmarks and targets most relevant to their operations.
Ira Srivastava is Competent Boards’ Program Coordinator. Follow Competent Boards on LinkedIn.Back To News & Views