W3 - Regulation of ESG disclosures

Question 1

What are some benefits of standardisation of ESG disclosures

Answer 1

• Comparability
• Completeness
• Understandability

Question 2

Why are potential benefits hard to assess

Answer 2

• Limited evidence of effects of standardisation
• Metrics for assessing the benefits is scarce
• Hard to generalise (each industry, case of standardisation is different)

Question 3

What are some difficulties with measurement

Answer 3

• Monetisation is difficult where no market exists
• Difficult to estimate a ‘controversial’ measure
• Numerical values may be viewed as more objective, even if they are based on questionable assumptions

Question 4

What organisations are the source of mandated disclosure for the US, EU and UK

Answer 4

US: SEC
EU: Corporate Sustainability Reporting Directive (CSRD)
UK: FCA

Question 5

SEC proposed climate dsiclosure requirements

Answer 5

GHG emissions disclosures:
Scope 1 and Scope 2 GHG emissions on a gross basis (before consideration of any offsets) and relative to intensity (e.g. tons of Co2 per dollar of revenue)

Scope 3 GHG in gross terms (before consideration of any offsets) and relative to intensity, if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions or if Scope 3 emissions are material.

Qualitative/governance disclosures:
How climate-related risks affected business models and financial results.
How climate risk management is integrated into the company’s risk management structure.

Question 6

EU Corporate Sustainability Reporting Directive (CRSD)

Answer 6

Double materiality
Alignment with Task force on Climate related Financial Disclosures (TCFD) requirements. (transition to a sustainable economy, with limiting global warming to 1.5°C and with climate neutrality by 2050).
Targets: Organisations must set targets, select a baseline and report progress towards these targets.

Question 7

What are financed emissions?

Answer 7

Indirect emissions attributed to financing activities – such as lending and investments – of financial institutions. These activities all contribute to providing capital or financing to a company that emits GHG emissions.

Question 8

How should Financed Emissions be reported?

Answer 8

Partnership for Carbon Accounting Financials (PCAF) is the leading global standard for calculating and reporting financed emissions.

Question 9

How does Akerlof’s market for lemons relate to Greenwashing

Answer 9

Akerlof’s market for lemons:
- Peaches worth $1,000
- Lemons worth $500
- Buyers cannot distinguish so will pay $750 for any fruit
In a market with an absence of information
- No one sells peaches for $750 as they make a loss. Everyone wants to sell lemons.
- Market for lemons crash.

Firms that are truly sustainable are affected by information asymetry as they priced out by greenwashing firms who claim to be sustainable but can operate at lower costs.

Question 10

What factors enables greenwashing, what are their consequences?

Answer 10

• Lack of Clear Definitions and Standards: Companies can make misleading promises and focus on minor aspects of sustainability
• Insufficient Regulation and Enforcement: Companies can use deceptive marketing practices with little fear of repercussions or penalties.
• Complexity of Supply Chains: Companies might obscure negative impacts occurring far upstream in their supply chains, or highlight positive aspects while ignoring larger detrimental effects.
• Consumer Confusion and Lack of Information: Companies can exploit this by using complex or confusing terminology to make products seem more environmentally friendly

Question 11

Assurance types for ESG disclosures

Answer 11

• by a financial audit firm
• consulting/engineering firms offer assurance

Question 12

How many S&P 500 companies have received independant auditing over their ESG reports

Answer 12

only 18%