The last year saw the highest volume of rule-making ever for climate and sustainability. And they project 2023 to be no different as legislators tighten the noose around shady or dishonest corporate behavior.
From Canada to South Africa, proposed or adopted regulations addressed a wide range of topics. They include a range from promoting corporate supply chain transparency to specifying what constitutes an environmentally benign action.
The European Union, one of the most active rule-makers, started to implement sustainability standards for asset managers. It is a part of a package of requirements meant to ensure that the bloc meets its climate goals and does its part to slow global warming.
Additionally, investment ratings and the labeling of sustainable investment funds have come under increased regulatory scrutiny.
Climate matters, no greenwashing
As trillions of dollars flood into businesses and investments bragging about their environmental, social, and governance (ESG) credentials, regulatory concerns about “greenwashing,” or exaggerated climate-friendly claims, have increased.
Regulators are pushing for clearer market guardrails because there is so much money riding on corporations performing well on ESG and because it is important to make sure that laggards are held accountable so that the world can achieve its climate and broader sustainability goals.
Without them, it has historically been difficult to penalize unethical behavior, until things started to change in 2022. For instance, due to ESG mistakes, Goldman Sachs Asset Management and BNY Mellon Investment Adviser were both penalized in the United States.
In the meantime, charges that the German asset management DWS misled investors about its ESG investments led to a raid on its offices and the resignation of its chief executive.
Higher standards for climate are necessary
With stricter regulations, businesses and financial institutions will be compelled to uphold higher standards and be more transparent about their ESG initiatives out of concern for legal, regulatory, or even public rebuke.
Mining corporation Glencore, Air France KLM’s Dutch subsidiary, and the directors of energy major Shell were among the businesses that encountered legal or regulatory difficulties over the last year.
Activist investors looking to use the sea of ESG capital in the market to influence boardroom reform are starting to pay attention to companies whose ESG credentials are under scrutiny.
New year, same strict climate policy
Companies will no longer be able to hide behind an unregulated patchwork of voluntary norms according to laws on climate-related disclosure that will be finalized in 2023 thanks to the European Union, the United States, and the new, worldwide International Sustainability Standards Board (ISSB).
The EU is anticipated to provide 200 pages of guidelines in January alone to assist market participants in using its green taxonomy, a list of environmentally beneficial activities, and other ESG requirements. ESG rules will also quickly become required rather than optional in 2023.
With so many new regulations emerging, one of the main tasks for regulators worldwide will be to ensure that they all work in unison, making it simpler for firms to administer and preventing the transfer of poor practices from one area to another.
In order to evaluate corporate activities around the world, the work of ISSB will also be crucial in advancing a worldwide baseline for the climate-related information exchanged by businesses with investors.
However, since there are no international standards or regulations on what constitutes sustainable investments, this is only expected to happen gradually starting in 2023.