With ESG continuing to grow in stature and presence, regulatory frameworks are quickly emerging to standardise the reporting of ESG metrics.
According to Confluence, the EU’s action plan for sustainable finance is currently leading the way with sectoral requirements starting this year, and Sustainable Finance Disclosure Regulation Level 2 rules kicking off January 1, 2023.
So, where do the ESG regulatory reporting regimes standing today and what impacts will they have for market players and investors?
Confluence said, “The EU’s comprehensive sustainable finance plans aim to provide a common definition of sustainable activity, mandate companies to integrate sustainability and risks in their management and disclose their impact in the market environment.
The goals of the plan is to provide greater transparency on ESG investment products, use a taxonomy to set a common definition of sustainable activity and set market standards for financial products.
Starting January 1, 2023, requirements will expand to require adherence to technical reporting standards, for pre-contractual and periodic disclosures at product level, as well as website disclosures at both entity and product level. Starting in June 2023, website disclosures at the entity level, addressing principal adverse impacts, must consider the first reference period – which is the calendar year of 2022.
Furthermore, under the Taxonomy Regulation, beginning on January 1 next year, non-financial firms must address key performance indicators for alignment with the Taxonomy Regulation.
According to Confluence, a key challenge is the discrepancy in the timing of disclosure requirements. Financial firms are being required to report ESG information that relies on data from corporates, who themselves are not required to disclose that data until later dates.
In the UK, similar disclosure and reporting regulations are developing, with the UK already having fully embraced the FSB’s Task Force on Climate-Related Financial Disclosures recommendations released in 2017 for the pension fund industry. By the end of 2021, TCFD supporters spanned 89 countries and jurisdictions with a combined market capitalization of over $25 trillion — a 99% increase over 2020, according to the FSB.
The US has also issued climate-related disclosure requirements for both financial firms and issuers. Based on global frameworks such as the TCFD recommendations and the GHG Protocol, the SEC-authored rules are scheduled to be implemented in stages beginning in 2023 and require specific climate-related data to be provided in registration statements, periodic reports, fund prospectuses and other filings.
Confluence concluded, “Over time, as more companies engage with ESG initiatives and participate in the reporting process, consistency and normalization of disclosures will improve. Sustainable action plans and regulatory reporting will generate more data to assist all parties with assessing companies’ performance and drive regulatory reporting. Investors will also benefit from more information on how well their sustainable preferences and requirements align with their investment portfolios.”
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