Throughout the ESG industry, many standard risks and opportunities are formulated based on speculation of future regulation—especially those surrounding climate change. In recent years, there has been a profound shift, with an increasing number of countries attempting to formalize, define, and quantify a host of ESG measurements and ideals. For the most part, the US has remained relatively stagnant—allowing individual companies to dictate when and how both ESG and impact metrics were adopted and reported. However, since the new administration took over—and immediately rejoined the Paris Agreement—in January of 2021, there have been early indicators that the US has finally decided to follow Europe’s lead. The long-suspected regulatory measures that have dictated forward-looking ESG recommendations may finally be here.
In January 2016, building on the success of the Millennium Development Goals (MDGs), the UN launched on one of the most comprehensive efforts to standardize and bring together disparate nations in order to fight poverty, inequality, and climate change, through the launch of their 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable development. At the time, more than 150 world leaders adopted the agenda.
Since then, a number of new initiatives have built on these concepts, but the overwhelming majority remain strictly in Europe, with the European Commission’s primary focus on regulating the financial industry through Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR).
There has also been an increasing number of independent organizations attempting to put a more usable frameworks around measuring, tracking, and qualifying various ESG and impact issues—from the Sustainable Accounting Standards Board (SASB) to the Global Reporting Initiative (GRI). The UN PRI also completely overhauled its scoring process within the last year, aiming to focus on what signatories are doing—rather than how—in order to produce more meaningful outputs, including a comprehensive climate change section.
However, without any guidance from US-centric regulatory agencies, many firms are simply left wondering what metrics to track, what data to collect, and which goals and standards to align to. There is nearly zero cohesion within the broader ESG landscape, including climate change KPIs. Even within lists of firms that claim to adhere to SDG standards, there are vastly different outputs and a high degree of greenwashing.
Now, there is finally some indication that formal regulatory compliance will arrive this year. In mid-March, the U.S. Securities and Exchange Commission signaled that corporations may soon have to report on how they expect climate change to impact their future business—with Allison Herren Lee, the regulator’s acting chair, noting it is no longer a question of if but how. Soon after, US Treasury Secretary Janet Yellen stated that her department would begin aligning with standards and objectives set out by the Paris Agreement in order to better combat climate change through financial regulation.
Finally, after previews from both Climate Envoy John Kerry and IMF Chief Kristalina Georgieva—including a note that that the organization had been working to standardize reporting risks with the G20 due to the “increasingly urgent” nature of climate change and environmental protection—US President Joe Biden formally announced the US’s plan to halve its emissions by 2030.
The official statement was made at the virtual climate summit attended by 40 of the world’s most powerful leaders, and was quickly followed by Britain, Canada, the EU, and Japan all committing to deeper cuts as well. Additionally, Biden indicated that more specific, sector-by-sector recommendations would be coming later this year, and that many changes would help increase blue-collar jobs, with the ultimate aim to build an “economy that’s not only more prosperous but healthier, fairer and cleaner for the entire planet.”
Currently, little else is known about specifics of the plan—or what financial regulations might accompany the broader industry goals—but it is already triggering a large transformation in investments around the world. With such a strong stance, more and more funds are trying to level set their own ESG processes in preparation for formalized policies that will be enacted in the coming months. However, even more of a shift is expected as institutions conform with new standardized definitions, comprehensive measurement standards, and shared long-term goals relating to environmental regulation and the mitigation of the transitional and physical risks of climate change.