15 February 2023

ESG Collection – 1 of 5 Insights

The ESG Collection: part one

  • Briefing

The ESG Collection is a series of articles in which our cross-sector team discuss current themes and topics high up on the ESG agenda for businesses. 

In part one of the series, we unpick the environmental pillar of ESG, covering a range of topics including climate change, energy use and efficiency, and nature. 

In this first insight, we've provided an overview of what's to follow in this collection.

The expectation for companies to align their business with environmental, social and governance (ESG) factors is on a rapid upward trajectory. Increasing stakeholder awareness of sustainability issues, and the impact that these can have on economic value, means that companies are coming under mounting pressure not only to tackle their negative impact on society and the environment, but to contribute positively to the community and the wider world in which they operate.

This heightened investor awareness and expectation is reflected in the increase, both in scale and scope, of mandatory ESG reporting requirements. Numerous investor-focused reporting initiatives have emerged, providing a framework for the type of information that businesses should disclose. Arguably the most important of these to date have been the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD Recommendations), which were published in June 2017. They seek to address all aspects of an organisation's climate-related policies and processes under the four lenses: governance, strategy, risk management, and metrics and targets. The TCFD Recommendations are supported by over 3,800 organisations, including more than 1,500 financial institutions, responsible for assets of $217 trillion. They are recognised globally as the "gold standard" for climate-related disclosures.  

In 2021, the International Sustainability Standards Board (ISSB) was launched and tasked with developing "a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets." In March 2022, it proposed two sets of standards (one focused on climate-related disclosures and one on general sustainability-related disclosures). The standards, which build on the TCFD Recommendations and incorporate industry-based disclosure requirements, are expected to be finalised in Q2 of 2023.   

In the UK, in November 2020 the government released its plans for mandatory TCFD-aligned disclosures across the economy by 2025. The requirements apply to seven types of organisation:

  • listed commercial companies
  • UK-registered companies
  • banks and building societies
  • insurance companies
  • asset managers
  • life insurers and FCA-regulated pension schemes
  • occupational pension schemes.  

The government has confirmed that the ISSB standards will form the bedrock of the UK's Sustainability Disclosure Requirements.

In addition to climate-related disclosures, to support the UK's commitment to net zero by 2050, the UK is developing a framework for robust and credible climate-related 'transition plans', building on the TCFD Recommendations and the ISSB proposed standards. A transition plan sets out how an organisation will adapt as the world transitions to a low carbon economy. The UK will move to make the publication of transition plans mandatory.

In the EU, the package of climate and sustainable measures is well advanced. In particular, for corporates, the new Corporate Sustainability Reporting Directive (CSRD) will apply to around 50,000 companies and will impact non-EU companies in the future if they have significant EU activity. The requirements in the CSRD align with a number of aspects of the TCFD Recommendations.

Significant strides have also been made in capturing the impact a company has on nature (and vice-versa). Building on the success of the TCFD Recommendations, the Taskforce on Nature-related Financial Disclosures (TNFD) seeks to deliver a risk management and disclosure framework for organisations to report and act on evolving nature-risks, to support a shift of global financial flows away from nature-negative outcomes, towards nature-positive outcomes. The TNFD framework is due to be launched in September 2023.

Alongside the evolving regulatory landscape, ESG is fast becoming embedded as a 'business as usual' concern across many sectors. For example, given the importance of real estate in reducing overall global emissions, there is a growing commitment to so-called 'green leases', which hardwire certain ESG provisions into leases (such as measures relating to energy efficiency, waste management and water efficiency). 

In the realm of advertising, marketing and media, the UK's Advertising Standards Agency continues to regulate environmental claims made in advertisements and has taken action where there is evidence of greenwashing.  

Finally, climate change-related litigation has increased significantly in recent years with the target of such litigation extending beyond traditional defendants such as governments and fossil fuel companies to other areas of the economy (including financial services, motor, aviation, and food). New duties of care have emerged and legal action is also being taken against trustees and board members, who often wrestle with the challenge of reconciling their fiduciary/director duties with responding to climate change risks.

In this series

Environmental, social & governance (ESG)

The ESG Collection: part one

15 February 2023

Environmental, social & governance (ESG)

Building a net zero future in real estate: green leases explained

1 March 2023

by Clare Harman Clark

Environmental, social & governance (ESG)

The risks of making environmental advertising claims

Timothy Pinto looks at recent ASA decisions on greenwashing in the context of the UK's regulatory framework.

3 April 2023

by Timothy Pinto

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