Key milestones in global ESG regulation and standards reached in Q3

By Laura Miller

Never a dull moment in ESG regulations and standards, and this quarter was no exception. Here we highlight three significant changes over the past few months that ESG and sustainable investors need to know about.

European Sustainability Reporting Standards

Most notable, according to a report from Sustainable Fitch, 3Q23 ESG Trends, were the European Sustainability Reporting Standards (ESRS) that were adopted in July and are the basis for corporate reporting against the Corporate Sustainability Reporting Directive (CSRD).

The adoption of the ESRS in July paves the way for the CSRD to be deployed from January 2024, with the first report expected in the first quarter of 2025.

The aim of the ESRS is to consolidate reporting approaches and frameworks under an EU-wide standard to give investors and other stakeholders comparable sustainability information.

A focus on double materiality is the defining feature of disclosures under EU laws and the expanse of the ESRS is intended to address this. Companies required to report under the CSRD will have to disclose information on material risks and opportunities stemming from environmental and social issues and also will need to report on the material impacts their activities have on people and the environment.

The ESRS is therefore more expansive than the International Sustainability Standards Board (ISSB), which launched two standards in June this year, with sustainability market practitioners estimating that across the 12 categories it requires reporting for more than 1,200 indicators. In practice, a materiality test for each category – except ESRS 2– determined by each reporting entity will result in a lower number of indicators actually reported, according to Sustainable Fitch.

Brazil sovereign sustainable bond framework

In September, Sustainable Fitch updated its ESG Regulatory and Reporting Standard Tracker tool, highlighting several recent developments at the international level as well as across regions.

Latin America stands out as a region with momentum, it found, particularly with regards to sustainable finance taxonomies and ESG disclosure requirements. As a result, coverage of the region was expanded across the tool, with Panama and Costa Rica being added.

In September, Brazil introduced a sovereign sustainable bond framework, which is expected to lead to the country’s first sovereign labelled bond issuance by the end of 2023.

This significant move aims to foster trust in sustainable markets and promote private offerings in South America’s largest economy. Sovereign bond issuances in Latin America, for example, in Mexico and Peru, have been instrumental in stimulating private-sector issuances, according to Sustainable Fitch.

Despite a global slowdown in 2023, the positive momentum for sustainability bonds among corporations and financial institutions continues, demonstrating the influence of sovereign sustainability issuances.

Brazil’s framework highlights its dedication to the goals of the 2015 Paris Agreement, aligning with a coordinated ecosystem of regulations and policies. The country’s economic prominence in the region and its status as a hub for biodiversity-related investments puts it on the map for international investors.

Its significant role and potential in the expanding carbon markets, both locally and globally, underlines its critical position, Sustainable Fitch said.

Taskforce for Nature-related Financial Disclosure

Last but by no means least, the recommendations of the Taskforce for Nature-related Financial Disclosure (TNFD) were officially released in mid-September, giving significant momentum to biodiversity-related investing.

Sustainable Fitch expects the TNFD to establish a global baseline for the disclosure of nature-related risks and opportunities. This will further help investors understand the financial implications and impacts of portfolio companies and their business activities on nature.

A nascent area in biodiversity-related investing is the sustainable marine economy. Oceans, together with land, freshwater and atmosphere, are the four major components that comprise nature under the TNFD framework.