California overtakes the SEC on climate. ESG ratings battle conflict-of-interest claims. Util data underpins landmark UNGC SDG report. Plus, is data impeding SDG progress?
In the world
🇺🇸 On Sunday, California Governor signalled his intent to sign into law two climate disclosure bills — the Climate Corporate Data Accountability Act and Climate-Related Financial Risk Act — which passed the state legislature last week. Mandatory for any large public company “doing business in California,” the disclosure rules extend to Scope 3, propelling the state ahead of the SEC in both action and scope (just as federal policymakers and regulators are forced to defend their own efficacy, no less). California has also filed a lawsuit against oil supermajors, accusing them of deceiving the public on fossil-fuel risks and suing for recovery funds for climate change-induced storms and fires.
🗺️ The Taskforce on Nature-related Financial Disclosures (TNFD) unveiled its final disclosure recommendations at Climate Week NYC, opening the door to broader environmental reporting. GSK has signalled its commitment, with other companies (and asset managers) expected to follow suit. The framework and its focus — which have been accused of overlooking double materiality — arrive as intertwining nature-related risks and outcomes dominate the news. Scientists warn that six of nine planetary boundaries are now broken (the four biological ones worst hit), while the effects of resource scarcity on investment returns serves yet another reminder that environmental risk is financial risk.
🇬🇧 Elsewhere, standard-setters are attracting a different type of scrutiny. Until recently, the Science Based Targets initiative (SBTi) was known by companies as the body responsible for both setting and validating emissions-reduction targets — for a fee. As corporate demand for climate targets has skyrocketed, so has criticism of a business model perceived as having an inherent conflict of interest. Now, the FT reports that SBTi, bowing to pressure, will separate its criteria and validation divisions into a non-profit and private company, respectively. Not, perhaps, the sparkliest item on the agenda this week, but the broader industry implications could be wide reaching — and ranging.
In Util news
💡 Util was delighted to provide data and analytical support to the Accenture and UN Global Compact Stocktake Report 2023 (and for the nod to our “efforts in pioneering impact measurement”). The report is the first to measure the Sustainable Development Goal (SDG) impact of the global private sector, a critical stakeholder in helping achieve the SDGs by their target date of 2030.
We would like to thank the three data providers ESG Book, Impaakt, and Util for their efforts in pioneering impact measurement, providing access to their data, and supporting our analysis.”
In the spotlight: How do you bridge the SDG funding gap?
The UN General Assembly and Climate Week NYC have arrived, attracting world leaders (and protesters) to New York to address mounting environmental crises. SDG performance and progress is high on the agenda, given this year marks halfway point between their 2015 inception and 2030 target date. So, how are we doing?
Put simply, not great.
The world is not on track to deliver any one of the 17 Global Goals. Per the latest Capital as a Force for Good annual report, the SDG funding gap has stretched to $137trn: a $2trn increase on 2021 levels. Though it acknowledges ongoing challenges such as the Russian war in Ukraine and rampant global inflation, the report warns that chronic underfunding is the main reason for stalled progress.
Of the many factors stifling investment, one in particular is worth dissecting (as we have before). Environmental risk is a crucial investment factor, but without complementary environmental impact data, it may have more than just a negligible effect on sustainable development. It may, for all the best intentions, have a negative impact on sustainable development.
Effectively taking a broader lens to a wider scope of risks, traditional ESG investing could deter much-needed investment in higher-risk developing countries, for instance. Equally, mismarketing ESG as impact or burying impact within ESG scores can lull customers into a false sense of security, preempting serious financial action.
To even begin plugging the SDG funding gap, investors and policymakers need to know where to look. That, in turn, depends on impact-based data and disclosures that sit alongside risk-based data and disclosures, both in terms of data quality and investment priority.
The Accenture and UN Global Compact Stocktake Report 2023 shines a spotlight on the issue, using Util data to decipher the revenue alignment of each sector relative to the SDGs. As noted in the report foreword, high-quality impact-based data — made possible by technological advances — are the first step towards achieving the SDGs:
“The private sector is a critical stakeholder in achieving the SDGs… Businesses contribute to all 17 SDGs and their actions will be key to meeting — or missing — the goals by 2030. However, most private sector contributions today are not properly measured, and as result the business community struggles to understand, report, and manage their impact on the SDGs.
“But this is changing. Just five years ago, using multiple large data sets to answer the key question of the private sector’s impact on the SDGs would have been impossible. Today, with advances in technology and data analytics, we are able to explore new ways of measuring the SDG impact of thousands of individual companies in consistent ways, and explore this relationship with ESG reporting.”
Speaking to Ignites Europe recently, CFA Institute Managing Director Paul Andrews told Ignites Europe that traditional ESG scores had “outlived their use.” That is not to say that ESG has outlived its use — indeed, a new study of 13,000 companies uncovers correlation between higher ratings and investment returns — and Andrews dismisses any such politicisation as “toxic.” Instead, he suggests that better and broader data across each of the three categories makes their individual analysis now possible and preferable.
Only by matching more holistic sustainability data with aggressive action will the next seven years achieve more for the SDGs than the last seven.