Quick Start Guide to Global ESG and Sustainability Standards

Quick Start Guide to Global ESG and Sustainability Standards: the European Union's standards are far reaching

In an era defined by climate change, Environmental, Social, Governance (ESG) and sustainability standards are gaining momentum around the world. This quick start guide to global ESG and sustainability standards explores how different regions are embracing sustainability.

 

As regulators respond to the challenge of climate change, ESG and sustainability standards provide a transparent framework for businesses and organizations to assess and improve their sustainability practices, and to protect their profits from climate risks. Regulators argue these standards benefit the environment and society, by promoting sustainable economic models, and by protecting investors and consumers from deceptive greenwashing practices.

Quick Start Guide to Global ESG and Sustainability Standards: the European Union
Quick Start guide to global ESG and Sustainability Standards

Europe is at the forefront of setting global sustainability standards. When its member states are combined, the European Union (EU) is the third largest emitter of GHGs in the world, after China and the USA. So the EU’s efforts have significant potential to impact the environment. The EU has introduced comprehensive regulations through three pillars of regulation. Although these regulations cover many areas of ESG and sustainability, climate change is the major driving force.

 

 

The first pillar is the EU’s upcoming Corporate Sustainability Reporting Directive (CSRD). This is aimed at helping investors and consumers to evaluate the sustainability of products and businesses. The CSRD will require large companies (over 500 employees) and listed companies to publish regular reports on social and environmental risks to their profits, ESG opportunities, and how their activities impact people and the environment. The rule is expected to kick in during 2024, and the first reports from the largest corporations will then be required by as soon as 2025. The EU also just adopted the European Sustainability Reporting Standards (ESRS), which define the detailed rules and requirements for reporting on the CSRD.

 

The second pillar is the EU taxonomy of sustainable activities, which classifies the different types of legitimately sustainable economic activities, according to the EU. The purpose of these standards is to promote more consistency, transparency and accountability in sustainability reporting. It will no longer be enough to claim to be green. In the EU, companies and investment products will have to meet the taxonomy standards to be considered sustainable, and false claims could be considered greenwashing and subject to enforcement action. This taxonomy informs reporting on the CSRD and ESG finance disclosures.

 

Third, the EU’s Sustainable Finance Disclosure Regulation (SFDR) defines sustainable disclosure rules for selling investment products. It will require large financial services firms to disclose ESG information on investment products. The regulation applies to asset managers in the EU and global financial firms marketing to clients in the EU. The SFDR defines mandatory ESG indicators. These include 9 environment related indicators and 6 indicators relating to social and employee issues, respect for human rights, anti-corruption and anti-bribery. The SFDR also requires asset managers to assess and disclose any negative impact investment decisions have on sustainability. The EU is even considering extending this regulation to all funds, and not only those claiming ESG methods or goals.

 

The EU regulations are complex, ambitious and far-reaching. Through the three pillars, a huge eco-system of sustainability business data, analysis and processes will be generated in the EU, which investors and consumers will be able to use in their decision-making. Starting in 2025, large U.S. and global businesses that are listed in the EU, or that own subsidiaries in the EU, will also be required to report using the CSRD and SFDR. This means that the EU will require disclosure of the sustainability data of non-EU parent companies, and so the EU standards will be truly far-reaching.

 

 

Quick Start Guide to Global ESG and Sustainability Standards: China

 

China, the world’s largest emitter of greenhouse gases, has acknowledged the urgency of addressing sustainability and pollution concerns. The “world’s factory” has pledged to peak carbon emissions by 2030 and to become carbon neutral by 2060. However, to achieve this enormous ambition for the country and the world, China needs trillions of dollars of investment at a time when overseas companies are concerned to invest in China over human rights and environmental issues. A lack of reliable and comparable ESG data is possibly the biggest barrier to more sustainable investment in China.

 

As a result, China has beefed up its ESG rules to make Chinese companies more attractive to international investors on the environmental and transparency front. China has voluntary ESG reporting guidelines, which are based on 100 ESG metrics that encourage companies to consider their responsibilities as “good corporate citizens.”

 

Listed companies are encouraged to make ESG disclosures by China’s stock exchanges and regulators, including the China Securities Regulatory Commission (CSRC) and the Insurance Asset Management Association of China, which encourages asset managers to incorporate ESG factors into the investment process. The Shanghai Stock Exchange has launched ESG-themed indices, and the listing rules of the Shanghai Stock Exchange and the Shenzhen Stock Exchange require issuers to publish a Corporate Social Responsibility (CSR) or ESG report. The Hong Kong Stock Exchange already has mandatory ESG disclosure rules for listed companies, which has boosted the number of mainland China companies publishing ESG disclosures.

 

 

Quick Start Guide to Global ESG and Sustainability Standards: United States of America

 

In recent years, the United States has witnessed a significant surge in ESG and sustainability adoption as well as a significant political backlash.

 

It is a shame that partisan division has entered ESG in the USA. Many influential initiatives that have helped to define and make sustainability mainstream in global finance and business hail from the USA and American leadership. For example, the Sustainability Accounting Standards Board (SASB) led the way in defining ESG material risks  in specific industries (that is, risks to profits).

 

Several factors have contributed to this rapid expansion and snap back. Increased investor pressure and demands from younger generations for greater corporate responsibility have driven finances into ESG products. What is more, many American corporations are leading the way in sustainability for their consumer products. For example, Microsoft has signed one of the largest ever carbon removal deals as part of its commitment to become carbon negative. Apple launched its first carbon neutral Apple Watch as part of its pledge to be fully carbon neutral by 2030.

 

By contrast, accusations of deceptive greenwashing practices from the political left, and accusations of “wokesim” from the political right, have given corporate leaders cold feet about continuing to use the term ESG. It is being invoked by some politicians to stoke anti-corporate sentiment. As Presidential election year 2024 approaches, American corporations will probably prefer to do ESG more than talk about it. They may also emphasize concrete initiatives, such as the sustainability innovations in their business models and products, or their social commitments to employees and communities.

 

In the long-term, American companies may deal with a complex regulatory environment for ESG and sustainability. The SEC is finalizing its mandatory carbon disclosures rule for listed companies. However, it is likely to face pushback from anti-ESG groups in legislatures and the courts.

 

Moreover, American states are adopting quite different standards and regulations of their own. Democrat-led California is likely to adopt legislation that will require large corporations to disclose their GHG emissions. Companies with revenues over $1 billion that do business in the State will be required to report on their scope 1, 2 and 3 emissions, and will be required to pay for third party assurance of their emissions reports from 2026 onwards.

 

On the other hand, 19 Republican-governed states have proposed anti-ESG legislation. These measures have faced some opposition from chambers of commerce, banking associations and public pension officials for reasons of maintaining free markets across states.

 

Nevertheless, there is a risk that a red state/blue state puzzle of ESG standards may emerge for corporations to have to navigate.

 

 

Quick Start Guide to Global ESG and Sustainability Standards: India

 

India, a country with a rapidly growing economy, faces immense opportunity but also pressing development challenges such as poverty, inequality and destruction of eco-systems. As the world’s third largest emitter of GHGs, it has committed to net zero carbon emissions by 2070. However, for decades to come, India will continue to grow using a combination of fossil fuel and renewable energy sources. India’s ESG policy therefore focuses on defining standards for inclusive growth and responsible environmental stewardship.

 

The Securities and Exchange Board of India (SEBI) adopted a series of measures to promote green financing. Starting this year, the top 1000 listed companies in India will be required by SEBI to report annually using India’s Business Responsibility and Sustainability Report guidelines (BRSR). These guidelines set out 9 areas for ESG key performance indicators, including GHG emissions, water and energy use, circular economy models (which means reducing waste and pollution), employee well-being, gender diversity, business ethics and openness to all.

 

To promote green growth, SEBI also expanded ESG investing opportunities. From 2023, asset managers are allowed to offer multiple types of ESG funds and strategies. Furthermore, mutual funds will be permitted to offer several ESG schemes to investors. To be considered compliant with ESG rules, ESG funds in India will have to align at least 80% of their assets with their ESG goals and strategy. In addition, SEBI will require at least 65% of ESG funds to invest in companies that report using the BRSR standards.

 

SEBI also requires asset managers to provide monthly ESG scores for their holdings based on BRSR criteria. What is more, asset managers are required to disclose their voting and other ESG engagement activity. Finally, boards of asset management firms will soon be required to assure and certify their annual ESG disclosures, making them legally responsible for the content.

 

 

Quick Start Guide to Global ESG and Sustainability Standards: Other major economies

The Task Force on Climate-related Financial Disclosures (TCFD), led by Michael Bloomberg, is a group of leaders and experts from the financial services industry who proposed standards for incorporating climate change considerations into listed companies’ financial disclosures. Their recommendations have already, or will be adopted in many major global financial centers, including Australia, Canada, Japan, New Zealand, Singapore, South Africa, Switzerland, and the UK. The recommendations cover corporate reporting on the ways that climate change presents financial risks and opportunities to business and investments, including: (i) corporate governance of climate-related financial risks and opportunities, (ii) corporate strategy to address climate-related risks and opportunities, (iii) corporate climate risk management and (iv) corporate climate metrics and targets.

 

From 2023 onwards, the UK will require all premium-listed companies to comply with the TCFD recommendations, or to explain why not. In addition, the UK’s Company Act requires large and listed companies to report on ESG-related themes, such as business impact on the environment and communities, and social policies towards human rights and employees. In Canada, the Toronto Stock Exchange (TSX) requires listed companies to report on ESG matters, making it one of the few stock exchanges globally to do so. The Japanese Stewardship Code and Corporate Governance Code encourages institutional investors to engage with companies on ESG issues too.

 

South Korea’s Fair Trade Commission (KFTC) has introduced tough guidelines on environment-related labeling and advertising to crackdown on greenwashing. Companies in S. Korea that make or infer environmental claims (for example, by marketing with the color green or nature-based images) must publish their detailed plans, resources and metrics for their sustainability claims. Many other major economies have or will introduce similar rules requiring environmental claims in marketing and advertising to be scientifically-proven, including Australia and the UK. 

 

Brazil, Mexico, Colombia and Argentina are considering ESG disclosure rules for their stock exchanges. Chile was the first country in Latin America to introduce a carbon tax on emitters in 2014, and Uruguay now has the world’s highest carbon tax on corporate emissions.

 

 

Quick Start Guide to Global ESG and Sustainability Standards: African Union

 

Africa is a continent rich in natural resources and rapid population growth. However, as economies grow and the effects of climate change start to be felt, economies face sustainability challenges such as deforestation, biodiversity loss, global heating and water scarcity. The African continent barely makes a dent in global carbon emissions now, but by the end of this century, many African economies will be major players and could be major GHG emitters.

 

Quick Start Guide to Global ESG and Sustainability Standards

Quick Start Guide to Global ESG and Sustainability Standards: African Union sustainable development priorities (Image by Jukka Niittymaa from Pixabay)

 

So, now is an important window in time for African countries, not only to have to adapt to climate change, but also to introduce more innovative circular economy models that preserve Africa’s natural resource wealth and mitigate climate change. Consequently, African countries are pushing for access to more global financing for renewable energy, sustainable infrastructure development, biodiversity conservation and sustainable natural resource management. At the UN, World Bank and IMF, Africa is collectively calling for reform of the global financial system to support continental investment priorities.

 

Like China, several African countries are developing ESG frameworks to attract foreign investors. Many rapidly growing economies in Africa have introduced ESG disclosure rules or guidelines for their stock exchanges, including Ghana, Egypt, Kenya, Mauritius, Morocco, Nigeria, Rwanda, South Africa, Tunisia and Uganda. In South Africa, the Johannesburg Stock Exchange’s has kicked off a Socially Responsible Investment (SRI) Index.

 

In 2023, the African Union Commission started a consultation with African businesses on ESG. The plan is to start a continental initiative to help African companies make ESG disclosures to help with accessing global finance and trade.

 

 

Is there convergence on a global standard for ESG and Sustainability?

 

Although progress is fast, it will also be important for these global standards to converge. There are many benefits for making global standards consistent, and ideally, interoperable with one-another. In my UN experience, multiple reporting is costly and creates a bureaucratic burden that is not motivational for achieving more sustainable practices. Companies should not spend more time ‘reporting’ than ‘doing’. Consistent standards also facilitate free trade. A standard international framework for ESG reporting would help many corporations to attract foreign investors. It would also promote consistent sustainability practices that companies are able to implement and report on seamlessly in multiple jurisdictions.

 

To respond to the need for consistency, the International Sustainability Standards Board (ISSB) was launched at the Glasgow Climate Summit in 2021. It involves nominees from around the world with a mandate to propose a single standards and reporting framework. In 2023, it launched new voluntary Sustainability and Climate Reporting Standards. The new standards could apply beginning in 2024 and 2025, and are expected to form the basis for regulations for large listed companies and asset managers in many jurisdictions. The standards are organized in two parts. Part 1 deals with sustainability-related financial information and part 2 deals with climate- and GHG emissions disclosures. The framework emphasizes material risks to profits and returns, as well as the business and financial opportunities businesses take by adopting more sustainable practices.

 

The UK announced that it plans to adopt the ISSB’s global standards, and China has indicated it will introduce mandatory ESG disclosures on the back of this agreed framework. Many American finance and retail companies have expressed their support for a common global standard. The International Organization of Securities Commissions (IOSCO), which includes 130 members and 95% of global financial markets, also endorsed the ISSB standards. It stated that the standards are an appropriate global framework for capital markets to develop the use of sustainability-related financial information, and it urged jurisdictions to use the standards in their regulatory frameworks.

 

Merger and inter-operability agreements are also underway to streamline reporting. For example, the ISSB has agreed to take over responsibility for monitoring financial firms’ climate-related financial disclosures from the TCFD, because the TCFD recommendations were included in the ISSB’s global standards. Entities reporting on Europe’s standards will also be considered to be reporting with reference to other pre-existing voluntary standards, such as the voluntary Global Reporting Initiative (GRI) Standards and TCFD, because Europe has closely aligned its standards with other initiatives.

 

The global adoption of ESG and sustainability standards reflects a collective acknowledgment of the urgent environmental and economic need to address sustainability challenges. While each region faces unique circumstances and priorities, they are all moving gradually toward a more sustainable definition of good business practice in the future.

 

If you would like to learn more about ESG, why not also read our Beginners Guide to ESG, or delve deeper into environmental issues in business in our Guide to the E in ESG.

 

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