The ‘crunchy’ debate between standard-setters

The Securities and Exchange Commission’s climate disclosure rule is stuck. The agency this week pushed back its timeline for publishing the final climate rule to October 2023. Early last year, the agency had said it hoped to finish the rule in October 2022. 

Former SEC commissioner Allison Lee told a conference at investment bank TD Cowen this month that in practice the rule was not likely to be finished until late this year or early 2024.

A well-placed source I talked to this week said the rule is stuck in a “Vietnam-like” quagmire, besieged by political attacks from Republicans. If this were not enough, the climate rule is certain to be challenged in court once it is adopted, putting its ultimate survival in serious jeopardy. 

US companies might be pleased that the SEC’s rule is in danger — but they face disclosure requirements elsewhere. The EU’s Corporate Sustainability Reporting Directive will apply to all affected companies by 2028. As part of this, climate disclosures will need to meet certain auditing standards.

What US companies need to understand is that if the SEC’s climate effort fails, they might end up having to play by Europe’s rules for climate disclosures. I don’t think that has dawned on them yet.

For today, Kenza digs into a crunchy debate over standards in the EU. And I write about the latest “blended finance” fund that is trying to unlock cash for green projects.

Finally, please check out our colleague Stuart Kirk’s latest contrarian column today, inspired by Moral Money’s reporting on ESG funds’ appetite for Nvidia. You read it here first. (Patrick Temple-West)

A new salvo in the sustainability standards debate

A few months before accounting professor Carol Adams became chair of the Global Reporting Initiative’s sustainability branch in March, she co-signed a letter to Australia’s Treasury with a stark warning about the voluntary standard setter’s main rival.

For its proposed new standards, Australia should not rely only on the International Sustainability Standards Board, which develops tools to report on sustainability risks faced by investors, Adams wrote. Instead, she argued, it should follow the EU and the GRI by scrutinising companies’ impacts on the environment and society around them.

“The ISSB is not developing ‘sustainability standards’ . . . its focus is on the reporting needs of investors,” Adams wrote, highlighting that “substantial concerns” had been raised about this approach in a public consultation. “A double materiality approach [disclosing impacts as well as risks] better serves Australia’s commitment to the United Nations’ Sustainable Development Goals.”

The tension between the two accounting initiatives highlights unresolved questions about the rationale for global sustainability disclosures.

• The “single materiality” approach, focused on financial risk, springs from the idea that investors should be aware of sustainability risks because this will help them create more value. The ISSB is largely guided by this approach.

• In contrast, the “double materiality” principle favoured by GRI suggests investors and companies should disclose how they themselves impact on the world, from pollution to human rights.

The GRI has grabbed less public attention in recent years than bodies such as the ISSB. That is partly because the former was created by environmental activists who were less adept at harnessing corporate support (and megaphones) than ISSB, which was backed by business leaders such as Michael Bloomberg.

The GRI’s focus on double materiality dates to its creation in 1997, on the back of the prolonged outcry over the Exxon Valdez oil spill.

“I would have thought that some area of the Australian government wants to know what impact companies are having on biodiversity,” Adams told Moral Money over Zoom from Melbourne.

But companies will try to “get away with as little as possible” until regulators around the world write these requirements into law, she added. “Even where it’s mandatory, if there’s any wiggle room, they find ways of not disclosing.”

The GRI is not exactly an outlier. Its standards are used by most of the world’s biggest companies, across more than 100 countries. The EU has thrown its weight behind GRI’s approach in reporting standards due to be adopted at the end of this month. New Zealand is also going down this path.

Still, the US Securities and Exchange Commission and other regulators are expected to use the ISSB’s new standards, due to be published in the next few weeks, as guidance for their own rules.

The ISSB and GRI agreed last year to team up and share information in a bid to create a “two-pillar” global disclosure system.

For now the two initiatives are working on putting together a Q&A about differences between the two standards. “The questions we agreed on really get to the crunchy end of it,” Adams said. “Whether we agree on the answers or not is another matter.” (Kenza Bryan)

Another blended finance project seeks to ‘crowd in’ investors for the climate

Last year, Treasury secretary Janet Yellen lamented that there was “a huge pool” of Americans’ savings sitting on the sidelines while a massive amount of money was needed to fund the fight against global warming. Specifically, there were not enough “bankable projects,” she said, meaning investors were nervous about plunging cash into risky climate projects that were exactly what was needed to cut carbon emissions. “Private investors remain risk averse,” Yellen added.

This year, financiers are increasingly turning to blended finance options to ease the risk of climate projects. Last week, we featured the Global Innovation Fund, which tries to “de-risk” financing so more investors can jump into projects to fight poverty. 

Now, a new blended finance firm for climate projects is in the works. Mark Gallogly, who recently worked with US climate envoy John Kerry, has helped launch Allied Climate Partners, a new group to increase the number of “bankable” climate projects.

This financing scheme plans to raise $235mn from family offices and other backers that will serve as subordinate, or junior equity. Alongside this, multinational development banks and private investors will plug in cash as senior equity holders. The goal is to attract up to $825mn initially, Gallogly told me. Investments will be identified in Africa, the Caribbean, Central America and India, he said.

To lead this project, Gallogly has hired Ahmed Saeed, currently a vice-president at Asian Development Bank for east Asia and the Pacific. The point of the new organization is “to be a force multiplier” and “crowd in” other investors, Saeed told me. 

“Few things will have a bigger impact on [the] energy transition in emerging economies than increasing the number of bankable climate-related projects,” he said.

These types of blended finance funds raise important questions for the World Bank, various development banks and family offices looking to do good for the world with their wealth. Are these pitches from Gallogly and others something they will bite on? Will these funds seriously help to fill the financing gap that Yellen and others have talked about? As always, we are interested to hear your thoughts. (Patrick Temple-West)

Smart read

UN secretary-general António Guterres has attacked oil and gas industry attempts to justify fossil fuel expansion with carbon capture technology as “proposals to become more efficient planet wreckers”, in a speech that appeared to be a thinly-veiled critique of the UAE hosts of COP28.

*This story has been corrected to state that Allied Climate Partners is a new firm.