US pace of ESG regulatory reforms expected to pick up

Compared to the European Union, US financial regulators have been slow to address ESG issues partly due to the stance of the Trump administration on climate change. The new administration is widely expected to speed up the regulatory process.

Given the lack of government oversight, companies tried to define for themselves what sustainability means. Investors can only rely on what companies report without clear rules and standards.

At the same time, several NGOs set independent standards for ESG reporting. Organisations like the Global Reporting Initiative, the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-Related Financial Disclosures (TCFD) have been working to promote better ESG reporting standards. However, adding more sets of rules and standards often frustrated and confused investors.

As a result, investor confidence in ESG investments has been undermined. Many investors complain that ESG ratings and ESG indexes are often based on unreliable data.

ESG regulatory developments in the US

The Securities and Exchange Commission (SEC) is looking to propose ESG reporting rules for public companies after receiving feedback from investors and other stakeholders to “bring some consistency and comparability” to what companies report,” Bloomberg cited SEC Chairman Gary Gensler.

The SEC announced the formation of a Climate and ESG Task Force within the Division of Enforcement to “develop initiatives to proactively identify ESG-related misconduct.” The SEC also named a Senior Policy Advisor for Climate and ESG in February 2021. Satyam Khanna will advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.

The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.

SEC

The U.S. Federal Reserve in December 2020 joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), an international group focused on climate change risk. The NGFS supports the exchange of ideas, research, and best practices on the development of environment and climate risk management for the financial sector.