ESG Weekly Update – November 17, 2022

17 November 2022

U.S.: Senator Pat Toomey Requests ESG Ratings Firms Disclose Methodology

On October 31, 2022, Senator Pat Toomey wrote to a group of twelve ESG ratings firms requesting information on methodologies used to calculate ESG ratings, and requiring them to preserve documents, communications, and other information related to the request. The twelve firms are MSCI, ISS, Bloomberg, Sustainalytics, Moody’s, CDP, S&P Global, FTSE Russell, RepRisk, FactSet, Refinitiv, and Arabesque S-Ray.

The letters are a follow-up to an initial request sent on September 20, 2022 asking the firms to share non-proprietary methodologies used to assign ESG ratings to companies. Specifically, the September 20 letters asked the firms to answer a number of questions, including:

  • whether companies have an opportunity to submit clarifying comments to their ratings for the benefit of investors;
  • how the firms determine the credibility of the data sources used;
  • how the firms approach ratings with respect to issues such as abortion and gun control; and
  • how the firms deal with potential conflicts of interest, in cases where the firms also issue proxy vote recommendations or offer advisory services.

The October 31 letters state that there is an “increased bipartisan interest in conducting oversight of the ESG industry” and that “the use of ESG factors in capital allocation has become an issue of increasing bipartisan interest to Congress and regulators.” Furthermore, Senator Toomey highlighted concerns about the “veracity” of third-party data, the opacity of ratings methodologies, and the management of conflicts of interest.

Press Release - U.S. Senate Committee on Banking, Housing, and Urban Affairs

Global: Corporate Executives Call for Action-Based Approach at COP27

Ahead of COP27, an alliance of over 100 top executives of large multinational companies, such as Nestle SA, Dell Technologies, and HSBC Holdings PLC, urged governments and other companies to combat climate change. The leaders are pushing for specific actions and support for existing solutions to meet the goals of the 2015 Paris Agreement, which included keeping global warming well below 2 degrees Celsius by the end of the century. The letter also asks governments to set clearer policies and transition plans, and to encourage more businesses to take action.

Specifically, the executives called for government regulations to be simplified to speed up approval for renewable infrastructure projects. They also argued that further incentives for businesses are needed, such as tax credits for renewable energy, energy efficiency, recycling, and carbon removal to combat climate change. In addition, the leaders stated that governments should increase research and development budgets, phase out fossil-fuel subsidies, and support workers affected by the transition through re-training.

The group called on governments to ensure that developed countries exceed their $100 billion commitment to support developing countries, and that the funds reach these countries directly to fund climate change mitigation and adaptation efforts.

They called on peers to do more. It called for more companies to set science-based emissions targets aligned with the Paris Agreement and for more collaboration within and across sectors and value chains.

Companies assumed a prominent role at last year’s COP, when a group of financial institutions forming the Glasgow Financial Alliance for Net Zero promised to cut their net emissions to zero. One year on, companies are calling on policy makers to support their willingness to move to net zero through clear and consistent frameworks.

Open Letter

Africa: Leaders Launch Carbon Credits Initiative

The Africa Carbon Markets Initiative (the “ACMI”) was launched at COP27 last week to increase carbon credit production and boost job opportunities in Africa. Specifically, ACMI plans to support the growth of the African voluntary carbon market to produce 1.5 billion credits annually, which could result in 110 million jobs created or supported, based on a climate change mitigation model. The ACMI has identified 13 action programs to support the targets, including developing carbon market activation plans and innovative credit projects.

In relation to carbon market plans, ACMI is also working with carbon credit buyers and financiers to set up advance market commitments for African carbon credits that would support the projects for capturing emissions. By generating advance commitments, ACMI intends to demonstrate a strong demand for African carbon credits across all projects, including renewable energy and nature-based solutions.

While the initiative aims to promote demand for existing credits across the continent, the ACMI also intends to encourage demand for credits in innovative projects that don’t yet have a market in Africa. For instance, nature conservation and biodiversity credits could be set up to monetize contributions to nature-related targets by selling credits. Companies could purchase these credits as an investment through a mechanism that guarantees that the funds will be used in verified and effective nature conservation work.

ACMI Roadmap Report