The Sillion Briefing 14.06.2024
Need-to-know corporate sustainability and ESG news, delivered fortnightly
In this edition...
SDR comes into force
Businesses against offsets
MEPs threaten Green Deal
Shein targets LSE
Insurance industry lagging
AI energy demand
Sillion launches State of Sustainability Communications report
Earlier this week, Sillion released a comprehensive report on sustainability communications in the UK, designed to equip communications leaders with essential insights for the sustainability transition.
Based on a survey with 250 industry professionals, the findings highlight the need for upskilling in sustainability communications, enhancing stakeholder interactions, and integrating sustainability into business models.
Read the full report here.
Regulation
SDR, the UK’s flagship sustainable investment ruling, comes into force
The FCA’s new Sustainability Disclosure Requirements (SDR) entered into force on the 31st May. This new regime, which can be found in full here, is designed to help institutional investors and other consumers navigate the market for sustainable investment products. It includes a so-called “anti-greenwashing rule” aimed at ensuring all sustainability-related claims around a financial product are fair and accurate. Similar to the EU’s SFDR, SDR introduces four investment labels – Impact, Focus, Improvers and Mixed Goals – accompanied by required disclosures, which firms can use to demonstrate the sustainability qualities of their products.
The implementation of SDR is an important moment for sustainability finance in the UK, and reflects increasing rigour around the allocation of sustainability-minded capital to deserving companies and funds. And as an FCA regime, it carries real weight, with a partner from law firm Charles Russel Speechlys commenting that “we are likely to see a significant uptick in regulation and even litigation” arising from the ruling.
No offsets please SBTi, say 3 / 4 of businesses
Ripples from the SBTi’s controversial statement on offsets, which floated the idea that companies might be able to use more offsets than currently allowed to reach scope 3 targets, continue to spread – you can read about the fallout in our briefing here. Central to the controversy is that using carbon offsets to reach scope 3 would be an ‘easy way out’ that would obviate the hard work undertaken on these reductions by companies so far. While this would make reaching targets much easier and less expensive, 75% of 180 businesses surveyed by Edie said that they didn’t believe that the SBTi’s updated Corporate Net Zero Standard (CNZS), which is still in the works, should allow more offsets than it currently does. This implies that companies would rather do the hard work to reach scope 3 than fall back on the carbon offsetting market, a space which is undergoing necessary changes to improve its general trustworthiness and the quality of the average offset. Uncertainty around offsets is reflected in their declining popularity, with data last month showing that the carbon market transaction volume dropped by over 50% year-on-year in 2023.
Government
MEPs threaten climate agenda and Green Deal
The European parliament elections have signalled strong gains for the far-right and centrist parties in a result that has cost the Greens a quarter of their seats. While the full impact of the election results is yet to be seen, analysts have suggested this outcome may complicate the passage of the climate policies required to achieve the EU's 2040 climate goals.
The atmosphere has shifted significantly since the 2019 elections when Ursula von der Leyen, the then-new President of the European Commission, unveiled the extensive initiatives of the EU's Green Deal. Recent developments have seen a relaxation of regulations concerning packaging waste and environmental due diligence. Documents seen by the Financial Times indicate member states are now turning their attention to the green claims directive amid concerns that the proposed verification process for green claims could burden companies, which are already grappling with stricter environmental reporting and more stringent pollution and waste regulations. Only four countries, including Germany and Austria, have not backed the loosening of the rules to a more “simplified procedure”. While it is early days for the new European parliament, this shift in tone signals that there may be challenges ahead to approve, implement and sustain robust climate policies.
Finance
Is Shein in? Fast fashion giant targets LSE listing
Following plans to list in New York being halted by US-China tensions, Chinese fast fashion company Shein, valued at around $66bn, has turned its eyes to a London IPO. The FCA faces a complex decision around whether to grant the listing, with interests in reviving the London Stock Exchange’s flagging ability to attract listings balanced against a possible ESG nightmare: environmentally unsustainable fast fashion, combined with alleged links to forced labour within supply chains. Attitudes around the listing will reflect how far UK bodies are willing to compromise on sustainability characteristics. Labour MPs have met the retailer, with a spokesperson commenting that “the best way to ensure” good business practices was to have “more companies operating from and regulated by UK law.”
Insurance industry lagging on climate change
The second installment of the FT’s deep dive into the insurance industry has suggested that the methods of risk assessment used by insurance companies are failing to adapt quickly enough to the intensity and unpredictability of natural disasters linked to climate change. The traditionally one-year term of insurance policies, as well as a risk modelling focus on major catastrophic risks rather than the increasingly more regular but less catastrophic climate events, like storms, has left the industry exposed to the unpredictable nature of climate challenges.
In the US, these challenges are causing insurers to raise premiums or leave high-risk markets entirely, reducing the availability of affordable insurance and perpetuating broader economic consequences like lower property values and less tax revenue for communities. Steps are being taken to invest in new risk tools to better manage long-term impacts, but the industry generally requires a more collaborative approach across all parties, insurers, regulators, governments, and policymakers to support and intervene across an evolving risk landscape.
Four in five institutional investors now discussing transition plans regularly
New research from Lloyds Bank, which polled 100 decision-makers at UK institutional investors, found 4 in 5 UK are frequently having discussions on net zero transition plans with their clients. And it was found that investors were more likely to request transition plans from corporates in high-emission, hard-to-abate sectors including mining and manufacturing.
Sillion are specialists in transition planning. If you’d like to speak about your transition plan, or are considering following the TPT Framework, then be in touch.
Energy
AI energy demand delaying US shift from coal
The FT has been exploring how unreliable grids and the increasing energy demand for new technologies, like AI, are delaying the move away from coal in the United States. The IEA has estimated AI application ChatGPT requires almost ten times as much electricity as Google Search. It's a headache for the Biden administration, who have goals to lead in AI development, but it's not unique to the US. Across the pond, the UK’s National Grid has indicated the demand for data-centre electricity for AI is expected to increase six-fold over the next 10 years.
Calendar
Q4 2024 | SBTi: Draft Corporate Net-Zero Standard V2 Public Consultation
December 2024 | EU Deforestation Law due diligence obligations imposed
Q1 2025 | UK Sustainability Reporting Standards (SRS) published
FY24 reporting | CSRD: EU firms already subject to NFRD (and large non-EU subsidiaries) to report ESRS
FY25 reporting | CSRD: Large private companies to report ESRS
FY25 reporting | CSRD: Non-EU companies (incl. UK) to report ESRS for large subsidiaries
FY26 reporting | ISSB S1 and S2 standards become effective in the UK
FY26 reporting | Transition planning, likely through TPT framework, to potentially become mandatory through UK SRS
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