Requirements for investment-related ESG reporting increasing

Concerns over 'greenwashing' prompt shift to ‘show me’ reporting, according to global review

Requirements for investment-related ESG reporting increasing

As corporate ESG reporting rules continue to grow, large or listed investors with operations in multiple jurisdictions can expect significant additional reporting requirements related to ESG-related investments, according to a recently published review by UN The Principles for Responsible Investment (PRI).

According to the review, the majority of asset owners in the investment industry (more than 90%) call for reporting that is either made available to the public or given directly to investors in a financial product, reflecting growing concerns about greenwashing.

Looking across nine jurisdictions, it found vast differences in the amount of rules governing ESG reporting on investments. The review set three categories based on the level of regulation observed:

  • High-regulation jurisdictions - including the EU, France, Hong Kong, and the UK;
  • Medium-regulation jurisdictions – including Australia, China, and Japan;
  • Low-regulation jurisdictions – including Canada and the US

Most jurisdictions have adopted obligatory ESG reporting requirements and have the strictest reporting requirements. Areas where there is still resistance to the idea that fiduciary obligations are consistent with ESG incorporation, meanwhile, often rely on voluntary or industry group requirements that are less stringent.

The review noted that initial reporting requirements relied heavily on reporting of stewardship practices and activities, with a focus on proxy voting. Most of the nine jurisdictions examined have comparable voting laws and voting histories.

In medium-regulation jurisdictions, investors are typically subject to a “tell me” approach to regulation. That approach requires them to report on their policies regarding ESG issues, their overarching ESG objectives and strategy, and how the strategy has been implemented in medium-regulation jurisdictions, but not on the outcomes of these actions or the sustainability outcomes of investments.

But as retail investors, fund members/beneficiaries, and potential members strive for greater information on what their money is invested in and how investment decisions are made, more initiatives are being launched to prevent greenwashing, especially for investment products marketed as ESG. Product suppliers are increasingly being asked to describe how ESG goals or concerns are represented in the fund's investments or sustainability results.

That’s driving a broad shift toward “show me” reporting, an example of which is the EU's SFDR. Under that regime, a fund intended to reduce carbon emissions must follow an EU climate benchmark or, in the absence of a suitable benchmark, present a thorough justification of measures made to achieve the goal.