Regulation at a Crossroads: Convergence or Fragmentation?

With at least 34 regulatory bodies and standard setters in 12 markets undertaking official consultations on ESG in 2021 alone, it’s no wonder that companies’ and investors’ heads are spinning. We see convergence in some core areas, yet there are signs of further fragmentation, driven by differing regional priorities.

Just take a look at our preliminary analysis below that compared the current pipeline of rules and proposals from select agencies in key jurisdictions along five dimensions: reporting target; objectives; materiality; stringency and uniformity of reporting. All of these proposals tackle the issue of transparency in ESG investment standards, yet there is a lack of uniformity in the other initiatives of the regulations. Such differences could prove a persistent obstacle to global convergence on ESG-related regulations.

 

The table shows a representative selection of regulatory initiatives that meet three criteria: (1) directly affecting financing activities and/or investors’ reporting; (2) aimed at improving investors’ decision-making processes; (3) come into effect within the next five years. Only initiatives with sufficient details disclosed are included.¹ Taxonomies² and prudential regulation³ are excluded.

¹ Initiatives that have been announced with limited detail as of the time of writing include: the U.S. SEC disclosure on human capital management and board diversity; the Swiss Federal Council planning mandatory climate reporting for large Swiss companies and for financial market players; the EU Sustainable Corporate Governance Directive (expected for Q4 2021); and the UK FCA Sustainability Disclosure Requirements for Companies.

² As of the time of this writing, taxonomies existed or were in the proposal stage in many parts of the world: EU, China, Hong Kong, Malaysia, Singapore, UK, and the ASEAN region, plus the Common Ground developed between EU and China.

³ Inclusion of climate-related stress tests into prudential regulation is being promoted by the Network for Greening the Financial System (NGFS) with over 100 Central Banks. Climate stress tests for banks are currently being undertaken or planned in many jurisdictions, e.g. Canada, EU, Hong Kong, Malaysia, UK, US.