Navigating Global ESG Regulatory Changes: How to Stay on Top of What You Need to Know

The ESG regulatory landscape is changing rapidly. With new groups, policies, and mandates popping up frequently, and more acronyms being added to the ever-growing list, ESG professionals must learn to stay on top of emerging trends and updates.

Read on to learn about recent updates to the global ESG regulatory landscape and what they mean for corporations, ESG professionals, and investors.

Significant ESG Regulatory Updates

“Within the global ESG regulatory environment, recent developments are already reshaping strategies,” says Dr. Isabella Bunn, a senior advisor for Oxford Analytica and a research fellow in governance and global ethics. Firms and their advisors are closely examining concepts such as materiality, due diligence, and disclosure, and looking at how these concepts will apply across business operations and supply chains.

EU

Gender Gaps and Minimum Wage

In September 2022, the EU Parliament issued new legislation for minimum wage throughout the EU. European countries will have two years to adopt the new standards. Meanwhile, in October 2022, the Council of the EU approved a new law requiring publicly traded companies to disclose their boards’ gender mix annually. By 2026, at least 40 percent of non-executive director roles, or at least 33 percent of director positions must be held by women.

SFDR Includes Gas and Nuclear

The Sustainable Finance Disclosure Regulation (SFDR) updated its disclosure requirements in October 2022. Now, financial market participants must disclose their exposure to investments in nuclear and gas activities within their portfolios. Companies seeking or relying on investment from financial market participants bound by the EU’s SFDR should take these new disclosures into consideration for their own ESG reporting.

CSRD Gets Final Approval

In November, the EU Council gave final approval to the Corporate Sustainability Reporting Directive (CSRD), which will replace the Non-Financial Reporting Directive (NFRD). The CSRD demands greater transparency in non-financial reporting, including sustainability concerns such as environmental, social, and human rights, as well as a range of governance criteria.

Deforestation Legislation

The EU Parliament and Council agreed on new legislation banning products produced in regions harmed by deforestation, with a particular focus on products containing beef, cocoa, soy, and timber. The EU is yet to reach a formal agreement on the legislation.

ETS Reform and Carbon Border Levy

The EU Parliament and Council have provisionally agreed on expanding the region’s Emissions Trading System (ETS) to increase emission reductions across particular sectors, including energy, aviation, and shipping. Meanwhile, provisional agreements have also been reached regarding the proposal of a carbon border adjustment mechanism (CBAM) applied to imports from countries with lower carbon prices. The levy will initially cover specific products in carbon-intensive sectors, including iron and steel, cement, fertilizers, aluminum, electricity, and hydrogen.

The Americas

Federal Reserve Board Considers Climate-Related Financial Risks

In December, the Federal Reserve Board invited public comment on a new set of principles proposing a framework for large banking organizations to safely manage climate-related financial risks. The principles would address physical and transition risks, but apply only to banks with more than $100 billion in total assets.

APAC

Japan Issues Guidelines for EU Funds

Japan’s Financial Services Agency (FSA) released new draft amendments for investment products (such as ETFs and investment trusts) that include ESG concerns within their names (for example, a fund titled The Sustainable Investment Fund), designed to tackle greenwashing in public funds. The FSA’s guidelines define specific disclosure criteria and due diligence for supervisors.

Hong Kong Stock Exchange Addresses ESG

Hong Kong’s stock exchange published the findings of its latest review of ESG disclosures in November 2022 and released new recommendations for ESG disclosure, including enhanced climate reporting requirements, transparency around social issues, board governance, and reporting practices.

The Meaning of ESG is Changing

As ESG funds and socially responsible investing gain popularity, what ESG means — and what it covers — is also changing. More issues are being considered within the environmental, social, and governance categories. The “S” of ESG, for example, can entail action on the UN Guiding Principles on Business and Human Rights, measures to combat modern slavery, and post-pandemic programs to rebuild social and human capital.

As the demand for diversity, equity, and inclusion intensifies, companies are responding with various initiatives, from the workplace to the boardroom. A new Task Force on Inequality-related Financial Disclosures (TFID), conceived in 2020 and modeled on the highly successful Task Force on Climate-related Financial Disclosures (TCFD), is designed to guide companies, investors, regulators and polymakers to identify human rights risks. The organization held its second global meeting in November 2022 and recently added the United Nations Development Programme (UNDP) to its Interim Secretariat.

How to Stay Up to Date on ESG Developments

An overwhelming amount of news and content is published in the ESG space. The challenge for professionals in the area is determining how to filter relevant news from noise.

“In a report by EY and Oxford Analytica, one particular theme resonates with me: the need to build trust across the ESG movement and strengthen ‘decision-useful’ information,” Bunn says. “Over the years, I have adjusted my perspective on the role of ESG. At first, with the advent of the UN-backed Principles of Responsible Investment, I saw ESG as an investment topic. When companies began to respond to emerging priorities in capital allocation, I saw ESG as a trend in corporate responsibility. Today, I view ESG as a catalyst for systemic change with far-reaching implications across business, government, and society.”

ESG News, Intelligence, and Analysis

Bunn recommends sourcing ESG news from a range of credible publications and organizations and identifying and assessing the trustworthiness of a full range of sources, from media to the financial sector to research institutes.

Thought Leaders

It is helpful to follow various organizations at the intersection of thought leadership and business strategy, such as the World Economic Forum, the FiscalNote Executive Institute, the ESG & CSR Board, and McKinsey & Company. Even studying the program agendas for events held by these organizations can prove useful in identifying emerging issues and relevant experts.

Staying on top of ESG regulatory changes also means making sure you have a go-to network of executives working on these issues who can share similar challenges, best practices, and ideas. For example, the FiscalNote Executive Institute (FNEI) — an exclusive thought leadership community for senior leaders who work in general counsel, ESG, and government and public affairs — organizes programs and events throughout the year highlighting top issues shaping the ESG landscape, including developing an ESG strategy, the politicization of ESG, and more.

The ESG & CSR Board does this by offering a trusted, vendor-free community for leaders of ESG, social impact, and sustainability at more than 125 of the world’s largest companies. Backed by expert facilitators, you’ll quickly get personalized, on-demand insights and advice from peers.

Specialist Newsletters

ESG professionals will benefit from subscribing to a range of specialized ESG and corporate governance newsletters, such as:

• The ESG Landscape: Trends and Standards Monitor — monthly coverage of critical developments in ESG frameworks and standards that could impact your business
• FNEI’s monthly e-newsletter — timely articles and executive summaries of the latest ESG thought leadership programming and resources
• FiscalNote ESG’s Top ESG Headlines — weekly analysis of top ESG headlines
• Roll Call on ESG — follow the news that lets you stay up to date on ESG regulation and policy
• Oxford Analytica’s Daily Brief — global analysis that gives top corporate and government executives a proven edge in predicting the course of key trends

International Initiatives

ESG professionals will glean useful insights by following international efforts, such as:

• The UN Global Compact (UNGC), which collaborates with leading multi-stakeholder initiatives on sustainable finance
• The Organization for Economic Cooperation and Development (OECD), which is currently updating the G20/OECD Principles for Corporate Governance to include consideration of ESG risks for the first time
• The Sustainable Stock Exchanges initiative, which spans 120 exchanges and offers a database for ESG guidance to bolster investment flows
• The Impact Management Platform, which launched in 2021 in association with key institutions of global economic governance and provides resources to support the management of sustainability impacts in ways that are integrated with financial performance

A Final Word on the Changing ESG Landscape

Keeping up with ESG developments requires horizon-scanning and thoughtful research. Attending seminars and conferences and conducting informal conversations with colleagues can help those in the space stay up to date on relevant news. Learning to filter sources and ask the right questions is critical to staying ahead in a rapidly evolving landscape.

“I must admit that I sometimes feel bemused by these three letters and the extraordinary level of attention they generate,” says Bunn. “But I also see how they are transforming business and investment, offering pathways toward a sustainable and resilient future. So yes, keep watching for trusted and decision-useful ESG information — and indeed, for ways to contribute to its evolution.”

You can follow ESG updates from Bunn’s team at Oxford Analytica, CQ, and experts across the FiscalNote group through our monthly publication, The ESG Landscape: Trends and Standards Monitor.