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We have observed a slowdown and outflows of ESG and sustainable investment in 2023. 2024 will expect tighter regulatory supervision, and more international collaborations on rolling out plans for ESG and sustainability reporting driven by ISSB & EFRAG, while strengthening reporting on natural resources, driven by TNFD.
LEADING TRENDS TO WATCH IN 2024:
SUSTAINABILITY DISCLOSURES REACHING A GLOBAL BASELINE: The finalization of IFRS-ISSB (International Sustainability Standards Board) and EU CSRD’s (Corporate Sustainability Reporting Directive) ESRS (European Sustainability Reporting Standards) have pushed global sustainability disclosures forward. Regional ESG reporting is picking up pace as well, Hong Kong, Canada, UK, Singapore, Australia, and Brazilia governments have announced plans to adopt Sustainability Disclosure Rules aligned with ISSB to a certain degree. While California also passed similar climate disclosure rules and Chinese SOE started mandatory ESG reporting this year. The U.S. Securities and Exchange Commission (SEC) and the China Securities Regulatory Commission (CSRC) are making significant strides in sustainability disclosure rules, and they are on the top of watch lists as we prepare to enter 2024. Click here to read the latest policy development in APAC and its current sustainability reporting landscape.
NATURE CAPITAL WEIGHTS MORE: COP28 has reaffirmed that not net zero without nature positive. The TNFD (Taskforce on Nature-related Financial Disclosures) has developed a set of disclosure recommendations and guidance for organizations to report and act on evolving nature-related dependencies, impacts, risks, and opportunities, and will work with key stakeholders in developing nature-related disclosures. Learn more about TNFD Recommendations here
WATER FOOTPRINT: Water footprint is one of the key measures for biodiversity risks across sectors. Stricter rules on water consumption and permit requirements will unfold shortly. e.g., Opinions On Further Strengthening the Conservation and Intensive Utilisation of Water Resources released by the National Development and Reform Commission (NDRC). The rules are the strictest so far, as provinces, cities, and towns are asked to control water consumption volume and intensity similar to energy control methods for the first time. The EU’s latest European Sustainability Reporting Standards (ESRSs) under the Corporate Sustainability Reporting Directive (CSRD) has set “E3 - Water and Marine Resources” for companies reporting their non-financial performance. A guide for coporates is available here, and for asset managers, “Blue Economy” & “Water Footprint” as KPI can be access here
PRICING CARBON: in both mandatory and voluntary markets. As an important supplementary mechanism to the Emissions Trading Scheme (ETS), the Chinese Certified Emission Reduction (CCER) scheme is scheduled to relaunch by 2023-end. While CBAM (Carbon Border Adjustment Mechanism) has come into force since Oct 2023, putting pressure on compliance carbon markets worldwide. Chinese ETS market is also looking for expansion to more industries, such as petrochemicals, chemicals, construction materials, steel, non-ferrous metals, pulp and paper industry, and civil aviation. And the EU ETS announced the inclusion of maritime emissions in 2024. This year, we saw the Chinese national carbon price rise to a record high of over CN¥80 (CN¥82.79) at the highest in October 2023 over mounting compliance pressures. Contact us to stay on track with GC Insights Monthly ESG Regulatory Watch Subscription to monitor the latest trending regulatory developments and the carbon markets.
HIGHER ESG-RELATED LITIGATION RISKS: Higher sustainability-related litigation risks announced in China and the EU as high counts demand for clarity for penalties upon environmental crimes. For instance, according to one of the cases released by China’s Ministry of Ecology and Environmental (MEE), Supreme People's Procuratorate, and the Ministry of Public Security on Oct 19, 2023, a chemical company constituted crimes of polluting the environment and disrupted the monitoring function of the exhaust gas online monitoring system (automatically monitored by the local) has been charged with CN¥200,000 yuan. The three defendants have been sentenced to fixed-term imprisonment ranging from one year and nine months to six months. The company has been asked to invest more than CN¥6 million yuan to upgrade its pollution treatment equipment and restore the monitoring equipment for proper function before operations can take place, and nearly CN¥1.03 million yuan in environmental protection tax and late fees are due.
STRICTER ESG INVESTMENT NAME RULES: Regulatory tightening on investment name rules on the use of ESG-related terms, such as proposed rules in the EU, US, UK, Australia, etc. The new rules will require funds with names that suggest an investment focus on ESG or sustainability-related factors to invest at least 80% of the value of assets by those factors. Read more about these trends here.
CLEARER RULES FOR ESG RATING METHODOLOGIES: Regulators are looking to tighten restrictions and requirements overseeing ESG rating agencies, and ESG score providers aim to promote transparency. The European Union has proposed that ESG rating providers offering services to investors and companies in the EU be authorized and supervised by the European Securities and Markets Authority (ESMA) to ensure the quality and reliability of their services to protect investors and ensure market integrity.
COP28 PLEDGES INTO ACTIONS: Accounting for other non-carbon emissions such as CH4 and HFC. Methane (CH4), as a primary component of natural gas and is responsible for about a third of the planetary warming we see today. As announced during COP28, several major oil and gas companies has pledged to reduce methane leaks from their pipelines by 2030, a small step towards the right direction. We will likely to see more regions announcing plans for methane emission reduction as China-US climate talks highlighted methane cut as priority for the bilateral collaborations. Meanwhile, the Global Cooling Pledge for COP28 witnessed over 60 countries pledge to slash cooling emissions amid rising temperatures. The pledge containing reduction of cooling-related emissions across all sectors by at least 68% globally relative to 2022 levels by 2050, with significant progress and expansion of access to sustainable cooling by 2030, including HFC phase-down plans, increased market penetration of highly efficient air conditioning equipment, etc. Read more on key takeaways from COP28.
SUPPLY CHAIN DUE DILIGENCE ON THE AGENDAS: Supply chain due diligence are increasingly important issues on policy agendas. Governments and organizations worldwide are implementing measures to combat environmental risks and ensure ethical practices in supply chains. For example, the EU Parliament and Council negotiators has recently agreed on new EU Corporate Sustainability Due Diligence Directive which would apply to EU and non-EU companies with a turnover over 150 million euro and smaller companies in sectors such as manufacture of textiles, agriculture, mineral resources and construction. Penalties include naming and shaming and fines of up to no less than 5% of net worldwide turnover. The EU is also moving towards mandatory due diligence legislation, which would require companies to publish and verify information about the country of origin of sourcing inputs in its supply chain, arrange for credible external inspections, audits, and other forms of due diligence. This would allow companies better oversight, control, and understanding of their supply chains, leading to improved supply chains, enhancing efficiency and innovation. Check out our supply chain sustainability research here
GLOBAL RENEWABLE ENERGY RACE CONTINUES TO BOOST TRANSITION FINANCE: The global energy transition is accelerating and creating massive investment opportunities. As nations agreed on tripling renewable energy capacity globally by 2030 during COP28, countries are racing to keep strategic fundings for renewable energy. As we are experiencing an environment of higher interest rates (outside China) means financing becomes more expensive. Projects become harder to finance; companies’ profitability is affected as they need to increase their reliance on more expensive equity; and very leveraged companies have a higher risk of default, as illustrated by the IEA. Whereas Chinese-produced solar PV modules are around half the price of those manufactured in the United States or the European Union. And the country is expected to continue to account for the majority of manufacturing capacity for wind, batteries, and especially solar PV, as well as for their key components, through to 2030.
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