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January 2023

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Making Sense of Sustainability: Global ESG Policy Developments and Implications for 2023

Making Sense of Sustainability: Global ESG Policy Developments and Implications for 2023

ESG policy is a complex, moving target for market participants that requires a global understanding.

CiaraHorigan Final

Ciara Horigan
Vice President, EMEA Regulatory, Industry and Government Affairs

Rick Lacille

Rick Lacaille
Global Head of ESG

Anna Bernasek

Anna Bernasek
Global Head of Thought Leadership

 

Amid profound geopolitical and economic disruptions in 2022, there was continued focus on managing risks stemming from climate change, as well as wider environmental, social and governance (ESG) issues. In almost all regions, regulatory and supervisory initiatives increased, and we expect this to continue throughout 2023. 

The implications for investors and other financial market participants will vary — but wherever these initiatives are taking root, it is likely to mean a greater degree of disclosure about exposures to sustainability-related risks and opportunities, as well as requirements to demonstrate the effective management of such risks within investment processes and business operations. 

In Europe, companies and financial services firms are facing increased pressure to conduct additional due diligence of their supply chains by identifying, assessing and mitigating adverse actual (or potential) sustainability risks.

There are different motivations and objectivities driving the actions of policymakers. Regulators in the United States are focused on ensuring banks, investment managers and investment advisers – as well as other financial market participants – are effectively managing risks stemming from climate change or wider ESG matters. 

Regulators in other jurisdictions, notably in Europe but also parts of the Asia-Pacific region, have been set explicit mandates by governments to “green the financial system;” in other words, to reorient private capital toward a more sustainable, resource-efficient and circular economy. 

However, there are three broad areas of interest:

  • Investor protection from the risks of mis-selling, as interest grows in investment strategies that are designed to navigate sustainability issues, or to have positive impact
  • Stability and efficiency of the financial system by ensuring that the market is able to identify and price sustainability risks and opportunities
  • Directing finance away from activities in the economy that are unsustainable, and toward those that are sustainable

It is the last of these that is the most unusual in a historical context. Support for this concept is by no means universal, but the sense of urgency regarding climate change felt by some has impelled policymakers to embrace a much more directive approach to financial markets.

In this report, we highlight major policy developments that occurred in 2022, discuss the implications for market participants in 2023, and provide key takeaways. 

To do so, we use the framework we introduced in our March 2022 paper, Making Sense of Sustainability: A Policy Perspective. That framework identifies five major areas of global policy aimed at:

1.  Enhancing transparency of climate and ESG risks across the financial ecosystem

2.  Establishing a common classification system for sustainable investments

3.  Ensuring appropriate governance and management accountability for climate and ESG risks

4.  Incorporating climate-related financial risk into banking rules

5.  Encouraging market-based initiatives

 

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