EU Parliament adopts key laws as part of ‘Fit for 55’ package

In our monthly Corporate ESG newsletter we breakdown the trending ESG* trades and themes, helping Corporates get ahead of the latest issues shaping the market.

Institutional Developments: Regulators / Standard setters

EU Parliament adopts key laws as part of “Fit for 55” package. The EU Parliament has approved the deals reached with member states in late 2022 on key legislation that forms part of the “Fit for 55 in 2030” package. The package plans to reduce greenhouse gas (GHG) emissions by at least 55% by 2030, in line with the European Climate Law. The EU Council will need to formally ratify the deal before it can come into force. Alongside phasing out of free allowances, the reform of the Emissions Trading System (ETS) improves on its ambition: it compels power generators and polluters to reduce emissions by 62% by 2030 along with creating a new separate ETS II for fuel used in road transport and buildings. This will price GHG emissions from these sectors in 2027. Other newly approved deals include the establishment of a new carbon leakage instrument in the form of the EU Carbon Border Adjustment Mechanism (CBAM), which aims to incentivise non-EU countries to increase their climate ambition; and a Social Climate Fund to combat energy poverty.

MPs warn that the UK is ‘falling behind the EU on ESG standards’. A group of MPs warn that the EU is outpacing the UK in delivering a joined-up approach to ESG disclosures, with the All-Party Parliamentary Group on ESG expressing concern that the UK is lagging behind. A new report from the Group notes that fewer than 10 MPs not associated with the Group have mentioned ESG in the past year in Parliament. It also states that while the UK is “ideally placed to become the world’s ESG standard bearer”, it “will not assume global leadership without a more joined-up policy infrastructure that addresses the inherent difficulties in ESG”. The report calls for the development of a single ESG strategy for the UK that would bring together existing standards, frameworks, and disclosure rules. A recommended starting point to develop such a strategy involved a consultation of ESG data, to collect information on how to make data more accurate and comparable.

PwC new research finds that 55% of global GDP is at risk from nature loss. PwC assessed the dependency of 163 sectors on nature, finding that more than half of global GDP is dependent on nature. This means around $58 trillion of global GDP is exposed to material risks relating to nature loss and degradation. The report concluded that most economic risk will occur, not in the operations of corporates, but in their supply chains, with the latter being at risk of most of their value being “wiped out” by ecosystem disruption. To prevent this from happening, PwC has called on businesses to develop and deliver credible, science-based strategies to give rise to net-positive impact through their operations and value chains.


Reporting: CDP's environmental disclosure system opens for reporting on plastics

As the Carbon Disclosure Project’s (CDP) global environmental disclosure platform opens for 2023 reporting, nearly 7,000 companies can now respond to requests from over 740 investors (worth $136 trillion in assets), to disclose their plastic-related impact. This is in light of significant risks posed by the plastic pollution crisis, in 2022, causing several large companies including Amazon, ExxonMobil and McDonald's, to face shareholder petitions for more disclosures on plastic waste reduction efforts.

Through CDP’s online disclosure platform companies from high-impact sectors such as chemicals, fossil fuels, food & beverage, fashion, and packaging are invited to disclose on the production and use of the most problematic plastics. This disclosure comes during ongoing negotiations for the Global Treaty on Plastic Pollution, in which corporate action is expected to play a critical role. 

Reporting: ISSB extends deadline companies on sustainability reporting to allow focus on climate disclosure

The International Sustainability Standards Board (ISSB) has announced that companies reporting under the new climate disclosure standards will be given an additional year for sustainability-related disclosure, to enable them to focus on climate-related reporting, which investors deem most urgent

Under these new reliefs, companies will be required to report on climate-related risks and opportunities in the first year of reporting, whilst having an extra year to provide: i) disclosure on other sustainability-related risks; ii) annual sustainability-related disclosures at the same time as the related financial statements; and iii) disclosure on Scope 3 emissions

The public consultation on an international standard for assurance of sustainability-related information is expected to open in the summer and extend into December, with the publication of the final standard anticipated for next year.

Ratings and data: S&P cautions against climate transition weighing on issuer creditworthiness

In a recent Sustainability Insights report, S&P stated that investing in decarbonisation and preparing for the climate transition could weigh on issuers’ credit ratings; however, the lack of “disruptive” and immediate environmental regulations in the highest-emitting sectors has resulted in limited climate-related actions from the agency since early 2022.

S&P warn that their muted action so far may understate the potential for more, given that “financial and operational pressures could ramp up” for companies, as net zero momentum builds. Climate transition and physical risks are already important considerations in the credit ratings of over a quarter of rated companies, as evidenced by the climate-related rating downgrades such as Latin America Power Limitada (to 'BB-' from 'BB').

Capital Markets

Primary Market

Hera, sustainability-linked bond (SLB). Hera’s 2nd SLB issuance is supported by its 2021 sustainability-linked financing framework with a step-up linked to (1) GHG emissions and (2) the amount of recycled plastic. The company has also been an active issuer of green use of proceeds bonds since 2014 and SLBs since 2021.

Acciona Energia, green bond. Acciona Energia is one of the largest global energy operators. It has integrated its finance and sustainability departments over the years, now led by a single chief financial and sustainability officer. The company recently completed its 3rd EUR public transaction, after entering the green bond market in October 2021.

TDC NET, SLB. The SLB was issued under TDC NET’s sustainability-linked finance framework - SPO by Sustainalytics - and follows prior transactions from Jan 2023 and May 2022, both in SLB format. The framework includes annualised targets for key performance indicator (KPI) #1 Scope 1 and 2 and KPI #2 Scope 3, therefore allowing flexibility in matching the tenor of the instrument with the most suitable target observation date.

Secondary Market

For further analysis and information on the Secondary Market, please take a look at the full monthly newsletter on Agile Markets. If you do not have access to Agile Markets, please contact us here.

Carbon Markets

Verra publishes draft of new consolidated REDD methodology

Verra, standards setter for climate action and sustainable development, updated its REDD (Reducing Emissions from Deforestation and Forest Degradation) methodologies to ensure the integrity and quality of its forest carbon credits - noted it is the most significant revision since it was introduced.

The updated draft will replace five separate methodologies that include avoiding unplanned deforestation (AUD) activities with one consolidated methodology. A module of that methodology, “Estimation of Emissions Reductions from AUD” will for the first time enable Verra to set baseline for AUD projects in specific country or region providing increased consistency and certainty. 


Scope 3: ‘omission impossible’. Yet a significant improvement in dataset quality is required to derive meaningful long-term investment insights

Scope 3 is a vital tool for measuring decarbonisation progress at a systems level and inadequate disclosure may blind stakeholders to efficient decarbonisation options and transition risk. Yet today’s data quality makes the use of Scope 3 challenging for investors. Company trends and relative positioning are more likely to be driven by methodology than the real world. Lower Scope 3 emissions relative to a peer is just as likely to mean ‘less complete disclosure’ as it is ‘better for climate’.

L&G IM is advocating for improved and standardised Scope 3 disclosure to facilitate comparisons between similar companies, and the same company across time, allowing for meaningful insights to be drawn.

AX IM - why, and how, investors should integrate biodiversity into fixed income portfolios

Managing risks, having a positive impact, and meeting regulations are three reasons why fixed income investors should consider biodiversity within their portfolios.

A full lifecycle and value-chain analysis should be undertaken to consider the impact on biodiversity and on social issues related to economic activities. In general, the fundamental analysis undertaken should, at a minimum, be based on a ‘do no significant harm’ principle. This will allow positive progress to be made in each key area without damaging another

Biodiversity loss is a complex issue - active engagement and detailed sector and issuer-level analysis are required to tackle it.

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