A Compendium of Important ESG Regulation.
The current economic model is still based on “take-make-replace.” It depletes our resources, pollutes our environment, and damages biodiversity and climate.
EU: Communication from the Commission: On making sustainable products the norm
The past two years have witnessed a significant shift in international focus on climate-related risk and business strategy. Countries and agencies have been proposing and implementing a variety of actions designed to improve the reporting of business impact. These proposals have appeared in three different but interrelated domains:
- in taxonomy;
- in securities regulations; and
- in government ESG regulation.
The tables that follow, capture the significant recent activities, by both governments and by agencies, that address climate- and ESG-related reporting and metrics.
A recently active word in the ESG lexicon is’ taxonomy’. A sustainable finance taxonomy can be defined as a classification system to help investors and other stakeholders understand whether an economic activity is environmentally and socially sustainable (or, more precisely, meets the social and environmental criteria defined by the taxonomy).
In practice, sustainable finance taxonomies generally comprise a list of activities that are considered to align with specified social or environmental goals, alongside technical criteria (e.g. performance metrics or thresholds) to assess when those activities are aligned with sustainability goals.
One of the critical questions for the developers of taxonomies is the extent to which national or regional taxonomies (e.g. within the European Union) should align with other taxonomies. Note below, that taxonomies that commenced with the EU, and have quickly spread to other countries. It will be interesting to see how these taxonomies become aligned or interoperable, that is, how they share common principles and metrics, and adopt processes to overcome potential inconsistencies.
Until this year, there has been some lack of conformity among the metrics and standards that may be used for identifying and quantifying sustainability. 2022 has seen the rapid development of three important sustainability standards, All are in draft form at this moment. KPMG has made some preliminary observations:
- SEC – investor focused and reporting on climate
- ISSB – investor focused, with general principles, plus requirement to report across all significant sustainability-related risks and opportunities. Standards presented for industry groupings (~30)
- EFRAG – multistakeholder focused with core principles plus granular requirements for sustainability impacts, risks and opportunities, including double materiality . Focus on data relevance to EU business and EU Green Deal.
There has been major Security Commission activity in 2022 in the field of sustainable business practice. This has occurred, both in anticipation of, and in response to, COP26 and also in response to government establishment of climate and emissions targets. The focus of new reporting activity appears to be shifting:
- from government regulations and directives that have been predominantly unenforced, under-enforced, or not enforceable (recommendations);
- to investor-focused security regulations that are mandatory.
A new database launched by UN Sustainable Stock Exchanges (UN SSE) shows that 69 stock exchanges globally are taking actions in support of enhancing climate-related financial disclosures in their markets
The most common disclosure action taken by stock exchanges has been in adding the TCFD’s recommendations to their ESG reporting guidelines for their markets. While 40 stock exchanges are referencing the TCFD recommendations in their ESG reporting guidelines, three stock exchanges have further provided climate-specific disclosure guidelines (HKEX, JSE and LSEG). The SSE’s Model Guidance on Climate Disclosure makes a case for climate-specific disclosure guidelines given the unique material risks and opportunities that result from climate change.
This shift in activity is visible in the recommendations, guidelines, and mandated requirements outlined in the tables below. Could it be that the financial stakes have risen?
The EU has been active in writing regulations and directives to facilitate alignment with Paris Agreement climate targets and the UN Sustainable Development Goals. These new directives (SFDR; CSRD; CSDD; ESPR) have been written in a much more obligatory tone than previous regulation.
ESG Regulatory Archive
EU Taxonomy Regulation EU 2020R852
The EUTR establishes a classification system (or a taxonomy) which provides businesses with a common language to identify whether or not a given economic activity should be considered when reporting
EU Platform on Sustainable Finance – Report on Social Taxonomy
While most economic activities have detrimental environmental impacts, social taxonomy Identifies the social benefits (e.g., job creation, paying taxes and producing socially beneficial goods /services), as well as human rights benefits.
ASEAN Taxonomy for Sustainable Finance (version1)
To serve as a common language across the different jurisdictions to communicate and coordinate on labelling for economic activities and financial instruments.
Singapore Green and transition taxonomy
To accelerate the development of green finance by (i) developing a taxonomy (ii) enhancing environmental risk management practices of financial institutions (iii) improving disclosures, and (iv) fostering green finance solutions.
South Africa Green Finance Taxonomy
Help the financial sector with clarity and certainty in selecting green investments in line with international best practice and South Africa’s national policies and priorities
EFRAG (European Financial Reporting Advisory Group) European Securities and Markets Authority
EFRAG is a private association, influencing the development of IFRS Standards from a European perspective and developing draft EU Sustainability Reporting Standards, and related amendments for the European Commission. EFRAG’s mission is to serve the European public interest in both financial reporting and sustainability reporting by developing and promoting European views in the field of corporate reporting and by developing draft EU Sustainability Reporting Standards. These standards will likely be used for reporting under the EU Corporate Sustainability Reporting Directive (CSRD).
Global Reporting Initiative
Independent international organization helping businesses take responsibility for their impacts by providing a common language to communicate those impacts. GRI envisions a sustainable future enabled by transparency and open dialogue about impacts
ED/2022/S2 Climate-related Disclosures
The IFRS (International Financial Reporting Standard) established a new standard-setting board, the ISSB, in November 2021, The IFRS has global influence in accounting standards, through their initial board, the IASB (International Accounting Standards Board). The former Value Reporting Foundation (VRF), itself a merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), has now merged with the ISSB.
APRA CPG 229 – Prudential Practice Guide on Climate Change Financial Risks
Guidance on sound practice in relation to managing climate change financial risks
Climate Risk Disclosure in Investment Management
FSC is a peak body which sets mandatory Standards and develops policy for more than 100 member companies in one of Australia’s largest industry sectors, financial service. FSC provides guidance on sound practice in relation to managing climate change financial risks.
Capital Markets Modernization Taskforce Final Report
Taskforce reporting to the Ontario government (Toronto Stock Exchange) on activities for ‘modernization’
Resolutions on ESG disclosure
Reporting on TCFD recommendations: Guidance on Climate Disclosures
To assist companies on complying with TCFD recommendations
Circular on Business Responsibility and Sustainability Reporting (BRSR) by listed entities
A step towards bringing sustainability reporting at par with financial reporting
Circular to licensed corporations, Management and disclosure of climate-related risks by fund managers; Amendments to Fund Manager Code of Conduct on TCFD recommendations: Guidance on Climate Disclosures
To direct managers to take climate-related risks into consideration in their investment and risk management processes and make appropriate disclosure
CMISA: Circular on Investment related to environmental, social and corporate governance, cyber and technology risks
CMISA: Circular on Risk Management for Regulated Financial Service Providers
To create a risk management framework for financial service providers. It does so by examining both the responsibility imposed on the regulated entity and the domino effect a risk management failure could trigger in one of the related entities, due to the relations and interconnectivity between these entities.
Model Guidance for Companies on Reporting on ESG information
A reference for listed companies to consider ESG disclosure.
Model Guidance for Companies on Reporting on ESG informatio
Investors are now taking into account ESG factors when evaluating mid- to long-term corporate value. Japanese and overseas entities have published standards, frameworks and guidance on ESG disclosure, but listed companies struggle to tell between them and want more information in Japanese
Japan’s National Action Plan on Business and Human Rights (2020-2025)
Lists a series of measures related to business and human rights to be implemented by the Government, as well as expectations for business enterprises to promote introducing human rights due diligence
Climate Innovation Finance Strategy 2020
From Ministry of Economy, Trade and Industry (METI) - Against the backdrop that global society, in particular, emerging countries in Asia and other regions, requires an enormous amount of investments to achieve decarbonization, the importance of the roles played by finance is growing for the purpose of not only promoting “green” investments (e.g., those in renewable energy), but also encouraging investment in companies committed to “transition” to a society which steadily advances low-carbonization and decarbonization or to “innovation” to dramatically decrease the emissions of carbon dioxide.
TCFD Guidance 2.0
From Ministry of Economy, Trade and Industry (METI), promotes disclosure in line with the TCFD recommendations
Basic Guidelines on Climate Transition Finance
To strengthen the position of climate transition finance ( “transition finance”) as a means of financing transitions, especially in hard-to-abate sectors, and introduce more funds in order to contribute to achieving the 2050 carbon-neutral goals and the Paris Agreement
Code of Conduct for ESG Evaluations and Data Providers
Issues regarding current status of ESG evaluation and data by ESG data providers, including transparency, and fairness of evaluation, were pointed out in a report by the Expert Panel on Sustainable Finance in June
Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021
Sustainability Guidelines for Companies
Helps issuing companies understand the context, characteristics and market best practices in ESG factor disclosures
Sustainability Reporting Guidelines for Publicly Listed Companies
Enable listed companies to measure and monitor their contributions towards achieving universal targets of sustainability, such as the UN's Sustainable Development Goals as well as national policies and programs, such as AmBisyon Natin 2040
Sustainability Reporting Guidelines
Guidelines to encourage using internationally accepted reporting frameworks such as GRI when developing reports and seeking third part assurance
Sustainability Guidelines for Companies
Tool for companies to position themselves correctly to become more attractive for international investments
UK Financial Stability Board: Task Force on Climate-related Financial Disclosures (TCFD)
One of the essential functions of financial markets is to price risk to support informed, efficient capital-allocation decisions. To carry out this function, financial markets need accurate and timely disclosure from companies. Without the right information, investors and others may incorrectly price or value assets, leading to a misallocation of capital.
The Financial Stability Board (FSB) created the TCFD to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change
UK London Stock Exchange Group: ESG Report Guidance
Make companies more aware of the importance of providing high quality ESG information, and engaging investors on sustainability-related issues
UK Greening Finance: a roadmap to sustainable investing
To ensure that the information exists to enable every financial decision to factor in climate change and the environment
UK TCDF Guidance on Metrics, Targets, and Transition Plans
To address recent developments … provides additional guidance for preparers regarding disclosures of climate-related metrics and targets and key information from transition plan
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022
Requires climate-related financial disclosures in their strategic report, with disclosure in line with TCFD recommendations provide
Dodd-Frank Wall Street Reform and Consumer Protection Act – Section 1502
Written out of concern that the trade of 3TGs was funding "extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein...
US Securities and Exchange Commission Climate Risk Disclosure Rule
As investment dollars have followed the interest in ESG, the regulatory focus from the SEC has needed to increase to assure appropriate reporting
EU Conflict Mineral Regulation EU 2017R821
In politically unstable areas, armed groups often use forced labour to mine minerals. They then sell those minerals to fund their activities, for example to buy weapons. These so-called 'conflict minerals', such as tin, tantalum, tungsten and gold, can find their way into our mobile phones, cars and jewellery. To stem the trade in conflict minerals, the EU passed this regulation to stop:
- conflict minerals and metals from being exported to the EU;
- global and EU smelters and refiners from using conflict minerals, and;
- mine workers from being abused.
EU Sustainable Finance Disclosure Regulation for Financial Institutions (SFDR) EU 2019R2088
Reduce greenwashing and the overstating of green credentials.
Nearly of 334 environmental claims reviewed by the EC were found to be false or deceptive, or 37% included purposely vague and misleading statements
EU Directive on Corporate Sustainability Reporting (CSRD)
EU2021D0189
The CSRD wants companies to disclose how their sustainability/ business strategies align with limiting global warming to 1.5C and how they contribute to the EU’s own climate goals.
EU Draft Directive on Corporate Sustainability Due Diligence (CSDD) EU2022D0051
Directive establishes a corporate due diligence duty. The core elements of this duty are identifying, bringing to an end, preventing, mitigating and accounting for negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains.
Ecodesign Requirements for Sustainable Products EU 2022R0095 (ESPR)
Establishes a framework to set ecodesign requirements for specific product groups to significantly improve their circularity, energy performance and other environmental sustainability aspects. It will enable the setting of performance and information requirements for almost all categories of physical goods placed on the EU market. It will enable the setting of performance and information requirements for almost all categories of physical goods placed on the EU market
EU COMMUNICATION FROM THE COMMISSION: On making sustainable products the norm
COM_2022_140
The current economic model is still based on “take-make-replace.” It depletes our resources, pollutes our environment, and damages biodiversity and climate. It also makes Europe dependent on resources from elsewhere.
To address these problems, the EU aims to move to a more circular economy model based on more sustainable products, to ensure that by 2030:
- a significant part of the products on the EU market are designed to be more durable and energy- and resource efficient, reparable, recyclable, and with preference for recycled materials
- companies from all over the world are able to compete on a level playing field without being undercut by others that leave society to deal with their environmental damage
- consumers have access to the information they need to make more sustainable choices, are better protected against practices harmful to the green transition and have longer-lasting products
- companies can access the data they need to ensure environmental sustainability and circularity of their products and business models
EU Green Bond Standard 2021/0191 (COD)
To better regulate the green bond market, improve its supervision, reduce greenwashing, and add clarity when money goes to gas or nuclear.
Law on corporate due diligence, for the avoidance of human rights abuses (Due Diligence Law)
Aims to protect the rights of people who produce goods for the German market.
Modelled after the United Nations Guiding Principles on Business and Human rights. They rest on three pillars:
- The duty to protect human rights. This is referring to states, whose job it is to ensure their citizens’ human rights are established and protected
- The responsibility to respect human rights. This is addressed at companies, who have to make sure their operations are conducted adhering to the international/national human rights legislations
Access to remedy. This pillar underscores the right of victims of corporate human right abuse to seek remedy before courts
US Department of Labor; Customs & Border Protection (CBP) : Uyghur Forced Labor Prevention Act
The UFLPA establishes a rebuttable presumption that any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the XUAR (Xinjiang), China, are not entitled to entry at any of the ports of the U.S
US Inflation Reduction Act
To make down payment on deficit reduction to fight inflation, to invest in domestic energy production and manufacturing, to reduce carbon emissions by roughly 40 percent by 2030, and to allow Medicare to negotiate for prescription drug prices
