The Big Business of ESG and Its Links to Forestry
ESG refers to Environment, Social and Governance. ESG is an approach that originated in the world of finance and is used by investors and banks to evaluate risks and opportunities associated with a company or sector. In addition to environmental elements, these frameworks look at how businesses are run and the ways they interact within their communities and society at large, including considerations of social justice and marginalized communities. While ESG includes a range of factors, these programs tend to be heavily focused on climate-related impacts and actions to counteract climate change along with issues like biodiversity and deforestation. For these reasons, ESG systems are poised to have a significant impact on forests and the forest sector.
For example, the Principles for Responsible Investing (PRI) system, a United Nations supported network of investors, has developed a set of principles for responsible investing, including a subset of ESG factors in forestry. These include water use and impacts, planting and harvesting techniques, biodiversity and ecosystem protections, land use rights, labor issues, worker health and safety, and systems for stakeholder engagement.1 At present, ESG is stirring political controversy in Washington and on Wall Street2, 3, 4 but, with an estimated $18 trillion of ESG-related assets under management, ESG is big business. ESG-related assets are expected to grow to almost $50 trillion by 2025, representing one third of all global investments.5
Areas of Focus
As we launch Sightline, there are a handful of initiatives that we plan to explore in detail. Here is a brief introduction to some topics to be covered in more detail in future issues and online sessions.
SBTi is a framework and an organization designed to help bankers and businesses reduce their greenhouse gas emissions (GHG) in line with the goals outlined in the Paris Agreement, an international climate treaty aimed at limiting global warming to less than 1.5 degrees Celsius. While the signatories of the Paris Agreement are governments, SBTi lays out a process for individual companies to contribute toward the 1.5-degree goal. First, the company looks at its operations and identifies a climate-related target, along with a related plan to reduce their emissions over time. Then, SBTi reviews and validates the company’s target and plan, if the approach meets an established set of criteria. The SBTi framework also requires public announcement of the target and public reporting on the company’s progress.
In 2022, the US Securities and Exchange Commission (SEC) released a proposal for climate-related disclosures. The proposed law, called Enhancement and Standardization of Climate-Related Disclosures for Investors, focuses on greenhouse gas emissions and climate risks, as well as other ESG metrics related to corporate oversight and a company’s social impacts. Like other ESG frameworks, the reporting rules would apply to an array of companies, including in the forest sector, but would also include provisions related to forests in the context of climate.
According to the SEC Commissioner Caroline Crenshaw, the SEC is following where the market has already moved. 6 Many of the largest companies have already set ambitious climate goals and are actively and voluntarily disclosing climate related impact information, based on demand from their investors. However, there is wide inconsistency in how that is happening, which makes fair comparison challenging for investors and the public at large. 6
A public consultation on the proposed disclosures ran through November of 2022. While a debate is ongoing in Washington, the SEC’s rules are expected for finalization by the summer.
Also of note is a proposed Federal Supplier Climate Risks and Resilience Rule. Under this rule, Federal contractors receiving more than $50 million in annual contracts would be required to publicly disclose information about GHG emissions and climate-related financial risks, including those potentially related to forests. These contractors would also need to set science-based emissions reduction targets (see the SBTi section).
Europe tends to be a forerunner on sustainability. As a result, many European laws become the baseline for the forest sector globally. In recent months, there have been a set of new developments in Europe that are already driving changes in the United States.
European Union (EU) Deforestation Regulation (EUDR)
To curb the illegal timber trade, the EU Timber Regulation (EUTR) came into effect in 2013 to prohibit placing illegal wood on the European Union (EU) marketplace. In late 2022, the EU reached agreement to replace EUTR with a new, broader EU Deforestation Regulation (EUDR) that would cover a wide array of commodities that may lead to deforestation including timber products but also coffee, palm oil, beef, and cocoa. The law includes measures like GPS coordinates for the precise geographic origin of harvest for any forest product entering the EU. While the regulation is not yet in effect, these requirements are viewed as impractical or unworkable by an array of North American wood producers.7, 8
European Union (EU) Corporate Sustainability Reporting Directive (CSRD)
On January 5, 2023, the EU’s Corporate Sustainability Reporting Directive (CSRD) into force. The law requires that companies will need to publicly disclose information about their environmental and social impacts. The disclosures reflect a heavy emphasis on climate and are tied to the auditable European Sustainability Reporting Standards (ESRS). The rules will apply to financial year 2024, for reports published in 2025.9
What to Expect
Over the next 12 months, Sightline plans to release three more special reports, each focused on an emerging sustainability trend, platform, or driver. We also plan to host webinars on the topics.
- Sightline Report, Spring 2023 completed
- Sightline Report, Summer 2023
- 1-Hour Webinar, Summer 2023 not completed
- Sightline Report, Fall 2023 not completed
- 1-Hour Webinar, Fall 2023 not completed
- Sightline Report, Winter 2024 not completed
An Invitation to Engage
The focus of Sightline is to illuminate and unpack the climate mitigation and sustainability trends in the business community that will affect our world of forests. As the Northeast Climate Hub launches this new initiative, we welcome your engagement. Which topics would you like to see explored? What questions are coming up in your communities and with your partners, stakeholders, customers or suppliers?
Please email us at firstname.lastname@example.org to provide feedback or input that will help us plan the content of this initiative.
This content is for informational purposes only. The inclusion of an item in Sightline does not imply endorsement or agreement by the Northeast Climate Hub, nor does the Northeast Climate Hub confirm the accuracy or completeness of the information. The appearance of external hyperlinks does not constitute endorsement by the Department of Agriculture of the linked web sites, or the information, products or services contained therein. Unless otherwise specified, the Department does not exercise any editorial control over the information you may find at these locations. All links are provided with the intent of meeting the mission of the Department and the Forest Service web site. Please let us know about existing external links you believe are inappropriate and about specific additional external links you believe ought to be included.
7 https://www.bbc.com/news/world-us-canada-63736486, https://hmr.com/news/ahec-trade-policy-alert-eu-deforestation-legislation/