ESG regulatory changes
ESG capital market regulatory changes to be aware of
Environmental, Social and Governance (ESG) continues to be a key focus area for both capital markets firms and regulators as we head further into 2024. Against a backdrop of heightened climatic and geopolitical risk this decade, ESG standards are becoming further engrained into the operational processes of financial firms at breakneck speed, amid an increasingly stringent and complex regulatory environment.
ESG Regulation can be split into general ESG regulation, which targets every type of company or organisation and ESG financial regulation, which specifically targets investment products or financial services. Financial institutions must adhere to both sets of regulation and thus, the regulatory burden placed upon them is higher than in most other sectors. The most important general and financial ESG regulations currently in place or being introduced mostly originate from the European Union regulators such as the Securities & Markets Authority (ESMA).
General ESG regulation is mostly targeted at disclosure of the data on a firm’s operations and spending as they relate to ESG factors. ESG financial regulation is targeted at using that data to calculate the ESG credentials of financial products with a (hopefully) uniform methodology to create consistent labelling, so that end investors purchase products and services which genuinely hold the characteristics with which they are marketed. This is to prevent so-called greenwashing, which is the practice of providing misleading information about a company’s ESG credentials. Nevertheless, ESG financial regulation is by no means the finished article, with specific regulations continuing to evolve and frankly, cause confusion among capital markets firms.
One such example is the Corporate Sustainability Reporting Directive (CSRD). CSRD requires all large corporates to report ESG sustainability data in their management report or as a separate non-financial statement. Adopted in November 2022, CSRD was initially intended to impose sector-specific reporting obligations on more than 50,000 corporations, including large non-EU companies with activities in the EU and sector-specific EU firms (including capital markets firms) from 2024. This ~50,000 figure was an uplift from the ~12,000 who were captured under the Non-Financial Reporting Directive (NFRD). Large firms are those who meet two of the following three criteria:
Assets on the balance Sheet of over more than €20m;
Annual turnover of more than €40m; and
More than 500 employees.
However, this 2024 deadline has now been moved to June 2026, with some sectors, including capital markets, finding out by 30 June 2025, at the latest, what their specific sector ESG reporting requirements will be.
The two-year delay aims to provide companies with additional time to focus on implementing the broader sustainability reporting requirements and frameworks laid out under the terms of CSRD. In many ways, the delay highlights the EU’s desire in promoting ESG transparency, while ensuring reporting standards are as high as possible.
However, a delay means that institutional investors and stakeholders may continue to face challenges in assessing and comparing the sustainability performance of companies based on their ESG disclosures, while also leaving uncertainties about what new reporting standards will look like. For the time being, this could prevent firms from meeting personal ESG targets. The delays also have the potential to leave many capital markets firms in limbo, while having to navigate a complex spate of other ESG-related regulations, including the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy and the European Sustainability Reporting Standards (ESRS), with ESRS coming into force as part of the original CSRD regulation (incidentally, there are no delays or changes to this particular aspect of CSRD).
Yann Bloch, head of product and pre-sales, Americas, at financial technology firm NeoXam, noted the impact the CSRD delays could have on buyside firms:
“This proposed delay to the Corporate Sustainable Reporting Directive could create a degree of worry in the institutional asset management community. These rules are meant to increase the level of sustainability information that is available, which would certainly make money managers’ ESG analysis and reporting easier. As it stands, while the availability of this kind of data is increasing, it can’t be accused of being equal to other types of financial information.”
Following the approval to delay CSRD, the European Parliament will be ready to start negotiations about the final shape of the legislation with EU governments. GreySpark will be keeping a close eye on this over the coming months.
Please feel free to contact us with any questions or comments you may have. We are always happy to elaborate on the wider implications of these headlines from our unique capital markets consultative perspective.