ESG Disclosure and Sustainability Regulations to Watch

  • March 03, 2023
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The call for increased environmental, social, and governance (ESG) standards is louder each year. A generation of socially conscious consumers entered the market to disrupt the status quo and establish loyalties with brands, demonstrating shared values. In response, corporations, partners, suppliers, investors, and regulators now recognize the influence of corporate ESG.

Regulators’ recognition of the importance of ESG is demonstrated in new rules instituted and proposed by the Securities and Exchange Commission (SEC), laws passed by Congress, and the creation of the Corporate Sustainability Reporting Directive (CSRD) by the European Union (EU). Based on the host of new regulations emerging surrounding ESG, regulators have made clear that it is not enough to talk about ESG initiatives — regulators call on corporations to take action.

The SEC enforces ESG

The SEC announced the launch of the Climate and ESG Task Force within the Division of Enforcement on March 4, 2021. Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the task force is charged with developing initiatives to proactively identify ESG-related misconduct. To identify potential violations, the task force also coordinates the effective use of Division resources, including sophisticated data analysis to mine and assess information across registrants.

Below are examples of the new ESG regulations, alongside Task Force enforcement action.

  • On August 6, 2021, the SEC approved new listing rules proposed by The Nasdaq Stock Market LLC (Nasdaq) to advance diversity on the boards of directors required for more than 3,500 companies listed on the Nasdaq. The new standard for the Nasdaq requires at least two diverse directors (including at least one woman and one member of an underrepresented minority). The company must explain why it failed to accomplish this baseline, which applies to a board size of at least six members. Given the timeline of two years following the initial approval in 2021, all companies trading on the Nasdaq will be held to this standard annually after providing its initial board diversity matrix.
  • As reported in the media on May 23, 2022, the S&P 500 ESG Index, a listing of companies that meets specific ESG standards, removed Tesla from its listing, citing racial discrimination and poor working conditions at its factory in Fremont, CA. Those claims prompted a California state agency to file a lawsuit in addition to a civil suit in which Tesla was ordered to pay a worker $15 million.
  • SEC fined the Bank of New York Mellon Investment Advisor $1.5 million on May 23, 2022, for misleading claims it made about funds that use environmental and social criteria to pick stocks.

Increasingly stringent U.S. Environmental Regulations

Environmental regulations are becoming increasingly stringent within the United States (US). The Inflation Reduction Act, passed on August 12, 2022, encapsulates the desire of the current administration to begin ramping up regulations that impact ESG. This desire is evident in provisions such as an amendment to the Clean Air Act that reinstates the Environmental Protection Agency's ability to regulate greenhouse gases and $370 billion in incentives to relocate from fossil fuels.

Provisions of the Inflation Reduction Act are bolstered by new SEC regulations proposed on May 25, 2022, that will set requirements for companies to make ESG disclosures available to investors. On May 25, 2022, the SEC proposed amendments to enhance and standardize disclosures related to ESG factors considered by funds and advisers and to expand the regulation of the naming of funds with an ESG focus. These proposed rules follow the landmark SEC proposal announced on March 21, 2022, requiring public companies to disclose extensive climate-related information in their SEC filings.

The pressures of international regulations

While the SEC has been driving ESG developments in the US, the EU is driving ESG regulations globally. On November 28, 2022, the EU passed the Corporate Sustainability Reporting Directive (CSRD), which will apply to non-EU companies with a net turnover of €150M and at least one branch or subsidiary in the EU. Therefore, even companies that are privately owned or listed on a stock exchange outside of an EU member state will be subject to the reporting requirements of the CSRD.

These requirements will mandate reporting on the following subjects: environmental matters, social matters and treatment of employees, diversity on company boards, and respect for human rights. Given the wide breadth of companies, the CSRD will capture the depth of the reporting standards; it will be necessary for companies to be proactive and adaptable in the future to comply with the CSRD.

Regulations are shaping business strategies for the better

No aspect of ESG can be ignored, as demonstrated by the various fines and new regulations being rolled out. Many companies are aware of the evolving socio-political climate and are acting accordingly. To ensure your company is not left behind, implement measures to reduce the risk of falling behind and suffering from decreased margins.

Four such measures could include:

  1. Appointing a dedicated ESG compliance officer;
  2. Conducting an ESG compliance benchmark;
  3. Creating a future ESG strategy; and
  4. Implementing an ESG training module for all employees.

Executive decision-makers should know the ESG-changing regulatory landscape and take immediate action to maintain compliance and a competitive advantage.

Learn more about emerging regulations and how to improve Risk Management & Compliance strategies.

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Rosalind Conway
Rosalind Conway
Rosalind is a seasoned executive with more than 20 years of Big 4 regulatory global financial services consulting and regulatory compliance experience in governance, financial crime, enterprise/operational risk management, and privacy and data security. She is experienced in leading global, diverse multi-cultural and cross-functional teams, and collaborates with executive management, as well as IT internal and external organizations. Clients include global banks, federal bank regulators, investment advisors, broker dealers and insurance companies.
Jacob Woody
Jacob Woody
Jacob is a consultant with the NEXT practice with experience in the financial services industry, specifically in credit risk, and the higher education industry. While working at a top 10 global bank, Jacob has experience creating an ESG evaluation tool to monitor the risks posed by gaps in clients' ESG offerings. He enjoys collaborating with diverse teams to find innovative solutions for clients.

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