So-called “green” investment claims, and the substance behind them, are on top of the agenda for businesses and their investors.
International regulators are, as a consequence, trying very hard to establish a workable framework. Different jurisdictions have different sustainability disclosure requirements, and this is putting companies, investors and asset owners under pressure.
ESG disclosure regimes aim to counter “greenwashing” by requiring financial firms who have marketed their investment products as “green” to disclose data relevant to their investments’ sustainability.
A single, global regime would better serve financial markets and their participants. But the intricacies of designing and implementing such a framework are huge.
Since early last year, the ever-changing nature of the EU’s Sustainable Finance Disclosure Regulation (SFDR) has left financial market participants scratching their heads about what data to disclose. Meanwhile, the US Security and Exchange Commission (SEC) announced proposals last month for a set of disclosure requirements that will apply to US investment advisers and funds, and many European firms with US investors.
In some respects, the two regimes are similar: both require firms to consider the categorisation of their investment products according to how focused they are on sustainability factors. Crucially, however, neither regime is designed to create a product labelling system; they do not guarantee any particular investment strategy.
There are also notable differences. The SEC’s categories are more clearly defined than the EU’s. SEC rules are also less prescriptive in their disclosure requirements for private funds.
Meanwhile, the UK is working on its own rules, with significant announcements from the British regulator expected in September. That regime is likely to be different again. Many international firms will have to comply with all three – as well as with multiple investor-specific requirements. They’re left with hoping that regulators will confront the consequences of overlapping regimes.
Inevitably, global convergence of ESG disclosure regimes presents challenges, not least due to differing goals and expectations. For example, EU policymakers, who have been in the vanguard, will want their standards to go further than other governments. In particular, EU standard-setters – and to some extent those in the UK – have consistently advocated for a “double materiality” approach, to include the negative externalities that are generated by a company’s activities.
But in other places there have been objections to even a baseline level of regulation. The state of Texas passed a bill last year preventing state pension funds from investing with financial institutions that shun fossil fuels, leading states like West Virginia and Indiana to adopt similar legislation.
European and US regulators are not the only players at the table: the International Sustainability Standards Board, for example, has put forward an ESG disclosures framework designed to act as a global baseline for companies. For now, firms caught under multiple ESG disclosure regimes should expect to navigate a patchwork of requirements. Given it’s the most onerous framework applicable, compliance with the EU’s regime will put firms in good stead to comply with US and UK rules.
Though compliance will be challenging, investments are going to continue to be an important tool for getting our global economy to a more sustainable place. Good regulation will undoubtedly help, but taking the time to get it right is likely to be a price worth paying.