Corporate environmental, social and governance (ESG) considerations are increasingly important to organizations and investor decision-making. Investors often say the availability and quality of ESG disclosures are insufficient to base investment decisions on.
Responding to this and the supply of information by organizations, many countries are initiating mandatory ESG disclosure regulations to force organizations to adequately disclose the right information through financial disclosures or standalone reports. The main aim is to enhance the supply of information.
Common law countries tend to enact disclosure regulations more because organization-level ESG performance is generally higher. However, the gap between the supply of and demand for ESG information is possibly larger in these countries, suggesting a greater need for mandating disclosure.
The two largest emitters of greenhouse gases (GHGs) – the US and China – are taking initial steps to update national corporate reporting regimes.
In the US, the Securities and Exchange Commission wants public comments on climate change and ESG disclosure. Focus is on key issues, including quantifying climate risks, sector-specific disclosure and enforcement.
The Biden administration is aiming to align US emissions with the Paris Agreement and will work to reduce GHG emissions by 50–52% from 2005 levels by 2030. The administration also wants to phase out the overseas financing of fossil-fuel projects and shift to renewable energy infrastructure.
Meanwhile, the China Securities Regulatory Commission (CSRC) is revising rules for listed companies’ periodic reports. The CSRC has issued a consultation on the reporting rules, updating the chapter on corporate governance, environment and social responsibility, which sets a foundation of mandatory ESG disclosure for Chinese listed companies.
The National Association of Financial Market Institutional Investors has launched a label for sustainability-linked bonds based on the International Capital Market Association’s principles to further support the low-carbon transition of traditional, high-emission industries, such as coal, iron and steel, as well as China’s neutrality goals.
China’s new Administration of Central Budgetary Investment for Pollution Control, Energy Saving and Carbon Emission Reduction Projects aims to improve central budget efficiency and mobilize social capital to aid pollution control, energy-saving and carbon-reduction project investments.
Alongside, the country’s Ministry of Ecology and Environment has three management rules for registration, trading and settlement work for the national carbon emissions trading scheme. Before officially launching the national registration and trading institutions, Hubei Carbon Emission Rights Trading Center is expected to undertake the registration work while Shanghai Environmental Energy Exchange is set to handle the trading business.
China also has a Notice on Wind and Photovoltaic Power Development and Construction Plan 2021. The National Energy Administration aims to increase wind and photovoltaic power in the total national electricity consumption to around 11% in 2021. This will gradually increase so non-fossil energy consumption hits 20% in 2025.
The European Supervisory Authorities have drafted Regulatory Technical Standards that provide clarity to investors preparing for disclosures against taxonomy under the Sustainable Finance Disclosure Regulation (SFDR).
The European Commission has been consulting on the Delegated Act that will determine the taxonomy disclosure requirements for a range of financial market participants and non-financial undertakings.
The Principles for Responsible Investment has also published an investor sign-on letter on Country-by-Country Reporting (CbCR). Thirty-five signatories, representing USD 5.6tn in AUM, and two supporting organizations wrote to the EU to ensure that upcoming regulations meet objectives and provide granular data for a full assessment of tax risks and opportunities.
The Department for Work and Pensions wants to find out if pension scheme trustees have sufficiently robust policies and practices on social factors and how the UK Government can support them.
Ahead of COP26 in Scotland in November, a committee has been seeking views on how the Government’s approach to the pension scheme can inform and be informed by stewardship approaches taken internationally.
The Department for Business, Energy and Industrial Strategy is consulting on transforming the UK’s audit, corporate reporting and governance systems after the Financial Reporting Council’s independent review. The consultation runs until July 8 (2021).
Each country or region is tackling the issue in its own way. But as many organizations push for mandatory ESG and climate disclosure, more investors want global convergence for ease and transparency.
Sustainability disclosure is vital to any company wishing to develop and demonstrate its green or community-oriented credentials.
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