Is That Convergence (on ESG Reporting) I See?
October 25, 2022
The objective of ESG reporting
The primary objective of reporting on environment, social, and governance (ESG) performance is to allow investors, regulators, and stakeholders a means to understand how businesses are addressing the risks, and taking advantage of the opportunities, related to ESG issues, including climate change. For example, businesses that can demonstrate they have mitigated the physical and transitional risks of climate change, or have invested in solutions addressing climate change, create long-term value for their organizations and shareholders. That value will be rewarded by continued access to capital, less regulatory burden, and acceptance in the marketplace.
The challenge with ESG reporting
While the objective seems relatively straightforward, good reporting practice is riddled with complexity and challenges. There are multiple and competing reporting frameworks, standard setters, disclosure platforms, software providers, and rating agencies. Just consider the acronyms of the major reporting standards and frameworks: GRI, CDP, IIRC, SASB, TCFD, ISSB, TNFD, UN SDGs. Providing guidance and clarity to businesses on which frameworks bring the most value is a challenge that companies, their reporters, and users face on a consistent basis.
Is that light I see at the end of the tunnel?
Last week the global consulting firm KPMG published its survey of sustainability reporting for 2022 – “Big Shifts, Small Steps” (October 2022) (link) – in which summarizes its exhaustive review of global sustainability reporting practices.
KPMG found that the Global Reporting Initiative (GRI) is the most commonly used reporting standard, with increased adoption by the largest companies for non-financial reporting. They found that nearly half of the world’s largest 250 companies by revenue are utilizing Sustainability Accounting Standards Board (SASB) standards for financial-related components of reporting, with growing adoption outside of the Americas. And finally, they noted a massive growth in the adoption of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations, with almost two-thirds of the same largest companies observing and adopting TCFD with its focus on governance, strategy, risk management and metrics and targets.
Convergence is good for business
Ultimately, we have the ingredients in place to provide for clear, consistent, comparable reporting for businesses worldwide to report meaningful ESG-related information to their stakeholders and providers of capital: TCFD, with its focus on climate-related risks and opportunities at the strategy, governance, metrics/targets and management levels; GRI, with its focus on the material impacts of the economy, environment, and people; and SASB and ISSB taking that information and formulating the financial impact on long-term corporate value creation.
While there is still a long way to go, we seem to be on the right path.
Sustrio ESG Advisors helps clients make sense of the reporting frameworks by bringing clarity to the complexity.
Greenwashing claim against RBC: Does it help or hurt sustainability efforts?
October 18, 2022
Last week, environmental groups Ecojustice and Stand.earth, together with six individuals, made a greenwashing complaint to the Competition Bureau of Canada against the Royal Bank of Canada (RBC). The essence of the claim is that RBC had made misleading and false claims when asserting in its marketing that it is aligned with the 2015 Paris Agreement on reducing greenhouse gas emissions and combating climate change. Specifically, the complaint is that by being one of the largest lenders to the oil and gas sector, RBC is not aligned with the Paris Accord, and thus the material and false/misleading claim.
The Competition Bureau’s Senior Communications Advisor, Marie-Christine Vézina, has confirmed that an investigation into the alleged deceptive marketing practices has commenced.
The Competition Bureau will be looking to determine if, in promoting its business interests, RBC’s claims of being aligned with reducing emissions are material (likely to impact banking customers’ use of RBC’s services) and are false or misleading. The Competition Act RSC 1985, c. C-34 specifically instructs the Competition Bureau to consider “the general impression conveyed” by representations, so the Bureau will have to consider how a reasonable customer would be impacted by RBC’s representations.
As we continue to see more and more “greenwashing” claims globally, the Competition Bureau’s handling of this case will be closely watched with interest, as it raises significant issues.
One big question is, when a company makes an ambiguous claim that it is aligned with reducing emissions or makes Net Zero commitments, does that conflict with its lending to the oil and gas industry? Last week, Blackrock, the world’s largest money manager, launched a webpage committed to “setting the record straight” about how it handles investment decisions and environmental, social and governance (ESG) disclosures. It takes the position that investing in energy companies, as long as those companies disclose the risks and opportunities related to climate change, is not inconsistent with being committed to the principles of ESG or reducing emissions. RBC will no doubt take the same position regarding its lending.
Another issue for these types of complaints to the Competition Bureau by environmental activists is the old adage “be careful what you wish for.” The objective is clearly to stimulate more sustainable practices, including the reduction of GHG emissions. Many institutional investors and lenders take the position that they contribute to sustainability more directly by working with their clients to understand how they are addressing the risks of climate change and energy transition risks. In fact, with tools like sustainability-linked loans, financial institutions can financially incentivize energy companies to speed up their sustainability efforts and outcomes. If institutional investors and lenders were not investing in energy companies, they may lose this leverage. That may defeat the intended objective of environmentalists.
The Task Force on Climate-Related Financial Disclosures (TCFD) is working hard to have its members, including banks like RBC, move faster on sustainability issues and assisting clients align with the Paris Agreement. TCFD urges transparent self-reporting as it relates, among other things, to the emissions a financial institution’s portfolio (be it investing, lending, etc.) and institution holds. The intent is to clearly hold these institutions responsible for showing reductions over time. But as the Financial Times reported last month, several of the largest banks in the U.S. are considering pulling out of the Net Zero Banks Alliance over fears they could be exposing themselves to legal risk as a result of decarbonizing commitments. Again, in bringing greenwashing challenges, challengers will have to balance calling out greenwashing versus inadvertently causing certain institutions not to publicly report emissions at all.
And finally, these greenwashing complaints highlight the need for companies and organizations that self-report on their sustainability credentials to ensure they are getting sound objective professional advice on the legal risks that are at stake here. An ounce of prevention is truly worth a pound of cure.
Sustrio ESG Advisors provides ESG assessments, including advice on whether representations are in compliance with global reporting standards, and can help identify legal and regulatory risks, backed by almost 30 years of ESG-related litigation experience.