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Sustainability reporting and corporate governance round up

Risk tool
An accounting risk management tool has been developed by MSCI, a provider of financial information indexes. The so-called MSCI ESG AGR model aims to help institutional investors, insurers and other financial institutions to identify potential accounting irregularities that may go undetected by traditional research methods, MSCI said. The tool measures corporations’ financial reporting and classifies their accounting in four categories: very aggressive, aggressive, average and conservative.

Corporate governance reform
Several accountancy stakeholders submitted written evidence to the corporate governance inquiry which is being conducted by the UK Parliament’s Business, Energy and Industrial Strategy Committee, building on related inquiries such as that of British corporates BHS and Sports Direct. The inquiry tackles executive pay, directors’ duties and boardroom diversity, including worker representation and gender balance on executive committees.

Those accountancy stakeholders are: International Integrated Reporting Council; accountancy firms Deloitte, PricewaterhouseCoopers LLP (PwC) and Mazars LLP; UK professional bodies ICAEW, ICAS, the Chartered Institute of Internal Auditors, ACCA, and CIMA; as well as the UK accountancy regulator, the Financial Reporting Council, whose chief executive, Stephen Haddrill also provided oral evidence on 15 November.

Corporate governance reform was a significant pledge in the first speech by UK Prime Minister Theresa May after she became premier in July. The UK government has also launched a consultation on the topic.

Class action
A securities class action was filed against Exxon Mobil Corporation seeking damages for an alleged accounting inaccuracy related to the oil giant’s reserves, which plaintiffs said affected the price of Exxon’s stock.

At least two USA law firms called on investors to join the class action, which alleges that the value of the company’s oil and gas reserves might have deteriorated due to the inherent climate change-related risks that fossil fuel pose.

The legal complaint reads: “Exxon understood and appreciated that it was highly likely that it would not be able to extract all of its hydrocarbon reserves and that certain of those assets were ‘stranded’. Yet Exxon publicly represented that none of its assets were ‘stranded’ because the impacts of climate change, if any, were uncertain and far off in the future.”

The complaint follows on the heels of two investigations by the Securities and Exchange Commission and the New York Attorney General Eric Schneiderman.

Stranded coal
The Carbon Tracker Initiative, a think tank behind key sustainability reporting concepts such as the stranded assets and the unburnable carbon theories, published a report warning that China risks wasting $490bn on unnecessary new coal plants.

In the report entitled Chasing the Dragon? China’s coal overcapacity crisis and what it means for investors, Carbon Tracker argues that structural changes to its economy, slower power demand growth and low carbon capacity targets will likely strand coal capacity.

Matthew Gray, senior analyst and author of the report said: “Reforms to the power sector and the introduction of a national ETS (Emissions Trading Scheme) mean that the current profitability of the coal fleet is not likely to continue. This is essential in order for China to start planning a phase-out of its coal capacity.”

Meanwhile, Romania decided to close two uncompetitive coal mines with the financial support of the European Commission, which will provide €99m ($105m) to alleviate the social and environmental impact of the closure. The Commission concluded such support would not constitute state aid or unduly distort competition.

In addition, the International Energy Agency (IEA) published its annual World Energy Outlook soon after the Paris Agreement entered into force on 4 November introducing ambitious goals towards the transition of a low-carbon global economy.

The IEA report considers renewables and natural gas “the big winners in the race to meet energy demand growth until 2040”.

To avoid the worst impact of climate change, the rise in average global temperatures should be kept below 2°C. In that 2°C scenario, the number of electric cars would need to exceed 700 million by 2040, and displace more than 6 million barrels a day of oil demand, the IEA said.

Another technology to meet the Paris Agreement’s climate goals is Carbon Capture and Storage (CCS), the IEA proposed in a separate report entitled 20 years of CCS: Accelerating Future Deployment.

The agency said CCS is the only technology able to reduce emissions significantly from coal-fired power plants and from industrial processes, including the production of steel, cement and chemicals.

Combined with other alternatives such as bioenergy, CCS can deliver so-called negative emissions: “as CO2 from the atmosphere is absorbed by biomass as it grows, but instead of this CO2 being released again when biomass is burned for energy, it is captured and permanently removed through geological storage.”

ESG requirements in EU pensions law
The European Parliament passed on 24 November the revised text of the Institutions for Occupational Retirement Provision Directive, known as the IORP II Directive, by 512 votes to 77, with 40 abstentions.

The updated rules explicitly introduced requirements for EU pension funds to consider environmental, social and governance (ESG) issues.

The move enhances sustainability reporting as pension funds must take into account ESG factors when making investment decisions, including climate change-related risks. Member states have 24 months to implement the IORP II Directive.

ShareAction, a UK-based NGO, called on the UK government to ensure that such protections afforded to European savers are extended to the UK despite June’s Brexit referendum result to leave the EU.

ShareAction said the European occupational pensions market, covered by the IORP II, invests over €3.2trn ($3.4trn) on behalf of some 75 million Europeans.

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