An Open Goal for Investors

Richard Gardiner, EU Public Policy Lead at the World Benchmarking Alliance, says CSDDD offers a rare opportunity to improve corporate human rights risk accountability.

The EU’s recently approved Corporate Sustainability Due Diligence Directive (CSDDD) has the potential to systematically change the way corporations approach their human rights risks, both within their operations and supply chains. It will do this by setting a legal baseline outlining exactly how the largest multinationals operating in the EU are expected to address these risks across their global supply chains.

The passing of this law has been hailed as a significant victory in the sustainability community. Investors in particular should be paying close attention to these developments, as CSDDD presents both challenges and opportunities that can significantly impact their portfolios.

Why CSDDD matters to investors

One of the most compelling reasons for investors to care about and invest time in understanding CSDDD is the enhanced leverage it provides. The law offers a legal and political framework to mandates companies to proactively tackle their human rights risks, which investors can utilise to push for greater corporate accountability. By directly referencing these legal obligations, investors can exert pressure on companies to engage more deeply with human rights issues within their value chains. Unlike the existing voluntary global standards, the leverage provided by CSDDD is not just theoretical. It has practical implications for improving corporate behaviour and, by extension, protecting the long-term value of investments.

Investors are not merely passive observers of corporate performance but have a proactive role to play. By incorporating CSDDD in their responsible investment practices, investors can ensure that the leverage provided is not just a by-product of the law but becomes a mainstream expectation across the investment community. This mainstreaming is vital for preventing and addressing both current and potential negative impacts on people, managing financial risks, and meeting the evolving expectations of beneficiaries, civil society, regulators and clients.

Current landscape and investor opportunities

This pressure point is more important now than ever. Data from the World Benchmarking Alliance’s Corporate Human Rights Benchmark (CHRB) underscores the urgency of CSDDD. Although 66% of benchmarked companies in high-risk sectors have demonstrated improvement on key human rights indicators, a staggering 40% still disclose no or insufficient evidence of a human rights due diligence process. This indicates a significant gap between current practices and the standards that the CSDDD aims to enforce. Investors, armed with the

Take Five: Modi Feels the Heat

A selection of the major stories impacting ESG investors, in five easy pieces. 

Climate wasn’t high on the ballot in India’s election, but Modi must soon face uncomfortable truths on coal.

Modi feels the heat – Conducted in record temperatures, the world’s biggest exercise in democracy dealt a blow to the ego of incumbent Prime Minister Narendra Modi, but it’s less clear how the outcome of India’s general election will impact its net zero transition. Stock prices were down this week on the assumption that reliance on coalition partners would slow the pace of the infrastructure investment plans of Modi’s ruling Bharatiya Janata Party (BJP). The impact of the election on India’s climate policy might be less significant, for a number of reasons. First, other priorities regularly topped polls of voter concerns, notably inflation and unemployment, although this has evolved recently, partly due to increased instances of climate-induced physical impacts, from landslides to floods to severe crop losses. Second, both the BJP and its leading opponent, Congress, are strongly committed to India’s continued adoption of renewables, albeit via different means – with the challenger party promising in its manifesto a new green transition fund and more resources for India’s National Adaptation Fund. A third reason, which leads on from the first two, is that neither major party has been forced to properly address India’s biggest climate problem – vast and rising emissions from coal. Indeed, current policy is for domestic production to increase up to 2040 to reduce reliance on imports. Coal – and Modi’s close relationships with the controversial Adani Group – notwithstanding, the BJP’s record on solar and hydrogen investments, and fossil fuel subsidy reductions is impressive. But regardless of the make-up of the coalition, India’s next government will need to up the ante to have a hope of meeting even its existing climate commitments, such as installing 500GW of renewables, which will handle 50% of electricity demand, by 2030.

Down, not out – Support for climate-related resolutions at the AGMs of US firms has been closely watched this proxy season for further signs of a “stewardship depression” witnessed since 2021. But climate votes only tell part of the story, with a high number of social-themed filings also vying for investor backing. These include four shareholder proposals seeking more action and transparency on pay, working conditions and racial equity by Walmart, the world’s largest private employer. Prior to

Australian Supers Should be Bolder on Climate 

New report finds Australia’s powerful asset owners are reluctant to take public stands against companies that are failing to reduce greenhouse gas emissions.

Australia’s US$2.45 trillion pension system should take a more public role in pressuring companies to improve their climate strategies – including by declaring voting intentions ahead of annual general meetings. That’s the view of the Investor Group on Climate Change (IGCC), an investor-led body focused on helping Australia and New Zealand’s…

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Take Five: Bound by Destiny

A selection of the major stories impacting ESG investors, in five easy pieces. 

Public and private sector coordination provides the theme – and events of Nairobi, London and Rio de Janeiro the backdrop – for this week’s digest.

Natural allies – Just ahead of this year’s UN International Day for Biological Diversity, delegates gathered in Kenya for the first review of the implementation of the Global Biodiversity Framework (GBF) since its adoption at COP15 in December 2022. A key task during the nine-day summit is to assess how well parties’ national biodiversity strategies and action plans (NBSAPs) support the 23 targets of the GBF. For the record, just nine countries, plus the European Union, have submitted updated NBSAPs since all 196 parties committed to the framework in Montreal. “The challenge is to ensure that the global aims are translated into nationally relevant targets that consider the context and the biophysical realities of each country,” said David Cooper, Acting Executive Secretary of the UN Convention on Biological Diversity. Delegates will also discuss the means of implementing the GBF, including capacity-building, technical and scientific cooperation, and resource mobilisation – the last of these being the trickiest given an estimated annual biodiversity finance gap of US$700 billion. Investors will be paying close attention to progress on the GBF’s fourth over-arching goal, the alignment of financial flows. According to a recent blog by Emine Isciel, Co-chair of the Finance for Biodiversity Foundation, a critical factor will be reducing existing harmful financial flows. As well as robust private-sector disclosures, via standards such as those outlined by the Taskforce on Nature-related Financial Disclosures, this requires public policy reforms to redirect US$542 billion in annual agricultural, fishing and forestry subsidies that damage nature, while also misdirecting private investment. “By fostering innovations, aligning incentives and setting clear boundaries, [finance ministers] can steer sectoral pathways towards reducing negative impacts, increasing positive impacts and catalysing private finance at scale,” she said.

Two figs – Alignment of finance flows with nature goals was also front of mind at the City Week event in London, with Karen Ellis, Chief Economist of the World Wide Fund for Nature UK, flagging two areas of opportunity. To avoid the nascent market for biodiversity credits making the same mistakes as the voluntary carbon markets, she said, governments could grasp the chance to create compliance markets. These could link the supply of financial incentives to the private

Human Rights as a Basis for Climate Litigation

Olga Hancock, Head of Responsible Investment, Church Commissioners for England, explores the implications for investors of the EHCR decision on Swiss government inaction.

In November 2023, I wrote about the links between human rights and climate change for investors. Since then, there have been significant developments. One in particular stands out.

Last month, the European Court of Human Rights (ECHR) determined that the Swiss government had violated its citizens’ human rights, due to its lack of action on climate change. The case – Verein KlimaSeniorinnen Schweiz v Switzerland – was brought by four women and a supporting association who were concerned about the consequences of climate change on their living conditions and health.

The ECHR ruling is significant because it makes the link between human rights and climate change material for investors – and establishes a legal precedent for climate litigation on the basis of human rights law. And so this ruling inevitably raises the pressure on governments to be more ambitious on climate change. The case is also important for investors because of the implications for private legal actions.

So what happened?

To simplify: the ECHR ruled that the Swiss government had not adequately addressed its climate change obligations and needed to take measures to do so. Significantly, these obligations were defined as alignment around 1.5°C, adequate intermediate reduction targets, and a goal of net zero by 2050. For the 46 member states of the ECHR, that effectively imposes obligations to enhance climate mitigation policies.

Engagement with governments

The decision hands investors an important weapon as they engage with governments to enhance climate ambition. Investor engagement with governments is an increasing area of focus, as investors move from a stewardship approach focused on company engagement to collaborative engagement with governments to address systemic risk – and thus create an enabling environment for sustainable investments.

Governments have to date been able to respond to investors by saying that their requests to create a Paris-aligned enabling environment form part of a broader political process. Now there is a judgment which requires ECHR member governments to comply with the ambition of the Paris Agreement.

This decision will no doubt guide other judicial bodies’ thinking around the world, when considering human rights as the basis for climate litigation. The jurisprudence in EHCR rulings, whilst not binding, is considered ‘persuasive authority’ in other jurisdictions, so the case is also important for engaging with governments outside

Investors Harness AI to Halt Deforestation

Technology is playing a “groundbreaking” role in PRI stewardship programme, which is gearing up to engage target companies across multiple sectors.

Advances in artificial intelligence (AI) have allowed global asset owners to take a novel approach to company engagement, through a campaign aimed at halting the destruction of the world’s tropical forests. Spring, a stewardship initiative launched last year by the UN-supported Principles for Responsible Investment, uses the large language models…

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“Ambiguous” Rules Restrict French Climate Stewardship

Corporate governance laws are limiting the ability to lodge resolutions, as pressure grows for greater transparency on voting and engagement by asset managers.

French shareholder resolutions on climate themes are being hindered by the country’s corporate governance laws, with the lack of voting clarity from asset managers also presenting obstacles. A recent report from think tank 2° Investing Initiative (2DII) on investor engagement with French firms’ transition plans found that regulations are limiting…

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Options Still Open for Fossil Fuel Engagement

Patience is a virtue when engaging with the oil and gas industry on climate, but opinions are mixed on whether investor efforts are paying off. 

It’s no secret that the oil and gas industry has been slow to act on the climate crisis.   But with the sector accounting for around 15% of global greenhouse gas (GHG) emissions, and science dictating that oil and gas demand must peak by 2030, the need for drastic action to…

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TAI Takes Stewardship Data to Task

Industry experts stress the importance of heightened engagement efforts and smarter allocation of resources.

The Thinking Ahead Institute (TAI) has flagged the lack of data for stewardship as a major impediment to the effectiveness of engagement efforts in recently released research. In a research paper commissioned by the UN-supported Principles for Responsible Investment, the institute assessed the level of resources that institutional investors should…

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Take Five: Green Means Green

A selection of the major stories impacting ESG investors, in five easy pieces. 

European regulators have ratcheted up efforts to eliminate greenwashing from the investment sector.

End of an era I – The fight against greenwashing inched ahead with the release of final guidelines for naming ESG- or sustainability-related funds by the European Securities and Markets Authority (ESMA). It had previously been possible to launch an EU environmental opportunities fund, claiming Article 8 classification under the Sustainable Finance Disclosure Regulation (SFDR), while allocating as little as 10% of assets to demonstrably green investments. ESMA has now declared that era to be over, with new guidelines and thresholds including a minimum of 80% of investments to meet funds’ environmental or social characteristics, or sustainable investment objectives. Initial reactions suggested the market has welcomed some aspects – such as definitions for what could be included in a fund with an ‘impact’ or ‘transition’ label – but is baffled by others. These include ditching plans to require funds labelled ‘sustainable’ to contain at least 50% sustainable investments as defined by SFDR – due to feedback saying this was too open to discretion – instead opting to introduce a commitment to invest “meaningfully” in sustainable investments – whatever that means.

End of an era II – Until recently, opportunistic portfolio managers could stuff their ‘green’ portfolios with tech stocks to deliver strong returns at relatively little expense to the planet. That scam has long been rumbled, but the gig is definitely up now that Microsoft – which in 2020 pledged to become carbon negative by the end of the decade – has admitted its carbon emissions jumped 30% last year, as it pursued dominance in the AI market. The upsurge – confirmed in the tech giant’s annual sustainability report this week – followed news of a deal with asset manager Brookfield to build 10.5 gigawatts of renewable energy capacity to support its plans to rely solely on clean power sources by 2030. With Microsoft having offered to relocate staff amid rising US-China tensions, its AI strategy might face as many ‘S’ and ‘G’ as ‘E’ headwinds. But a sector-wide power grab seems likely, within the context of wider demand trends, with the International Energy Agency forecasting data centres will double their energy needs to 800 terrawatts by 2026, fuelled by both cryptocurrencies and AI.

Levels of engagement – More evidence was provided this week