Regulators are taking a tougher stance on environmental, social and governance (ESG) disclosures, according to a study released this week.
Datamaran, a software as a service (SaaS) company with a focus on non-financial risk management, analyzed the growth of ESG regulations back to 2012. Researchers focused on three sectors—financial services, utilities and pharmaceuticals—across the United States, Canada and the United Kingdom. Their findings indicate an evolving regulatory landscape that increasingly favors more non-financial information from public companies.
In the last three years alone, ESG-related regulations grew by more than 100 percent across the U.S., Canada and the U.K., the study revealed. Regulators imposed new disclosure standards on topics like business ethics, energy use and product safety, a trend Datamaran researchers expect to continue.
“Business needs to be aware of emerging ESG regulation,” said Marjella Alma, co-founder and CEO of Datamaran. “The tougher stance taken by regulators means that companies who are not integrating ESG issues into their strategy and their risk analysis will have a harder time navigating the complex and evolving regulatory landscape.”
The sharp rise in ESG regulations over the past six years, together with a tougher hand from policymakers, should make business stand up and take notice, Alma said. “The message is clear,” she insisted, “non-financial issues are a ‘must have,’ not a ‘nice to have.’” Datamaran’s researchers expect business ethics, as well as supply chain management, to be a key focus for regulators moving forward.
As the regulatory landscape continues to tighten, institutional investors are also calling on companies to increase their non-financial disclosures. At the start of this year, the CEO of the world’s largest asset manager said he expects companies to demonstrate their long-term value to society, as well as healthy financials. “I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation,” BlackRock CEO Larry Fink wrote in an open letter to the CEOs of all publicly-traded companies.
“Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change—affect your potential for growth.”
In other words: as issues like wealth disparity, resource scarcity and climate change continue to pose risk to the way companies do business, investors—as well as regulators—want assurance that these companies are planning ahead.
“Business has to think beyond the one- and two-year perspective to a much longer term as it evaluates the potential impacts of ESG risks,” advised Paul Sobel, chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a multi-stakeholder risk management initiative. “These risks are mainstream, and they have to be part of the overall risk assessment and monitoring.”
European markets in particular are looking to tighten their ESG reporting standards. In May, the European Commission proposed a new regulation to clarify how how institutional investors—including pension funds and insurance companies—should integrate ESG into their investment decision-making.
In the U.S., however, it’s two steps forward and one step back. In April, the U.S. Department of Labor published a guidance cautioning financial managers that investments based on ESG issues may not always be a “prudent choice.” The guidance stands in stark contrast to best practices advised under the Barack Obama administration—which encouraged investors to consider ESG factors, Compliance Week reported.
Still, ESG regulations for the American pharmaceutical sector doubled over the past six years, according to the Datamaran study, while those impacting financial services companies increased by 87 percent since 2015. And, for their part, decision-makers seem unconvinced by the Labor guidance. "Markets are in no doubt of the materiality of ESG considerations," Fiona Reynolds, CEO of Principles for Responsible Investment, which represents investors with more than $70 trillion in assets, told Investment News.
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