Introduction to sustainable finance regulation
Since 2015, the financial landscape has seen a marked shift towards a more pro-ESG stance, particularly from the investor side. Investors are increasingly seeking to understand and assess a firm’s commitment to environmental, social and governance issues in all facets of their operations. In response, companies have started to report on these criteria, although the results have raised some concerns over global consistency, frequency and quality of the data currently being disclosed. To address these growing concerns, it is expected that in addition to the corporate disclosure requirements introduced over the past 18 months further disclosure regulations will be introduced. According to Verdantix, a research and advisory firm, new mandatory disclosure requirements are expected for EU and US markets in coming years.
In this blog we look at the current standards, frameworks and regulations relevant to sustainable finance to give you a better understanding of which are most relevant for your needs.
Sustainable Finance Standards and Frameworks
The first important distinction to make is between standards and frameworks themselves, and what they mean for companies.
Standards are well-defined and have specific requirements for metrics and data that are expected to be followed closely. Frameworks act as guidelines for reporting rather than providing specific metrics or requirements.
Below are some of the most popular standards and frameworks currently used:
Global Reporting Initiative Standards (GRI Standards) are currently the most widely used and accepted standards for sustainability reporting. They are managed by the Global Sustainability Standards Board (GSSB) and are split into 3 sections: Universal, Sector and Topic. They prioritise stakeholder engagement and materiality assessments as an integral part of the reporting criteria.
- Pros: These standards offer a fair and transparent reporting for all 3 pillars of ESG and will most accurately reflect stakeholders needs. The Sector specific requirements make them versatile and easy to adapt to the requirements of an individual company.
- Cons: The GRI Standards are oriented towards public companies and might be less useful for the private sector and the extensive data required may intimidate new reporters.
Sustainability Accounting Standards Board (SASB) Standards identify materially relevant subsets of ESG information that impact long-term value creation for companies. It gives specific topics and metrics for each of the 77 industries that it covers, avoiding superfluous data collection and reporting fatigue.
- Pros: The SASB standards are used widely and therefore, using their industry-specific topic coverage, it becomes easier to benchmark performance against other companies in the same industry. Their robust and specific criteria also means companies do not report inconsequential or irrelevant information.
- Cons: As the standards are very focussed, they run the risk of limiting the scope of metrics that a company will use to report its sustainability data which prevents them from taking a holistic view of said data.
The Sustainable Development Goals (SDGs) are 17 goals introduced by the UN in 2015 that cover all 3 pillars of ESG. They form a part of the 2030 Agenda for Sustainable Development pushing to end global poverty, protect the environment, and ensure international peace by 2030. Each of the 17 goals is broken down into targets that are specific and actionable so that they can easily be reported on.
- Pros: Unlike many of the other standards currently used, these are not based on disclosures; the SDGs use a goal-oriented approach that users are expected to report on.
- Cons: The targets and goals laid out in the SDGs are qualitative and do not provide specific data points that must be reported. This affects their credibility as a robust reporting framework.
The Task Force for Climate-related Financial Disclosures (TCFD) was created by the Financial Stability Board (FSB) to improve the quality of information disclosed to investors, lenders and insurance underwriters. They are structured around four areas that represent core elements of how companies operate: governance, strategy, risk management, and metrics and targets. This allows companies and their stakeholders to better understand their exposure to climate-related risks, and ultimately promote the channelling of funds towards sustainable and climate-resilient solutions. This is one of the most relevant frameworks for sustainable finance.
- Pros: The TCFD framework allows the entire market, from lenders and investors to insurers, to understand the climate risks that a given company is exposed to, and manage them using consistent and reliable reporting.
- Cons: The framework focuses solely on the environmental considerations of a company and offers very little in the way of social and governance aspects.
The International Finance Corporations (IFC) Performance Standards provide an international benchmark for identifying and measuring environmental and social risks in a company or its investment activity. The standard uses 8 metrics that cover topics from labour and resource efficiency to biodiversity and cultural heritage. The scope of these standards covers the most high profile, complex and potentially high impact projects but also are relevant to lower profile projects.
- Pros: The IFC’s performance standards provide clear guidance on identifying and managing environmental and social risks.
- Cons: They do not take into account governance issues, which are highly relevant in the case of corporate sustainability.
Regulatory Bodies and Relevant Regulations for Sustainable Finance
Across the international markets, regulators are working to integrate ESG as an integral part of investment decisions for companies. As it stands, there is no single international standard, although in July 2021 the G20 announced its support for the global implementation of the TCFD framework. Some members already planned to integrate the framework, and in April 2022 the UK was the first G20 country to legally require reporting against the TCFD for 1,300 of its largest businesses. It is expected to come into force across the UK economy by 2025.
The most advanced ESG disclosure policy can be found in the EU. The EU’s green taxonomy is the first to attempt to define sustainability or sustainable activity in the context of the markets. The most relevant regulations under the new taxonomy for corporates will be the Corporate Sustainability Reporting Directive (CSRD) which supplements the Non-Financial Reporting Directive (NFRD) in requiring companies to disclose climate-relevant information. The CSRD expands the scope of the legislation to include all large companies, listed-SMEs and EU subsidiaries of non-EU companies. Similarly investors will have to disclose ESG-related information from investees.
How can APlanet help?
APlanet’s experienced ESG experts are always on-hand to help you to navigate the complex world of ESG reporting and understand which are the most relevant and important regulations, standards and frameworks for your needs.
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