Comparing global regulatory demands on ESG funds will continue to be elusive, according to a regulatory update from ISS ESG published Sept. 21.
Experts at the Institutional Shareholder Services' sustainable investment arm reviewed current and proposed regulations in the European Union, U.K., U.S., Canada, Australia, Hong Kong, Singapore and Japan, and surmised "that navigating the emerging regimes will remain a challenge for the foreseeable future," the 2023 Global Regulatory Update said.
It noted that two major sustainability reporting standards were finalized in 2023: The European Commission's updated European Sustainability Reporting Standards and sustainability disclosure standards from the International Sustainability Standards Board. "Although the two standards are interoperable to an extent, differences in areas such as the definition of materiality or the application of material assessment could considerably reduce their comparability across companies," the ISS ESG report said.
While some regulators aim for more disclosure and classifications that would also inform retail investors, the "naming, labelling, and reporting regimes still leave room for interpretation on which investment products qualify as sustainable," the report said.
On the horizon are efforts to clarify due diligence obligations in corporate supply chains when it comes to human rights and environmental impacts, with greater regulatory ambitions in goals, scope and enforcement, the report said. It noted that the EU Corporate Sustainability Due Diligence Directive being negotiated will also apply to companies outside the EU, and there is more scrutiny from the U.S. Securities and Exchange Commission on how public sustainability disclosures match SEC filings.
The U.K.'s regulatory approach to ESG reporting by companies "may be less expansive," and give companies more flexibility than the EU rules, it said.
The report also covers rules and guidelines for the sustainable bond market, noting that principles from the International Capital Market Association for labeled debt instruments have influenced bond market regulation in China, India and Japan, while the EU is adopting more stringent ones.