Emmanuel Faber’s ISSB releases sustainability guidelines

Hello from New York. It is April Fools’ Day, and the first anniversary of the “Voltswagen” debacle. Be careful out there folks.

This is not an April 1 joke, but has received some disbelieving reactions: Expensify.com, a $1.5bn company that helps businesses to manage their expense reporting, has pledged to donate 25 cents for every dollar paid to white male employees. The company has said this will fund social justice and equity efforts.

As our colleague Jamie Powell points out, this is probably the first corporate offset for white male exposure. “How long until we see a market develop for credits to help manage workforce diversity?”

For today’s edition, Simon talked to Emmanuel Faber about the debut draft standards from the International Sustainability Standards Board. Kristen and I wrote about the first instances of boardroom battles at companies that maintain ties to Russia. Please read on. (Patrick Temple-West)

Faber’s ISSB releases draft of its standards

“Capital allocations need to be based on what counts,” Emmanuel Faber told me over coffee in the City of London this week. “And climate counts.”

A year after his stormy exit from the top job at food giant Danone, Faber is now chairing the International Sustainability Standards Board. This new body, set up during November’s Glasgow climate summit, aims to create global standards for companies’ sustainability-related disclosures, so that investors can treat them with the same confidence as corporate financial statements. Yesterday the ISSB published a draft version of the standards, which it wants to finalise by the end of this year.

One aspect of the standards has already provoked controversy: their tight focus on issues that are financially material for the company. This contrasts with the standards drawn up by other bodies such as the Global Reporting Initiative, which ask companies to disclose environmental and social impacts on the world regardless of any risk to the business’s finances.

When I mentioned these objections, Faber pointed to a recent announcement from the ISSB and GRI in which the bodies promised tight collaboration. “We are looking at being compatible and complementary,” Faber said, promising that companies would be able to report under both frameworks with minimal duplication of effort.

You can take a look for yourself at the ISSB’s draft standards, which include one set focused on climate and another on broader sustainability risks. An important feature of the former is a requirement for companies to disclose the emissions of their suppliers and customers. It also includes an explicit demand for banks, insurers and asset managers to report on the emissions enabled by their loans and investments.

Faber noted that there was still no generally accepted methodology for calculating these “scope 3” emissions, adding that he hoped the ISSB’s push for disclosure would drive progress in that space. “We really think it’s time for that conversation [about a scope 3 reporting methodology] to happen,” he said. “Someone really needs to be in charge . . . whether that’s us or somebody else, I don’t know.”

In practice, scope 3 reporting for the financial industry may need to be introduced in phases, said Dan Mistler, head of ESG advisory at the consultancy ACA Group. Calculating the carbon footprint of complex financial derivatives could prove tortuously difficult, he said. “It’s very tricky. There are so many different financial instruments that understanding your share of the emissions is hard.”

Haggling over the details of scope 3 calculations could slow down the wider implementation of sustainability reporting standards, warned Natasha Landell-Mills, head of stewardship at the asset manager Sarasin & Partners. “There’s going to be all sorts of debate, huge lobbying,” she said.

Landell-Mills went on to argue that there is no real need for a new breed of regulation around the reporting of financially material risks related to sustainability. Companies were already required to report on every sort of financially material risk, she said — but these rules were not properly enforced.

In any case, Faber and his ISSB colleagues are hoping that their standards will galvanise new action from regulators on this front. But it remains to be seen whether authorities in key jurisdictions such as the US and EU will coalesce around the ISSB framework or opt for bespoke standards, leaving companies and investors to contend with a fragmented regulatory landscape.

“It’s a bit early to say,” Faber told me, adding that he’d been encouraged by his early conversations with regulators, who appeared to be waiting to see the final ISSB standards later this year before making a call on how to use them. “There is momentum, I think.” (Simon Mundy)

Game-changing decisions face investors as companies stick with Russia

This proxy voting season, there will be some tough calls to make for investors in companies that have opted to maintain ties to Russia. Next week will be a case in point.

On April 6, oil company Schlumberger and Danish insulation maker Rockwool hold annual general meetings. Proxy adviser Glass Lewis has recommended shareholders vote against board members — including Thomas Kähler, Rockwool’s board chair — at these two companies based on their businesses’ ties to Russia.

On March 4, Rockwool said it would continue operating in Russia, though it cancelled a planned expansion at a factory in Vyborg. As a result, Jeffrey Sonnenfeld — a Yale professor who is keeping a running list of companies’ decisions regarding their status in Russia — gave Rockwool a “D” grade. Glass Lewis cited this rating in its decision.

“It is reasonable to hold [Kähler] accountable for what we perceive as a failure to provide sufficient disclosure on the risk assessment made for continuing the company’s operations in Russia,” Glass Lewis told Moral Money.

But Rockwool’s chief executive says that if the company suspends or stops Russian operations, four factories will be nationalised — a “gift” worth hundreds of millions of euros to president Vladimir Putin.

“We can’t see how this ends the war and are certain it would do more harm than good to Ukraine,” CEO Jens Birgersson said in a statement to Moral Money. “We condemn the war unequivocally and in response have cancelled future investments in Russia.”

Schlumberger has longstanding business relationships with Rosneft and Gazprom, both of which have been placed under sanctions. Schlumberger’s board also includes Tatiana Mitrova, a professor at the Energy Centre of the Moscow School of Management. She is on the board of PAO Novatek, a Russian natural gas company that includes Russians under sanctions, Glass Lewis said.

“We are deeply concerned with Schlumberger’s continuation of operations in Russia and its work with companies that appear on international sanctions lists and are led by sanctioned Russian oligarchs,” Glass Lewis said.

These two companies are the first to face no-vote recommendations concerning Russia ties, Glass Lewis said.

Notably, Institutional Shareholder Services did not recommend voting against board members at these two companies. ISS told Moral Money it would not offer any voting recommendations for board members placed under sanctions “as we believe those could be construed as either ISS or its clients, or both, facilitating prohibited dealings with these individuals”.

Both of these AGMs will serve as test cases for how much investors care about potential risks associated with Russia ties. As of March 31, 107 companies have “D” or “F” grades on Sonnenfeld’s list. If these scores suddenly become a reputational risk for companies, shareholders are bound to get upset.

Though long-term conclusions cannot be drawn yet, companies that wavered in their response to the Ukraine invasion saw their stocks tumble further than the rest of the market, Sonnenfeld told Moral Money. Forget what companies say to puff up their environmental or social credentials, he said, “this [Ukraine] crisis shows everything you need to know”. (Patrick Temple-West and Kristen Talman)

Chart of the day

Why are companies still failing to meet their environmental, social and governance goals? According to many board members, they’re simply not capable of doing so. That was the most popular response among company directors who responded to a recent survey by the Boston Consulting Group and INSEAD business school. Others pointed to cost constraints, or a lack of commitment among management — and, for that matter, among board members.

Smart read

• Renewable energy might be booming, but most of the world’s poorest communities have yet to benefit, with nearly 800mn people still lacking access to electricity. This new paper from non-profit investment group Acumen sets out some illuminating ideas on how innovative financing could change that. In particular, it argues for putting philanthropic capital to work in blended finance structures to fund solar projects serving poor communities. Grant money can make up a first-loss layer, Acumen says, boosting the interest of mainstream investors by cutting their risk.

“To have 800mn people with no electricity is not just unproductive — it’s immoral,” Acumen founder Jacqueline Novogratz told Moral Money. “This is a $200bn investment opportunity in energy access, which is a downpayment on a cleaner future for all of us.”