New regulatory rule-making around sustainable, ESG and climate disclosure are on the up around the world and this uptick is pushing companies and financial services firms to move their ESG activities under the oversight of risk and compliance teams.
The launch of the first set of International Sustainability Standards Board standards on 26 June 2023 marked one of the first endeavors towards establishing a global baseline in sustainable reporting and there is legislation and guidance being produced in America and Europe.
Prior to this, the leading framework and standard-setting organizations — the Carbon Disclosure Project, the Climate Disclosure Standard Board, the Global Reporting Initiative (GRI), and the Value Reporting Foundation (itself formed by the integration of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council — provided guidance and rules to develop a comprehensive corporate reporting system with both financial accounting and sustainability disclosures.
The regulation can be broadly broken into fund level disclosure and company level disclosure and across key themes such as climate, diversity and more. This article takes a look at the key reporting frameworks and their implications.
Source: www.esgbook.com
Fund level sustainable disclosure
Investment funds are the main focus of much of the targeted greenwash legislation from regulators around the globe.
Two SEC rules proposed in May 2022, the "ESG Rule" and the "Names Rule", both aim to curb greenwashing and provide investors with more transparency and clarity into ESG investments and processes. These rules also aim to put additional scrutiny and responsibility on asset managers to match their claims with explicit, verifiable results. Now funds with labels that suggest investments incorporate ESG factors - such as 'green' or 'sustainable' - will be required to invest at least 80% of assets in accordance with such characteristics.
The Climate Disclosure rule, also proposed in May 2022, would give investors the information needed to understand whether or not companies they invest in are addressing climate change (and, more importantly, how they are doing so).
In addition to the SEC, in 2022, the Department of Labor (DOL) finalized its rules allowing for ESG investment options in retirement plans, on the basis that ESG factors are financially material and plan fiduciaries should therefore be allowed to consider ESG factors when evaluating plan investments.
The EU, Switzerland, the U.K. and the U.S. have all issued proposals to prevent greenwashing of the sustainability attributes of financial products and services. The EU also proposed amendments to a consumer protection rule that would help fight greenwashing. The proposal would add the environmental and social impact of a product, as well as its durability and reparability, to the list of characteristics that a seller specifically cannot misrepresent. It would also prohibit additional misleading communications such as displaying a sustainability label that is not backed by the government or third-party verification.
Singapore set disclosure and reporting guidelines for ESG funds that went into effect Jan. 1, 2023. Australian regulators issued an information sheet providing detailed guidance to managed funds on how to avoid greenwashing when offering or promoting sustainability-related products.
Company level sustainable disclosure
In March 2022, the Securities and Exchange Commission (SEC) announced new environmental, social, and governance (ESG) disclosure requirements for companies. Under these new rules, public companies must enhance and standardize climate-related disclosures, such as the impact of severe weather events and the governance of risk management processes.
Similarly, in Europe, the Corporate Sustainability Reporting Directive was adapted to publish regular standardized reports on companies’ environmental and social impact activities from the fiscal year 2023 onwards.
There have also been a number of initiatives aimed at classifying sustainable revenue, including:
Canada: The Sustainable Finance Action Council (SFAC) published its Taxonomy Roadmap report in March 2023, which includes Canadian Green and Transition Financial Taxonomy Framework.
China: China's green taxonomy or "Green Bond Endorsed Project Catalogue" was related in 2015, followed by a revised version in April 2022.
Singapore: The Green Finance Industry Taskforce (GFIT) released its fourth and final public consultation paper in June 2023 to receive feedback before it finalizes its Singapore-Asia taxonomy
Australia: The Australian Sustainable Finance Initiative (ASFI) began developing technical screening criteria for an Australian sustainable finance taxonomy in July 2023, which should be completed in 12 - 18 months
Japan: Japan's Expert Panel on Sustainable Finance published 3 reports on sustainable finance initiatives between June 2021 and July 2023
South Korea: SK has established the "K-Taxonomy" in December 2021 to assess the sustainability of economic activities.
Climate Disclosure
Many jurisdictions’ disclosure requirements are closely aligned with the Task Force on Climate-Related Financial Disclosures (TCFD), a voluntary framework that since its introduction in 2017 has become the de facto standard for climate-related reporting. TCFD recommends organizations make climate-related financial disclosures in four core areas: governance, strategy, risk management, and metrics and targets.
Since the beginning of 2022, climate reporting rules have gone into effect in Singapore, China, the United Kingdom and New Zealand, among other jurisdictions.
The EU adopted the Corporate Sustainability Reporting Directive (CSRD), a large-scale ESG disclosure law that will require organizations that meet specified criteria to submit detailed climate disclosures. The Swiss Federal Council also adopted climate reporting rules that will go into effect in 2024.
The EU’s CSRD introduces a gradual approach from limited assurance requirements for sustainability reporting by 2026 to reasonable levels of assurance by 2028. New Zealand’s climate law will require organizations to obtain limited assurance of their Scope 1, 2 and 3 GHG emissions and GHG accounting processes beginning in 2024.
Also during 2022, the United States Securities and Exchange Commission (SEC) proposed climate reporting requirements, Canada announced it was revisiting its proposed climate reporting rules, and Australia launched a consultation on what its climate reporting rules could look like.
The SEC's proposed Climate-Related Disclosure Rule would require publicly traded companies to disclose emissions data and provide transparency into how their businesses are assessing, measuring, and managing climate-related risks and their actual or likely impacts on the companies' business, strategy and outlook. Targets and transition plans would also need to be disclosed. The proposed disclosure aligns with similar broadly accepted disclosure frameworks, such as the Task Force on Climate-related Financial Disclosures and the Greenhouse Gas Protocol. The proposed SEC climate rules would require certain public companies to obtain limited assurance of their Scope 1 and 2 emissions data as early as 2024 and reasonable assurance beginning in 2026.
At the same time, both California and the European Union are expected to approve rules in the coming months that require companies, both public and private, doing business there to disclose their carbon emissions, including Scope 3. Accordingly, given the size of these two economies, by default, most large companies will need to disclose emissions from their suppliers and customers.
Diversity disclosures
The EU recently adopted rules related to gender diversity that requires listed companies to report on the gender composition of their board of directors and to achieve quotas for the underrepresented gender. The other requires many companies to report gender pay gaps. The EU CSRD will also require companies to report on diversity topics such as gender equality.
In Malaysia, recent rules require listed companies to have at least one female director. The Hong Kong Stock Exchange set gender diversity disclosure rules and will prohibit single-gender boards. Board diversity rules went into effect in Singapore last year.
In the U.S., the NASDAQ requires companies listed on its exchange to disclose board-level diversity information and to either have at least two diverse directors or explain why they do not. The SEC is considering enhancing broader human capital management disclosures and is expected to propose in an additional rule to enhance corporate board diversity disclosures.
Supply Chain Due Diligence
In Germany, a rule that requires organizations to prevent and end human rights and environmental violations in their supply chains became effective on Jan. 1, 2023. Organizations must establish due diligence procedures, such as risk management systems and complaints processes throughout their supply chains.
A Canadian law targeting forced labor and child labor in supply chains begins to go into effect next year.
A human rights due diligence rule also went into effect in Norway last year. In the U.S., the Uyghur Forced Labor Prevention Act was signed into law, prohibiting imports made by forced labor in the Xinjiang region of China.
The EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) would require organizations to identify, prevent and end adverse human rights and environmental impacts in their operations and value chains. A separate EU proposal aims to ban products made with forced labor.
Circular Economy
In 2022, California adopted the Plastic Pollution Prevention and Packaging Producer Responsibility Act. The law requires all single-use packaging and plastic single-use food service ware to be recyclable or compostable by 2032. It also establishes the California Plastic Pollution Mitigation Fund and mandates future funding requirements be implemented for producers. Last year Colorado also adopted EPR legislation that covers packaging materials and paper products.
In the last year, EPR rules for plastics producers went into effect in the Philippines; India published guidelines on EPR for plastic packaging; and a plastic packaging tax and a separate EPR for packaging waste went into effect in the U.K.
As part of its Circular Economy Action Plan, the EU proposed revisions to its Packaging and Packaging Waste law that would require all packaging to be recyclable by 2030 and would put in place targets for minimum recycled content in plastic packaging that increase over time. Among other requirements, the proposal would set mandatory rates of recycled content in new plastic packaging and would establish additional EPR requirements.
Where is legislation happening?
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