The battle for planet Earth

As large corporations and big business work towards being more ethical, more responsible, more sustainable for the good of people and planet, there are movements against formalising environmental social governance (ESG) and sustainability standards.

This month, in the US, Idaho’s House of Representatives passed a motion to draft legislation that “protects the State of Idaho and its citizens from the use of ESG standards”, because they argue that “the rights and freedoms of the people of Idaho are increasingly threatened by the alliance of large corporations, banks, investors, and governmental entities in their efforts to impose environmental, social, and governance (ESG) standards.” Idaho is not the only state in which Republican legislators introduced legislation to ban ESG or launching inquiries into ESG activities. West Virginia and Kansas introduced similar legislation. However, an attempt to introduce a bill in Wyoming to ban financial institutions from using “environmental, social justice or governmental score or metric” failed to get past the committee stage.

What is this anti-ESG stance really protesting, in the face of closer alignment of existing ESG standards and conventions, and especially the realisation that the financial world rests on the natural world? Indeed, on March 15, the Task Force on Nature-related Disclosures (TFND) released its first beta version of its risk management and disclosure framework for organisations to report and act on nature-related risks. TFND acknowledges that the loss of natural ecosystems presents financial threats to organisations.

In most corporate board rooms directors are aware that their organisations should do their part to slow global warming and help to ensure that we can achieve our collectively agreed target to limit warming to 1.5C so that that we have a 50 per cent “chance of a liveable future.” At COP26 in Glasgow last year, the Caribbean led small island states under the slogan "1.5 to stay alive."

At this point in time the average temperature rise is close to 1.1C. Humankind is currently emitting about 41.6 GtCO2 per year. To have a 66 per cent chance to stay within 1.5C we must not surpass a total carbon budget of 360 GtCO2. That means that at the current rate, we have no more than nine years left. However, current policies and actions by signatory countries fall far short of the collective target and the world is headed to a 2.5-2.9C rise in average temperature by 2100.

In 2017, the TCFD, which is part of the Financial Stability Board (FSB), released the first version of the framework for climate-related disclosure recommendations designed to help companies provide better information to support informed capital allocation.

The disclosure recommendations are structured around four areas that are linked to how organisations operate: governance, strategy, risk management, and metrics and targets.

The TFCD recommendations have been well received by companies, markets, standard setters, and regulators. They have been adopted by many forward thinking companies for their corporate strategy even if not mandated to do so. By 2021 Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and UK have adopted TCFD-aligned official reporting requirements. The TCFD’s general approach is also being integrated into the emerging global baseline for sustainability standards currently being developed by the International Sustainability Standards Board (ISSB), which is part of the IFRS Foundation. Last week the ISSB and the Global Reporting Initiative (GRI) announced that they will be working to align their standards. The European Union has also indicated that they are seeking to align with the work of the GRI, ISSB, and TCFD and will use the latter two as minimum baselines upon which to build.

It is within this context that the TFND released its risk management and disclosure framework for organisations to report and act on nature-related risks. This framework is explicitly building on the approach taken by the TCFD but it goes beyond specific climate-related dimensions. The TFND provides guidance and recommendations on nature-related and risks and opportunities.

This is very important because even though more than half of the world’s economic output is estimated to be highly or moderately dependent on nature, most companies, investors and lenders do not adequately account for nature-related risks and opportunities in their decisions.

The first beta version of the TFND framework consists of three components:

• An outline of fundamental concepts and definitions that enable market participants to assess and disclose nature-related risks and opportunities

• Draft disclosure recommendations for nature-related risks and opportunities

• Guidance on who should undertake nature-related risks and opportunity assessments and how to build these into enterprise strategy and risk management processes.

The TFND is expecting the framework development process to go through three more beta iterations over the next two years, like the TCFD did. The release of the TCFD recommendations is planned for September 2023. In view of the precedents set, and the alignment in structure with the other frameworks, take-up of TFND is expected to be exponentially faster.

There is no doubt that the ESG field is developing quickly and there is a lot of consolidation taking place. For those that are looking at the science of what is happening, the momentum is quickening but still not fast enough. It needs to be scaled up and increased by a whole lot, because we are still far off the mark. We know that system-change is hard. It will take great political will and skill, and it is likely that many battles will have to be fought – even in the courtroom.

Dr Axel Kravatzky is managing partner of Syntegra-ESG Ltd vice-chair of ISO/TC309 Governance of organisations, the co-convenor and editor of ISO 37000 Governance of organisations – Guidance. He is currently the project leader for ISO 37006 Indicators of effective governance. Comments and feedback that further the regional dialogue are welcome at axel.kravatzky@syntegra-esg.com