ESG roundup: EU Council agrees position on CSRD

The Council of the EU, representing member states, has agreed a general approach to the proposed Corporate Sustainability Reporting Directive (CSRD), it relayed yesterday following a meeting of ministers in the Competitiveness Council.

The next step will be for the member states body to negotiate with the European Parliament, with a view to reaching an agreement on the Directive at first reading.

Olivia Grégoire, French minister of state, said: “The adoption, under the impetus of the French Presidency, of a common position by the Member States on this text represents a major step forward for the green transition of our businesses.

“This is a further step towards more responsible capitalism. Europe will be a future reference point for non-financial standards.”

The Council said that its text amended the scope of European Commission’s proposal to ensure that reporting requirements are not too burdensome for listed SMEs (since the obligations do not apply to other SMEs) and that they have sufficient time to adapt to the new rules.

The Council’s text still requires sustainability reporting to be in electronic format, but provisions obligating non-listed companies subject to the CSRD to publish their accounting information in European Single Electronic Format were deleted.

FCA writes to credit rating agencies

The UK’s Financial Conduct Authority (FCA) has written to credit rating agencies (CRAs) to communicate its expectations about what they should do to minimise risks to consumers, market integrity or competition from failures to meet regulatory requirements.

The letter was not focussed on matters pertaining to environmental, social and governance (ESG) investing, but made a few points in this regard.

It said CRAs should make clear where ESG-related product offerings are not credit ratings and sit outside the FCA’s remit, and that where CRAs were sharing resource and data ‘across the regulatory perimeter, there should be appropriate governance arrangements and management of conflicts of interest”.

The FCA also said it expected CRAs to disclose ESG risk factors according to their methodologies.

In June last year the FCA asked for feedback on whether it should regulate ESG data and rating providers. It is due to publish a feedback statement on this and other topics, in the first half of last year.

In the EU, the securities markets watchdog is seeking evidence about the market structure for ESG rating providers in the bloc. It separately recently reported having found “striking” divergences in CRAs’ ESG disclosures.

New framework classifies climate risks at firm level

The Centre for Climate Finance & Investment at Imperial College Business School has developed a framework for classifying climate risks at the firm level, as opposed to the macro-economic level.

The main advantage of this approach, according to the developers of the taxonomy, is that investing and lending decisions are likewise made at the firm level.

“Quantifying climate risks and pricing them appropriately has become a central goal of climate finance,” wrote Bob Buhr, honorary research fellow, in the report. “But it cannot occur unless risks are properly specified at the appropriate level in the first place. One does not, for instance, invest in or lend to the chemicals sector (except in index funds); one invests in or lends to a specific company.”

The authors also said that existing “green” taxonomies, no matter how well-constructed or well-intentioned, shared an inherent shortcoming, namely “they speak to what investors should do in the future, but not to the firm-level costs of adopting green adaptation or transition measures, particularly when there are significant non-green assets at risk”.

The framework encapsulates climate risks in terms of relatively traditional climate risk categories (physical and transition) and an additional category: natural capital risks.

The latter category, according to Buhr, represented an entirely novel concept and a first attempt to codify such risks into an organised taxonomy.

“In essence,” he wrote, “they constitute risks to asset values, profitability, cash flows, or margins from natural events that may be accelerated as a result of some form of natural capital depletion or disruption.

“The four major indicators chosen – subsidy loss risks, depletion risks, boundary condition risks, and geopolitical event risks – are, in fact, all manifesting themselves at present. We believe these four general metrics accommodate the wide range of natural capital issues currently unfolding, many of which are receiving increased attention from investors.”

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