The reporting of environmental, social and governance (ESG) risks could encourage investments that address climate change targets, but a lack of standards raises reliability concerns.
DOI: https://doi.org/10.58248/HS32
In 2021, a key part of the European Green Deal entered into force, the Sustainable Finance Disclosure Regulation (SFDR).1 This is part of green finance regulations that will categorise investment products as sustainable or not, either dark green, light green or unsustainable (with activities classified according to impacts under the EU Taxonomy Regulation).2 The SFDR requires fund groups to provide information about the environmental, social and governance (ESG) risks in their portfolios alongside other financial risks. The EU’s 2014 Non-Financial Reporting Directive already requires all large public interest entities to disclose information on environmental, social and community matters,3 and its effectiveness will be reviewed by the EU this year.4 PwC predicts that assets in ESG investment products in Europe will reach €7.6 trillion by 2025,5 and these will be subject to disclosure requirements set by the European Supervisory Authorities.6 In 2022, funds will have to report on issues such as carbon footprint and investments in companies active in fossil fuel sectors. However, the deforestation requirements initially consulted on have not been included.7 The six UN Principles of Responsible Investment, set out in 2006 as a voluntary initiative to incorporate ESG into investment,8 had over 2,300 signatory organisations managing over US$80 trillion in assets by 2018 and has set out nine priority areas to 2027, including promoting climate action as a priority and aligning with the UN Sustainable Development Goals.9 Surveys of professional investors suggest that they consider ESG-related information key to determining whether a company is adequately managing risks from climate change, with the climate transition increasingly recognised as a central element of this assessment.10 A growing number of companies have pledged to reach net zero by a given date.11 For example, Apple has pledged carbon neutrality for its supply chain and products by 2030 despite producing 25.1 million metric tonnes of greenhouse gases (GHGs) in 2019. It intends to reduce emissions by 75% through the use of renewables, but the remaining 25% is accounted for by carbon removal or projects such as planting trees and restoring habitats to offset its remaining fossil fuel emissions. Sources of low carbon materials, such as carbon-free aluminium, have yet to be secured.12,13,14,15
The British Academy’s Future of the Corporation programme stated that the purpose of business is to profitably solve the problems of people and planet, and not to profit from creating problems. It has set out eight ‘Principles for Purposeful Business’. They include a principle that corporate investment should be made in partnership with private, public and not-for-profit organisations that contribute towards the fulfilment of corporate purposes, including addressing climate change.16 The Net Zero Asset Managers Initiative, launched in December 2020, has committed to supporting the goal of net zero GHG emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5°C; and to supporting investing aligned with net zero emissions by 2050 or sooner.17
The Energy Transitions Commission estimates that the additional investments required to achieve net zero by 2050 will be in the order of US$1 trillion to US$2 trillion per year, equivalent to 1–1.5% of global GDP. Achieving the right trajectory will require creating the investment environment through policies, regulations and working with financial institutions to channel investment, not only to ‘green activities’, but also for energy-intensive industries making their transition.18 For example, in June 2020 Amazon launched the Climate Pledge Fund designed to invest in “sustainable and decarbonizing technologies,” across a number of industries, such as transportation and logistics, energy generation, manufacturing, and food and agriculture, and has committed to reach net zero by 2040.19,20
Industries that rely on exploiting resources will pose specific ESG risks.21 Heavy industry (cement, steel, chemicals and aluminium) and heavy-duty transport (shipping, trucking and aviation) are together responsible for nearly one-third of global CO2 emissions and may require a range of initiatives and investments.22 Renewable energy technologies, including batteries, solar panels and wind turbines, will also require increasing quantities of metals.23 The OECD’s 2060 forecast for metals has projected an increase from 8 to 20 billion tonnes (+150%) a year, doubling the environmental impacts of extraction and processing by 2060.24 However, comprehensive analyses of metals’ sustainability are limited,25,26 with concerns around the security of supply for those classed as ‘critical materials’ (POSTnote 609).27,28,29
PwC suggests that sustained growth in ESG investment will be driven by four factors: regulatory change, the performance of ESG assets, increasing investor demand and growing societal awareness of ESG risks.2 However, the lack of global standards for corporate ESG disclosures means that the availability and quality of company information is often poor,30 and unreliable.31,32,33 Research also suggests one size fits all approaches to ESG may be less effective for delivering desired societal outcomes, and an approach tailored for different ownership and industry types may be needed.34
Some studies suggest firms’ ESG policy adoption initially enhances their ability to pursue innovation activities and eventually positively affects their value and performance.35,36,37,38
There is evidence of consumers adopting a more ethical mindset during the COVID pandemic, which may lead to more companies adhering to environmentally friendly practices and production.39
The International Financial Reporting Standards Foundation will launch its ‘sustainability standards board’ at the UN’s COP26 climate summit for setting out a ‘gold standard’ for ESG reporting.43
Experts have helped us identify 30 areas of change to help the UK Parliament prepare for the future.
Photo by American Public Power Association on Unsplash
The UK aims to achieve net zero greenhouse gas emissions by 2050. While industry support for the target is growing, some argue the target must be brought forward to limit global warming to 1.5°C.
Transforming the food system, to achieve all the UN SDG long-term goals, is challenging and will require a comprehensive, longer term approach to outcomes.
The effective ways of increasing agricultural productivity while minimising environmental impacts are debated, such as if biodiversity gains can be integrated into farming systems.
