Reporting: FCA confirms sustainability disclosure and labelling regime
The Financial Conduct Authority (FCA) has finalised the new sustainability disclosure requirements and a labelling regime for sustainable investment products; aiming to reduce greenwashing and improve trust in the market. Its announcements include an anti-greenwashing rule for all authorised firms to ensure the validity of sustainability-related claims, and, among others, product labels to help investors navigate ESG credentials. The rules apply to UK-based asset managers, although labelling and anti-greenwashing provisions also extend to UK distributors; non-UK market participants are therefore excluded. In addition, the FCA has introduced four labels for investment products, with the latest being “sustainability mixed goals”. In order for the label to be granted, at least 70% of the investments must match a product’s sustainability goal. The rules regarding greenwashing, labelling and marketing will become effective in May, July and December 2024, respectively.
Reporting: 2023 EY climate risk disclosure barometer
The EY Global climate risk barometer is a benchmark that scores the progress achieved in the number of recommended disclosures that companies make (coverage) and the extent and detail of each disclosure (quality) of climate-related disclosures globally. The analysis shows an increase in companies’ reporting on climate; however, businesses seem to be falling short of their carbon ambitions. The barometer illustrates that certain markets and sectors are pushing ahead with climate reporting, while others are lagging. In terms of disclosure quality, the Middle East and Southeast Asia have improved their performance vs last year but are still trailing behind Europe. Sector-wise, energy companies scored the highest for quality and coverage, closely followed by financial institutions. Overall, quality has improved across the board, with the most positive changes observed in real estate, mining and agriculture, mostly due to stakeholder pressure, according to the barometer. However, the report concludes that the pace and intensity of reporting are not progressing as quickly, with data and technology being recommended as potential solutions to the above.
Reporting: 14% of companies reduced carbon emissions in line with their ambitions, in the last five years
The study by CO2 AI and Boston Consulting Group (BCG) investigates the progress that businesses have made on emissions measurement and reduction globally. 1,850 executives with relevant responsibilities in the field, working at companies with at least 1,000 employees and $100m in revenues, were surveyed across 18 major industries and 23 countries. The survey found that only 10% of companies currently measure and report all their emissions, revealing no improvement relative to the 2022 survey. Furthermore, only 14% confirmed that they have reduced their emissions in line with their ambitions over the past five years. Companies that report reducing their emissions as set out in their commitments were found to display four notable traits: i) collaboration with suppliers and customers; ii) calculation of emissions at the product level; iii) harnessing of the power of digital technology in the emissions-management process; and iv) having a positive view on regulation.
Ratings and data: UK to unveil regulatory regime for ESG ratings industry
The UK government plans to regulate ESG rating agencies due to concerns about their unregulated status and influence on sustainable investment. Formal proposals are expected in January after a three-month consultation closed in June. In order to regulate ESG agencies, the Treasury is considering whether new legislation needs enacting and new regulatory bodies need creating. Expanding the remit of the FCA, which is currently encouraging the industry to adopt a voluntary code of conduct, is also being considered as an option. For context, the voluntary code is due to be published in December 2023; in July 2023, the draft set out that providers should avoid conflicts of interest, which can be achieved through transparent publication of their methodologies, alongside other reforms.
Ratings and data: European Central Bank (ECB) paper studies ESG ratings’ effects on cost of debt
The study aims to understand how debt investors incorporate ESG ratings into investment decisions and the resulting implications for certain US firms’ cost of debt. It utilises an April 2020 methodology-driven change in ESG ratings by Refinitiv ESG and its effect on loan market-based credit spreads using a sample of US corporates. In summary, the paper finds that loan spreads of downgraded ESG-rated firms augmented by around 10% compared to non-downgraded ESG-rated firms following amendment in Refinitiv’s methodology; the firms were within the same industry, rating category, and month. The research concludes that the rise in spreads was not driven by firms’ increased default risk, rather by investors’ demand for a greater premium; furthermore, the impact on credit spreads was found to be temporary, as firms’ increase in cost of debt was followed by a decline around two months post the methodological change.
Ratings and data: 2024 MSCI ESG Ratings model consultation
MSCI ESG Research hosted a virtual event on 7 November to walk through the proposed changes in their ratings model. Investors and rated corporate issuers were invited to actively participate in the consultation process (consultation ended on 8 December). The key areas of focus for the proposed changes were: i) MSCI ESG industry materiality map, aimed at determining the relevance of ESG key issues to each industry; ii) ESG ratings industry peer set groupings, with proposed adjustments to groupings; and iii) the introduction of “buffer zones”. The proposed introduction of buffer zones around the letter rating band thresholds, which MSCI already utilise in methodologies unrelated to ESG ratings, is intended to enhance the stability of ESG ratings.
