This is a transcript of the podcast Danesmead ESG’s Daniella Woolf and Harriet O’Brien on the evolving nature of ESG disclosure and reporting, a discussion between GRIP’s commissioning editor Jean Hurley, and Danny Woolf and Harriet O’Brien of Danesmead ESG.
[INTRO]
Jean Hurley: Hello listeners, I’m Jean Hurley, commissioning editor at GRIP. Today on the GRIP podcast, we are here to discuss the ESG disclosure rules in the US and the UK with Daniela Woolf and Harriet O’Brien of Danesmead ESG.
Welcome Danny, Harriet. I’m delighted you could join us. Please introduce yourselves and give our listeners a brief overview of what you do and your expertise.
Danny Woolf: Thank you. I’m Danny Woolf. I founded Danesmead ESG, almost five years ago.
Beyond that, I have a background in hedge funds and banking as well as sustainability. Danesmead ESG provides ESG advisory and outsourced services, primarily to investment managers and their portfolio companies.
Most of the work that we do relates to ESG regulatory compliance, so alignment with and reporting on the regulatory and voluntary frameworks such as SFDR, CSRD, PRI, TCFD, all the acronyms, some of which we’ll talk about in more detail today.
Jean Hurley: Thank you.
Harriet O’Brien: I’m Harriet O’Brien, and I’ve been with Danesmead ESG for about three years. And my background is in climate action and sustainability. So I’ve spent a long time working with companies and cities, to help them develop climate action plans and think about their resilience and their climate related strategies.
Jean Hurley: That’s great. Thank you very much. So, Danny, let’s set the scene and look at regulatory reporting in the light of labelling and marketing requirements from the UK’s FCA and also from the European regulator, ESMA.
Danny Woolf: Yeah, let’s start with the FCA. We’ll start with the naming and marketing rules, which are just one element of the FCA’s sustainability disclosure requirements, the SDR and investment labels regime, which was published at the end of last year.
So under these rules, firms can use sustainability related terms and product names if you’re using one of these product labels, or if the fund has sustainability characteristics and the name sort of accurately reflects those characteristics. So you’ve basically got to be very clear about what you’re doing.
Now, the naming and marketing rules, which is the piece that sort of governs this, the deadline for this has very recently been extended from it was due to come in this December, and it will now be April 2 next year. So there’s a little bit more time on this, which frankly just reflects the fact that there’s quite a lot more to do.
So the FCA has very much acknowledged that especially for firms seeking to use an investment label under SDR, or for those that need to change names of their products because they don’t want to kind of meet certain requirements, there is additional time is just needed to sort of comply with these higher standards. So this temporary flexibility has been given for firms intending to use these labels or change their names.
So that’s the big thing that’s happening in the UK at the moment.
Notably, I’d say that important to note though is a big part of the SDR is very focused on firms who are marketing to retail investors, and a lot of this stuff doesn’t necessarily apply to those marketing to institutional investors, which captures a fair portion of the funds industry.
Over in Europe, SFDR, the Sustainable Finance Disclosure Regulation that’s been in place since beginning of 2021. So this has been well, well bedded in now. And this sets out disclosures that are required for funds that are making sustainability claims. Now, I think everybody knows that SFDR was intended to be a disclosure regime.
But it’s broadly been used by the market as a labelling regime and the EU Commission has realized that and recognize that. So last year they conducted a review of kind of the future of SFDR, which concluded almost a year ago, sort of asking, among other things, but importantly, whether SFDR should implement these formal product labels.
So the market responded and they’ve kind of shared initial feedback. But this summer, there’s been two really, really important updates on this. So the first thing was that the ESA, the European Supervisory Authorities, which includes ESMA, they provided feedback, sort of suggesting that two distinct product categories should exist, which would replace what we currently know as Article 8 and Article 9.
And those categories, they sound familiar to those who are aware of the FCA’s SDR product labels. So we have sustainable, which is for those that are investing in companies that are already environmentally or socially sustainable, and then transition for those that are not yet but are on the path to becoming so.
Then there would be various different KPIs that you would have to report on and criteria to use these labels.
So that’s the first piece, which I think is quite strong and it sounds like there is a lot of support for that direction.
The second thing that happened shortly after that was ESMA sort of added to that, they kind of, you know, provided further recommendations, building on those, the joint ESA’s opinion.
And the most notable thing that they’ve recommended to the EU Commission for their consideration is the proposal that all financial products should disclose some kind of minimum basic sustainability information.
And that might end up being like a small number of sustainability KPIs on things like GHG emissions or impact on biodiversity, those sorts of things. But what’s important about this is that if that goes forward, this could bring all current Article 6 funds into scope for some kind of sustainability reporting, as well as the Article 8 funds and 9 funds. And there would have to be a very, very clear transition for how we would get from what we currently know as Article 6, 8 and 9 to these new kind of labels and disclosure systems. So it would be very interesting to see where this ends up.
It’s obviously up to the EU Commission to kind of gather all of these opinions and feedback and decide whether to take those recommendations on board. And we should know more on this next year.
Jean Hurley: Thank you. That’s very interesting indeed. So if we’re going to give some advice to firms on what they should be doing now to address these rules that are coming up, what would you advise?
Danny Woolf: So the UK asset managers, if you’re marketing products to retail investors and using sustainability terms in fund names, that is very, very important to make sure that you’re in compliance with these naming and marketing rules by April next year. I would imagine any organizations for whom that applies are probably already aware of that and are on top of it and making progress on that.
But it’s important to know that those sustainability related terms can only be used in product names and marketing, if they use those labels or comply with specific rules that will produce equivalent disclosures.
So that’s the kind of UK piece. For those in scope for SFDR, I think I’d probably just say it’s business as usual for now. There’s nothing specific to do. But do keep a very close eye on the potential changes in the coming months.
We expect there to be a transition to any new framework which possibly starts next year. But we’ll see a bit more and be able to plan for that next year.
Jean Hurley: Brilliant. Thank you. Harriet, looking across the pond, can you give us an update on the US reporting requirements and also climate legislation in California?
Harriet O’Brien: Yeah, sure. So a couple of years ago, the US regulator, the SEC, proposed its own set of climate related disclosure rules. So that’s equivalent to what Danny’s been talking about with the EU’s SFDR and the UK’s SDR. But we’re still waiting for those to be finalized due to ongoing legal challenges.
But in the meantime, there has been some sort of lower federal level, state level, there’s been some individual progress. So things like the California greenhouse gas emissions reporting requirements, as it’s known, and that very recently has just been given the go ahead to move forward as intended after there was a proposal that it should be delayed and in some ways changed.
So that is going to go ahead. And just by way of background on what that includes, it’s known as SB 253 and SB 261. And it came into law last year.
These are two separate regulations, but broadly they require companies operating in California, to report, both greenhouse gas emissions, but also their climate related risks in the same way that in the UK would do TCFD.
It’s a similar sort of approach and the disclosures would be [similar as well], they’re expected from 2026. So this is actually a pretty, it’s pretty major change in the US where there is no other climate related legislation, and it’s got a pretty wide scope. It’s likely to impact about 75% of Fortune 1000 companies. And unlike the federal ongoing, not yet released rule, which focuses mostly on Scope 1 and 2 emissions, California rule will eventually bring in Scope 3. So it’s pretty advanced for the US.
Jean Hurley: So also in the US, there’s been some very vocal anti ESG states. What have been your observations on this?
Harriet O’Brien: Yes. So there have undoubtedly been a pretty vocal backlash. And that’s definitely had some impact. But what we see amongst our own clients is that there’s still a lot going on in the ESG space. And there’s a lot of US investors who want to see ESG in investment funds. And then a lot of US managers still need to incorporate ESG to satisfy EU investors or EU regulations for those in scope. So yes, there has been a bit of a shift in how ESG is seen.
But many are continuing as before. And they’re just not all talking about it in the same way. So for example, some are not using the term ESG so much anymore and might prefer terms like impact or energy transition or sustainability, just trying to literally avoid the term.
And some are just avoiding talking about ESG so openly. So, you know, removing some of the references in their publications or minimizing the space on their website that is occupied. But generally speaking, we haven’t seen as big a drop in ESG activity as the kind of media might suggest.
Jean Hurley: You were saying about the litigation on the SEC rule. Any thoughts about when we’ll hear more about that?
Harriet O’Brien: No thoughts on when we’ll hear more. But the background to that is that rule, as many of these things do, started out with quite a broad scope. It got slightly watered down. And some of the more stringent elements stripped out. Then it received a lot of opposition. And that was from both sides, but mostly on the Republican side. And this has led to it being effectively paused while these legal challenges are going on. So the SEC are saying that very publicly that they’re pushing forwards and that they think it’s important and that investors want it.
But there is still a lot of opposition and we’ve no idea how long that may take to go through the courts. And then, you know, there’s the election.
We don’t expect to see any movement on that before the election. And then after the election, that will obviously depend on who is in power and how they feel about this. So we won’t know how that progresses for a while. It’s basically on hold.
Jean Hurley: What frameworks and rules should we expect from international standard setters?
Danny Woolf: Good question. There’s probably two key things to flag here. The first is EU legislation, but it has a sort of broader reach than EU companies.
It’s already enforced, but ultimately it will impact around 50,000 companies over the next few years, primarily targeting corporates rather fund structures. But there is a little bit of overlap.
It includes public and private companies, and it includes EU and non-EU companies meeting certain criteria. And essentially what CSRD does is that it mandates reporting in line with a set of standards called ESRS, the European Sustainability Reporting Standards, that is a set of mandatory and topical sustainability metrics and standards.
CSRD requires a number of fairly onerous steps for companies who are in scope. The first is obviously figuring out if you are in scope and if so, which elements and when you’re required to report as there is a phased introduction approach. That alone can be fairly complex, and we do sort of recommend getting a bit of legal guidance on the scoping.
CSRD has this concept of double materiality analysis, which is an exercise you have to go through to establish exactly which standards and which metrics you’re then required to report on.
What’s interesting about this is that the double materiality element is sort of asking you to assess impact materiality, so your impact as a business on the outside world, on people and the planet, as well as financial materiality. So the impact of these sustainability risks on your business.
And then the conclusion of that sort of then feeds into exactly what you have to report on. You then have to obviously go and collect all that data, fill in any gaps. There is an assurance process, so the ultimate report and data needs to be assured a third party.
Then the report that you publish, which is sort of in your annual report, has to go through a digital tagging process so that it can be machine readable. So every metric gets tagged with a little signal that can be read by software.
So a number of quite big things have to happen for any company and scope for that. So our recommendation on this is to kind of check quite soon if you are in scope and when.
There’s quite a lot of work to do, and you sort of almost have to work backwards from your reporting year to your data collection year, DMA process, kind of scoping and so on. So it’s worth looking at this one now and planning ahead.
More globally, we have the ISSB, which is the International Sustainability Standards Board.
And this is expected to become the kind of go-to international standard for sustainability reporting. This integrates other frameworks that we already know well, such as TCFD, the Task Force for Climate-related Financial Disclosures, and SASB, which is the Sustainability Accounting Standards Board, plus a couple of other elements. So it should hopefully feel quite familiar to organizations already and hopefully not a massive leap, but this is still a new framework and it will take time to get used to it. So what we’re seeing here is, so this is not a piece of regulation in itself, this is simply a framework, but the expectation is, what we’re starting to see is that governments are adopting this framework as the kind of key sustainability reporting framework in their jurisdictions.
You can kind of track on the ISSB website which ones have completed their consultations on it and where they’re at.
We do expect this to be used by key regulators in the coming years. The UK has already sort of completed a sort of information gathering consultation on it, so we expect that to come soon.
Jean Hurley: Thank you. So there’s a lot to do. And there’s been reports that say that ESG disclosure is becoming too much of a burden on firms. What’s your experience of this with your clients?
Danny Woolf: Ultimately, this is what keeps us really busy and this is a really, really fair point. So, you know, and it is a criticism that we’re hearing more and more and we fully understand the regulatory compliance cost and burden is huge and kind of added to that. Like, is it really having an impact? Is it really, you know, kind of generating any actual outcomes or is it a lot of just data in and data out?
I recently had a real estate investor saying that their reporting burden has gone from about four or five different frameworks to 16. So there’s clearly a need to kind of address this point. The good news is that there is, of course, kind of work going on to look at the interoperability between frameworks like ISSB and CSRD and really across all sustainability reporting. There is a lot of effort that’s going into this. Where there are overlaps, you wouldn’t necessarily have to report on multiple different frameworks.
We’re also seeing this between things like the PRI, which is a voluntary framework TCFD and UK stewardship code. So they’re also looking at where duplicative reporting might be taking place. And next year, part of the mandatory reporting for the PRI includes actually declaring what other reporting you do so they can gather that information and try and do their best to consolidate where applicable. But that’s going to take time.
I think the danger is that people and companies will just get really fatigued by the level of reporting and disclosure and the kind of lack of action taking place. But I think what we feel is that the first step in any movement like this is that you do have to be able to kind of measure and disclose this information. You have to know what you’re collecting and know what, kind of how bad it is if you like, in order to kind of figure out where to take action and what to do.
And it is exciting that we’re seeing things like CSRD, like I mentioned, the double materiality requirement, companies need to take into account their impact on people on the planet and report on that as well. And that’s a really important first step towards taking action. But I think regulators need to be quite careful here.
We’re definitely seeing feedback that more needs to be done on action, not just reporting, and that reporting does need to be consolidated where possible. I think one danger I see is that firms only have a certain amount of budget, resource, tolerance, effort in the area of sustainability. And at the moment, a lot of that is going into this reporting and compliance piece.
And the risk is that they’re putting so much effort into that that they’re not therefore putting budget and resource and effort into kind of actually making changes in their business and taking action on sustainability issues. So we’ve got to be super careful that we don’t lose sight of what it’s all about.
Jean Hurley: Thank you. So Harriet, would you say that ESG as we know it, following on what you were saying earlier in the US as well, it’s going to get deprioritized, and will this have an impact on the investment into net zero?
Harriet O’Brien: I wouldn’t say it’s necessarily getting deprioritized, but it is evolving. So we’ve seen shift in the reasons that people are doing ESG, not necessarily in the amount of things being done. So, for example, while a few years ago, the focus was a lot on doing ESG because investors were asking firms to do it.
But what we’ve seen is a kind of a shift towards regulatory compliance. So the investors still are still asking, but the nature of the overall approach is now a lot more about regulatory compliance.
We think that that’s only going to increase with these rules that are coming through like CSRD and changes to SFDR, there’s only going to be more of that.
So we don’t think it’ll get deprioritized necessarily, and well, people probably think that ESG is here to stay, it’s just the way that it is going to change.
I think on the net zero point, again, probably not, you’ve got to bear in mind that we in the UK and in many countries have legally binding to get to net zero. And that is continuing to drive innovation and progress.
And even if there are a lot of issues along the way, and perhaps that progress isn’t as fast as we’d like it, you know, the transition is happening. So we think that investment will continue to be focused there. And so we expect ESG to have a place to kind of marshal that. But yeah, it’s evolving, it’s becoming more nuanced.
That’s, I think, what you would expect from an industry that is growing and maturing. I think it’s also worth noting, sort of on that point, that what we’re seeing is a kind of more sophisticated and nuanced approach to ESG.
So that could be around things like how firms are collecting and analyzing their climate related information and reporting on their climate related risks, but also kind of moving beyond just looking at climate and thinking more about things like biodiversity and nature on the environmental side. Also, there’s a lot going on around human rights and labour issues on the social side. So that’s all kind of good momentum.
So we think, yeah, you know, it’s still happening. It’s just, it’s a changing environment.
Jean Hurley: So you say that the reports, that say the companies are doing less on sustainability. You think they’re just making headlines and that’s not what’s happening in practice?
Harriet O’Brien: It’s a difficult one you know, that, yeah, there have been a lot of reports saying that companies are not doing as much. But then we’ve also seen an equal, if not greater number saying that companies are continuing to do more on sustainability. But some are doing it perhaps more quietly.
But we definitely think it’s still, you know, on the agenda and important to customers, to investors, everyone really. But I think probably how companies are approaching it is changing.
And in part, that’s probably to do with the sort of anti ESG backlash. But on the positive side, there’s also the kind of regulatory environment.
So, for example, around greenwashing. So this is causing companies to kind of reassess what they’re publishing and how they’re talking about what they’re doing, which is, you know, mostly a good thing because they’re now having to substantiate what they’re saying, which they didn’t really have to before. So now it’s, you know, we’re moving to a clearer, more sort of careful place, maybe.
And that’s it’s a sort of tied in with this idea of green hushing where companies deliberately stay quiet on what they’re doing around climate avoid being scrutinized or drawing attention to to what they’re doing, which, you know, may not be absolutely perfect. And so they may have some criticism in the media.
But the problem with this is that, you know, if everyone stops talking about what they’re doing, then the result is that the overall level of ambition slows down and momentum really, you know, starts to dwindle and that impacts on what on outcomes and on impacts on climate action.
Broadly, no, we don’t see it falling off the agenda. And if anything, it’s sort of becoming more embedded in different parts of businesses rather than kind of sectioned off in the sustainability team where no one else knows about it. But, you know, it’s, again, we think it’s it’s changing rather than falling off the agenda.
Jean Hurley: So similarly, I suppose it would be that, you know, the recent survey where some CEOs, said that AI has been cited as being far more important than ESG. Do you think it’s just because it’s one of those buzzwords now?
Harriet O’Brien: Yeah, I mean, it’s new, right? And new is shiny. But, you know, yeah, you could not miss the huge amount going on around AI at the moment. Undeniably, it’s the, the latest hot topic.
But we don’t think ESG has gone away. And, you know, probably more that more people now have got their heads around ESG a bit and are generally just getting on with it.
We don’t need to talk about it in quite the same way, whereas AI is kind of the next big thing.
But, I mean, we also think that AI could be really useful to ESG for things like collecting and analyzing data, reporting, identifying greenwashing. So, yeah, we expect to see plenty more of our AI for sure. But hopefully in a way that supports and complements ESG.
Jean Hurley: Thank you. So, Danny, looking ahead, how do you see the future for ESG and ESG disclosure and reporting?
Danny Woolf: I mean, to echo Harriet’s point, really, yes, we have seen these reports about ESG falling down the agenda for certain company boards. But what we’re seeing in practice is sort of that companies are doing more, but they’re shouting about it less. And it’s very much just sort of become the new normal.
And it’s an expectation now. It’s not a kind of differentiator. We definitely think it’s here to stay. I think there’s two big drivers behind that. One is investors and consumers recognise the kind of real world impact of ESG issues and the sort of long term need to address sustainability issues across the globe, as well as the potential impact it has on economic factors. So we think there is a big driver there still.
As we’ve sort of said through the theme of pretty much everything we’ve said today, regulation has very much acted to ensure that ESG is here to stay. I guess I personally think it’s quite a good thing that ESG has just become a sort of normality now.
And it sort of shouldn’t be the outlier. It shouldn’t be the differentiator. It should just be baked into business strategy for long term sort of thinking. And not just a hot topic that kind of comes and goes and eventually fades away.
It’s important that it has become the new normal. And you’re always going to see these kind of spikes in new concepts, but I’m quite excited that we’re sort of it’s levelling off in a way that it’s just becoming business as usual.
Jean Hurley: Great! Danny, Harriet, it’s been great having you on the GRIP podcast. Thank you for your time and sharing your insight on ESG. And thanks to the listeners for tuning in.
