Watershed Year for Expansion of Corporate ESG Reporting

Is the SEC moving forward on expanding corporate sustainability disclosure rules, or standing still with no real change to existing rules, or perhaps moving backwards on the initiative to expand ESG information for investors? Any day now we may find out when the proposed Climate Disclosure Rule’s fate is announced. Will that be before or after the mid-terms? Stay Tuned.

The Chair of the SEC, Gary Gensler, responded to challenges at a recent conference of RIA’s (registered investment advisors) who apparently are concerned that the agency was moving faster than the RIAs and their clients on expanded corporate disclosure. “We don’t want to see the climate-risk factors over-emphasized to the detriment of other factors…,” said Investment Advisors Association CEO Karen Barr.

Chair Gensler responded to the group that the SEC is aiming to modernize the industry “to meet the realities of the time we live in.” In addition to the corporate climate disclosure rule, the agency is updating technologies around cybersecurity, and the labeling of ESG mutual funds. Part of the modernization, he explained, is that investor habits have changed and investors really do care about climate risk.

The ongoing dialogue in the United States about climate change (causes, effects, actions to be taken, disclosures to be made) is not isolated. In the European Union, more populous than the U.S. (447 million for EU vs. 328 million for U.S.), corporations will face even more mandates for ESG disclosure. And so, both EU-based and non-EU based companies will be affected by enhanced or new corporate reporting rules. The 2014 Accounting Directive adopted by the 27 EU states is being updated by the European Commission with a proposed new directive (“CSRD”) that would replace the current rule (“NFRD”).

This new directive could expand ESG reporting to all large companies listed on regulated markets; introduce assurance of reporting information; require publications of information, and more. EU member countries would have 18 months to adopt the new rules, which are intended to “make it compatible with financial information, easier to find, comparable, and reliable”.

The new directive, if issued, might “improve the allocation of financial capital to companies that address social, health and environmental problems and make companies more accountable for their impacts on people and the environment, thereby building trust between them and society,” note an “Explanatory Memorandum” issued by the EU Commission (in effect, the executive branch).

The above are part of a global forward movement on increased finance regulation in 2022, notes Hazel Bradford, writing in Pensions & Investments. She explains that sustainable financial regulation around the word has increased in both scope and pace. (As we have often written, “volume and velocity” characterize the uptake of ESG strategies, policies, and actions by both corporate sector and capital markets).

Pensions & Investments’ report “Depth and Breadth of Sustainable Finance Regulatory Initiatives, Global Development in 2022” analyzed proposed or implemented rules (sourcing a proprietary ISS ESG index). As expected, the EU continued to lead with regulatory initiatives, followed by Asia (picking up the pace) and North America, and Australia. Outside of the EU, the United Kingdom (a former EU member) has the most expansive country regulatory framework.

Here is the key finding: 2022 is a watershed year (so far, even with the SEC’s final rule not yet in place) for mandates for climate and ESG reporting by corporate issuers. The sovereigns adopting rules and regulations are widely dispersed – such as New Zealand, Japan, China, Chile, and of course, the U.S. and the EU.

In our Top Stories we are sharing the details of the “volume and velocity” or “scope and pace” of the formulation of rules and mandates for ESG/sustainability reporting. The G&A Institute team is closely monitoring these developments and guiding and assisting corporate clients in their ESG disclosure and reporting requirements, both voluntary and mandated.

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.