The ESG Landscape is Moving Quickly
The ESG regulatory landscape is a hive of activity. Climate and social justice are now key concerns for policymakers and corporate leaders around the world, and the speed at which governments and regulatory bodies are moving to address these issues is unparalleled. Every corner of the globe is affected by the emergence of new proposals, as well as updates and developments to existing legislation and proposals.
With the first quarter of the year behind us, we look ahead at key ESG policy developments from around the world and provide an analysis of the potential impact on large organizations. Consider this a cheat sheet for sustainability leaders — a simple way to stay up to date with what matters right now in the world of ESG regulation.
North America
The SEC’s Climate Disclosure Rule
What is it?
In March 2022, the SEC released its proposal for a new Climate Disclosure Rule. The rule would require publicly listed companies to disclose their Scope 1, 2, and certain Scope 3 emissions, along with material climate risks (those that are “reasonably likely to have a material impact on their business, results of operations, or financial condition”).
What does it aim to do?
The new rule aims to hold companies accountable for their role in climate change and give investors the information they need to use their buying power as a force for a more sustainable economy. The consensus from investors is positive, and many are looking forward to the more detailed and standardized disclosures the rule will enforce.
“The new disclosure requirements will likely wake investors up to the importance of ESG metrics in the long-term performance of an asset,” explains Melissa Gipson, ESG and climate strategy associate at FiscalNote. Additionally, she hopes the requirements will reveal what’s really going on under the lid, particularly to senior managers. “When you find out that every member of the board fits only one demographic, that’s a problem. Younger generations, in particular, are using their talent and spending power in ways that reflect their values, which will impact market demand.”
How will it impact corporations?
Companies will find themselves in one of two positions as the SEC rules are passed into law — likely sometime in 2023. Some have been disclosing sustainability information in line with global standards such as TCFD, SASB, and GRI. For these organizations, adapting to the SEC’s disclosures, which are broadly aligned with frameworks like the TCFD, will require a relatively smaller effort.
But for those companies that have not embraced voluntary ESG disclosures, preparing to meet SEC disclosure requirements will be a significant undertaking — and one that should begin now if it is not already underway. Organizations need to assess how they will collect and manage the complex data these disclosures require and develop streamlined processes for reporting and disclosure. The risks of non-compliance include litigation and financial penalties, not to mention investor fallout.
Canada’s Corporate ESG Reporting and Disclosure
What is it?
Although a recent report criticized Canada’s slow uptake of ESG regulation, mandatory ESG reporting is coming in 2024 for large Canadian banks, insurance companies, and federally regulated financial institutions (FRFIs). In March of 2023, the Office of the Superintendent of Financial Institutions introduced a new guideline requiring FRFIs to consider climate change in their management practices and financial disclosures.
What does it aim to do?
As part of the country’s push toward a net zero economy, the regulation will require FRFIs to submit TCFD-aligned disclosures, revealing material climate-related financial risks and exposures.
To whom does it apply?
Initially, the guidelines will apply to some 400 financial institutions and 1,200 pension plans (compliance required by 2024), while smaller companies will be required to comply in 2025.
The impact on other corporations will be significant: FRFIs will not be reporting solely on their own climate risk and GHG profiles but also on their clients’. Moving forward, any companies that engage with these financial institutions will also need TCFD-aligned disclosures. Companies that don’t meet disclosure requirements risk litigation, regulatory enforcement, and lost capital.
Inflation Reduction Act
What is it?
In August 2022, the U.S. passed a landmark federal law known as the Inflation Reduction Act (IRA), which contains $500 billion in new spending and tax breaks to build on the foundational climate and clean energy work by the Biden-Harris Administration.
What does it aim to do?
The IRA aims to fight inflation, invest in domestic energy production, and lower the costs of prescription drugs, healthcare, and energy.
Why should you care?
For large corporations, the recently passed Inflation Reduction Act represents not so much a regulatory burden but rather an opportunity worth exploring. “In the U.S., we are likely to see companies expanding operations in the industries the IRA covers,” explains Gipson, “and possibly doing more research into their own operations to determine where and how to capitalize on the fiscal incentives available.”
The implications of the IRA are not just domestic. “The IRA has already inspired some EU companies to start or expand their American operations and has possibly inspired some competition in the EU,” Gipson explains. “It speaks to how the EU and U.S. economies tend to mirror each other on incentives and regulation.”
Asia Pacific
Japan FSA’s Guidelines for ESG Funds
What is it?
In December 2022, Japan’s Financial Services Agency (FSA) released partial draft amendments to the “Comprehensive Supervisory Guidelines for Financial Instruments Business Operators, etc., regarding ESG Investment Trusts.”
What does it aim to do?
The guidelines aim to address greenwashing within public funds and help retail investors make more informed decisions by defining specific disclosure criteria and due diligence for supervisors and asset managers.
To whom does it apply?
The guidelines apply to financial products such as ETFs and investment trusts that position ESG as a key factor in their selection of investment assets and describes in the “Objectives and Characteristics” section of the fund’s prospectus. And while the guidelines apply only to financial products, the public companies within these products must pay close attention to comply with investor disclosure requirements.
China’s First ESG Disclosure Standard
What is it?
In June 2022, a Beijing-based think tank (China Enterprise Reform and Development Society) released its Guidance for Enterprise ESG Disclosure, proposing what could become the country’s first ESG disclosure standard.
What does it aim to do?
China is pushing for green development — one of the top priorities of the Communist Party of China’s 14th five-year plan. But to date, the country’s corporate ESG disclosures have been inconsistent and fragmented. The guidance offers a standardized framework for ESG reporting that is customized to China’s unique economic and social realities.
Why should you care?
Compliance is currently voluntary, but companies would do well to begin preparing. Other parts of Asia have adopted similar voluntary measures in the past before transitioning to mandatory reporting requirements, and mandatory ESG disclosures are a likely reality in China’s future.
Hong Kong Stock Exchange Addresses ESG
What is it?
In November 2022, Hong Kong’s stock exchange (HKEX) published the findings of its latest review of issuers’ ESG disclosures and released new recommendations for improved ESG disclosure. They include suggestions around improved climate reporting requirements, transparency around social issues, board governance of ESG issues, and reporting practices (ESG reports are to be published at the same time as annual reports).
What does it aim to do?
The review analyzed ESG reports in the wake of the exchange’s “2020 Enhancements” recommendations. Both the 2020 Enhancements and the 2022 Review aim to drive sustainability across the public markets and improve board governance and management of climate risks, in line with HKEX’s aim to align with the TCFD framework and ISSB standards.
To whom does it apply?
Companies listed on HKEX should closely analyze the review to reveal areas for improvement in their own ESG reporting and management. At the same time, they should pay close attention to the recommendations and push for alignment, even if the recommendations do not yet pose mandatory requirements. HKEX has repeatedly demonstrated that it will take ESG transparency and disclosure seriously, and being such a central exchange to the APAC market, it is likely leading the way for other market players to follow suit.
Europe
Corporate Sustainability Reporting Directive
What is it?
In January 2023, the Corporate Sustainability Reporting Directive (CSRD) came into effect, marking a major development in European ESG policy.
What does it aim to do?
The CSRD expands on the requirements and scope of the Non-Financial Reporting Directive (NFRD). Under the CSRD, companies must disclose sustainability-related information according to the new European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG). Reporting requirements will be phased in over the next few years; the first companies required to comply (those already subject to the NFRD) will have 18 months to do so.
To who does it apply?
The sheer number of companies required to comply with CSRD disclosure requirements makes its global impact significant. “Where the NFRD applied to some 12,000 companies, the CSRD will apply to approximately 50,000 companies,” explains Gipson. Initially, the CSRD will apply to large companies within the EU that meet at least two of the following:
- €50 million in net turnover
- €43 million in assets
- >250 employees
A simpler set of reporting requirements will apply to small and medium-sized companies within the EU that meet at least two of the following:
- €40 million in net turnover
- €20 million in assets
- <250 employees
Additionally, all companies listed on EU-regulated markets, and some non-EU companies with €150+ million in turnover in the EU and at least one EU-based branch or subsidiary, will also be subject to CSRD reporting requirements, though these companies will have several years to begin reporting.
Why should you care?
The CSRD will have major implications for EU companies and companies with a presence or dealings within the EU. As the continent’s most comprehensive ESG requirements yet, the CSRD could become the role model for other markets’ sustainability reporting standards.
Gipson recommends that companies outside of the CSRD’s scope closely monitor how their EU counterparts implement and follow these new regulations. “Watch for the growing pains they experience, and learn from their mistakes,” she advises. No matter where your company operates, similar requirements are likely to appear in the future.
Circular Economy Action Plan (CEAP) and the Right to Repair Legislation
What is it?
The EU made a major push toward a more circular and sustainable economy with its 2020 Circular Economy Action Plan (CEAP). Measures under the plan call for greater disclosure and transparency, and a focus on repairability and recyclability. One significant measure is the right-to-repair legislation.
What does it aim to do?
The proposal aims to incentivize consumers to repair rather than repurchase. It would also oblige manufacturers to grant free access to repair information, ban planned obsolescence, and offer repairability scores and information on certain products.
To whom does it apply?
Initially, the right-to-repair legislation will apply to a particular list of products, including servers, data storage products, washing machines, dishwashers, fridges, electronic displays, lamps, and possibly smaller digital items such as phones and tablets.
Geraint Edwards, managing director at FiscalNote, urges companies to begin thinking not just about compliance but about how to succeed in an economy that no longer allows for the creation of monopolies through product design. “For corporations, the real opportunity here is to think more seriously about how to design sustainable and highly durable products,” he says. “What does a competitive advantage look like in a market that prioritizes recyclability, repairability, and durability?”
Corporate Sustainability Due Diligence Directive (CSDDD)
What is it?
The EU has proposed a Corporate Sustainability Due Diligence Directive (CSDDD) that would require companies to improve their due diligence standards across human rights and sustainability risks.
What does it aim to do?
The CSDDD is one of a series of measures designed to move the EU further along its path toward a sustainable and climate-neutral economy. In an effort to foster sustainable and responsible corporate behavior, the CSDD doesn’t focus solely on environmental impact; it also looks closely at exposure to human rights and labor rights impact right across companies’ global value chains.
To whom does it apply?
The directive would apply to EU companies with more than 500 employees and €150 million in net turnover worldwide, or 250 employees and €40 million in net turnover worldwide if more than half of net turnover is generated in a high-risk sector. It would also apply to non-EU companies with more than €150 million net turnover within the EU, or €40 million net turnover within the EU, where more than half of worldwide turnover comes from a high-risk sector.
Although the CSDDD won’t apply directly to smaller and medium-sized companies, as suppliers of larger companies, they will also need to meet certain due diligence standards.
Why should you care?
Companies asked to comply with the new due diligence requirements (and their suppliers) will need to begin investing in new due diligence procedures and consider the costs of a transition to more sustainable and ethical operations — including, if necessary, compensation for victims harmed by previous practices. Noncompliance costs include sanctions, fines, and compliance orders, so companies should take preparation seriously.
Minimum Wage Legislation
What is it?
In September 2022, the EU Parliament issued new legislation for minimum wages throughout the EU.
What does it aim to do?
The aim is to ensure minimum wages across the continent are adequate and improve the ability of workers to access minimum wage protection. Member states will have to guarantee that their national minimum wages take into account the cost of living.
To whom does it apply?
Individual countries will have two years to adopt the new standards, and companies operating in countries with historically inadequate minimum wages will want to pay particular attention to the changes and plan accordingly.
Board Gender Composition Legislation
What is it?
In October 2022, the Council of the EU approved a new law requiring publicly traded companies to disclose their boards’ gender makeup annually.
What does it aim to do?
The aim is to achieve a more balanced gender representation on the boards of publicly listed companies.
To whom does it apply?
By 2026, at least 40 percent of non-executive director roles, or at least 33 percent of director positions, must be held by women. Companies that fail these criteria will need to change their board selection process to make it fairer and more transparent.
Why should you care?
The European Parliament has not yet adopted the directive, but public companies in the EU should begin to analyze their board selection process and make arrangements for compliance.
Staying on Top of Key Global ESG Policy Updates in 2023
“Ultimately, at the ESG policy level, there will be few real ‘surprises’ in 2023,” Edwards explains. Much of what we will see passed into law has been several years in the making, and what happens in one market can reasonably be expected to appear in other markets with time.
What matters now is that organizations affected by these changes take compliance seriously and prepare early. The risks of non-compliance will be significant, while the opportunities of getting ahead and using policy changes and disclosure requirements to demonstrate proactive action on ESG are largely untapped.
At FiscalNote ESG Solutions, we empower organizations to take charge of their ESG strategy and stay compliant through technology and expertise. FiscalNote ESG Solutions brings together a combination of an award-winning platform (Equilibrium), a global advisory service, essential ESG intelligence, and a peer community. From helping leading companies measure and manage their carbon footprint, tackle DEI goals, and track ESG regulation, to creating a holistic ESG strategy. FiscalNote ESG Solutions is the best-in-class destination to achieve your ESG goals.
