Governments and regulatory bodies across the globe are increasingly implementing reporting requirements that align with the recommendations set forth by the Task Force on Climate-Related Financial Disclosures (TCFD). Following a domino effect, these requirements have been adopted in numerous countries, including Canada, Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, and Switzerland.
As such, these regulatory developments are significant factors contributing to the surge in ESG-mandated assets globally. Based on the current growth trajectory, ESG-mandated assets are poised to constitute half of all professionally managed assets worldwide by the year 2024, according to Deloitte
Moving forward, the transparency and accountability enforced through these regulations are likely to be influential in driving capital towards investments that are aligned with ESG criteria.
CSRD – the Key Sustainable Regulation
The Corporate Sustainability Reporting Directive (CSRD) will be implemented gradually starting in 2024, with reporting requirements beginning in 2025. It is important for companies to assess their data management, systems, and management reporting processes to ensure compliance with the CSRD within the given timeline.
From January 1, 2024, EU companies (including EU subsidiaries of non-EU groups) already subject to the Non-Financial Reporting Directive (NFRD) will be required to comply with the CSRD. The first reporting under the CSRD will be due in 2025.
Introduced to streamline sustainability reporting, the CSRD affects close to 50,000 companies which are expected to monitor and report on performance concerning climate change, pollution, and the circular economy. Moreover, organizations must be transparent about addressing biodiversity loss and reduction in resource and water consumption, especially where this is material or obligatory under other EU legislation.
Likewise, CSRD mandates reporting on social issues, including the treatment of workers both within the organization and throughout the value chain. Corporate behavior is also under scrutiny, with disclosure requirements regarding business conduct policies. This encompasses corruption and bribery prevention, supplier relationship management, lobbying activities, and payment practices.
Upcoming ESG Regulation in the US
In the US, the SEC stated its intentions of introducing new disclosure regulations for publicly traded companies, which could come into effect as early as January 2024. These ESG disclosure mandates would necessitate companies to conduct extensive analysis and report on an ever-evolving array of factors. Initially, the proposed SEC regulations would require companies to disclose their greenhouse gas emissions, specifically on their operations and utilities.
Over time, this requirement is expected to extend to emissions across their entire supply chains. Companies would be mandated to disclose potential exposures to extreme weather events such as hurricanes, heatwaves, wildfires, and droughts. This entails an obligation to report on these exposures and elaborate on the methodologies used for risk assessment.
What are the Implications for Investors?
Global ESG-mandated assets rise due to TCFD-aligned reporting requirements, driving capital towards accountable investments. Deloitte predicts ESG assets to reach 50% of managed assets by 2024. Regulatory changes create prospects for ESG-focused companies and funds. Strong ESG performance and compliance attract investors and foster financial growth.
Quite significantly, investors must consider evolving ESG regulations when assessing risks. Mandated disclosures provide insights into long-term sustainability and resilience, aiding informed decisions.
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