Good morning,
“We've been following the fact that over the last few years attention to climate and ESG has really shifted in a lot of organizations. So it's not just the [corporate social responsibility] people or the sustainability people or even the investor relations people—it’s the finance people.” That’s what Meggin Thwing Eastman, managing director and global ESG editorial director at MSCI, told me.
MSCI is a provider of investment decision support tools, such as ESG (environment, social, and corporate governance) and climate products for the global investment community. I sat down with Eastman to discuss the company’s annual “ESG and Climate Trends to Watch” report. Here are some key findings:
A is for Accountability
Get ready to get very accountable when it comes to what you and your suppliers are producing.
The U.S. Securities and Exchange Commission’s proposed mandatory climate-risk disclosure rule will launch next year if approved. It requires all filers to disclose Scope 1 and Scope 2 greenhouse gas emissions that occur onsite and are controlled by the company. Meanwhile, reporting Scope 3 emissions (those that aren’t produced directly from the reporting company but from the activities of its value chain), will become a requirement for some companies as well.
“If you as a firm have a net-zero emissions goal and include Scope 3, suddenly you’ve got to be working with all of your suppliers and your customers in order to get to that goal,” Eastman notes. “It’s much more of a network effect. I think investors and regulators both are understanding how intertwined the economy is with these relationships businesses have. And they see a lever that they can pull to get companies to influence each other.”
The Partnership for Carbon Accounting Financials, a global organization, has been making progress on a standard for Scope 3 financed emissions measurement and disclosure, Eastman says. MSCI has been using that methodology for clients who want to analyze their portfolio, but it’s also available to banks and investors directly, she says. "It's just an estimation," Eastman says. "But it's shining some light on something that was previously completely dark.”
She says a focus on "insured emissions" is also on the horizon. It would allow insurance and reinsurance companies to measure and disclose greenhouse gas emissions associated with their underwriting portfolios. “Insurers are going to be looking at the business models and the emissions footprints of the entities that they insure—not just their physical risks, or whether your waterfront property will be there in 10 years,” for example, she says.
New regulation
MSCI ESG Research provides ESG data and analytics for about 1,700 clients worldwide, and provides ESG indexes, according to the company. “Regulators are increasingly looking to regulate businesses like our own, and other ESG and data ratings providers,” Eastman says.
For corporations, regulation is going into new areas. For example, “There's a brand new law in the EU that is going to require all commodities products coming into the EU be able to prove that they were not produced in a way that caused new deforestation,” Eastman says.
There are also proposed updates to the SEC’s naming of funds rule, and “more stringent regulation in the European Union with the sustainable finance directive,” she says.
“So we're seeing disclosure, categorization, and naming of funds and most banks are not prepared for that at this point,” she says.
Better boards
New corporate board demographics could play a role in say-on-climate and other proxy voting trends, according to the report.
“Companies are really needing to look at structuring their boards and their governance structures for a whole new class of problems and challenges,” Eastman says. “It’s about assembling the boards of tomorrow today. So we're looking at things like, do they have climate expertise on the board? What's the view of diversity, not just gender or race or ethnicity, but age, nationality, experience.”
There's a lot of moving parts, for sure.
See you tomorrow.
Sheryl Estrada
sheryl.estrada@fortune.com
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