On April 22, we celebrated the 53rd annual Earth Day to celebrate the planet and move further towards protecting and celebrating the Earth. In the world of finance, the ESG sector is the primary vehicle for tackling the issue of climate change. Since last year’s Earth Day, how has the sector fared?
In the opinion of research and insights firm Skadden, ESG appears to have cemented its position in the corporate landscape over the past year. With investors and businesses alike seeing the environmental, social and financial benefit of moving more towards the sector, there has been a greater shift than ever before.
There trends are showing up in the numbers. Research from Deutsche Bank last year found that over half – 53% – of investors regard climate change as the most important factor affecting their investment decisions. Meanwhile, 78% of private and business clients are concerned about the negative impact climate change has on the global economy.
With a greater focus on climate change and the challenges around reaching net zero, the ESG regulatory landscape is also changing. While, as highlighted above, the move is broadly in the direction of more oversight on sustainability issues and more vigilance on greenwashing – not all movements have been in favour.
In the United States, the US Republican Party has made an effort of going after ESG and its impact on investment decisions and pensions. For example, back in February a group of 27 Republican state Attorneys General published a letter to Congressional leaders aimed at blocking the implementation of an ESG investing rule.
Meanwhile, Governor of Florida Ron DeSantis recently barred fund managers for state and local entities in the state from considering ESG factors in investment decisions.
Erik Becker, Bodo Windmöller and Klaas Van Imschoot – product directors at RegTech firm Regnology – recently offered their take on these regulatory changes.
“Overall, we have seen significant developments in the ESG regulatory landscape over the past 12 months, with many countries such as the US, Canada, Japan, Europe, and China introducing new regulations and requirements – or planning to adopt those recommended by the ISSB – aimed at improving the transparency and standardization of ESG disclosures,” they said.
The trio provided some key examples of regulations in the EU. Firstly, the Sustainable Finance Disclosures Regulation was adopted in 2022 and started to apply from January 1 this year. It is used by financial market participants when disclosing sustainability-related information.
In addition, the standard set of the disclosure templates of the ESG EU Taxonomy must be applied by all financial market participants for the 31 December this year, including the Green Asset Ratio.
The Regnology trio added, “The already applied disclosure of ESG Risks according to 449a CRR will be extended in 2023 and includes the GAR, which is in line with the requirements of the ESG EU Taxonomy.”
There is also the Corporate Sustainability Reporting Directive, which entered into force at the beginning of this year. Regnology remarked that this legislation will modernise and strengthen the rules that include all levels of an organisation, from reporting functions to governance, data and systems. The corresponding reporting standards are under construction by EFRAG and expected to be published in the second or third quarter of this year.
Looking forward, what changes could we see in the ESG regulatory space over this coming year? According to the trio, further adaptions of the various ESG standard setters are expected soon.
“However, it is difficult to predict exactly which qualitative and quantitative aspects will be changed as these developments are influenced by a variety of factors and stakeholders.”
Despite this, the Regnology directors stated that they believe that the main changes are further climate stress tests are expected to assess the progress of financial institutions in their risk management processes regarding financial risks and resilience to climate change.
Likely further criteria for other environmental objectives such as pollution prevention and the circular economy are expected to be developed and integrated into the existing reporting templates such as ESG EU Taxonomy and ESG Risk disclosure over the coming year.
Regnology said, “In this context we expect discussions on loopholes in the EU taxonomy drafts for greenwashing, e.g., whether fossil powered shipping is considered “green”. We will also see a new Taxonomy (as part of DPM 3.3.) for the submission on ESG Risk disclosure to EBA. Also, the role of environmental risk in the prudential framework will further be clarified as operational realities and demands of various stakeholders align.”
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