Around the World in 10 Days: ESG Regulatory Developments
For global investors, the accelerating pace of ESG regulatory developments portends a massive, additional layer of compliance obligations they will need to fulfill. To illustrate (and take inspiration from Jules Verne’s novel), we need only take a tour of developments around the world in just the last 10 days:
- 18 October – UNITED KINGDOM –HM Treasury publishes “Roadmap to Sustainable Investing”, setting forth sustainability disclosure requirements, and reiterates “ambition to make the UK the best place in the world for green and sustainable investing.”
- 18 October – CANADA –Canadian Securities Administrators (CSA) proposes climate-focused disclosure requirements for issuers, open to public comment until 17 January 2022.
- 20 October – UNITED STATES –SEC Commissioner Allison Herren Lee stresses importance of standardized sustainability risk disclosures for US markets, noting that “regulators can now pick up the baton to help achieve what a voluntary system alone cannot – that is, consistent, comparable, and reliable disclosure.”
- 21 October – NEW ZEALAND – Passage of final legislative stage for new climate-related disclosures bill is acknowledged by FMA, which will monitor and enforce new regime.
- 22 October – EUROPEAN UNION – European Supervisory Authorities (ESAs) publish final draft Regulatory Technical Standards under Taxonomy Regulation, articulating additional environmental assessments required in disclosures.
- 22 October – CHINA – Central Committee of the Communist Party and State Council set forth carbon-neutrality goals, including improvement of carbon emissions disclosures by companies and financial institutions.
A Whirlwind of ESG Regulatory Developments
The whirlwind of developments can easily throw compliance departments off course, some might say like Phileas Fogg’s hot air balloon. Moreover, the pressure is bound to increase. As KPMG’s Kaye Swinburne, a former EU Parliamentarian who herself worked on the EU’s current ESG regime, noted in our recent podcast, the U.N. Climate Change Conference (COP26) which opens next week in Glasgow is likely to place even more impetus on regulators to finalize their efforts.
To stay on track, asset managers should make it a compliance priority to determine where they may be subject to ESG reporting obligations, and what types of firms those regimes cover. (For example under the EU’s Sustainable Finance Disclosure Regulation, website disclosures about the “principal adverse sustainability impacts” of investment decisions are much less onerous for firms with less than 500 employees.) Once the scope of requirements is narrowed down, in most jurisdictions managers will benefit from certain aspects of these regimes. Firstly, generally speaking (outside the EU) new ESG disclosures won’t need to be submitted until 2023 or 2024 at the earliest, giving managers some time to prepare. Another common thread is that the requirements usually address only the “E” (environment) of ESG, and in fact are often focused only on climate-related issues, hence limiting somewhat the variety of data that will be needed by managers for reporting. Finally, many of these regulators are adopting the recommendations of the TCFD (Task Force on Climate-related Financial Disclosures) for their standards, which should streamline compliance efforts.
In those respects, the sometimes held view of ESG compliance as an insurmountable hurdle is probably like that familiar balloon: full of hot air. (Although often appearing on book covers of Around the World in 80 Days, a hot air balloon is in fact nowhere to be found in Verne’s novel.) It’s likely that once reporting standards are further harmonized, investee companies enter their initial reporting phases, and investor compliance departments become accustomed to their disclosure obligations, ESG will be viewed as a critical yet manageable aspect of regulatory compliance.