In this episode of Signals, Nick Mazing sits down with Daniella Woolf, Director at Danesmead ESG. They dive into the alphabet soup of ESG and sustainability acronyms. The focus is on the TCFD framework, a key tool for disclosing climate-related risks and opportunities, along with the different stages of maturity of the ESG frameworks across the globe. The conversation also covers CSRD, ISSB, and PRI.
Danesmead ESG, a UK-based consultancy, works with asset managers, hedge funds, private equity managers, allocators, and corporates across the US, UK/EU and APAC.
The driving force behind this surge in ESG initiatives is investor demand. More and more, investors are looking for companies that not only turn a profit, but also make a positive impact on the world. Tune in to learn more about this evolving landscape.
💡 Name: Daniella Woolf
💡What she does: Director, ESG Consulting
💡Company: Danesmead ESG
💡Noteworthy: As the Director of Danesmead ESG, Daniella Woolf brings a wealth of experience in ESG consultancy, having worked on ESG initiatives at a bulge bracket bank, as well as at an investment management firm, prior to joining Danesmead.
💡 Where to find Daniella: LinkedIn
Navigating the ESG Acronym Jungle
The ESG landscape is a maze of acronyms, with over 350 representing different regulations, conventions, standards, and industry bodies. Key ones include TCFD (Task Force for Climate-Related Financial Disclosures), a framework for disclosing climate-related risks and opportunities, and ISSB (International Sustainability Standards Board), an initiative to develop sustainability-related reporting standards. The goal is to create a global standard incorporating other standards, including TCFD and SASB.
Danesmead ESG: Guiding Global Entities Through ESG Implementation
Danesmead ESG, a UK-based consultancy, has worked with over 40 global hedge funds, private equity firms, and corporates. They assist clients with various ESG implementation and alignment projects, often in relation to regulatory sustainable investment type labels or alignment to other industry bodies like the Principles for Responsible Investment (PRI). The majority of their clients are driven by investor demand for ESG initiatives.
Unraveling the Net Zero vs. Carbon Neutrality Conundrum
The terms ‘net zero’ and ‘carbon neutrality’ are often used interchangeably but have distinct meanings. Carbon neutrality involves offsetting emissions by investing in projects that reduce carbon emissions elsewhere. On the other hand, net zero is a longer-term goal of reducing all emissions as much as possible and only offsetting what’s left. Understanding these differences is crucial when evaluating company disclosures and claims about their environmental impact.
The Regulatory Landscape of Corporate Reporting in the EU and the UK
The discussion kicks off with an exploration of the current state of corporate reporting requirements in the EU and the UK. Daniella explains that these regions have led the charge in sustainability and ESG regulations, with other jurisdictions following suit. She highlights the upcoming Corporate Sustainability Reporting Directive (CSRD) as a significant regulation that will standardize and digitize reporting, with a third-party assurance element for validity.
“So CSRD, it was announced a couple of years ago. This is in line with a commitment made under and called the European Green Deal. And the idea is that CSRD will replace the NFRD, the non-financial reporting directive already in place.”
The Ripple Effect of Regulations on Non-Scope Companies
Daniella discusses the indirect impact of regulations like CSRD on companies that are not directly in scope. She suggests that even companies not formally required to comply will start seeing similar requests for information, creating a sort of “collateral damage” from such regulations.
“There is a sort of general expectation that that’s what you get now, and that’s what companies will provide. So even those who aren’t directly in scope for this, you’re gonna start seeing a similar sort of request for similar sorts of information.”
The Emergence of ISSB in Sustainability Reporting
The conversation shifts to the International Sustainability Standards Board (ISSB), a new initiative that aims to develop sustainability-related reporting standards. Daniella explains that the goal of ISSB is to create a global standard that incorporates various other standards, such as TCFD and SASB.
“The next piece that I think is really important to know about, which is sort of related in some way to CFFD, is called ISSB, the International Sustainability Standards Board. This is a really exciting new initiative from the IFRS. And they have a mandate essentially to develop sustainability-related reporting standards.”
Decoding Scope One, Two, and Three Emissions
Daniella delves into the difference between scope one, two, and three emissions, a common point of confusion in ESG discussions. She explains that scope one covers direct emissions from a company, scope two covers indirect emissions from energy purchased, and scope three covers all other indirect emissions that occur in a company’s value chain.
“One is the difference between, sort of scope one, scope two, and scope three emissions. And there’s a good reason why this is important. So the ESG two protocol is the sort of protocol around the calculation and reporting of different types of emissions generated by a company.”
[00:00:00] Daniella Woolf: I think that there are something like 350 or more different acronyms now representing. Different regulations and conventions and standards and industry bodies relating to ESG and sustainability. I definitely don’t know all of them. but maybe I’ll just cover some of the really key ones that I think people should know.
[00:00:18] Probably top of my list right now would be TCFD. So this is the task force for climate related financial disclosures. And essentially this is a framework that helps, public companies and investment managers, and, you know, all sorts of other organizations, disclose climate related risks and opportunities.
[00:00:34] Nick Mazing: Hello and welcome you listening to Signals by AlphaSense and I’m your host, Nick Mazing. Today we’re going to demystify ESG with Danny Woolf, director at Danesmead ESG, leading UK-based ESG consultancy, helping fund manager, institutional allocators and corporates. Navigate the ever-changing, or shall we say, ever increasing ESG requirements. Danny, welcome and can you tell us a little bit more about you and about Danesmead
[00:01:17] Daniella Woolf: Thank you. yeah, of course. So, we established Danesmead around three, three and a half years ago. as you said, we’re dedicated ESG consultancy, and we’ve worked with over 40 different hedge fund private equity. Allocators in corporates globally, since we started. we’re super well spread across, the world.
[00:01:35] So around 50% of our clients are in the US about 40% in the uk and then the 10% is in, sort of Hong Kong, Australia, different places. and we work with, our clients on various different sort of ESG implementation and alignment project. A lot of it is in relation to, regulatory, sort of sustainable investment type labels, or alignment to other industry bodies like the principles for responsible investment, the p r I.
[00:01:58] but to be clear, the, the majority of our clients are doing. E s G things because their investors want to really, or want, want them to. They’re not necessarily, you know, managing impact funds. they, these are normal hedge funds, private equity managers, long only strategies, but they are considering ESG as risk factors.
[00:02:17] so just to be clear, we’re not, you not sort of super tree hugging investor types. Prior to Danesmead ESG, I spent seven years at Goldman Sachs and five years working musltistructural hedge fund, where I looked after their ESG program as well. So ESG in alternatives has been sort of part of my life for the last maybe eight, nine years now.
[00:02:35] Nick Mazing: So the first question that I have, and it’s. Abroad is the current state of corporate reporting requirements in the EU and the uk. So in the US we’re perennially behind, in terms of regulations on, on that end, even the s e c climate disclosure requirements that keep getting pushed back and challenge.
[00:02:57] But what is interesting? In, in the regulatory world, as an example in the us if there is a large geography that requires something, it becomes a defacto standard. So let’s say in the US, if California has certain requirements for a certain product, it becomes defacto of the national standard. So can you kind of walk us through what’s, what’s going on in the us in the UK and the EU?
[00:03:21] Daniella Woolf: Yeah, and you’re quite right. There is a lot. and. Like you said, to the, the UK and the EU in particular have led a lot of this, with other jurisdictions, very much sort of following suit. And we are starting to see a little bit more convergence now across different jurisdictions around the sorts of things that have required, of corporates.
[00:03:40] in the EU alone, there’s at least 10 pieces of regulation, at the moment that relate in some way to sort of sustainability, it, it climate specifically or environmental issues, or governance and things like that. I, I definitely won’t go through all of them, but there are maybe a few that are really, really important.
[00:03:57] at the moment, on the fund side, there is, the sustainable finance disclosure regulation and EU taxonomy, and on the corporate side, There is right now something called the non-financial reporting Directive, N F R D, and very soon we’re getting a really important piece of regulation called the Corporate Sustainability Reporting Directive, C S R D.
[00:04:19] and that’s probably the one that’s worth. Just going into a bit more detail on at the moment, cause this relates to corporates. So CS r d, it was announced a couple of years ago. This is in line with a commitment made under and called the European Green Deal. and the idea is that CS r D will replace the N F R D, the non-financial reporting directive, which is already in place.
[00:04:38] and there’s a whole range of different reported information that will sort of be under the, requirements of this piece of regulation. It’s things like, you know, to what extent are businesses aligned with carbon neutrality, you know, science-based targets and progress policies. significant sort of negative impacts to things like, You know, environmental issues and, and, and like exposure to coal and oil and gas related activities.
[00:05:02] And then a lot of other reporting around, risks and how they’re managed and how you’ve got information, that sort of stuff. and an important sort of additional element of C S R D, is a requirement for. What you report to be audited, you know, assured. So this adds some much needed accountability, in terms of, the sort of transparency reporting.
[00:05:22] but what they’re aims to do really, and this is a really good thing, is that it simplifies and, and sort of brings sustainability reporting on a part with financial reporting. It sort of make, the idea is that these should be seen as equally important. and we all get financial reporting that’s been around for a very long time, but sustainability reporting is still quite patchy.
[00:05:41] so CSRD captures at around 50,000 companies operating in the eu. This is much, much bigger in scope than the NFRD that was around, 11 or 12,000 companies. and your brought in scope if you meet sort of two or two or three different criteria, and they’re all related to size. but importantly, Non EU companies that have a turnover, in the EU above 150 million euros are also brought into scope here.
[00:06:05] So this is not just European based companies, it’s, there is a sort of extra territorial element as well. and one of the sort of most important things about CSRD is that it requires something called double materiality. and what that means is that it’s not just businesses disclosing, The risks that they’re facing from things like climate change, but they’re also being asked to disclose the impacts that they may have on those sorts of issues like climate and society.
[00:06:32] and so essentially it’s not just, you know, the, the risk the world has on you as a business, but also the, the kind of impact that you have as a business on the world. And that’s this really key thing called double materiality, which hasn’t necessarily been around, in prior, perversions. so all this data is, you know, sort of gathered.
[00:06:50] It’s, supposed to be standardized in a very digital format. and as like I said, you know, there will be a sort of third party assurance element as well, so that people reading it can have assurance that it’s, fair and valid and correct and so on. there’s a phase timeline for this, as there often is.
[00:07:04] So, as of 2024, those entities already subject to NFRD will be brought in scope and what they have to do is. Report 2024 data in 2025. So that means from six months from now, they’re gonna have to start collecting this data, make it ready for reporting 2025, and then each year after that, and a new sort of wave of, entities becomes in scope, depending on size and, and, and so on.
[00:07:28] there is a massive question at the moment whether the companies that are in scope are gonna be ready for this. And it’s widely reported that I think around 50% of companies are expected to not be ready. so there’s clearly a lot to do, but This is good. We, we need this. We can’t expect, you know, the investment management industry to make informed decisions, around, you know, sustainability risks and their investments if they can’t make those assessments.
[00:07:52] And in our work, one of the biggest challenges that we find our clients, you know, experience is. Good quality data, good quality reporting, reliable reporting, consistent reporting in order to be able to actually make these assessments of, you know, is this a risk? Is, you know, is, you know, should I be taking this into account?
[00:08:10] So this is a really, really good step in the right direction, but clearly there’s a lot of work to do. and then to your point around, does this have a sort of knock on for other jurisdictions who aren’t directly in scope? I absolutely believe that is the case. That’s exactly what we see happening quite a lot.
[00:08:26] the UK already has some climate disclosures, in place, which are in line with something called TCFD, which is the task force for employment related financial disclosures, which impact both corporates and managers already. and the US has, you know, proposal for, corporate climate disclosures, which would be from next year, which covers things like GSG emissions, a whole range of different climate related, you know, financial metrics and qualitative disclosures.
[00:08:49] scope one and two reporting and so on. So, we are seeing other jurisdictions proposing similar things. But to your point around sort general, you know, conformity, what we typically see is once a piece of regulation like this is, is out there and is, is being, you know, fulfilled by those who are in scope.
[00:09:07] There is a sort of general expectation that, that’s what you get now and that’s what companies will provide. So even those who aren’t directly in scope for this, you’re gonna start seeing this a similar sort of request for similar sorts of information. And I think it just sort of, Indirectly impacts, there’s a huge, like collateral damage from, a piece of regulation like this, bringing loads of others in scope even if they aren’t formally required to.
[00:09:31] So yes, I, I think your point is absolutely right. that’s probably about enough about CSRD.
[00:09:36] Nick Mazing: So, moving on from, from corporates, you also work very extensively with investment managers and with the largest institutional allocators on ESG issues, around requirements for that type of portfolio level reporting on ESG impacts and, and, and similar. So what can you tell us on, on, on that side about the EU and UK regulations?
[00:09:59] Daniella Woolf: Yeah, so again, the EU has, sort of led the charge here. so they’ve had a piece of regulation out for about two more than two years now, called, s FDR r Sustainable Financial, finance. Hang on. Can we just start that bit again? Sorry. Cut. Okay. Shall I just start my answer again on that bit?
[00:10:19] Nick Mazing: Yeah,
[00:10:21] go ahead.
[00:10:22] Daniella Woolf: okay. I was just gonna think about what I’m saying now. I’ve slightly lost it. Hang on. I’m so sorry. And, Okay. Right. You’re absolutely right. So, again, the EU has, led the charge here and they’ve had a piece of regulation out for two years now called S F D R, the Sustainable Finance Disclosure Regulation. and there’s sort secondary part of that called the EU taxonomy. this is actually a disclosure regime.
[00:10:52] S F D I. It’s not a labeling regime, although the market has very much treated it like a labeling regime. And there are three key articles in this piece of regulation. and depending on sort of what you do as an investment manager, you need to disclose in line with the, regulation for that particular article.
[00:11:08] So they’re called, article six, article eight, and Article nine. article six funds simply, is a sort of comply or explain just a disclosure about whether or not, and in what way you consider sustainability risks in your investments. article eight funds are those that promote specific environmental or social characteristics, and they may or may not also have a commitment to a certain, element of sustainable investments or alignment with the EU tax summary.
[00:11:33] So there’s a bit of a spectrum around what eight funds do. And then Article nine funds, which are the sort of more extreme, kinda end of spectrum. all investments in an Article nine fund are defined as sustainable, which means they need to be contributing, to some kind of social or environmental objective.
[00:11:49] and that needs to be defined and measured and demonstrated and, and reported on. like I said, this is not intended to be labeling, but we do hear people, I think I. Just said Article nine Fund, article eight Fund. And that’s how, the market has ended up using this. and sort of perhaps in response to that, the UK’s regulator, the SCA, has come up with proposals for very similar, yet different sort of regime called, the SS d r Sustainability disclosure Requirements.
[00:12:14] and this is a labeling regime and it is proposed to be a labeling regime. And, and perhaps it’s attempting to sort of fix some of the. You know, areas of SFDR, and they proposed three labels, which are called Sustainable Focus, sustainable improvers, and Sustainable Impact. And you can choose to opt into those labels, if you meet the criteria for them.
[00:12:34] But if you don’t, then you are sort of prohibited from using words like E S G or sustainability when you are marketing those products. so it’s sort of trying to bring in a, a kind of anti greenwashing rule as well. To, to kind of build complete clarity really for those, investors in those products as to exactly how sustainable they are and what they’re doing.
[00:12:54] and then there’s a whole bunch of sort of disclosure requirements around them. we’re expecting final rule rules on that in, in the next few months. It was supposed to be the end of June, but it’s been pushed back a bit cause it’s been a big, big response to the consultation there. And then in the US on the asset management side, we also, had proposals from the S E C for, ESG fund naming rules and fund labels and their labels.
[00:13:16] Proposed labels are integration funds, ESG focused funds and impact funds. and like you said, pushback. So we’re not exactly sure of the timing of that, but what we’re likely to end up with at some point, maybe later this year, maybe early next year, is, three different but very sort of similar regulations from the, the year the UK and the us.
[00:13:36] And no doubt more from others. and the challenge here is that certain investment managers. Will be in scope for two or three of these different pieces of regulation, but they’re, they’re not the same. So you could end up, you know, disclosing under, let’s say Article eight of S FDR R but not necessarily meet the criteria for the labels in the UK system.
[00:13:55] Or, you know, there isn’t necessarily a sort of direct equivalence. So I think we would probably like overall to have a little bit more convergence across your global labels. I think it’s going to be quite challenging to justify, you know, how can you, be an Article eight fund and not be a, I don’t know, whatever label, you know, sustainable focused fund under the UK’s regime.
[00:14:17] So I, I think that this will be a very interesting kind of next six to 12 months and to see how, you know, we managed to navigate this, but we all was, very much a, you know, nobody knew how to sort of navigate that and we survived it. So I think we’ll get through this as well.
[00:14:33] Nick Mazing: And another question that I have for the more casual listeners or more casual hosts in my case, has to do with the alphabet soup of e s g reporting standards. Frankly, there there are so many acronyms that just get thrown around in the meetings can be very confusing. So what are the main acronyms that a casual listener should know?
[00:14:56] Daniella Woolf: I think that there are something like 350 or more different acronyms now representing. Different regulations and conventions and standards and industry bodies relating to ESG and sustainability. I definitely don’t know all of them. but maybe I’ll just cover some of the really key ones that I think people should know.
[00:15:14] Probably top of my list right now would be TCFD So this is the task force for climate related financial disclosures. And essentially this is a framework that helps, public companies and investment managers, and, you know, all sorts of other organizations, disclose climate related risks and opportunities.
[00:15:30] And what they have done is developed four pillars. Which is governance, risk management strategy, and then metrics and targets. and under those pillars, 11 different recommendations, on, you know, how, organizations should be, sort of fulfilling, the, the requirements of those pillars or, or like recommendations of those pillars really.
[00:15:48] it’s become the basis of many, many different global regulators, climate related disclosures. So if you’re looking at any climate risk disclosures in Hong Kong, in Singapore, in, certainly in the uk, in Canada, it’s very good to understand, this framework first. as it’s a, it is generally been used as sort of basis for many of these.
[00:16:10] The next piece that I think is really important to know about, which is sort of related in some way to CFFD, is called I S S B, the International Sustainability Standards Board. this is a really exciting new initiative from the IFRS. and they have a mandate essentially to develop sustainability related report,sort of reporting standards.
[00:16:31] Which bring in a lot of these other acronyms from our alphabet soup. So they, they incorporate TCFD, they incorporate something called cd sb, which is the Climate Disclosure Standards Board. they incorporate, SASB, the Sustainability Accounting Standards Board. They sort of bring, and a couple of others as well.
[00:16:47] But they bring them all together. And the goal here is to sort of have the standards to end all standards, that companies would use. but this isn’t a piece of regulation. The vision is that, Regulators will adopt this as the standards and it will become a sort of global standard. So, we should keep a really close eye on this.
[00:17:05] This is super exciting. We will see a lot more on this very soon. As yet slightly unclear in exactly what way it will be sort of used by regulators, but the vision is that it will, it will be used and I think we should be supportive of that. and maybe the last sort of big one to be aware of, is the p r i, the Principles for Responsible Investment.
[00:17:23] This is, most applicable for investment managers and asset owners. it’s a un affiliated industry body. It’s got around maybe nearly five signatories now and. all those signatories are committing to sort of operate in line with six principles, for responsible investment. And there are minimum requirements for being a signatory in the, annual reporting process.
[00:17:41] Actually, we’re deeply involved with right now cause we’re right in the reporting window. Right now. but this is a very, very good way of, demonstrating to, you know, publicly what you are doing in the context of responsible investment, and you know, how you approach it. and it’s a good signal that you have met, you know, a minimum standards.
[00:17:59] So, those are probably the three I focus on.
[00:18:02] Nick Mazing: And the final question that I had is about some of the reporting terminology or KPIs, if you wanna call them, that you’ve noticed quite a bit of erroneous reporting and labeling of ESG characteristics. And when we’re talking. I was very surprised actually. Uh uh, net zero is not carbon neutral. So can you tell us a little bit more about your favorite or least favorite mislabeling examples?
[00:18:28] Daniella Woolf: No, I think this is a really, really good point because, I think when people think about E S G or sustainability, one of the biggest things they jump to is. Mislabeling, they’re greenwashing confusing statements and, and it’s amazing how often we end up in conversations where we end up explaining some of these things.
[00:18:46] And I think that actually many, many people don’t have a good understanding of the difference between them and Fair enough. Like why should you? It’s a, it’s a relatively new concept for lots of people. but there’s probably a couple that I would, say are kind of, these occur quite often. One is the difference between, sort of scope one, scope two and scope three emissions.
[00:19:04] And, and there’s a good reason why this is important. So the ESG two protocol is the sort of, protocol around, you know, the calculation and reporting of, different types of emissions generated by a company. scope one emissions are those that, This covers the emissions that the company makes directly.
[00:19:19] So if you are, you know, running boilers or your own vehicles, these are the direct emissions that you are producing as a company. Cause of the things that you are doing that’s straightforward, you can measure that quite easily. scope two emissions. So these are the emissions that you sort of make indirectly.
[00:19:33] So it could be electricity or energy, something that you are buying. from a third party for, you know, anything that you need to be doing, heating and cooling buildings, that kind of thing. so these are essentially emissions that are being produced on your behalf, directly incur by you because you need them, but they’re sort of by near somebody else.
[00:19:50] again, probably quite easy to measure. but scope three is where it gets a bit tricky. and this category is sort of for all the emissions that are associated, not with the company itself, but that the organization has, is sort of indirectly responsible for. and these could be upstream or downstream.
[00:20:05] So for example, it could be. Emissions from the, you know, the products and materials that you are buying from your suppliers, or the emissions from the, you know, products that you are selling onto your customers. And this is nearly always the, you know, the biggest portion. it usually accounts for around 70% of a company’s, emissions footprint, for our investment management clients.
[00:20:27] Scope three emissions also includes their financed emissions, so the share of the emissions. That they are in essentially responsible for from, their investments in companies. and that can be quite tricky to calculate accurately if that underlying company isn’t reporting that information themselves.
[00:20:44] So again, this back to the point at the beginning around, you know, corporate disclosures is really key in order for, the investors to be able to. Do the reporting that they need. we often see companies reporting only scopes one and two emissions. and I understand why it’s obviously much easier to calculate and assess and it’s a very good start and we shouldn’t discourage that obviously.
[00:21:05] but scope three is really where it’s at. Scope three is really where the sort of bulk of emissions are. So I think, you know, when you’re looking at people’s disclosures, Do look into the scopes that they’re reporting and it gives you a good sense of, you know, how far they’ve gone in this process.
[00:21:19] and connected to that is this, as you pointed out, this carbon neutral versus net zero. And there is a simple yet really important difference between these two, terms, carbon neutral. This is really much easier to achieve as a very sort of short term goal. And the idea here is that you are. You are, you know, assessing, measuring, and then directly offsetting your emissions.
[00:21:39] So you don’t necessarily have to do anything or change anything in what your business is doing. You can just calculate your emissions and pay to offset them. it can be limited to just str one and two emissions. Obviously it’s good if you could do scope three, but like I said, lots of people don’t. and the offsets can be, sort of indirect reduction or avoidance offsets.
[00:21:59] They don’t have to be, direct removal offsets, which means the type of offset that you can buy, to achieve your carbon neutral status is, quite low cost. You know, it’d be 10, 20, $30. Achievable per carbon ton. it’s a good thing to be doing, but it is no, nowhere near really the kind of effort you have to go to to make a net zero, target or, or commitment.
[00:22:19] This is a much longer term goal. the first thing you have to do is try and reduce everything that you possibly can. And then you only offset what’s left at the end. and only certain types of offset can be used to formally achieve net zero. So you have to truly remove the carbon from the atmosphere rather than simply reduce the amount of carbon that’s being emitted.
[00:22:40] and this obviously has to include scope three as well. so quite important differences I think when you are, you know, again, if you’re looking at company disclosures and you see, a company make a claim that they are net zero. Or net zero have a net zero target maybe, or that they’re a carbon neutral company.
[00:22:56] It’s important to know what they’re actually saying there. Cause they are quite big, differences. And, yeah, it’s, it’s, it’s definitely one of the biggest, confusions I think in, in the terminology.
[00:23:06] Nick Mazing: Danny, thank you for joining us today.
[00:23:08] Daniella Woolf: Thank you so much for having me.
[00:23:10] Nick Mazing: Today we spoke with Danny Woolf from Danesmead ESG, and I know I learned a lot about ESG, and hopefully you did too. This was another episode of Signals by AlphaSense. My name is Nick Mazing and you can find us on all the major platforms. Thank you for watching or listening.