September’s edition of the Policy Digest features key regulatory developments surrounding the global baselines set by the EU Corporate Sustainable Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) Standards.
In the EU, the European Financial Reporting Advisory Group (EFRAG) has finalised the format and presentation of sustainability statements with the XBRL taxonomy for the first set of European Sustainability Reporting Standards (ESRS). The digital taxonomy allows reporting entities to tag their sustainability statements in a machine-readable XBRL format, improving accessibility of decision-useful information for investors. Meanwhile, the German FNG label has proposed a three-way split of the label to keep up with market demands and regulatory developments. The label will be divided into three distinct categories – a values label, a transition label, and a sustainability label.
In the UK, the Financial Conduct Authority (FCA) has proposed a delay in the implementation of its investment labelling regime – the Sustainable Disclosure Requirements (SDR). The SDR naming and marketing rules have extended the deadline for firms to meet the regulatory criteria, reflecting a pragmatic approach to supporting compliance.
Turning to Asia-Pacific, Australia is progressing toward the establishment of a comprehensive sustainable economic framework with significant regulatory advancements. The country has implemented mandatory ISSB-aligned climate-related disclosures and an interim report on the development of its sustainable finance taxonomy, both key pillars of its national sustainability agenda. Progressing the adoption of IFRS standards further in the region, Singapore has announced timelines for the incorporation of the standards in its sustainability reporting regime.
Meanwhile, in the US, the outlook for ESG legislation remains uncertain, driven by ongoing political polarisation. In Missouri, a District Court ruled the state’s anti-ESG disclosure law unconstitutional, while in California, legislators are advocating for the timely implementation of corporate climate disclosure laws, rejecting an extension period proposed by the Newsom administration. At the federal level, the US Securities and Exchange Commission (SEC) recently approved new standards to regulate audit quality, modernise practices and strengthen accountability through the use of emerging technologies. Despite progress in rulemaking, however, the Commission’s commitment to enforcing ESG regulation is now in question, with the recent dissolution of the SEC’s Climate and ESG Enforcement Task Force signalling a potential shift in direction amid mounting legal challenges and industry opposition.
Finally, in South America, the Chilean financial regulator, Comisión para el Mercado Financiero (CMF), has issued a consultation proposing the adoption of the ISSB standards. Chile is among a list of Latin American countries, including Brazil and Costa Rica, that have committed to adopt the ISSB standards, further aligning the region with international sustainability frameworks.
These developments reflect a concerted push from global regulators to promote the harmonisation of reporting standards and frameworks. With the foundations for sustainability reporting increasingly in place, the challenge is now around how financial institutions and companies navigate this ever more complex world of ESG regulatory compliance.
EUROPE
EFRAG publishes XBRL taxonomy for set 1 of ESRS
On August 30th, 2024, the European Financial Reporting Advisory Group (EFRAG) published a digital taxonomy for the first set of the European Sustainability Reporting Standards (ESRS), which will enable users to digitally tag their sustainability statements in a machine-readable XBRL format. EFRAG has simultaneously released an XBRL Taxonomy for Article 8 disclosures. The ESRS Taxonomy facilitates standardisation and comparability of ESRS statements by providing ‘tags’ for every datapoint and dimensional disaggregation defined in the disclosure requirements. Specifically, the advanced tagging of narrative disclosures will enhance the usability of ESRS statements for key users including investors. Companies may voluntarily mark-up sustainability disclosures in accordance with the XBRL Taxonomy until it is adopted by way of an amendment to the Delegated Regulation on the European Single Electronic Format (ESEF). Read More.
German FNG Label to be split into three separate label categories
The FNG label has introduced a significant update, proposing a split into three distinct label categories—Values, Transition, and Sustainability—as part of a methodological approach aligned with recent legislative changes on the continent. The new labels reflect FNG’s commitment to maintaining a high-quality standard for sustainable investments. To obtain the FNG label, funds must meet the minimum mandatory criteria proposed for the voluntary labels. The proposed Values label requires at least 50% of assets to be allocated to values-oriented investment strategies in line with existing FNG Seal Exclusions. The Transition label requires 80% of assets to be focused on climate, sociological or ecological transitions and apply the climate transition benchmark exclusions. And the Sustainability label is aligned with Paris-aligned benchmark exclusions and ESMA’s fund labelling guidelines. The labels will continue to have the star ratings system to allow funds to be put into individual categories. These changes bring greater transparency and consistency with evolving regulatory frameworks and market demands. A public consultation will take place in December 2024, with the new labels set to launch next year. Read More.
UNITED KINGDOM
FCA provides limited extension for compliance with SDR naming and marketing rules
The FCA announced it plans to delay implementing its Sustainability Disclosure Requirements regulation (SDR) which came into effect on 31st July 2024. The SDR and four investment labels (Sustainability Focus, Sustainability Improvers, Sustainability Impact and Sustainability Mixed Goals) are part of a package of measures for asset managers, including a naming and marketing rule, and an Anti-Greenwashing Rule (AGR) which applies to all FCA-authorised firms in the UK. The FCA has confirmed that it will extend the deadline to comply with the naming and marketing rule to 2nd April 2025 for firms that have submitted a completed application for amended disclosures by 1st October, 2024, and currently use terms such as ‘sustainable,’ ‘sustainability,’ or ‘impact’ in their fund names. The “temporary flexibility” allows firms additional time to meet the criteria specified in the naming and marketing rule. The AGR which took effect in May 2024 will, however, still apply to all funds in scope. Read More.
ASIA-PACIFIC
Australia’s mandatory climate disclosure regime to come into effect in January 2025
On 9th September 2024, the Australian Federal Parliament passed a law establishing mandatory climate-related disclosures aligned with the ISSB standards. The AASB will now incorporate both non-mandatory sustainability-related disclosure (ASRS 1) and a mandatory climate-related disclosure (ASRS 2), reversing its earlier decision to only incorporate mandatory climate disclosures. Key changes to the legislation to adopt the ISSB-aligned standards include a requirement to disclose information relating to climate scenario analysis using both the low (1.5°) and high (2.5°) climate scenario analysis. Reporting will encompass the entire value chain, providing comprehensive transparency on climate impact and management. The AASB will set a phased approach for assurance requirements with ‘end state’ reasonable assurance for all climate disclosures becoming mandatory from 2030. Read More.
Australia releases interim report on the development of its sustainable finance taxonomy
On 10th September 2024, Australia’s Department of Treasury released an interim report on the development of a sustainable finance taxonomy that aims to provide common definitions for sustainable economic activities and direct private investment towards the country’s net-zero transition plan. Initiated in July 2023, this taxonomy forms a key component of the government’s sustainable finance agenda. The interim report gives an overview of the taxonomy’s progress, including recommendations from the Taxonomy Technical Expert Group (TTEG) and technical screening criteria for priority sectors focused on climate change mitigation. It also offers an analysis of the alignment between taxonomy deliverables and policy objectives set out in the Terms of Reference and a summary of stakeholder consultations, outlining the stakeholders involved, the frequency of engagement, and key insights from the discussions. Read More.
SGX RegCo announces timeline for incorporation of IFRS sustainability disclosure standards
The Singapore Exchange Regulation (SGX RegCo) has announced that it will start incorporating the IFRS sustainability disclosure standards into its sustainability reporting framework from FY 2025. The regulator has published an implementation roadmap with baseline reporting practices starting in 2025, when all listed companies will be required to disclose their Scope 1 and 2 GHG emissions and integrate climate-related information into their sustainability reports. The roadmap mandates that the primary components of the sustainability report, including material ESG factors, be disclosed from 2026. The regulator has also recognised proportionality of burden, providing a phased implementation plan for smaller issuers grappling with the methodological complexities of Scope 3 reporting. Larger market-cap companies, on the other hand, must report Scope 3 emissions on a mandatory basis, aligning their climate reporting with the IFRS Standards from FY2026. Read More.
NORTH AMERICA
Missouri District Court strikes down anti-ESG disclosure rules in recent ruling
In 2023, the US state of Missouri enacted a law requiring securities firms and professionals to obtain written consent from clients before incorporating ESG factors into investment advice, with a disclaimer that such advice may not solely focus on financial returns. While the rule was part of Missouri’s broader stance against ESG investing, it is worth noting that the federal Employment Income and Retirement Security Act of 1974 (ERISA) allows fiduciaries to consider ESG factors in investment decisions. The United States District Court for the Western District of Missouri has now issued a permanent injunction and ruled the state law unconstitutional, citing federal preemption and First Amendment violations. This ruling could set a precedent in other states with similar anti-ESG regulations across the US. Read More.
California’s state legislature pushes for timely implementation of climate disclosure laws
Following the Newsom administration’s proposed amendments in June to the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261), which included a two-year implementation delay, state legislators have passed related amendments (SB 219) to support the timely enforcement of the climate disclosure laws. SB 219 provides a six-month extension from January 1, 2025, to July 1, 2025, for the California Air Resources Board (CARB) to finalise the Climate Corporate Data Accountability Act (SB 253). CARB will have the authority to determine the timeline for Scope 3 emissions disclosures, while keeping the 2027 reporting start date unchanged. Additionally, the Board may allow consolidated reporting under SB 253 at the parent level, exempting subsidiaries. Importantly, SB 219 preserves the reporting timelines established in the original bills. California Governor Gavin Newsom has until 30th September 2024 to sign or veto the proposed amendments to climate disclosure laws featured in SB 219. Read More.
US SEC approves benchmarks to regulate quality of audits
The US Securities and Exchange Commission (SEC) has approved the new Public Company Accounting Oversight Board (PCAOB) audit standards adopted by the Board in May 2024. The approved standard (AS 1000) sets out general responsibilities of the auditor in conducting an audit, while adding other amendments to the PCAOB standards. The standards seek to modernise and consolidate audit practices, increasing alignment with new technologies and enhancing accountability on registered accounting firms to manage, control and monitor audit quality to ensure investor protection. Additionally, the Commission also approved amendments to Audit and Evidence (AS 1105) and the Auditor’s Response to the Risks of Material Misstatement (AS 2301) to regulate technology-assisted analysis in auditing procedures. The standards and related amendments will be effective from December 2024 and apply to smaller audit firms a year later from December 2025. The new standards address deficiencies in audits of public companies identified from a 2022 survey which inspected 157 firms and found that 40% of the audits lacked quality and evidence to support their claims. Read More.
LATIN AMERICA
Costa Rica publishes consultation on the adoption of ISSB standards
Chilean regulator, the Comisión para el Mercado Financiero (CMF), has issued a consultation proposing to adopt the IFRS S1 and IFRS S2 standards in the country. Earlier in 2021, the CMF had issued rule NCG N°461 requiring listed companies to report sustainability and governance related disclosures, with phased implementation from 2023 to 2025. The regulator has now decided to reconcile existing disclosure requirements with the ISSB standards, to promote internationally consistent sustainability reporting. The CMF’s does not expect any significant changes to the existing law following the proposed consultation. Mainly, the proposed regulation sets a revised timeline for the adoption of the standards in 2026 with first mandatory reporting expected in 2027. Latin America is leading the way in the adoption and use of the ISSB standards, with Costa Rica recently joining the ranks of others in the region including Brazil, Chile and Bolivia. Read More.
OTHER NEWS & RESOURCES
- IFVI and GRI to collaborate to advance sustainable growth through measurement and application of corporate impacts. Read More.
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