Teneo U.S. ESG Roundup 12.14.23 | Teneo

This article explores key market developments related to ESG and their implications for companies and investors.

ESG in the news

The United Nations Climate Conference, COP28, concluded with a historic agreement to abandon fossil fuels and stop climate change. Representatives from nearly 200 countries agreed to take action to achieve, on a global scale, a tripling of renewable energy capacity and a doubling of improvements in energy efficiency by 2030. The agreement faced criticism from climate-vulnerable small island states, with Samoa leading negotiator , Anne Rasmussen. , saying: "We have achieved gradual progress from business as usual, when what we really need is an exponential change in our actions." US Special Presidential Climate Envoy John Kerry said: “For the first time at the COP, fossil fuels have been on the table as an important part of our negotiations. “The decision that emerged from this clearly encompasses transitioning energy systems away from fossil fuels to achieve net zero emissions by 2050. That is a clear and unambiguous message on one of the most complicated issues we face.”

• Teneo Conclusion: The agreement aims to keep the Paris Agreement's 1.5°C target within reach and recognizes the need to move away from (but not “phase out”) fossil fuels. It is now up to each country to implement policies to achieve these goals, and to stakeholders to hold countries accountable for doing so.

The European Parliament reached a provisional agreement on the EU's proposed Corporate Sustainability Due Diligence Directive (CSDDD), which outlines rules for businesses that require large companies to assess and address adverse human rights and environmental impacts in their value chains. The new rules will apply to EU companies with more than 500 employees and more than €150 million in global revenue and will also apply to non-EU companies with more than €300 million of net revenue generated in the EU. . The directive requires companies to adopt climate transition plans that confirm that their business models and strategies are aligned with the Paris Agreement. The requirements will need formal approval by the EU Council and Parliament before coming into force. In particular, the CSDDD excludes financial companies from due diligence on clients who obtain loans or make investments, and are only required to check for forced labor or environmental damage within their own operations.

• Teneo Conclusion: The CSDDD adds to an evolving set of global ESG disclosure requirements. Thousands of US companies are likely to be subject to the new EU directive, and the first disclosures for US companies will have to be made three years after the rules are finalized.

The second released its 2024 rulemaking agenda, which highlighted that the final climate disclosure (April) and proposed human capital management disclosure (October) are scheduled to be published sometime in 2024. The rules have faced significant pushback from Republicans since the SEC proposed them in March 2022. If Republicans take control of the Senate in 2024, Congress could repeal regulations issued after the first few months of 2024 under the Congressional Review Act. In November, SEC officials He suggested reduce some of the Scope 3 emissions disclosure requirements, which would be a significant departure from EU rules requiring Scope 3 disclosures if they are considered material.

• Teneo Conclusion: Chairman Gensler also argued that an SEC climate disclosure rule may ultimately serve as an exemption to EU disclosure rules that many US companies will be subject to; perhaps his best argument for those against the SEC implementing a final rule.

The European Union agreed on a new AI Law that regulates artificial intelligence, establishing a global benchmark for countries seeking to harness the potential benefits of the technology, while attempting to protect against its potential risks. The law imposes controls on systems like OpenAI's ChatGPT and Google's Bard, including transparency requirements and fines for companies that violate the rules. It would also dictate how law enforcement can use AI-powered surveillance, how it can be deployed in critical infrastructure, ban social scoring and AI used to manipulate or exploit user vulnerabilities, and affirm consumers' right to file complaints and receive meaningful explanations. The AI ​​Law still requires formal approval from EU member states and Parliament. The EU action follows the Biden Administration's Executive Order on AI, which was also broadly designed to harness the benefits of AI while mitigating the risks.

• Teneo Conclusion: Like global climate disclosures, AI guardrails will require alignment of global standards and will take time to develop. Generative AI governance has faced criticism that regulators have been too reactive to “worst-case scenarios” and have not proactively limited AI bias.

The Global Reporting Initiative and the European Sustainability Reporting Standards signed a memorandum which substantiates the benefits of the alignment achieved between both organizations and commits them to continuous collaboration. As part of the memorandum, a GRI-ESRS Interoperability Index has been made available to the public today as it is presented for approval at the December meetings of the EFRAG standards bodies. The tool establishes how the disclosure requirements and data points of each set of standards relate to each other, emphasizing the high degree of similarity already achieved and laying solid foundations for building a reciprocal digital taxonomy. The agreement also outlines common core principles and areas for further collaboration.

• Teneo Conclusion: “Interoperability” remains the buzzword for the remaining ESG disclosure frameworks, with GRI and EU CSRD in a strong partnership on a “dual materiality” disclosure standard. Meanwhile, the IFRS/ISSB ESG disclosure standard maintains its “single materiality” standard for its disclosure framework, creating a clear distinction for companies to consider as part of their ESG disclosure strategy.

Similarly, nearly 400 organizations have advanced the adoption or use of climate-related reports from the International Sustainability Standards Council at the global level. Corporate membership groups representing thousands of companies around the world have signed the statement, joined by more than 140 companies preparing public disclosures who also chose to demonstrate their support directly. More than 25 stock exchanges have also directly expressed their support, as well as the African Stock Exchange Association, which represents 27 stock exchanges, and the Arab Federation of Capital Markets, which represents 17 stock exchanges. ISSB President Emmanuel Faber said: “The signatories of this statement represent organizations of all sizes and from all continents. “We recognize this as a sign of the urgency behind our work and a confirmation that the ISSB Standards can offer a vital global solution to the need for better information on climate risks.”

• Teneo Conclusion: Supporting institutional investors include Neuberger Berman, Legal & General, Fidelity International, UBS, CalSTRS and CalPERS. After years of debate about having too many ESG disclosure standards, ESRS and ISSB (with SASB, TCFD, CDP and TNFD under the ISSB umbrella) are emerging as the two dominant (albeit competing) frameworks that are being widely adopted across the world.

They said it: ESG influencers speak out

Following the conclusion of COP28, President Biden saying, “Today, at COP28, world leaders reached another historic milestone: committing, for the first time, to abandon fossil fuels that endanger our planet and our people, agreeing to triple renewable energy globally by 2030, and more . While there is still much work ahead to keep the 1.5 degrees C target within reach, today's result puts us a significant step closer... The climate crisis is the existential threat of our time. But, as America has always done, we will turn crisis into opportunity: creating clean energy jobs, revitalizing communities and improving quality of life.”