How Companies Can Prepare for ESG Risks and Regulatory Changes Across the Globe

• In the UK, the Task Force on Climate-related Financial Disclosures (TCFD) framework has evolved from a voluntary framework to a mandatory requirement for certain listed companies³, asset managers and owners. Large UK-registered private companies and limited liability partnerships are also now required to report climate-related financial disclosures in a similar, but less stringent framework as TCFD.
• In 2021, the UK government’s Roadmap to Sustainable Investing set expectations for wider disclosures called the Sustainability Disclosure Requirements (SDR). The initial consultation focuses on sustainability disclosures, fund labeling and a general anti-greenwashing rule for regulated asset managers. Additional consultations are expected to expand and evolve the regulation over time, incorporating the final UK Green Taxonomy and the International Sustainability Standards Board (ISSB) disclosure standards.
• There are wider sustainability disclosures that will impact any UK company with more than 150 million euros ($165 million) of annual revenues in the EU, where compliance with the EU Corporate Sustainability Reporting Directive (CSRD) will be mandated.
• Board-level diversity disclosure was required in April 2022 for UK-listed companies and in November 2022 for EU-listed companies.
• The European Green Deal Industrial Plan, announced in January 2023, has led to various EU directives. These include the EU taxonomy that aims to identify the proportion of sustainable assets, the Sustainable Finance Disclosures Regulation (SFDR) geared to financial market participants, and the CSRD that will be implemented as soon as 2024 for certain companies. The CSRD includes requirements to disclose Scope 3 emissions and more detail on the social risks within ESG, such as working conditions, equal treatment and opportunities for all the employees in the value chain, as well as pay equity disclosure (for more information, read our article “Navigating the New EU Directive on Pay Transparency”).

• Aon’s recent pulse survey on how companies in the Middle East are addressing ESG finds that many organizations are prioritizing human capital management compared to environmental issues. However, some Northern African and Middle Eastern countries are getting more involved on the international climate stage, with Egypt hosting the United Nations COP27 conference in 2022 and Dubai hosting COP28 later this year.
• ESG regulation and reporting lags Europe, but we see some activity emerging. In January 2023, the Gulf Cooperation Council countries’ stock exchanges and financial sector regulatory authorities agreed to implement a common set of voluntary ESG reporting disclosure metrics. These incorporate 29 standards, with categories across greenhouse gas emissions, energy usage, water usage, gender pay, employee turnover, gender diversity and data privacy. Each exchange will supervise the disclosure reporting for the listed companies in their jurisdiction under this new unified framework.

• In the U.S., final rules on climate and cybersecurity disclosures, as well as proposed rules on prescriptive human capital and board diversity disclosures, are expected from the Securities and Exchange Commission.
• Asset managers continue to emphasize diversity, equity and inclusion (DE&I) progress and transparency, some pushing for EEO-1 disclosures and others moving from requiring a minimal number of women directors on corporate boards to percentage thresholds. Indeed, new data shows racial and ethnic minorities now represent 20 percent of board seats in the Russell 3000 — a milestone indicating a decade of progress towards greater diversity in the boardroom.
• President Biden’s administration proposed the Federal Supplier Risk and Resilience Rule in November 2022. This would require major or significant federal contractors to disclose their greenhouse gas emissions and climate-related financial risks and set science-based emission reduction targets. The proposed rule would have a ripple effect for other companies.
• Critics of using ESG to influence investing decisions continue to capture headlines. More than a dozen states passed measures to prohibit the consideration of ESG factors in investing state retirement funds. The Vanguard Group quitting the Net Zero Asset Managers Initiative was seen as a symbolic win for the movement. More states are expected to pass anti-ESG measures going into the 2024 presidential election year.

“While ESG activism in Asia is not as prevalent as in North America and Europe, we do see an increase in shareholder engagement by more ESG-mature organizations in the region to proactively manage risks,” says Sitara Fernando, director for Aon’s Human Capital Solutions.

Here are some highlights:

• Organizations in the region are aligning net-zero commitments with their governments’ strategies. Many exchanges have mandated sustainability reporting for publicly traded companies. The most recommended framework by regulators for climate reporting is TCFD.
• Recognizing the benefits DE&I has on overall business and talent strategies, some institutional investors are pushing larger organizations to report DE&I performance and articulate their targets.
• Boards are focusing on ESG and working towards building knowledge and capacity to understand and manage these emerging risks. However, there is a scarcity of ESG expertise in many markets, especially those severely affected by the pandemic and/or geopolitical disruption.
• Scope 3 emissions reporting is posing challenges for many organizations in Asia — especially since numerous supply chains originate or include in the region. It is likely that this will continue to lag until regulators mandate disclosures.

“For global companies, the ESG risk identification process has implications on all types of suppliers. This means that companies operating in Latin America are starting to feel pressure from their global clients to mobilize an ESG strategy regardless of their own regulatory environment,” says Anna Barrera, director in the Corporate Governance and ESG Advisory practice in Aon’s Human Capital Solutions.

Here are some highlights:

• While the region trails others in ESG reporting regulations, there are signals that organizations will not wait for regulation to advance their ESG strategy. The first ESG Summit Mexico was held in 2022. Company leaders and asset managers emphasized opportunities to address climate change and ESG pressures facing clients in the U.S. and Canada.
• As Luiz Inácio Lula da Silva takes over as Brazil’s president, we expect challenges to extractive industries like mining and agribusiness operating in Brazil’s environmentally sensitive areas.
• Issuance of sustainability-linked bonds is growing, with proceeds going toward green goals and sustainability performance targets.
• Several Latin American countries have focused on enacting human rights and diversity-specific regulations. For example, Brazil prohibits companies convicted of using child labor from participation in the bidding process, while Chile requires companies to report on diversity, internal pay gaps and occupational safety.