New international ESG regulatory proposals, in a nutshell

How legislators worldwide are seeking to make industry more sustainable

National and supranational political and legislative assemblies across the world have been releasing updated regulations to hold local governing bodies, businesses, and investment funds accountable to ESG goals. Examples of regulatory organisations that have recently published updated ESG regulations include the Securities and Exchange Commission (SEC) in the USA, the ‘Fit for 55’ plan by and covering the European Union (EU), and Ping An’s ‘Guidance for Enterprise ESG Disclosure’ in China.

Other ESG regulatory bodies working towards establishing tangible frameworks to measure results organisations achieve against definitions of ESG success include the Australian Sustainable Finance Institution (ASFI), and the Financial Services Agency (FSA) in Japan. These relatively local regulators have been galvanised into action by the International Sustainability Standards Board (ISSB), which has demanded the development and implementation of “common rules for disclosures about climate risk and other environmental, social and governance (ESG) issues”.

Clearer international standards of climate-risk disclosure

The ISSB in March 2022 proposed frameworks for regulators about how organisations should disclose the ways they measure and handle ESG concerns. The ISSB has hoped its proposals can serve as a model for other regulators to develop “a ‘global baseline’ of ESG disclosure standards”. That the development of formal disclosure standards has been deemed necessary by regulatory bodies points to the important fact that such standards have been absent or inadequate previously.

National and international governing bodies have social and environmental targets to work towards. It is obvious that holding businesses responsible for their roles to operate in socially beneficial and environmentally sustainable ways goes a long way to meeting these goals. Clear disclosure standards have therefore been prioritised with the simple aim that from now, organisations should be able to report on their social and environmental impacts according to coherent and consistent models.

New ESG proposals put forward by the SEC

The very general aims expressed by ESG regulatory bodies focus on demanding that entities required to disclose information pertaining to ESG regulation do so in clear, standardised, intelligible ways. In the USA, for example, the SEC has amended its rules for investing bodies so that they “provide consistent standards for ESG disclosures, allowing investors to make more informed decisions”. Furthermore, the amended SEC rules aim to hold firms accountable for their ESG rhetoric, forbidding them from saying one thing but doing another, an approach which in the context of climate change has become known as greenwashing.

The SEC puts its regulations thus: they are “designed to allow investors to determine whether a fund’s or adviser’s ESG marketing statements translate into concrete and specific measures taken to address ESG goals”. Finally, the SEC outlines rules on greenhouse gas (GHG) emission disclosure, requiring environmentally-focused funds to declare the extent of the emissions associated with their funds. Nevertheless, a clause in the SEC brief stating that “funds that disclose they do not consider GHG emissions as part of their ESG strategy would not be required to report this information” seems to provide some firms with a convenient loophole.

New ESG proposals put forward by the EU

Similarly, the EU has published legislative proposals and policy initiatives which aim to better help the bloc reduce net greenhouse gas emissions by 55% by 2030. The set of proposals, termed “Fit for 55”, is extensive, and can be found in detail here. The proposals touch on several areas that aim to influence the behaviour of both business organisations and individual consumers. The areas the proposals touch on include emphasis on investment to increase overall dependency on renewable energy sources, research and implementation of more efficient methods of using energy (including through issuing carbon dioxide standards for vehicles), and looking for alternative, greener forms of fuels in aviation and shipping besides fossil fuels.

Other areas which the legislation and policies cover include proposals for a social climate fund that seeks to invest in decarbonising heating and cooling systems in buildings, making buildings more energy efficient, greater reliance on renewable energy, and better access to zero- and low-emission mobility and transport.

Finally, one of the most wide-reaching proposals put forward by the EU is the “carbon border adjustment mechanism”, a measure which aims to “prevent the emission reduction efforts of the EU [from being] offset by increasing emissions outside its borders through relocation of production to non-EU countries or increased imports of carbon-intensive products”.

In summary, the EU’s new legislative proposals and policy initiatives prioritise investment into renewable energy and more energy-efficient modes of transportation, housing, building, and manufacturing processes. The EU’s regulations are thus clearly defined to tackle several industrial areas and aim to make a meaningful impression on the target to reduce net GHG emissions by 55% by 2030 in its jurisdictional territories.

New climate-risk proposals in Japan

Organisations in Japan and Australia are also taking steps to introduce frameworks and methods through which the environmental and social impacts businesses and organisations have can be measured, formally disclosed, and then subjected to scrutiny.

Japan’s Financial Services Agency (FSA) has been working towards making “climate risk-related disclosures” mandatory for Japanese companies “if new plans from the country’s financial regulator get the green light”. Regulation Asia states that this requirement “could take effect when companies file their securities reports for the fiscal year ending on 31 March 2022 at the earliest”.

The fundamental aim of setting consistent disclosure standards is, in the FSA’s own words, “to step up the scrutiny of funds claiming to be environmentally friendly and be on the lookout for ‘greenwashing’”. While the details of the FSA’s plans are not yet as developed as the SEC’s and the EU’s, their regulatory intentions are echoed.

The state of ESG regulation in Australia and Singapore

Similarly (and interestingly), there are two distinct regulatory bodies operating from Australia and Singapore that share the same acronym (ASFI) — the Australian/Asia Sustainable Finance Initiative. The pair have similar aims, with the Asia SFI stating that it “aims to harness and amplify the power of the finance sector to create low-carbon, climate resilient economies that deliver on the Sustainable Development Goals (SDGs) and the Paris Agreement. This will ensure that economic and social development is achieved while preserving the natural capital on which all societies depend, and support the urgent transition to sustainable food, energy, transport, and infrastructure systems.” The Australian SFI was established in 2019 and will expressly “draw on existing international efforts, including the EU’s”, while adding that it “will work with the Australian financial system ‘to determine what a sustainable finance taxonomy should look like in Australia’”.

Applications closed on April 2022 to join the expert technical group at the Australian SFI, while selections were made based on “their expertise around ‘the development or application of sustainable finance taxonomies or other sustainable finance policy, regulation, and tools”. So, the Australian SFI is very much in its planning stages, recently reaching out for experts in the ESG field to join their advisory panel. The Initiative has said it will look to pre-existing regulations such as the EU’s as a loose model, but that regulations for Australia will need to be suitable in “the Australian economy and context”.

National and international legislative assemblies and policymakers have thus been busy updating regulatory guidelines about what ESG practices should entail at both the organisational and individual levels. Some regulatory bodies, such as the EU, have already published detailed guidelines highlighting the areas of industry and consumption that demand their focus, articulating clear goals and setting out a list of actions territories within it need to take in order to meet those goals. Other bodies, such as the Australian SFI, are still in their planning stages.

Nevertheless, it is clear that regulatory bodies emphasising clear systems of climate- and social-risk disclosure are serious about resolving the issue of false-reporting and box-ticking practices tantamount to greenwashing in the context of climate change. That regulatory bodies are prioritising the clear expression of standards and measures against which organisations will be scrutinised should enable greater transparency of risk disclosure as threats to the global climate and local ecosystems continue to persist.

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