Environmental, Social, and Governance (ESG) issues represent a global problem. The Covid-19 pandemic and a sharp increase in natural calamities worldwide due to global warming have brought about an awareness that unrestrained human activity is bound to have an irreversible effect on the environment, with far-reaching consequences.
A February 2022 Intergovernmental Panel on Climate Change (IPCC) report says the impact of global warming is now ‘irreversible’. Despite the numerous national pledges at the recent COP26 for creating net-zero economies in the next two to four decades, time is running out faster than efforts can be made.
And a global problem of such magnitude needs to have a global solution with an equal commitment by all stakeholders and countries involved. Change is coming – gradually but surely. Investor groups are among the most vocal, nudging companies towards sustainable business practices and seeking transparent, comparable information on ESG issues.
Demand for sustainability information has caused a proliferation of reporting frameworks as well as efforts by governments everywhere to make companies disclose ESG issues. In this blog, we look at ESG disclosure mandates in several jurisdictions.
North America
USA – SEC Releases Long-Awaited Proposal On Climate-Risk Disclosures
The US Securities and Exchange Commission on March 21, 2022, released a proposal for climate-risk and greenhouse gas emissions disclosures by public companies. The draft rule requires companies to disclose their direct and indirect greenhouse gas emissions – which are classified as Scope 1 and Scope 2 emissions. Scope 3 emissions – those generated by the companies’ suppliers and partners – will also need to be disclosed wherever they are material or included in the companies’ emissions targets.
According to SEC Chair Gary Gensler, the proposal would draw on the regulator’s existing rules and guidance governing climate-related disclosures, as well as from the Task Force on Climate-related Financial Disclosures.
The proposal, which is available for public feedback and will be finalized later in 2022, has been long-awaited and comes in the wake of several efforts to make available material and transparent ESG disclosures to US investors. It may be recalled that ESG disclosures in the US until now have largely been voluntary.
Some recent ESG-related developments are as follows: In March 2021, an all-agency effort to tackle climate change and climate risks was kickstarted. Spearheaded by the SEC, the effort included the setting up of a Climate and ESG Task Force in the Division of Enforcement. The purpose of this effort was to crack down on ESG-related violations by companies.
In October 2021, the Financial Stability and Oversight Council (FSOC) – a grouping of several US federal agencies – recognized climate risk as a major and emerging threat to the US economy and called for corporate disclosures in accordance with the TCFD recommendations.
Canada – ESG Reporting Mandate On The Cards
Canadian Prime Minister Justin Trudeau in December 2021 wrote to his deputy prime minister and environment and climate change minister, asking them to work toward mandatory climate-related disclosures based on the Task Force on Climate-related Financial Disclosures (TCFD) framework. The mandatory disclosures may apply to state and federal agencies, financial institutions, and pension funds in Canada.
Until this point, ESG disclosures by Canadian companies have been largely voluntary. PwC’s 2022 survey Exploring the ESG reporting maturity of Canada’s top companies threw up some interesting insights. Of the 150 companies surveyed, 75% have a sustainability plan; 35% disclose a net-zero target; 30% disclose timeframes for ESG targets; 62% identify material ESG issues in their organization; 28% explicitly identify ESG opportunities; 20% have their sustainability report externally assured.
Canada has committed to achieving net-zero emissions by 2050, along with an interim goal to cut GHG emissions by 40% – 45% by 2030.
South America
Brazil – Sustainability Reporting Efforts On Various Fronts
In 2018, the Brazilian National Monetary Council passed a resolution requiring the asset managers of pension funds to factor in ESG risks while making investment decisions. In 2021, the Brazilian Central Bank came up with initiatives meant to increase ESG reporting by banks. Also in 2021, the S&P Dow Jones Indices and the Brazilian stock exchange created the S&P/B3 Brazil ESG Index to display companies with strong ESG track records traded on the Brazilian stock exchange.
Argentina – Stock Exchange-led Initiatives For Sustainability Practices
While the Buenos Aires Stock Exchange Argentina does not require sustainability disclosures from public companies, the bourse has put in place some initiatives to facilitate good corporate governance and sustainability practices. One of these initiatives is a Sustainability Index to display the ESG performance of companies to investors.
Chile – ESG Disclosure Mandate Pending Regulatory Approval
In Chile, a proposal to mandate ESG disclosures in the annual reports of listed companies is pending with the Financial Market Commission. And since May 2021, the country’s Superintendency of Pensions has required retirement plans known as AFPs to disclose how they consider ESG risks in their investment process.
Europe
European Union – Towards An Expanded ESG Disclosure Mandate
In April 2021, the European Commission adopted the proposal for a Corporate Sustainability Reporting Directive (CSRD) that is meant to replace the Non-financial Reporting Directive (NFRD), which came into effect in the EU in 2018. The coverage of the NFRD is limited to around 11,000 companies that have been given the flexibility to choose from a wide range of sustainability reporting frameworks. Under CSRD, the coverage would extend to around 50,000 EU companies.
The European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) are currently collaborating on building the EU sustainability reporting standards, with the first set of standards expected to be adopted by the European Commission in the latter half of 2022.
For EU investment firms and investment fund managers as well as non-EU alternative investment fund managers marketing their funds in the EU, there is the Sustainable Finance Disclosure Regulation to adhere to. SFDR came into force in March 2021. SFDR requires the entities under its purview to disclose their policies on factoring sustainability risks in their investment decisions.
The United Kingdom – Towards Nationwide TCFD Disclosures by 2025
From April 2022, UK entities that include premium-listed issuers, standard listed issuers, as well as some financial companies will start making disclosures using the TCFD framework. This is in keeping with the UK’s 2019 Green Finance Strategy in which the government committed to making TCFD-aligned disclosures mandatory across the economy by 2025.
In the run-up to the November 2021 UN Climate Change Conference in Glasgow, Scotland, in November 2021, the UK released a document called ‘Greening Finance: A Roadmap to Sustainable Investing’. The roadmap is a strategy to implement new sustainability disclosure requirements (SDRs) in the UK, building on the success of the aforementioned 2019 Green Finance Strategy.
At the heart of the new roadmap is a long-term plan to align the UK’s economy with the country’s ambitious net-zero greenhouse gas emissions target by 2050, and a pledge to cut the emissions by 78% by 2035 compared to 1990 levels.
Three types of disclosure under the SDRs include Corporate Disclosure; Asset Manager and Asset Owner Disclosure; and Investment Product Disclosure. The SDRs will employ the global baseline standards that the newly established International Sustainability Standards Board (ISSB) will develop by building on the work of the Task Force on Climate-Related Financial Disclosures (TCFD) and other standard-setting bodies.
While the ISSB standards will facilitate the collection of information that is material to investors, the SDRs will go further to examine the impact of the reporting firms’ activities on the environment — requiring disclosures that employ the UK Green Taxonomy.
Africa
Nigeria – Companies Making ESG Disclosures Since 2020
The Nigerian Stock Exchange (NSE), which is a United Nations Sustainable Stock Exchanges (SSE) Partner Exchange, published Sustainability Disclosure Guidelines for listed companies in the country in November 2018. The guidelines included a phased approach to integrating ESG measures into business activity beginning January 1, 2019. The guidelines also mentioned the indicators companies needed to consider while making their annual disclosures to the exchange, as well as the timelines for such disclosures. ESG reporting was mandatory for companies listed on the premium board of the NSE right from the first year of the mandate.
South Africa – A New Sustainability Disclosure Guidance
In December 2021, the Johannesburg Stock Exchange (JSE) launched consultation papers for a Sustainability and Climate Disclosure Guidance to help listed companies understand the best practices on ESG reporting. The Disclosure Guidance considers many of the frameworks currently in use across the world, including the Global Reporting Initiative (GRI), Taskforce on Climate-related Financial Disclosures (TCFD), as well as the recently-created International Sustainability Standards Board (ISSB) prototype standards. The Disclosure Guidance, which also factors in similar guidance by peer exchanges, is meant to help companies navigate the multiple frameworks available with respect to materiality in the South African context.
Asia
China – New Disclosure Requirements Kick In From Feb 2022
Chinese companies have new disclosure rules to follow from February 2022. The new rules require companies to disclose by March 15 of each year their sustainability information for the previous year beginning in January and ending in December.
Companies need to disclose their generation, governance, and emission of major water and air pollutants as well as their carbon emissions.
The focus of the new disclosure requirements is on companies with a high environmental impact, those that implement mandatory audits for clean production, listed entities, and bond issuers. The latter two must also provide information on financing and investment with a focus on their impact on the environment and climate protection.
If companies fail to disclose environmental information or furnish information that is false or inaccurate, they can be subject to corrective action and even fines of CNY100,000. Late filings can incur a penalty of up to CNY50,000.
India – Mandatory Reporting To Start Under Amended Framework
The Securities and Exchange Board of India (SEBI) 2012 mandated the top 100 Indian companies by market capitalization to file a Business Responsibility Report (BRR) with the stock exchanges as a part of their annual reports. The BRR was to disclose the companies’ initiatives on the ESG front. The coverage of this mandate was progressively increased to include the top 500 Indian companies in 2015 and the top 1,000 in 2019.
The SEBI in May 2021 made amendments to a regulation to discontinue the BRR requirement and introduce a Business Responsibility and Sustainability Report (BRSR) in its place. The securities regulator also released the prescribed format of the BRSR and a guidance note to understand the scope of disclosures.
The top 1,000 Indian companies by market capitalization were allowed to voluntarily submit the BRSR in the 2021-22 financial year. Mandatory filing requirements kick in from the 2022-23 financial year. Listed companies other than the top 1,000 companies and companies with specified securities listed on the Small and Medium Enterprises (SME) exchange may voluntarily submit the BRSR from 2021 to 22.
Southeast Asian – ESG Disclosure Being Spearheaded By Bourses
Stock exchanges of all six Association of Southeast Asian Nations – Singapore, Malaysia, Thailand, Vietnam, Indonesia, and the Philippines – are members of the Sustainable Stock Exchange Initiative.
Singapore: Singapore Exchange’s published a Sustainability Reporting Guide 2016 which requires every listed company to prepare an annual stability report on a comply-or-explain basis. Companies are free to choose one of the global sustainability reporting frameworks suited to their disclosures. Material ESG factors must be reported in financial terms in the sustainability report, along with a company’s policies, practices, performance, and targets in that context.
Malaysia: Under Bursa Malaysia’s listing requirements, companies’ annual reports need to include a narrative report on how they manage material economic, environmental, and social (EES) risks and opportunities. The exchange has made available a Sustainability Reporting Guide and six toolkits for companies’ use.
Thailand: The country’s Securities and Exchange Commission (SEC) issued a Corporate Governance Code in 2017 under which companies need to report on sustainability issues using an appropriate framework. While the exchange has not mentioned any particular framework, many companies prefer the Global Reporting Initiative (GRI) framework.
Vietnam: The country’s Ministry of Finance has set out provisions for companies to prepare an annual report that talks about their environmental and social impact and objectives for corporate sustainability. State Securities Commission of Vietnam 2016 published an Environmental and Social Disclosure Guide in association with the World Bank’s International Finance Corporation. The guide is based on the GRI framework. Independent external assurance is encouraged.
Indonesia: Indonesian listed companies started preparing sustainability reports in 2020 based on a Financial Services Authority rule. The guidance provided under the rule includes a list of items for sustainability disclosure. Indonesian financial service providers are required to submit an action plan that sets out their plan for sustainable finance activity.
Philippines: The Philippines Securities and Exchange Commission 2019 released Sustainability Reporting Guidelines for listed companies to submit sustainability data along with their annual financial report on a comply-or-explain basis. There is a penalty imposed on companies whose annual reporting is incomplete. The Guidelines allow reporting based on four sustainability frameworks including GRI and TCFD.
Oceania
Australia – Looking Forward To A Climate-Risk Disclosure Mandate
ESG reporting by Australian companies is broadly voluntary. However, the Australian Securities and Investments Commission (ASIC) recommends TCFD recommendations for reporting by listed companies that have material exposure to climate risk. In December 2021, ASIC Commissioner Cathie Armour gave an insight into what’s on the cards by indicating that climate-risk disclosures will be among the most significant governance issues of 2022.
New Zealand – 200 Prominent Entities To Report Under New Act
In the New Zealand parliament, October 2021 passed the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 (FSAA). The FSAA is meant to provide a uniform policy for non-financial reporting in New Zealand by amending several existing acts. Under the FSAA, about 200 entities, which include listed companies, big banks, licensed insurance companies, and registered investment scheme managers will make climate-risk disclosures using the TCFD recommendations starting with the financial years beginning in 2023. The government has said that the passing of the FSAA makes New Zealand the first country to have a law requiring the financial sector to disclose the impact of climate change on their business and explain their management of climate risks and opportunities.
The Final Word
Our readers would notice that sustainability mandates are not at a uniform level in the various jurisdictions discussed above. This may not be an optimal situation given the urgency with which climate and sustainability risk issues must be addressed. It is up to governments worldwide to study the best practices on ESG disclosure; come up with mandatory disclosure requirements; and ensure efforts everywhere are at comparable levels.
