ESG Solutions

In the EU, an ‘ESG framework’ has been developed, which is a package of reform measures that derive from the EU’s Action Plan on Sustainable Finance and is an effort to ensure that the EU meets its commitments under the 2016 Paris Agreement to keep the increase in global temperatures to well below 2 °C above pre-industrial levels and to pursue efforts to limit the increase to 1.5 °C.

As investor demand for climate and ESG information soars, the regulatory bodies have responded to the industry with guidelines. In particular, the SEC have responded with an all-agency approach, including

(i) the release of ESG Investor Bulletins,

(ii) the creation of the Climate and ESG Task Force in the Division of Enforcement,

(iii) enhanced focus on Climate-Related Risks as part of the 2021 examinations of investment advisers.

In April 2021, the SEC issued a Risk Alert following the Division of Examinations’ review of ESG investing. The Risk Alert concluded by encouraging “market participants promoting ESG investing to clients, prospective clients, investors, and prospective investors to evaluate whether their disclosures, marketing claims, and other public statements related to ESG investing are accurate and consistent with internal firm practices. Additionally, firms should ensure that their approaches to ESG investing are implemented consistently throughout the firm where relevant, are adequately addressed in the firm’s policies and procedures, and are subject to appropriate oversight by compliance personnel. Lastly, firms should also consider taking steps to document and maintain records relating to important stages of the ESG investing process.”

The CFTC has established a New Climate Risk Unit to focus on the derivatives market’s role in addressing climate-related risk and transitioning to Low-Carbon Economy.

The SEC’s Office of Investor Education and Advocacy, the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA), the National Futures Association (NFA), have issued an Investor Bulletin regarding ESG to raise awareness about the importance of investor education and protection.

In May 2022, the SEC proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of ESG factors. Learn more here.

In the UK, the Financial Conduct Authority, (the “FCA”) has set out its arrangements to respond to the expectation set out by the UK Government’s commitment to a net zero economy by 2050 in all regulatory activities.

The UK Government has committed to mandatory TCFD-aligned disclosure obligations across the UK economy by 2025. Building on this, in October 2021, the Government set out plans for economy-wide Sustainability Disclosure Requirements (“SDR”) as part of a Roadmap to Sustainable Investing. The SDR aims to ensure that ‘the information exists to enable every financial decision to factor in climate change and the environment’. This is expected to closely mirror the EU’s SFDR regime with product labels and consumer facing disclosures with standardized information on the product’s key sustainability attributes. An FCA Consultation Paper on disclosure rules and labelling is expected in 2022.

As part of the new prudential regime for MiFID investment firms (the Investment Firms Prudential Regime), the FCA will be releasing a consultation paper on the introduction of ESG disclosures for listed companies and regulated firms in Q3 2022.

In Singapore, as part of the Monetary Authority of Singapore (MAS) Green Finance Industry Taskforce (GFIT), MAS issued Guidelines on Environmental Risk Management for Asset Managers, i.e. (a) holders of a capital markets services license for fund management and (b) registered fund management companies.

The Guidelines aim to enhance the resilience of funds/mandates by setting out sound environmental risk management practices. Asset managers are expected to implement the Guidelines in a risk proportionate manner and not on a “comply or explain” basis.

As part of MAS’ supervisory approach, MAS will consider how asset managers have incorporated environmental risk in their investment activities and observed MAS’ expectations on environmental risk management, taking into consideration the size and nature of the asset manager’s activities and the strategy for the funds/mandates.

In a strengthening of commitments, the Singapore Government announced in February 2021 the Singapore Green Plan 2030 to lay a roadmap to achieving the United Nations’ 2030 Sustainable Development Agenda, the Paris Agreement and its long-term net-zero emissions goal.

In the United Arab Emirates, the UAE Sustainable Finance Working Group, comprising numerous federal and local UAE regulators and exchanges, issued a High-Level Statement on Sustainable Finance detailing their commitment to achieving the UAE’s sustainability objectives and its recently announced Net-Zero 2050 ambition as the first country in the MENA region.

The Statement builds upon the commitments set out in the UAE Guiding Principles on Sustainable Finance, published in 2020, and has 3 key deliverables.

• a targeted study aimed at encouraging consistent Environmental Social and Governance corporate disclosure standards across the UAE
• an examination of how to strengthen good corporate governance by UAE companies to contribute to driving the sustainability agenda
• the creation of a UAE taxonomy of sustainable activities, which constitutes a major milestone defining the path for the economic transition to sustainable development.