ESG: a key item on the agenda for regulators and financial institutions in 2023

By Susie MacKenzie, Head of Legal and Regulatory Analytics at Corlytics.

It is clear that ESG will remain a key item on the agenda for regulators and financial institutions as we head into 2023, particularly in relation to Sustainable Finance.

This past year has seen an emphasis on Sustainable Finance, with a plethora of global regulations published, and many more in the pipeline, as regulators seek to address the key issues of ESG classification and disclosure in their pursuit of net zero ambitions. Currently, market participants are required to keep up to date and comply with rapidly evolving, differing national and supra-national regulatory frameworks formulated against a backdrop of varying regional political, social and commercial pressures.

GOOD ESG CORPORATE PRACTICE AND REGTECH

Regtech solutions play an instrumental role in building good ESG corporate governance practices, by mapping various taxonomies (making like-for-like-comparisons), the automated monitoring of the ever changing global bodies improving predictive compliance and risk management.  Corlytics aggregates, classifies emerging and actual changes relevant to client business activities globally ensuring that clients are kept up to date with anticipated regulatory changes and actual regulations and all impacts of these on the firm. This allows fast changing regulations to be presented as relevant information that flow directly into internal governance and control structures.

KEY DEVELOPMENTS LIKELY IN 2023

GLOBAL: On a global scale we are expecting the ISSB (International Sustainability Standards Board) to issue its standards on sustainability and climate-related disclosures, which aims to develop a comprehensive global baseline of sustainability disclosures for capital markets. These are likely to be widely adopted globally and it is critical for firms to be getting ready now.

EU: It is full steam ahead in the EU as it pursues its Green Deal action plan, with a comprehensive ESG framework being put in place:                   

First in the diary for January 2023, has been the application of SFDR Level 2 regulatory technical standards, which integrate the EU Taxonomy.  Somewhat late in the day in November, the ESAs published their Q&As covering a range of questions on interpretation and practical issues. As we head further into 2023 we are likely to see further clarifications issued. A key concern for financial market participants heading into the new regime is the lack of access to reliable data. FMPs will have to rely on the data currently available and, whilst the EU regulatory regime will likely improve the provision of such data once the scope of sustainability reporting requirements is broadened when the CSDR comes into force, this will not cover all the data requirements.

In 2023, we are likely to see further guidelines in the form of controls on fund names which use ESG or sustainability-related terms.  ESMA is considering such measures, along with the introduction of quantitive thresholds for a minimum proportion of investments needed to back up fund names. Further measures aimed at greenwashing are also anticipated following the recent ESAs joint review which seeks to establish the extent of greenwashing in the industry.

UK: The UK is pushing ahead with its proposed new sustainability disclosure requirements (SDR) regime – which is, essentially, the UK’s equivalent to the EU SFDR.  The FCA issued a consultation paper in October 2022, with its final rules expected by the end of H1 2023.  Anti-greenwashing rules are likely to come into force immediately with more detailed rules on disclosure and labelling unlikely to come into force until at least June 2024. It is critical that firms are tracking and adapting to post-Brexit regulatory divergence.

USA: In the USA, we are likely to see the SEC driving forward with its ESG regulatory initiatives, following its issuance of two proposed rules earlier in 2022 which aim to require additional disclosures for registered funds that use ESG factors in investment strategies and to expand rules relating to the naming of funds to cover funds that suggest investment decisions incorporating ESG factors. In addition, over the past year we have seen enforcement actions against both Goldman Sachs and BNY Mellon in connection with greenwashing. However, such initiatives are not taking place against a background of societal or political consensus.  For example, at state level anti-ESG legislation has been passed, with Texas leading the way with a law that bans municipalities from doing business with banks that have ESG policies against fossil fuels and firearms in place.  Further, the Supreme Court decision in West Virginia v EPA has opened the door to increased legal challenges to federal agencies as they seek to put climate change regulations in place.

APAC: In APAC, 2023 is shaping up to be a busy year.  Green taxonomies are being developed across the region and we are likely to see steps to align regulatory frameworks with the ISSB financial disclosure standards when these are published. Australia has prioritised tackling greenwashing with ASIC issuing guidance on how to avoid greenwashing and issuing its first enforcement for greenwashing in 2022.

ESG AND GLOBAL CODES OF CONDUCT

In 2023 we are likely to see progress in relation to the introduction of globally consistent Codes of Conduct for ESG data and ratings providers. This step is to be welcomed. As firms integrate ESG considerations into their activities, they are increasingly reliant on unregulated third-party ESG data and ratings providers. Transparency regarding the methodologies utilised by these providers and the quality of ratings and data is critical to the issue of trust around ESG claims.  Japan is leading the pack in relation to the drafting of such a Code, but the FCA and EU have also taken steps in this direction. 

Corlytics solutions deliver a single source of decision-useful, forward looking information on financial regulator impacts.

If you are interested in learning more about how we are helping our clients manage their regulatory compliance, please get in touch with us.

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