The ESG regulatory landscape is changing rapidly. With new groups, policies, and mandates appearing frequently, and more acronyms being added to the list, ESG professionals must learn to stay on top of emerging trends and updates.
Read on to learn about recent updates to the global ESG regulatory landscape and what they mean for corporations, ESG professionals, and investors.
Significant ESG Regulatory Updates
“Within the global ESG regulatory environment, recent developments are already reshaping strategies,” says Dr. Isabella Bunn, a senior advisor for Oxford Analytica and a research fellow in governance and global ethics. Firms and their advisors are closely examining concepts such as materiality, due diligence, and disclosure, and looking at how these concepts will apply across business operations and supply chains.
Fit for 55
The EU has published legislative proposals and policy initiatives designed to reduce net greenhouse gas emissions for the region by 55 percent by 2030. The proposals prioritize investment in renewable energy and more energy-efficient modes of transportation, housing, building, and manufacturing processes.
The European Union’s adoption of a proposed Corporate Sustainability Reporting Directive (CSRD) in April 2021 replaced existing requirements under the Non-Financial Reporting Directive (NFRD) and arranged for the European Financial Reporting Advisory Group (EFRAG) to develop new standards.
The CSRD requires large companies to report regularly on a range of ESG factors to help investors and other stakeholders evaluate non-financial performance and improve transparency across ESG investing.
Carbon Border Levy
In March, the European Council agreed to the Carbon Border Adjustment Mechanism (CBAM) proposed under Fit for 55. The CBAM will place a levy on imports from countries where the cost of carbon is lower than the EU (or unpriced). This will help prevent carbon leakage — that is, European companies outsourcing production to low-carbon-price countries to avoid carbon prices under the EU’s Emissions Trading System.
A New Climate Disclosure Rule by the SEC
In March, the SEC proposed a new rule that would require public companies to disclose data against ESG criteria in clear, standardized, and intelligible ways. This will give institutional investors a standard framework for comparing the ESG risks and opportunities of public companies, while holding corporations accountable to the ESG-related claims and goals they announce publicly.
This new climate disclosure rule is likely just the beginning. “Everyone needs to realize that this must only be the beginning of a series of climate packages designed to make up for decades of climate inaction,” says Kim Cobb, climate scientist and director of the Institute at Brown for Environment and Society.
The SEC hopes to approve the rule later this year and, if adopted, it will come into effect in 2023, with auditing rolling out over the following two years to give companies time to prepare for disclosure requirements.
“No one bill was ever going to do it all,” says Leah Stokes, a climate policy expert at the University of California, Santa Barbara. “This will get us on a pathway to cutting carbon pollution by 40 percent below 2005 levels by 2030. That’s really important, but we need to go even further.”
China’s First ESG Disclosure Standard
In May, China announced its first ESG disclosure standard — the Guidance for Enterprise ESG Disclosure — developed by a state-funded think tank known as China Enterprise Reform and Development Society (CERDS). With international ESG standards often difficult to adapt to Chinese conditions, this standard was developed specifically for Chinese companies and seeks to become the first China-specific ESG disclosure standard. Although it is non-binding, it offers a framework of ESG disclosure criteria for different types of companies. The standard went into effect in June 2022.
New Climate Disclosure Proposals in Japan
In 2021, Japan’s Financial Services Agency (FSA) proposed making climate disclosures mandatory for large Japanese companies beginning in 2022. The proposal would require all companies listed on the Tokyo Stock Exchange’s “Prime” market to disclose climate-related data in alignment with TCFD recommendations.
Changes to Standards, Frameworks, and Institutions
Corporations are also monitoring changes in what is sometimes referred to as an alphabet soup of ESG institutions.
The Sustainability Accounting Standards Board (SASB), an independent standards-setting organization, recently merged with the International Integrated Reporting Council (IIRC), forming a new organization known as the Value Reporting Foundation (VRF).
In November 2021 at the COP26, the International Financial Reporting Standards Foundation (IFRS) announced the launch of the International Sustainability Standards Board (ISSB). The ISSB intends to define a comprehensive set of ESG considerations to help improve transparency in sustainable investing and provide investors and other capital market participants with clear information about a company’s environmental risks and opportunities.
The Meaning of ‘ESG’ is Changing
As ESG funds and socially responsible investing gain popularity, what ESG means — and what it covers — is also changing. More issues are being considered within the environmental, social, and governance categories. The “S,” for example, can entail action on the UN Guiding Principles on Business and Human Rights, measures to combat modern slavery, and post-pandemic programs to rebuild social and human capital.
As the demand for diversity, equity, and inclusion intensifies, companies are responding with various initiatives, from the workplace to the boardroom. A new Task Force on Inequality-related Financial Disclosures (TFID) held its first global meeting last year, modeled on the highly successful Task Force on Climate-related Financial Disclosures (TCFD), which was developed for the environmental sustainability aspect of ESG. It aims to build a set of metrics to guide companies and investors in measuring and managing their impacts, thereby bolstering ESG performance.
How to Stay Up to Date on ESG Developments
An overwhelming amount of news and content is published in the ESG space. The challenge for professionals in the area is determining how to filter relevant news from noise.
“In a report by EY and Oxford Analytica, one particular theme resonates with me: the need to build trust across the ESG movement and strengthen ‘decision-useful’ information,” Dr. Bunn says. “Over the years, I have adjusted my perspective on the role of ESG. At first, with the advent of the UN-backed Principles of Responsible Investment, I saw ESG as an investment topic. When companies began to respond to emerging priorities in capital allocation, I saw ESG as a trend in corporate responsibility. Today, I view ESG as a catalyst for systemic change with far-reaching implications across business, government, and society.”
ESG News, Intelligence, and Analysis
Dr. Bunn recommends sourcing ESG news from a range of credible publications and organizations and identifying and assessing the trustworthiness of a full range of sources, from media to the financial sector to research institutes.
It is helpful to follow various organizations at the intersection of thought leadership and business strategy, such as the World Economic Forum, the FiscalNote Executive Institute, the ESG & CSR Board, and McKinsey & Company. Even studying the program agendas for events held by these organizations can prove useful in identifying emerging issues and relevant experts.
Staying on top of ESG regulatory changes also means making sure you have a go-to network of executives working on these issues who can share similar challenges, best practices, and ideas. For example, the FiscalNote Executive Institute (FNEI) — an exclusive thought leadership community for senior leaders who work in general counsel, ESG, and government and public affairs — organizes programs and events throughout the year highlighting top issues shaping the ESG landscape, including developing an ESG strategy, the politicization of ESG, and more.
The ESG & CSR Board does this by offering a trusted, vendor-free community for leaders of ESG, social impact, and sustainability at more than 125 of the world’s largest companies. Backed by expert facilitators, you’ll quickly get personalized, on-demand insights and advice from peers.
ESG professionals will benefit from subscribing to a range of specialized ESG and corporate governance newsletters, such as:
- The ESG Landscape: Trends and Standards Monitor
- FNEI’s monthly e-newsletter — timely articles and executive summaries of the latest ESG thought leadership programming and resources
- Equilibrium’s Top ESG Headlines — weekly analysis of top ESG headlines
- Roll Call on ESG — stay up to date on ESG regulation and policy
- Oxford Analytica’s Daily Brief — global analysis that gives top corporate and government executives a proven edge in predicting the course of key trends
ESG professionals will glean useful insights by following international efforts, such as:
- The UN Global Compact (UNGC), which collaborates with leading multi-stakeholder initiatives on sustainable finance
- The Organization for Economic Cooperation and Development (OECD), which is currently updating the G20/OECD Principles for Corporate Governance to include consideration of ESG risks for the first time
- The Sustainable Stock Exchanges initiative, which spans 120 exchanges and offers a database for ESG guidance to bolster investment flows
- The Impact Management Platform, which launched in 2021 in association with key institutions of global economic governance and provides resources to support the management of sustainability impacts in ways that are integrated with financial performance
A Final Word on the Changing ESG Landscape
Keeping up with ESG developments requires both horizon-scanning and thoughtful research. Attending seminars and conferences, and conducting informal conversations with colleagues can help those in the space stay up to date on relevant news. Learning to filter sources and ask the right questions is critical to staying ahead in a rapidly evolving landscape.
“I must admit that I sometimes feel bemused by these three letters and the extraordinary level of attention they generate,” says Dr. Bunn. “But I also see how they are transforming business and investment, offering pathways toward a sustainable and resilient future. So yes, keep watching for trusted and decision-useful ESG information — and indeed, for ways to contribute to its evolution.”
You can follow ESG updates from Dr. Bunn’s team at Oxford Analytica, CQ, and experts across the FiscalNote group through our monthly publication, The ESG Landscape: Trends and Standards Monitor.
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