• ESG and Sustainability Issues Are Here to Stay…

ESG and Sustainability Issues Are Here to Stay…

09 November 2022

Developments in the financial services sector related to environment, social and governance (“ESG”) and sustainability issues have continued to occur throughout 2022, maintaining the momentum gathered in recent years.

Events such as Russia’s invasion of Ukraine, rising cost of living and increases to interest rates globally have contributed to economic and geo-political challenges this year. However, arguably this has only accentuated the need to focus on sustainability globally and the financial services sector has always been seen as a key catalyst to be able to do this.

What has changed in 2022?

Here are some of the key initiatives and developments this year:

  • Following the introduction of the first provisions of the European Union’s (“EU”) Sustainable Finance Disclosure Regulation (“SFDR”) in March 2021, in April this year the final version of the Regulatory Technical Standards were adopted and the first “reference period” started on 1 July 2022, meaning financial market participants in the EU will have started collating sustainability related data in order to make the relevant additional disclosures required under the regulation from 2023 onwards.
  • Following the announcement of the International Sustainability Standards Board (“ISSB”) by the IFRS in November 2021, the ISSB published two exposure drafts in March 2022 related to sustainability disclosure standards, one in relation to "general requirements for disclosure of sustainability-related financial information”, and the second specifically on “climate-related disclosures”.
  • The Task Force on Climate-related Disclosures (“TCFD”) reporting framework has garnered further support across the globe this year, for example in March the Securities and Exchange Commission (“SEC”) issued proposed rules that would require domestic and foreign registrants to significantly enhance their climate-related disclosures within registration statements and annual reports, depending on registration type. Additionally, new climate-related reporting rules have been introduced in Japan and India, with China and Canada announcing plans in this regard within the last 12 months.
  • In the UK, the Financial Conduct Authority (“FCA”) published its ESG handbook, a new set of rules that at this stage are largely focussed on the climate-related reporting by financial service firms that it regulates. Additionally, the FCA introduced new diversity and inclusion rules for listed entities in the UK. Finally, the FCA launched a consultation last month of its sustainability disclosure requirements (“SDR”), designed to “help consumers navigate an increasingly complex investment product landscape, protect them from greenwashing, and rebuild trust“.

What else is expected to come in 2022?

And yet we expect there will be more to come this year! Including:

  • The ISSB is holding a series of meetings in November 2022 to seek to finalise the requirements under the ISSB’s sustainability and climate-related disclosure requirements, as well as important announcements expected to be made a COP27 in Egypt this month too
  • The SEC climate-related reporting requirements are expected to become effective from December 2022 for the largest SEC registrants, meaning reporting for fiscal years commencing in 2023 would require the necessary climate-related disclosures.

How we have been supporting clients

A constant challenge has been managing the significant pace and volume of legal, regulatory, governmental and economic change in relation to ESG and sustainability issues. Additionally, with the volume of developments comes the challenge of adhering to potentially conflicting standards and requirements for both national and multinational companies, such as the EU SFDR and any potential deviation within the FCA’s SDR.

Within BDO’s global Financial Services team, we have provided a range of accounting, risk and regulatory advisory and assurance services to clients in relation to ESG and sustainability. Our local financial services practices in key jurisdictions such as the UK, EU and in the USA possess the local expertise to support clients, but we are also collaborating internationally to provide our clients with the tools and specialist support they need to navigate the challenging and ever-changing ESG landscape.

As an example, we have provided the following services to clients:

  1. Conducting ESG materiality assessments in order to help our clients identify the material risks and opportunities to their businesses related to ESG factors;
  2. Creating ESG governance structures and strategies;
  3. Accounting and corporate reporting advisory in respect of TCFD reporting;
  4. Interpretation of regulatory rules and guidance in relation to ESG and sustainability; and
  5. Assurance services such as internal audit engagements related to ESG and sustainability.