The regulatory surge soon to be heralded by ESG considerations might be too much of a bitter pill to swallow for most organizations. This article provides some context to the increasing ESG regulations and the efforts of SGS in facilitating a seamless transition into this new reality.
The global push for more transparent disclosure standards necessitates the need for stricter ESG regulations. ESG Regulations are products-and-firm-level obligations that compel asset managers to relinquish information relating to sustainability considerations and how these sustainability risks are incorporated into the decision-making process.
By implication, on an ‘administrative’ level, companies will be bound to disclose any principle adverse impact of investments made on external sustainability factors. On a ‘product’ level, companies will be bound to make disclosures on products promoting environmental or social objectives or products having ESG-inclined goals as a specific objective.
‘ESG’ (Environmental, Social, and Governance) is a global initiative driven by a set of policies geared towards building a sustainable economy for the future. ESG-driven policies majorly touch on social issues like equality and diversity at senior level, data security, companies’ labor practices, product safety. Its broad reach also spans areas of governance, for instance, executive pay & business ethics, and board diversity. Environmental issues like resource scarcity and Climate Change are also not left out of the scope of what ESG encompasses.
It’s crucial to examine the trends driving ESG materiality in the present corporate eco-system.
First off, there is an abundance of scientific evidence that has increased the relevance of ESG to businesses. For instance, scientific findings relating to the damage caused by environmentally harmful activities trigger a bias for investors and the public towards organizations that visit ESG considerations in their operations.
Stakeholder activism also plays a major role as it shapes societal expectations through societal narratives and social media. The activities of these stakeholders mean a lot to investors to propel regulatory shifts that could significantly impact asset values.
Societal expectations also shape ESG materiality as the forces of consumer behavior now somewhat tilt towards more demand for sustainable products and services.
Now more than ever, proper Investor analysis cannot be carried out without evaluating companies from an ESG perspective — with findings constituting a foundation for portfolio construction. Investors sometimes also venture into ESG investor activism that pushes for greater transparency and more focus on environmental and social issues.
a. US – Biden administration
Suppose the Joe Biden-led administration’s ambitious policy theme on climate (supported by the Federal Reserve) is anything to go by. In that case, EGS regulatory changes will be largely consequential in actualizing these policies.
The SEC under the Trump administration strongly resisted calls to tighten ESG regulations. Currently, public companies are not at all compelled to disclose ESG information. Public Companies are at liberty to choose to disclose or divulge ESG information as it may be beneficial to the investors’ perception of their business.
Things are looking to take a different direction given the election result, though, and in what is an anticipatory move, businesses and Trade Groups have dabbled into lobbying and meeting with the presidency on matters relating to ESG risk and compliance. Consultations are also carried out with an air of inevitability of an imposed ESG disclosure requirement on public corporations.
However, the overall climate of opinion permeating the financial industry favors a principles-based approach to ESG regulations. Companies dealing with more ESG—related concerns get a larger share of the ESG responsibility rather than a one-size-fits-all approach that could potentially stifle innovation to satisfy ESG concerns.
b. Europe and UK — new disclosure obligations coming in March
The UK may have severed ties with the EU. Still, two EU regulations have been scheduled to be taken on board the UK’s already existing regulatory framework enforcing ESG — The Disclosure regulation and the Taxonomy Regulation. The necessary implication of this is that both regulations will affect the UK and apply to all portfolio managers and management companies.
This disclosure regulation applies to UCITS management companies, AIFMS, investment advisers, and portfolio managers make certain disclosures on sustainability risks and sustainability factors that may be relevant to their investments. These ESG-related disclosures link to events that could occur and cause a negative impact on the value of investments. The comply-or-explain basis that this regulation operates on is to the effect that management companies and corporations that do not wish to comply with this regulation must provide a clear reason for their decision.
Compliance with the Disclosure Regulation starts with Asset Managers and Investment advisors taking the following steps:
Website Disclosures: Managers and even larger firms are advised to publish relevant information on their website about their policies and how they plan to integrate sustainability risks in their investment advisory & decision-making processes.
Disclosures evidence the manager’s assessment taking in sustainability risk impacts considerations. It must also be taken into account in documents like the Investment Management agreement or the fund’s prospectus. Such documents must also spell out a clear explanation if the manager does not consider the importance of factoring in any sustainability risks.
Investments that are made out to be sustainable from the outset may require an added disclosure obligation to meet the Taxonomy Regulation requirements.
Managers are required to disclose the relevance of ESG-related factors to their Investment policies and procedures. They will also be required to specify why they are not compliant in the event that they choose not to disclose how their policies and procedures take sustainability risks into consideration.
SGS ESG Assurance Solutions provide a comprehensive framework to help clients achieve their environmental, social and governance (ESG) goals. Leveraging SGS’s expertise in compliance, verification and training services, we create tailored solutions that meet the individual requirements of the client.
Whether your goal is raising your ESG rating, improving your ESG disclosures or ESG processes, or raising a stock market listing, our experts will identify the issues and compliance gaps that may impede your progress. ESG Assurance Solutions follow a simple process for identifying the needs of our clients. After an initial assessment and analysis of the findings, our technical experts will recommend a tailored range of solutions from our Certified, Verified and Optimized service categories.