ESG reporting enters its 'winter of discontent' in 2022–2023

By Louis P. Le Guyader, CPA

Various regulatory bodies in several countries and regions continue their quests to issue rules for environmental, social and government (ESG) reporting. The general worldwide state of ESG reporting at this date remains a largely voluntary practice for reporting entities, investment funds and asset managers, except for the EU’s Non-financial Reporting Directive (NRFD). The NRFD is a protocol that applies to the EU’s 12,000 publicly traded companies.

The major regulators working towards new and mandatory rules include: (1) in the United States, the Securities & Exchange Commission (SEC); (2) in the European Union (EU), European Financial Reporting Advisory Group (EFRAG) under the new Corporate Sustainability Reporting Directive (CSRD) from the EU parliament and EU Commission; and (3) in the International Financial Reporting Standards (IFRS) reporting community, the new efforts of the International Sustainability Standards Board (ISSB). 

Military, economic and political shocks have negatively impacted ESG efforts worldwide 

The Russian Special Military Operation in the Ukraine is associated with an EU energy crisis that may peak during the winter of 2022-2023. Germany reversed plans to mothball three nuclear plants. France began rapid retrofitting and redeploying 33 nuclear facilities that had planned to go offline. The Nord Stream pipeline was destroyed under mysterious circumstances, exacerbating the immediate energy crisis on the continent. 

At the same time, economic slowdown caused by the COVID-19 pandemic left a negative impact on carbon reduction efforts but compelled regulators to use prospective mandatory reporting to bring ESG plans back inline. At the end of summer 2022, the EU announced that its short-term carbon reduction goals could not be met. There was some talk about delaying more ambitious long-term net zero emissions goals until further economic recovery provided a suitable economic foundation to achieve them.

Political uncertainty in the UK accompanied the death of Queen Elizabeth II as the country was led by three separate prime ministers in less than two months — Johnson, Truss and Sunak.  The UK typified political calls to address economic stability ahead of ESG goals. In these two months, the ESG community suffered a setback when the UK’s King Charles III announced that, due to the impartiality standards to which the UK Crown was held, he would not attend the COP meetings this Fall. This is consistent with the UK’s political leanings away from climate change to face economic challenges. 

In the United States, the continuation of high annualized inflation rates of more than 8% and capital market disruptions spotlighted ESG investment efforts negatively. More than 20 state attorneys general announced plans to litigate firms that used ESG factors in their investment algorithms. State treasurers withdrew funds from investment managers that appeared to place ESG goals above standard Du Pont Analysis ROE targets. The most notable cases of new anti-ESG investment sentiment affected  the New York-based BlackRock firm. BlackRock responded by proposing new mechanisms to allow their investor-clients to join in the firm’s investment professionals to achieve a mutually satisfactory balance between traditional financial return metrics and ESG metrics. The United States is also bracing itself for a difficult winter with uncertainty about the price levels and supplies for fossil fuels, including fuel used in home heating. Political “green New Deal” and “renewable energy” agendas slowed due to these uncertainties as the country headed into the 2022 midterm elections. 

Several ESG-related meetings across all interested ESG regulators were scheduled for late fall. (This publication’s cut-off date is Nov. 1, 2022.)

Global ESG regulatory updates

The United States 

The SEC issued a request for comment on proposed disclosure rules that would apply to certain investment funds, issuers and investment managers, etc. The comment period ended in August 2022. The SEC is continuing its review of comment letters and has not yet issued draft rules for exposure and continued deliberations. 

At the same time, the SEC’s Enforcement Task Force focused on Climate and ESG issues now highlights 15 major ESG enforcement cases, with notable successes for the SEC enforcement staff. 

As to ESG disclosure rules for reporting entities, the Financial Accounting Standards Board (FASB) has commissioned a research effort on Accounting for Financial Instruments with ESG Features. The effort’s research work continues, and the last update was posted by the FASB in July 2022. 

The European Union (the EU)

By the end of summer 2002, plans to replace the NRFD with the more expansive CSRD were buffeted by the various political and economic winds as discussed above. While the EU Commission and EU parliament committees had agreed in principle to a provisional form of the CSRD by August 2022, it was not finalized as hoped by October. Instead, the most effective lobbying successes seemed to include, at a minimum, pushing out mandatory compliance dates to 2026. 

EFRAG continued its work on the European Sustainability Reporting Standards (ESRS). At this date, 13 draft standards have been issued in exposure formats for discussion. 

The IFRS Reporting Community 

At the London-based IFRS, the fully constituted ISSB has been active, coalescing legacy ESG reporting frameworks and philosophies. Two exposure drafts for “IFRS Sustainability Disclosure Standards” have been issued for discussion and comment: IFRS S1 Disclosure of Sustainability Related Financial Information; and IFRS S2 Climate-related Disclosures. The ISSB website contains details on each item and ISSB’s agenda overall. 

One notable breakthrough in the quest for a global ESG reporting model is a new focus on “interoperability.” The ISSB is working to create a format for all legacy ESG reporting frameworks to act interactively while they continue to exist, and as the ISSB and the IFRS seek to create an updated and cohesive global ESG reporting model. 

The ISSB is celebrating its one-year anniversary; it was announced on Nov. 2, 2021, during the COP26 meetings held in the UK. 

Summary

Except for the EU’s NRFD, there are no mandatory ESG reporting rules that apply to all issuers (reporting entities), investment funds or asset managers in any single country or regional economy. All regulators, whether in the United States, European Union, or operating under IFRS, have continued their announced efforts to issue updated rules. All such efforts seemed to have been negatively impacted by the twin economic costs of military actions in Europe, and the price and supply uncertainty for fossil fuels as the Northern Hemisphere enters winter.

Political risks can explain likely postponement of climate change-oriented efforts and wholesale reversals of national ESG strategies. Nations under stress plan returns to fossil fuel and nuclear energy to face the 2022-2023 winter. And this uncertainty has slowed worldwide progress to new ESG reporting rules that are mandatory.

This may be the “winter of discontent” for many in the ESG community and particularly for those involved in ESG reporting. 

Louis P. Le Guyader, CPA, is an accounting professor at Southeastern Louisiana University. He began his academic career after earning his Ph.D. at Columbia University, and this followed two decades on Wall Street at PriceWaterhouseCoopers and BNP-Paribas. His first transaction as an investment banker after graduating from the Darden MBA program was an early form of sustainability financing — the tax-exempt financing of pollution control facilities at a fossil fuel power plant in Louisiana. Contact him on LinkedIn.