As sustainability issues such as climate change and biodiversity loss have risen to the top of societies’ agenda, there has been a significant increase in laws, policies, regulation and disclosure requirements from governments and regulators for companies and the financial services industry.
The aim is to curtail adverse social and environmental outcomes, enabling investors and other decision makers to make more informed decisions regarding these risks. The growing requirements is causing concern for companies and funds, as complexity, time and costs rise for organisations having to comply.
Globally, not only there been an increase in the number of environmental and social policies and regulations, but also the variety. We now see new laws, policies and standards which are not only about corporate or investor disclosure, but real-economy sustainability issues such as air quality, plastic, water and soil pollution, food safety, carbon neutrality goals, modern slavery and diversity.
Growth in policy and regulation
According to the UN’s Principles for Responsible Investment, 2020 saw over 120 new or revised policy instruments established, the highest number ever recorded and over 30 per cent more than in 2019 − most of this being driven out of Europe.
During the Trump administration we saw a plateau in the number of policies promoting sustainable finance in the US. Since then, the new Biden-Harris administration has signed several executive orders, including re-joining the Paris Agreement. In early August 2022, we saw the passing of the Climate and Tax Bill in the US Senate.
The Securities and Exchange Commission (SEC) has also announced a review of previously-issued guidance on climate-related corporate disclosure and an enhanced focus on climate and ESG-related risks. Following the rise in flows to ESG funds, the SEC has ramped up its focus on fund greenwashing with investigations into Bank of New York Mellon Corp, Goldman Sachs and Deutsche Bank’s asset management division DWS.
In Asia, there has been a marked upturn in policy and regulations in the last five years. This could grow further as the Japanese Green Growth Strategy, Taskforce on Preparation of Environment for Transition Finance and Expert Panel on Sustainable Finance takes effect.
Also, regulations may materialise from the environmental proposals of China’s 14th five-year plan, as well as the jointly issued guiding opinions to promote climate investment and finance from five Chinese regulators. China has recently released its green bond principles, aiming to align them with international principles and thus attract more global investors.
Other recent notable developments in Asia include India’s proposed regulations for green and blue bonds, and the Reserve Bank of India has published a discussion paper on climate risk and sustainable finance. In Singapore, integrity of ESG claims remain in focus as disclosure guidelines have been issued for retail ESG funds which will take effect from January 2023. In addition, public consultation of a Carbon Pricing (Amendment) Bill is underway and the Singapore Exchange is setting up the ESGenome disclosure portal, which makes companies’ climate disclosures available to investors. In Hong Kong, the Securities and Futures Commission is following its agenda for green and sustainable Finance.
Looking at the type of regulations across regions, in 2020 we saw a large increase in the number of investor-related ESG disclosure regulations (up by 74 per cent from 2019) and investor-related ESG integration policies (up by over 100 per cent). Taxonomies and associated sustainable finance initiatives are now gaining traction, as well as anti-greenwashing regulations.
Developments in Australia
Australia has largely looked to Europe where the leading sustainability laws, polices and regulations are being developed. While the politics of Australia’s climate change policy has been in disarray over the last decade, the Albanese government is close to securing a more ambitious carbon reduction target (from 26-28 per cent to 43 per cent by 2030) through the Climate Change Bill 2022. The government is also likely to introduce a set of associated policies and standards such as electric vehicles and emission standards.
Independently, the Australian financial system regulators, the Reserve Bank of Australia, APRA and ASIC have recognised banks, asset managers and other institutions in the financial system face significant risks arising from climate change. Over recent years, these regulators have taken steps and made public statements to ensure that financial institutions and other corporations manage the financial risks associated with climate change. Coordinating their activities through the Council of Financial Regulators (CFR), these Australian agencies are also actively engaged in international forums to learn about and contribute to the development of best practice in addressing climate-related risks.
Australia’s super funds are some of the leading asset owners on responsible investment globally, with leadership and high regard at the PRI and UNEP Finance Initiative. More recently, Australia has largely taken the lead from Europe on the major corporate and responsible investment frameworks and policy developments such as Taskforce for Climate-related Financial Disclosures (TCFD), Taskforce for Nature-related Financial Disclosures (TNFD) and the International Sustainability Standards Board (ISSB).
Australian corporate disclosure
Clearly customer expectations for companies to disclose their environmental and social impacts is rising with well-resourced and progressive companies leading the way. Smaller listed companies, private companies, and small-and-medium enterprises with fewer resources, tend to focus on regulatory or legal requirements and on areas that have material impact on their companies.
According to the Australian Council of Superannuation Investors, the majority of top ASX 200 companies are now providing detailed information to their investors on a range of ESG factors – 2021 saw an increase in ‘comprehensive’ reports, with 104 out of the 200 in that category, up from 86 in 2020.
Leading companies typically release sustainability reports which are either integrated into their Annual Reports or stand-alone. Leading corporates are closely following the development of the ISSB standards. Also ESG factors based on materiality to their business such as diversity and gender, Indigenous reconciliation action plans, carbon and greenhouse gas emissions and contribution to the UN’s Sustainability Development Goals. Other disclosures include TCFD and considering, planning and in some cases reporting on TNFD, carbon disclosure projects and philanthropic and community contributions.
Leading responsible funds typically report on responsible investment strategy and policy such as positions on modern slavery, gender and carbon; stewardship codes; real world impact or outcomes on society and the environment; fund certification through Responsible Investment Association Australasia or other responsible investment rating bodies, carbon footprint, holdings and memberships to industry initiatives and alliances.