EMISSIONS – THE URGENT MISSING ‘E’ IN ESG


In most trilogies – think faith, hope, and charity (love) in the Christian tradition – one is greater than the other two. Alas, the main thrust of that great mantra of finance today – environmental, social, and governance, or ESG – gets lost in much of the noisy and wide-ranging but often confusing and misunderstood debate around this bandwagon. That omission from much of the discussion and analysis threatens to undermine its chief purpose, which is to tame the climate challenge and bring global temperatures under control. The omission is emissions – the biggest threat of all.


When Gary Gensler, chair of the US Securities and Exchange Commission (SEC), launched his climate disclosure proposals in March 2022, he gave a fractious Washington establishment a curt history lesson. “Our core bargain from the 1930s is that investors get to decide which risks to take,” he said, “as long as public companies provide full and fair disclosure and are truthful in those disclosures. … Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognise that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.” The proposals launched into a sea


of controversy, even though, some would argue, they missed the main target of disclosure and verification. They cover Scope 1 emissions, the ‘greenhouse gases’ that a company makes directly, say, running its vehicles, ships, and boilers, and also Scope 2 – indirect emissions from, for instance, the electricity or energy it buys for heating and cooling buildings, or energy which is being produced on its behalf. But Scope 3 is nearly always the


big one, representing almost 90% of all major company emissions, according to recent MSCI data. In this category go all the emissions associated, not with the company itself, but that the organisation is indirectly responsible for, up and down its value chain. That covers buying products from its suppliers, and from its products when customers use them. Under the SEC proposal, these would need to be


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disclosed only if they were deemed material or part of companies’ climate targets. Scope 3 disclosures would not be subject to third-party verification and would be protected from legal liabilities. That is a big hole in the disclosure ozone layer, and in plans to measure corporate and investor responses to this greatest of current challenges. This issue of RoFM returns to the


themes of leadership in finance, of building the right boards to cope with today’s opportunities and threats and those to come. We hear from four leading thinkers from across the planet – Professor Alexander Van de Putte and Clare Nickson Havens on matters of governance, and Dr Juzhong Zhuang and Professor Michael Mainelli, Chartered FCSI(Hon), on innovation in green finance, based on our recent joint webcast on this theme with the Central University of Finance and Economics in Beijing, which attracted more than 30,000 live viewers. Between them, this foursome hold passports of seven countries on four continents and have residency rights in at least a further two. Nearer home, for a different


light on our sector, catch up with our incisive ‘poet-in-residence’ Nigel Pantling, former soldier, senior civil servant, merchant banker, and now corporate mentor, at cisi.org/rofm-aug22.


George Littlejohn MCSI Editor, Review of Financial Markets george.littlejohn@cisi.org


THE REVIEW SEPTEMBER 2022


REVIEW of FINANCIAL MARKETS


SEPTEMBER 2022 – ISSUE 30


RESEARCH INTO WEALTH MANAGEMENT, CAPITAL MARKETS, AND BANKING


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