Global ESG Framework Landscape
Which ESG frameworks are frequently encountered?
What are some common ESG frameworks?
EU Taxonomy
EU Taxonomy is composed of three important directories:
- Green taxonomy
- Sustainable Finance Disclosure Regulation (SFDR)
- Corporate Sustainability Reporting Directive (CSRD)
Green Taxonomy:
Entered into force on 12 July 2020
Green Taxonomy (The EU Taxonomy) is a dictionary or classification system for defining sustainable activities. With 6 main environmental objectives, it assesses more than 100 economic activities. The aim of the taxonomy is to prevent greenwashing and to help investors make greener investments and scale-up sustainable investments, in order to better implement the European green deal.
SFDR:
Enter into force on March 2021
Asset managers, pension funds, and insurers with European Union assets must disclose how they consider ESG risks in their investment decisions, including statements on due diligence of sustainability risks and measurement of the adverse sustainability impacts at the entity level (or product-level) — Principal Adverse sustainability Impacts (PAIs). Funds need to include related information on their websites, fund documentations, and reports to investors.
CSRD:
Enter into force in 2023
CSRD is a reform of NFRD, where non-financial companies (European listed and large public-interest companies with more than 500 employees and that have either a balance sheet total of more than 20 million euros or a net turnover of more than 40 million euros) shall disclose the proportion of environmentally sustainable economic activities that align with the EU Taxonomy criteria.
TCFD: Task Force on Climate-related Financial Disclosure
The Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. More countries are pushing companies and financial institutions to report their climate-related risk on a mandatory rather than voluntary basis based on the TCFD framework, with the newest implementation by US SEC.
ISSB (International Sustainability Standards Board, Under IFRS)
On 2021, at the 26th U.N. Climate Change Conference, COP26, IFRS announced to create an International Sustainability Standards Board, guiding companies on what sustainability disclosures investors should supplement into financial statements.
SASB (The Sustainability Accounting Standards Board)
SASB is a non-profit organization, founded in 2011 to develop sustainability accounting standards. SASB has developed a complete set of 77 Industry Standards. In November 2018, SASB published these Standards, providing a complete set of globally applicable industry-specific Standards which identify the minimal set of financially material sustainability topics and their associated metrics for the typical company in an industry.
Global ESG Regulation Landscape
🇪🇺 European Union
January 2022 (reporting period 2021): qualitative information and information on the proportion of taxonomy-eligible activities needed to be disclosed;
January 2023 (reporting period 2022): the Delegated Act will apply fully to non-financial undertakings falling under the NFRD to start reporting on the alignment of taxonomy eligible activities;
🇬🇧 United Kingdom
Mandatory TCFD-aligned disclosures across the UK economy by 2025
The FCA has clarified that firms will no longer have to comply with both TCFD and the European Union’s Sustainable Finance Disclosure Regulation (SFDR)4 methodologies: only disclosure of metrics using TCFD methodologies will be required.
🇺🇸 United States
The SEC proposed new rules for climate change disclosures, consistent with the Task Force on Climate-Related Financial Disclosures (TCFD) disclosures. It requires the disclosure of Scope 1 and 2 greenhouse gas emissions, and Scope 3 emissions if the company has set a GHG emissions reduction target that includes Scope 3 emissions. The largest companies would need to start disclosing climate risks in fiscal 2023, while other firms would have until fiscal 2024.
🇨🇳 China
The Shanghai Stock Exchange asks the Science and Technology Innovation Board (STAR) market companies to disclose ESG information in annual reports beginning in 2022.
In 2008, the Shanghai Stock Exchange requested companies to disclose environmental information in its Guidelines on Corporate Social Responsibility (CSR).
🇭🇰 Hong Kong SAR
The Hong Kong Securities and Futures Commission (SFC) has announced that from January 2022, ESG funds, and climate-focused funds products will have to disclose how they incorporate ESG factors, report and reference ESG criteria, showcase portfolio measurement approaches and release periodic assessments annually. (link)
Synergy with SFDR: UCITS ESG funds in Hong Kong that meet disclosure and reporting requirements under Articles 8 & 9 of SFDR will be deemed to have complied with disclosure requirements under the SFC
🇸🇬 Singapore
The Singapore Exchange (SGX) announced on December 15 that starting from 2022, all listed companies should provide climate reporting on a comply or explain basis, following the Taskforce on Climate-related Financial Disclosure (TCFD).
More countries are coming up with ESG regulations, stay tuned with 🇮🇳 India 🇰🇷 Korea 🇯🇵 Japan 🇸🇦 UAE.
There exists the urgency to implement a comprehensive and uniform framework to push financial institutions and public companies to act immediately, following with private actors, in order to force transparency of ESG data.