Volume 1: CSRD

CSRD

Industry updates: 

Diversity, Equity and Inclusion rollbacks: 

Several major U.S. companies, including Ford and Deere & Co., have reduced their Diversity, Equity, and Inclusion (DEI) programs, initially expanded after the racial justice movements of 2020. Despite these efforts, the racial wealth gap has barely improved. Rather than abandoning Corporate Social Responsibility (CSR), businesses are shifting focus to less divisive areas like rural education and veterans' rights. This change reflects the growing impact of political polarization, as companies adjust strategies amid U.S. "culture wars" and align more with specific political ideologies, especially with upcoming elections in mind. Link to article 

ESG Investing Gains Ground Despite Political Headwinds 

Despite political pushback, especially in the U.S., a recent Morningstar survey shows ESG factors are gaining importance among asset owners globally. About two-thirds report ESG becoming more material over the past five years, with 42% of assets now incorporating ESG considerations, up 4% since 2022. This trend continues even as the U.S. House passes bills targeting ESG investing in retirement accounts. European firms are leading the charge, with 53% of asset owners viewing sustainability as aligned with fiduciary duties. Climate readiness, labour practices, and business ethics top the list of ESG priorities. However, challenges like data standardization and greenwashing concerns persist, reflecting the complex landscape of ESG investing in today's political climate. Link to article  

‘Retraced’ platform receives €15 million in funding:

Retraced, a platform assessing sustainability for over 15,000 suppliers across 150+ fashion brands, has secured funding to expand globally and enhance its AI-driven services. The funding will help improve its European Digital Product Passport and prepare for upcoming EU regulations. Investors see Retraced as a potential leader in supply chain transparency. CEO Lukas Pünder stressed the need to simplify sustainability management as regulations grow more complex. This new funding will allow Retraced to further develop its platform, helping fashion brands meet sustainability goals and strengthen supplier relationships. Link to article 

ESG Funds Embrace Fossil Fuels Amid Mixed Investment Flows 

Goldman Sachs' research on EU-regulated sustainable funds reveals a shift in investment strategies. More ESG funds are including oil, gas, and mining stocks, with over half now holding at least one oil and gas company. Despite this trend, sustainable equity funds faced outflows in early 2024, while non-ESG funds saw inflows. Conversely, sustainable fixed-income funds outperformed their non-sustainable counterparts in attracting investments. This data indicates a complex evolution in sustainable investing, as fund managers adapt to changing market dynamics and potentially broaden their interpretation of sustainable investments. Link to article 

ASIC Takes Legal Action Against Active Super for Alleged Greenwashing 

Australia's corporate regulator, ASIC, has initiated court proceedings against superannuation fund Active Super, alleging misleading ESG claims. The fund reportedly claimed to eliminate investments posing environmental and community risks, citing exclusions in tobacco, nuclear weapons, oil tar sands, and gambling. However, ASIC alleges that between February 2021 and June 2023, Active Super held 28 investments in these areas, including companies like Skycity Entertainment Group and Gazprom. The regulator also claims Active Super continued holding Russian securities despite promises to divest. This case marks ASIC's third greenwashing action in 2023, reflecting increased scrutiny on ESG disclosures in the financial sector.  

What the Heck is CSRD? 

In the boardrooms of Europe, a new acronym is making waves: CSRD. The Corporate Sustainability Reporting Directive isn't just another regulatory hurdle; it's a paradigm shift in how businesses communicate their impact on the world. As balance sheets expand to include carbon footprints and social responsibility, the CSRD stands as the EU's bold declaration that sustainability is no longer a footnote—it's the headline. 

The Corporate Sustainability Reporting Directive (CSRD) represents a significant advancement in the European Union's strategy to foster sustainable business practices and elevate corporate transparency. The CSRD aims to transform how companies disclose their environmental, social, and governance (ESG) impacts. Its objectives are comprehensive: to enhance the quality, consistency, and comparability of sustainability information provided by companies, thereby increasing corporate accountability for their environmental and social effects. By requiring more detailed reporting, the CSRD seeks to provide investors with reliable sustainability data for informed decision-making. 

Implementation of the CSRD follows a phased approach. As of January 1, 2024, large public-interest companies with over 500 employees, already subject to the NFRD, needed to comply. By 1st of January 2025, large companies not previously subject to the NFRD must report. From January 1, 2026, listed SMEs, small and non-complex credit institutions, and captive insurance undertakings will need to comply. Finally, from January 1, 2028, non-EU companies with significant EU operations will be required to provide a sustainability report. 

These standards are comprehensive, requiring companies to report on their strategies, targets, role of administrative, management and supervisory bodies, principal adverse impacts connected to the company and its value chain, intangibles, and how they have identified the reported information. Companies must provide both retrospective and forward-looking information, as well as qualitative and quantitative data. 

A key feature of the CSRD is the introduction of the 'double materiality' concept. This principle requires companies to report on two distinct but interconnected aspects of materiality: 

1. Financial materiality: Companies must disclose how various sustainability issues affect their financial performance, position, and development. This includes risks and opportunities related to climate change, resource scarcity, or social issues that could impact the company's bottom line. 

2. Environmental and social materiality: Companies must report on their impact on people and the environment. This covers a wide range of issues, from greenhouse gas emissions and biodiversity loss to labor practices and human rights throughout their value chain. 

This double materiality approach ensures a comprehensive view of a company's sustainability profile, catering to the information needs of a wide range of stakeholders, from investors to civil society organizations. 

Will CSRD Actually do anything?  

The introduction of the CSRD in Europe has sparked renewed interest in a critical question of corporate responsibility: Can mandated sustainability and ESG reporting drive meaningful change in business practices?  The momentum behind standardized ESG reporting is growing, from the SEC’s proposed climate disclosure rules in the U.S. to similar initiatives in Asia and Africa. 

Proponents argue that standardized metrics create a common language for sustainability, allowing better comparison across companies and industries. This standardization could influence investor decisions and corporate strategies by offering a clearer picture of a company's sustainability performance. For example, a 2021 study by the European Commission found that only 20% of companies in the EU were reporting on all the sustainability data that investors and stakeholders needed. 

Jane Stevensen, former Engagement Director for the Climate Disclosure Standards Board, highlights the importance of mandated reporting: "Mandatory reporting creates a level playing field and drives action. It’s not just about disclosure, it’s about driving change." However, critics warn that reporting alone doesn’t guarantee action. There's a risk that companies might prioritize enhancing their reports over improving their actual sustainability practices—a phenomenon known as "greenwashing."  

Smaller businesses face additional hurdles with these reporting systems, which can be resource intensive. For SMEs, which make up 90% of businesses globally, the costs of compliance might divert resources from meaningful sustainability initiatives. Striking a balance between rigorous reporting standards and not overburdening smaller players is essential to fostering genuine sustainability across all business sizes. 

The ESG reporting landscape is complex, with multiple frameworks in play, leading to calls for harmonization. Despite these challenges, the complexity has driven innovation in data management tools that could eventually streamline the process. An important yet often overlooked benefit of ESG reporting is its potential to address social issues like labor practices and gender equality. A 2020 study showed that the UK’s mandatory gender pay gap reporting in 2017 increased the likelihood of companies taking action to reduce their pay gap by 23 percentage points. 

As global reporting initiatives continue to unfold, their success will hinge on balancing standardization with the flexibility needed to address diverse sustainability challenges across industries.  

The CSRD, despite its promise, faces significant implementation challenges. It requires considerable resources from companies, potentially creating an administrative burden with uncertain value. Moreover, the directive and the broader European Green Deal family have been criticized for not fully integrating the most recent scientific knowledge on sustainability. The study suggests that while the CSRD is ambitious in scope, its true impact may depend on companies moving beyond mere compliance. Only then can it serve as a meaningful tool for ecological and social sustainability, though the race to adapt will inevitably create winners and losers.  

Read more! How can CSRD move companies strategically toward sustainability?  

Recommended Media 

First FT, by The Finacial Times 

This is an extremely informative newsletter that pops into my email inbox every day. The news is in a format that I can chew over whilst getting through breakfast in the mornings and help me go into the rest of the day with a better grasp on global affairs. 

David: 7/10 

The Intelligence, by The Economist

I’ve loved listening regularly to this podcast, by The Economist, over the past couple of months. The interviewers ask questions that get to the roots of the issues. I also love how they give such a range of stories. There will be stuff about finance, politics and global relations, upcoming tech and the occasional obituary. If bitesize news from around the globe is interesting to you, give this a listen!  

David: 8/10 

ESG Ratings Are Not What They Seem, by Bloomberg 

I recently watched this great video made by Bloomberg which explored the issues with current ESG ratings, specifically MSCI which is the largest ESG rating company. The main takeaway for me was the lack of understanding people have for what these ratings actually mean. For MSCI the lens of their system is actually the impact of the world on the company rather the impact of the company on the world. Really worth watching people!! 

George: 8/10