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Sep 08, 2023

Net-zero targets not backed by ‘credible’ transition plans, finds research

Firms unprepared for EU’s upcoming ESG regulation

The majority of climate targets are not matched by credible transition plans, according to research, raising concerns about how prepared companies are for the new European Sustainability Reporting Standards (ESRS), expected to become EU law and implemented on January 1, 2024.

A study of the largest 300 companies across Norway, Denmark and Sweden – a region typically associated with advanced ESG standards and reporting – finds ‘significant implementation challenges ahead’.

Net-zero and exec pay

For example, although 62 percent of surveyed companies have ‘net-zero by 2050’ targets in place, just 41 percent boast a credible transition plan verified by the Science Based Target Initiative, seen as a key indicator of credibility. Just three of the 300 companies surveyed – clean energy specialists Vestas and building technology firm FLSmidth from Denmark and Swedish construction giant Skanska – detail a robust plan.

Researchers say, however, that companies are increasingly linking executive pay with ESG targets: 34 percent now do so, up from 25 in the previous year’s study. But despite the 9 percentage-point increase over the course of a year, Position Green – the firm behind the research – says it doesn’t go far enough.

‘Pressure on boards to incorporate ESG measures in executive pay is clearly driving the move, but this still falls well short of meeting investor expectations,’ it states.

Based on 2022 disclosures from the 300 companies, Position Green says there is a gulf between what is being reported and the requirements expected to come in in January: on average, it says the companies surveyed report just 54 percent of the core ESRS disclosures.

Given that the region tends to be ahead of peers in ESG reporting, Position Green says these findings highlight a potentially much larger gap in the data companies are reporting and what the EU expects to see in 2024.

Not just in the EU

Around 50,000 companies are expected to report under the new rules, as well as non-EU firms with a big presence in the bloc. The researchers say this will comprise more than 10,000 non-EU-domiciled companies, including more than 3,000 in the US and 1,000 in the UK, further raising concerns about ‘widespread non-compliance’.

The EU’s standards, which take account of discussions with the International Sustainability Standards Board and the GRI, are designed to generate information that helps investors understand the sustainability impact of the companies in which they invest.

Anti-ESG sentiment

Priority Green says the reporting burden – in particular for non-EU companies as well as among firms far from prepared for the new standards – has potential to drive anti-ESG views.

‘With the major expansion of social issues on which companies must disclose – including workforce, workers in the value chain, affected communities and consumers – there is potential to inflame existing anti-ESG rhetoric in the US, specifically with regard to policies on diversity, equity and inclusion,’ it says in a statement accompanying the findings of its ESG100 research.

It also notes that ‘many investors [are] already calling on the EU to tighten mandatory disclosures on emissions and climate risk in the current ESRS draft’, adding that ‘additional gap[s] in compliance may undermine investor confidence at a time when private capital is required to drive net-zero.’

Commenting on the research, Joachim Nahem, executive chair and co-founder of Position Green, says: ‘There is turbulent political rhetoric surrounding the very nature of ESG, and a key objective of ESRS and the Sustainable Finance Disclosure Regulation [for asset managers and other financial markets participants] is to avoid greenwashing, requiring that companies provide investment-grade disclosures.’

He goes on to describe ESRS as ‘the deepest, broadest and most forensic set of ESG rules ever introduced’, adding that it ‘remains to be seen whether the reporting requirements themselves are too onerous.’

Garnet Roach

An award-winning journalist, Garnet Roach joined IR Magazine in October 2012, working on both the editorial and research sides of the publication. Prior to entering the world of investor relations, her freelance career covered a broad range of...