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US RISKS FALLING BEHIND AS GLOBAL ESG REPORTING STANDARDS TAKE SHAPE



by Cliodhna Murphy, global head of environmental sustainability, MUFG 12 Jan
2022
 * 
 * 
 * 
 * 
 * 


MUFG'S CLIODHNA MURPHY SAYS THE LAG HAMPERS EFFORTS OF FUND MANAGERS OPERATING
IN THE COUNTRY



While the United States has been a leader in developing technology to combat
climate-related risks, there is one area where it lags Europe, Asia and other
regions of the world.



The US Securities and Exchange Commission (SEC) has been slow to craft and adopt
global ESG reporting standards. Proposed regulations being developed elsewhere
are a work in progress but they have begun to bring some clarity.

In the US, however, the burden of inconsistent or absent standards will continue
to fall heavily on companies and investors. How the US addresses this issue will
have broad implications for asset owners and managers.  


DOWNSIDES OF FALLING BEHIND

US-based fund managers won’t have clear ESG standards for their domestic
investors. They could also be constrained by geographic boundaries causing them
to miss out on opportunities in Europe, Asia and other regions which have
structured ESG regimes in place. Selling into these markets will force them to
confront a patchwork of domestic and global metrics and reporting standards,
raising the complexity level and causing inefficiencies in the process.

Research shows that investors are already frustrated by the amount, quality and
consistency of research available to them. The 2020 EY Climate Change and
Sustainability Services (CCaSS) Institutional Investor survey found that 91% of
respondents agree nonfinancial performance played a pivotal role in investment
decision-making.

Yet many are not satisfied with the information available to them. More than
four out of 10 respondents said there was inadequate disclosure of social and
governance risks, and the proportion that are dissatisfied with environmental
risk disclosures has increased by 14% since 2018.


INVESTOR-DRIVEN REPORTING STANDARDS

While it’s not fully clear what existing or hybrid standards will prevail,
harmonization efforts are coming together. The Group of Five, a coalition of
major standards-setters, is collaborating on a common set of sustainability
disclosures. Further, the International Financial Reporting Standards Foundation
has established an International Sustainability Standards Board (ISSB). The ISSB
launched at COP26 in November and will offer baseline standards that will also
allow for reporting requirements that are specific to particular jurisdictions.

While the need is acute, the SEC has been reluctant to take a leading role or
even engage much in the harmonization process although that appears to be
changing somewhat. Its leaders have expressed that ESG reporting standards
should be largely investor-driven and not the purview of federal regulators. It
has also stressed that “materiality,” its traditional criteria for reporting, is
not always a fit for ESG standards.

SEC commissioner Hester Peirce wrote in Eurofi Magazine April that, “A single
set of metrics will constrain decision making and impede creative thinking.
Unlike financial accounting, which lends itself to a common set of comparable
metrics, ESG factors, which continue to evolve, are complex and not readily
comparable across issuers and industries.”




BELATED ACTION

Nonetheless, the SEC is taking some actions, if slightly belatedly. Earlier this
year, the SEC’s Enforcement Division announced its Climate and ESG Task Force –
an effort to proactively identify ESG-related misconduct and “greenwashing.”

According to the SEC, the task force will look for “gaps or mis-statements in
issuers’ disclosure of climate risks under existing rules” and analyse
“disclosure and compliance issues relating to investment advisers’ and funds’
ESG strategies.”

An SEC risk alert this year also seeks to examine how “the variability and
imprecision of industry ESG definitions and terms can create confusion among
investors if investment advisers and funds have not clearly and consistently
articulated how they define ESG and how they use ESG-related terms, especially
when offering products or services to retail investors.“


NOTING GLOBAL STANDARDS

A positive statement from the SEC Chair Gary Gensler that the commission will
consider global standards while crafting, by early next year, a proposal for
mandatory climate risk disclosures for consideration by SEC commissioners.

The proposal, which was very well-received, would require companies to report
metrics such as greenhouse gas emissions, financial impacts of climate change
and progress towards climate-related goals.

Further, the SEC’s Division of Corporate Finance in September released a sample
comment letter that requests additional information from companies related to
climate change.  While the letter does not create substantive new law, it
demonstrates the SEC’s increased interest in ESG and climate-related disclosures
under the Biden administration.


EUROPEAN EFFORTS

As efforts continue, whether they’re red hot or lukewarm, some organizations and
firms are taking a practical approach to how reporting metrics might be
implemented. A study by industry group Irish Funds, for example, is looking at
whether data vendors have the capability to meet the Level 2 — Regulatory
Technical Standards (RTS) EU— of the Sustainable Finance Disclosure Regulation
(SFDR).

These Level 2 measures will become effective in July 2022 and look at the
principal adverse impacts (PAI) of investment decisions on sustainability
factors. The draft RTS set out mandatory and optional PAI indicators. The
indicators span greenhouse gas emissions, biodiversity, water, waste,
environment, and social and employee issues, among others.

In a measure of how difficult compliance and measurement might be, the
information that data vendors will supply to gauge PAI is incomplete and
inconsistent. For example, the vendor survey found that data is generally
available for only eight of the 14 mandatory PAIs relating to investee
companies, and that there is a wide range of variance in the reported data with
low levels of comparability between data vendors.


US OUTPACED

While there is much that needs to be worked out, it’s clear that Europe and
other regions of the world are far ahead of the US, leaving that country and its
investors with much more uncertainty even as demand soars for ESG assets and
reliable metrics related to those assets.

In the preceding five years, having gone through the difficult process of
establishing SFDR and the EU taxonomy, Europe will be even further ahead in
terms of reporting. The European road map is clearly defined and will continue
despite any changes in regimes.

In the US, however, politics and hesitancy will continue to slow advancement,
despite recent efforts to make some progress.

As investors look ahead, the trend is clear: the US will lag and will further
hamper the efforts of fund managers who operate in the US and also globally. It
will also put a heavy burden on companies that won’t have the clarity and
guidance they need. In a global world, cooperation and collaboration are
essential.

To make the move toward meaningful and accurate global reporting, every country
and region, including the US, must participate actively or be left behind.

Read More: America, Asia, Climate
risk, Compliance, Disclosure, Emissions, Esg, Europe, Greenhouse
Gas, Greenwashing, ISSB, Products, Regulation, Securities Exchange
Commission, SFDR, TCFD


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