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  • Gordon Tveito-Duncan

2024 Global ESG Regulations: Insights for Investors & Asset Managers

Environmental, social, and governance (ESG) regulations are constantly evolving, fundamentally reshaping financial services. Last year brought significant developments in ESG regulations, and it seems like 2024 will bring more meaningful changes.


Investors and asset managers will need to adapt to evolving compliance requirements and align their strategies with ongoing developments in ESG regulations. This proactive approach is important for maintaining financial stability and encouraging responsible investment practices in the constantly changing environment shaped by ESG regulations.


Given these considerations, this article will explore some upcoming ESG regulatory changes happening this year in different regions around the world.


United Kingdom


Let’s start here in the United Kingdom, where the Financial Conduct Authority (FCA) has recently finalised its Sustainable Disclosure Requirements (SDR). This initiative introduces sustainability-related product labels, disclosures at both product and entity levels, and additional regulations for sustainable investing in the UK.


The FCA's goal with the UK SDR is “to provide greater transparency, consistency, and in turn, trust, in the market for sustainable investment products”. The proposal includes a general anti-greenwashing rule for all FCA-authorised companies, as well as specific regulations for labelling, marketing, and naming sustainable funds, diverging from the European Union's SFDR. Four new labels are introduced, each required to have a sustainability objective.


1. Sustainable Focus: Products maintaining 70% of the asset profile by investing to meet a credible standard of environmental and/or social sustainability or aligning with specified themes.


2. Sustainable Improvers: Products with the goal of delivering measurable improvements in the sustainability profile of assets over time. These products invest in assets selected for their potential to become more environmentally and/or socially sustainable, influenced by the firm's stewardship.


3. Sustainable Impact: Products explicitly designed to achieve predefined, positive, measurable real-world outcomes. These investments target assets providing solutions to environmental or social problems, often in underserved markets or to address observed market failures.


A fourth label, "Sustainability Mixed Goals," allows fund managers to combine elements of the other three labels. All four labels require that at least 70% of the fund's assets align with the designated label, selected based on robust, evidence-based standards. 


The SDR will start coming into force in May 2024 for the anti-greenwashing rule, and firms can start using the labels from July. 


Europe


We have also seen some notable developments in Europe. Towards the end of the previous year, the three European Supervisory Authorities (EBA, EIOPA, and ESMA – collectively known as ESAs) published their final report, making amendments to the draft Regulatory Technical Standards (RTS) for the Delegated Regulation that complements the Sustainable Finance Disclosure Regulation (SFDR).


The ESAs suggest the inclusion of new social indicators and propose a more streamlined framework for disclosing the principal adverse impacts of investment decisions on the environment and society. Additionally, the ESAs recommend introducing new product disclosures related to "greenhouse gas emissions reduction" targets.


The ESA also proposes some additional technical revisions to the SFDR Delegated Regulation, including:

  • Improvements to disclosures illustrating how sustainable investments "Do No Significant Harm" (DNSH) to the environment and society;

  • Simplification of pre-contractual and periodic disclosure templates for financial products; and

  • Various other technical adjustments, such as the treatment of derivatives, the calculation of sustainable investments, and provisions for financial products with underlying investment options.

 

The European Commission will carefully review the draft and make a decision on whether to endorse these proposed changes within the next three months. 


United States


The Securities and Exchange Commission (SEC) is set to unveil a climate-disclosure rule amending Regulation S-K in April, compelling issuers to disclose various climate-related risks and greenhouse gas (GHG) emission data.


The SEC is also taking steps to curb misleading claims by amending the Investment Company Act’s “Fund Names Rule" in 2023. The amendment mandates that investment companies and funds invest a minimum of 80 per cent of their assets in line with the investments implied by the fund or company's name. Compliance deadlines for this amendment vary among fund groups based on their net assets.


They also proposed a rule in 2022 to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices, expected to be finalised within the next twelve months. This rule introduces three types of ESG investment funds:

  • Integration Funds

  • ESG-Focused Funds

  • Impact Funds


Meanwhile, individual states are taking proactive measures. In October 2023, California passed two bills mandating reporting from companies meeting specific thresholds: 


  1. SB 253 (Climate Corporate Data Accountability Act) necessitates the annual disclosure of scope 1, 2, and 3 GHG emissions.

  2. SB 261 (Climate-Related Financial Risk Act) requires biennial reporting of climate-related financial risk, aligning with the recommendations of the Task Force on Climate-related Financial Disclosures.


The first disclosures under these acts are expected to be published in 2026, covering the 2025 fiscal year, with companies likely to begin preparations in 2024. 


APAC


The Asia-Pacific region is seeing an acceleration in ESG regulation. The Singapore-Asia (Green and Transition) Taxonomy, set to take effect in 2024, marks the world's first multi-sector transition taxonomy. This includes a plan to phase out coal-fired power. Importantly, it incorporates a comprehensive framework for phasing out coal-fired power.


Australia is also placing increased emphasis on sustainable finance. A draft sustainable finance strategy published in November 2023 by the Australian government seeks to attract private and public investment for companies transitioning to more eco-friendly operations. While a specific timeline hasn't been provided, the strategy's measures will be gradually implemented once finalised.


ISSB's Global Impact


On a global scale, the International Sustainability Standards Board (ISSB) is scheduled to come into effect in early 2024. It was published on June 26, 2023, unveiling the first two Sustainability Disclosure Standards: IFRS S1, "General Requirements for the Disclosure of Sustainability-related Financial Information", and IFRS S2 ", Climate-related Disclosures."


Both S1 and S2 heavily lean on the four core pillars of the Task Force on Climate-related Financial Disclosures (TCFD), requiring disclosure on Governance, Strategy, Risk Management, and defined Metrics and Targets. This integration reflects a collaborative effort to improve transparency and standardisation in sustainability reporting globally.


The ISSB's implementation will lay the groundwork for mandatory reporting standards across various jurisdictions, underscoring a shared commitment to consistent and comprehensive reporting practices.


Final Thoughts 


The United Kingdom, Europe, the United States, and the Asia-Pacific region are all seeing significant regulatory developments, reflecting a shared commitment to advancing sustainable finance.


Investors and asset managers must stay vigilant, adapting their strategies to comply with evolving ESG regulations and contributing to a more sustainable and responsible financial ecosystem.


GaiaLens is an AI-powered sustainable analytics platform which acts as an automated ESG analyst team to support institutional investors. If you want to learn more, visit our website or request a demo.

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