December 15, 2021 - by Tess Virmai. In a recent LSTA webcast, Allen & Overy partners from New York, London and Hong Kong took stock of the global regulatory landscape with respect to ESG and funds. The drive on ESG and climate has been incentivized and pushed by the EU’s focus on policy, but has seen an increased amount of attention this year around COP 26 as well as the Biden administration’s focus on ESG disclosure. That being said many, particularly in the U.S., may still wonder: why should I care? A&O answered that question. The touchpoints of ESG and climate risk in all aspects of business life are going to proliferate and will increasingly be economic drivers.  This drive on disclosure, reporting and shareholder involvement is not going away and neither is regulatory focus.  Therefore, whether one believes that climate risk presents a legitimate financial risk on its own – the related policies will. As we head into 2022, companies, financial institutions and financial firms will need to understand how these issues can have an impact legally, operationally, and reputationally both for them and their partners.

Europe has really taken the lead in putting together rules and procedures for disclosure, reporting and management and given that leadership role it is important that US market participants are aware of these rules because it may serve as a blueprint for what is adopted elsewhere. Moreover, it will inform disclosure requests US market participants receive from European firms. One of the core pieces of EU ESG regulation is the Sustainability Finance Disclosure Regulation (SFDR). SFDR has and will impose detailed reporting requirements on in-scope firms and even firms that are not subject to the SFDR are seeing investors ask them to comply on a contractual basis.  The SFDR is geared toward establishing transparency about what a firm is promising to do with respect to sustainability issues and ultimately what they achieve. Some high-level requirements are already in effect, but the heart of the SFDR will be set forth in the Technical Standards which are still in development and likely to take effect in in January 2023. This will be a space to watch for market participants across the globe.

Another space to watch is the work of the International Sustainability Standards Board (ISSB). At COP26 last month, the IFRS announced that it has established the ISSB to work to harmonize global approaches around sustainability. The ISSB will sit alongside the IASB and seeks to develop a global baseline of sustainability disclosure standards. While compliance with these standards will be voluntary, the initiative is backed by the G20 and IOSCO. It is understood that IOSCO will act as a bridge between the ISSB and global regulators with a view toward encouraging regulators to include these standards in their mandatory ESG disclosure requirements. 2022 will see the first phase of this work focused on climate likely completed. Prototypes of those standards are available here.

Additional Resources:

• A replay of the webcast is available here
• More detailed information about the regulations discussed on the webcast is available here
• Please see the article “ESG Regulation Looms Large” in December’s Loans Magazine for a discussion of what U.S. expectations are for 2022.