In 2023, ESG regulation became more stringent, and the synchronization of international approaches and standards began.
Countries and international associations are moving from ambitious declarations and conceptual debates about sustainable development to more concrete measures and implementation of plans. In terms of regulatory mechanisms, new mandatory requirements, clear standards and deadlines appear, and fines are introduced for violators and companies not involved in the process. At the same time, the innovations adopted in 2023 affect almost all main areas in the ESG field.
Businesses in many countries have been publishing ESG reports for a long time. But even in Europe the practice remained largely voluntary. Mandatory reporting requirements adopted in the EU in 2018 affected fewer than 12 thousand companies.
In 2023, the European Parliament approved a new directive (CSRD) on ESG reporting. It expands the range of organizations that are required to disclose the social and environmental impacts of their activities. The document will affect about 50 thousand public and non-public companies, including foreign ones. It is planned to put it into operation in stages starting in 2024.
The fact that businesses must provide non-financial reporting is also stated in the updated Principles of Corporate Governance of the OECD and G20. The main purpose of their revision is to promote practices that contribute to the sustainable development of corporations. For the first time, the document included recommendations in the field of ESG.
Work on harmonizing approaches to ESG reporting is finally moving into practice. Previously, companies focused mainly on the GRI standard, which has existed since 1997 and is constantly being updated with additional provisions and industry recommendations. At the same time, more and more new requirements, directives and recommendations appeared: on climate, sustainability risk management, impact management, etc. To solve the problem of unifying various approaches, the International Sustainability Standards Board (ISSB) of the IFRS Foundation was created.
In 2023, the ISSB finally released the long-awaited ESG disclosure standards - IFRS S1 and IFRS S2. They provide a more in-depth analysis of the impact of ESG topics on financial performance.
The possibility of introducing these standards is being considered by the UK, Canada, Japan, Singapore, Chile, Malaysia, Egypt, Kenya, South Africa and other countries. Brazil has already announced that it will introduce mandatory ESG reporting for businesses based on IFRS S1 and IFRS S2 from 2026.
At the UN Climate Change Conference (COP28), which took place in the UAE in early December, nearly 400 organizations from 64 jurisdictions pledged to promote the implementation of ISSB standards at the global level. Participants emphasized that consistency of efforts and standards is one of the most important conditions for moving towards sustainable development.
Chief Coordinator of the UN Sustainable Stock Exchanges Initiative, Anthony Miller, noted that today the efforts of exchanges, regulators, standard setters and market participants are largely aligned to achieve sustainable finance goals that lead to a zero-emission economy. The expert is confident that a lot of work remains to be done on synchronization, but clear global standards are already emerging, around which all market participants are rallying.
Today, more than 600 ESG ratings of varying degrees of distribution are issued around the world. But while the correlation between major global credit ratings is 0.99, for ESG ratings this figure is only 0.61.
It is very difficult to compare estimates from different agencies, European Financial Commissioner Mairead McGuinness admitted in June 2023. According to her, the segment is “completely unregulated” and there are potential conflicts of interest. Therefore, the EU proposed introducing new rules for rating compilers. Agencies must be authorized by the Securities Authority, supervised by the regulator, and not provide related services to businesses.
There are three main problems that the ESG rating market as a whole faces: the lack of a unified methodological approach to determining ESG ratings, the low level of transparency of ESG rating methodologies and the limited ESG data provided by the market. For some countries, individual issues are not so acute, but in general, these three aspects are the main limiters.
At the same time, demand for ESG ratings continues to grow following an increase in the volume of investments tied to the implementation of sustainability principles by companies. Investors are demanding greater transparency on ESG issues. Developed stock markets are leading the way, but ESG investing is also gaining momentum in Asian countries. Intensified work helps reduce barriers to investment flows, creates opportunities for the implementation of joint projects and the development of international relations.
A shift in the financial sector towards the explicit inclusion of ESG factors in the investment process also requires changes in investment methodologies and financial sector tools.
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