Category: Sustainability

Global ESG and Climate-Disclosure Regulation: A Converging but Uneven Landscape

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The global sustainability regulatory landscape is entering a new phase of consolidation, divergence, and transition. Across Europe, the UK, the Americas, and Asia Pacific, governments and regulators are tightening expectations around climate risk, due diligence, stewardship, and sustainable finance. Yet, each region is doing so at a different pace and with varying degrees of prescriptiveness. The result is a complex compliance environment in which multinational companies must navigate both increasing standardisation and persistent regulatory fragmentation.

Europe and the UK: From Ambition to Calibration

Europe remains the most advanced and comprehensive jurisdiction for sustainability regulation, spanning corporate disclosure, due diligence, banking supervision, fund labelling, and sustainable finance instruments. The European Commission’s suite of regulations, including the CSRD, CSDDD, EU Taxonomy, SFDR, and the EU Green Bond Standard, has set a global benchmark for investor-grade sustainability reporting and climate-aligned financial markets.

However, Europe is now entering a phase of regulatory recalibration. Through its Omnibus Proposal, the Commission is responding to industry concerns over complexity, cost, and readiness. CSRD and CSDDD scopes may contract by up to 80 percent, assurance timelines are expected to be relaxed, and due diligence obligations may be narrowed to direct suppliers. Similarly, the EU Taxonomy may adopt materiality thresholds and fewer DNSH requirements, signalling a shift from over-prescriptive rules toward more pragmatic implementation.

Financial market rules continue to strengthen through enhanced Pillar 3 ESG disclosures, MiFID II sustainability preferences, fund naming guidelines, and the Low Carbon Benchmark Regulation. All aim to reduce greenwashing and align investment flows with climate objectives. The EU Green Bond Standard, effective from late 2024, will test issuer capability to meet high taxonomy thresholds and strict assurance requirements.

The United Kingdom, outside the EU framework, is converging toward global standards through its Sustainability Disclosure Requirements, climate risk governance expectations, and forthcoming ISSB-aligned UK Sustainability Reporting Standards. With anti-greenwashing rules, fund labels, TCFD-aligned disclosures, and strengthened stewardship codes, the UK is positioning itself as a global centre for credible sustainable finance while maintaining regulatory independence.

Americas: Patchwork Progress and State-Level Leadership

Regulation in the United States remains fragmented. The SEC’s ESG fund disclosure rules have advanced transparency for investment products, yet the broader SEC climate disclosure rule is stalled amid political and legal contention. In this vacuum, California has emerged as a powerful subnational regulator. Its SB 253 and SB 261 laws impose some of the world’s most stringent mandates on Scope 1, 2, and 3 emissions reporting and climate risk disclosure for companies with more than USD 1 billion in revenue, creating de facto national obligations for many large firms.

Prudential regulators, including the Federal Reserve, OCC, and FDIC, are gradually embedding climate risk management into supervisory expectations for banks, signalling slow but steady institutionalisation of ESG risk within the financial system.

Canada is moving toward full alignment with ISSB (CSDS 2) standards, with forthcoming mandatory climate disclosures for public companies, enhanced stock exchange guidance, and climate risk governance expectations under OSFI’s Guideline B 15. In Latin America, momentum is accelerating. Brazil, Mexico, and several other markets are transitioning from voluntary expectations to mandatory ISSB aligned reporting by 2026, supported by phased assurance requirements and growing investor demand.

Asia Pacific: Rapid Alignment with ISSB and Transition to Mandatory Regimes

The Asia Pacific region is shifting from fragmented voluntary practices toward a coordinated move to ISSB-aligned mandatory disclosure.

Hong Kong and Japan are among the earliest markets to require ISSB-based climate reporting, building on strong TCFD foundations. Japan is concurrently advancing climate governance through revisions to the Corporate Governance Code and enhanced stewardship expectations.

Australia’s 2024 climate reporting law marks one of the fastest transitions to mandatory ISSB-aligned disclosure, with Scope 1 and 2 reporting required from 2025 and Scope 3 from 2026.

In Southeast Asia, regulators are accelerating reforms:

  • Malaysia is transitioning all Main Market issuers to ISSB-aligned sustainability statements by 2025 to 2026, with assurance requirements added over time.
  • Singapore will begin its phased ISSB regime from FY2025, with Scope 1 and 2 mandatory for listed issuers and assurance expected from the middle of the decade.
  • Indonesia, Thailand, and the Philippines are strengthening their frameworks, guided increasingly by global baselines and emerging regional taxonomies.

India and China represent two of the largest markets undergoing structural regulatory evolution. India’s mandatory BRSR reporting for the top 1,000 listed companies is expanding, and new rules for ESG rating providers signal rising regulatory scrutiny. China’s new Sustainability Disclosure Standards (Trial) and its 2024 application guides mark the beginning of a phased transition toward mandatory ESG reporting across major exchanges by 2027 to 2030, including features such as double materiality and value chain disclosures.

South Korea is expected to fully align with global standards by 2030, with climate risk integration expanding across its prudential supervisory regime.

Middle East and Africa: Sovereign Wealth Funds Driving Market Discipline

In the Middle East, regulatory momentum is increasing, driven heavily by sovereign wealth funds such as PIF, ADIA, Mubadala, and QIA, which increasingly require strong ESG credentials from their investees. Stock exchanges in Saudi Arabia, the UAE, and Qatar encourage sustainability disclosure, and more formalised ESG requirements are expected as these markets expand sustainable finance instruments.

In South Africa, the JSE, King IV Code, and the Prudential Authority’s Climate Roadmap together embed ESG governance, integrated reporting, and climate risk management into corporate expectations. Anticipated future alignment with ISSB standards will further strengthen comparability and investor confidence.

Conclusion: Toward a Fragmented but Converging Global Baseline

Across all regions, the direction of travel is unmistakable: clearer standards, broader disclosure mandates, stronger assurance, and deeper integration of climate risk into financial supervision. The ISSB standards (IFRS S1 and S2) are rapidly becoming the de facto global baseline, even as Europe pursues a broader double materiality model and the United States remains politically divided.

The next two to three years will define the global regulatory equilibrium. Companies operating internationally must prepare for:

  • Convergence around ISSB for climate-related disclosures
  • Increasing due diligence expectations, although calibrated in Europe
  • Stronger anti-greenwashing regimes across capital markets
  • Expanding assurance obligations
  • More prescriptive stewardship and governance requirements
  • Sovereign wealth funds and stock exchanges serving as new enforcement centres

The global ESG regulatory landscape is no longer emerging. It is crystallising. Firms that invest early in data architecture, credible transition planning, and integrated reporting will be best positioned to meet rising expectations, secure capital, and maintain legitimacy across jurisdictions.

Challenges faced by investors in integrating ESG into decision-making

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Integrating environmental, social, and governance (ESG) considerations into investment decision-making have become increasingly popular in recent years. However, the integration has been slow and there are still several challenges associated with effectively integrating ESG factors.

Some of the key challenges faced by investors for ESG integration are:

  1. Lack of standardized ESG data and metrics. ESG data comes from a variety of sources and rating agencies, and as a result, there is often inconsistent information and difficulties in comparing and benchmarking investments. This lack of standardization makes it difficult for investors to assess the materiality of ESG factors in their investment decisions. Additionally, the lack of uniformity in ESG data, definitions, and methodologies presents a major challenge for investors seeking to integrate ESG factors into investment analysis and decision-making. According to the Global Sustainable Investment Alliance’s 2020 Global Sustainable Investment Review, “the lack of uniformity in ESG data, definitions and methodologies presents a major challenge for investors seeking to integrate ESG factors into investment analysis and decision-making.”
  2. Complexity of ESG issues: The complexity and the need for specialized expertise to fully understand and assess their impact on investments. ESG issues can range from climate change and biodiversity to human rights and labour practices. Understanding these issues requires a deep knowledge of the environmental and social impacts of different industries, as well as an understanding of the regulatory landscape. This complexity can make it difficult for investors to effectively integrate ESG considerations into their decision-making processes. As noted in a report by the Principles for Responsible Investment, “investors may find that ESG analysis requires a greater level of detail and specialized expertise than traditional financial analysis.”
  3. Reduced financial returns: There is a concern that focusing too much on ESG factors could lead to reduced financial returns. Companies that prioritize ESG issues may face additional costs or have lower profitability in the short term. There is a risk that too much emphasis on ESG factors may come at the expense of financial returns, particularly if investors focus too much on short-term ESG concerns that do not align with long-term financial performance. This concern can make investors hesitant to fully integrate ESG considerations into their decision-making processes.
  4. ESG considerations with investment objectives: Finally, there is the challenge of balancing ESG considerations with other investment objectives. While ESG factors are important, investors also have other objectives such as achieving financial performance targets or meeting liquidity requirements. Investors must strike a balance between their fiduciary duty to maximize financial returns and their responsibilities to incorporate ESG considerations into their investment processes. As noted in a report by the Principles for Responsible Investment, “investors must also ensure that their investment approach aligns with the objectives and needs of their clients or beneficiaries.”

Addressing concerns:

To address these challenges, a holistic approach is necessary. This approach involves collaboration among different stakeholders, including investors, asset managers, companies, regulators, and standard-setters. The integration of ESG factors into investment analysis and decision-making is a process that requires the involvement of multiple parties, including investors, asset managers, companies, and regulators.

There also needs to be a greater emphasis on developing standardized ESG metrics, improving data quality and availability, and increasing education and training on ESG issues. The Principles for Responsible Investment’s guide on ESG integration for equity investing notes that “investors can improve their ESG integration approach by developing more specific and actionable ESG metrics that are relevant to their investment processes.” Additionally, the guide recommends that investors seek out specialized expertise on ESG issues and invest in training and education for their staff.

Overall, successfully integrating ESG considerations into investment decision-making requires a multifaceted approach that addresses the challenges associated with standardized data, the complexity of ESG issues, financial returns and ESG consideration into investment objectives.

Could the transition to renewable energy be truly sustainable? Are Environmental and Social issues adequately considered?

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Sustainable energy sources are commonly understood as energy sources that meets the needs of the present without compromising the ability of future generations to meet their own needs.  In the past, we have transitioned our major energy sources from Coal to Oil and Gas, which was considered more environment friendly at that time.  Now, we are urgently transitioning from Oil and Gas to more greener and sustainable energy sources.

Renewable energy sources are often termed as sustainable energy sources. However, are they truly sustainable?  Is the transition sustainable this time around or are we just solving a current problem and creating another one for the future? 

Renewable energy is energy from sources that are continuously replenished naturally.  Among others, common forms of renewable energy include solar power, wind power, hydroelectric power, tidal power, and biomass energy.

As per the UN Energy Progress Report 2021, the world is making progress towards Goal 7, Affordable and Clean Energy, of the UN Sustainable Development Goals. Data from 2018 (latest available) shows that globally the share of renewable energy is 17 per cent of the Total Energy Consumption.

The rapid transition to clean energy is inevitable, but it creates some pertinent questions regarding the Environmental and Social sustainability issues in the transition:

  1. Environmental sustainability:  Let’s not close our eyes for what’s happening. For instance, the mining of Neodymium, a rare earth element important for generator components in wind turbines Mining coal is harmful the environment, but mining neodymium is harmful as well, although considered relatively abundant in the Earth’s crust by some industry experts (opposing views are plenty!)
  2. Social sustainability:  Social aspect is globally diverse and complex. The planet’s resources need to be effectively and efficiently used to provide enough food and energy for everyone. As per the UN Energy Progress Report 2021, 13 per cent of the global population still lacks access to modern electricity and 3 billion people rely on wood, coal, charcoal or animal waste for cooking and heating. Is the transition to renewable energy solving energy poverty globally or is it limited to the fortunate who have had access to energy previously as well?
  3. ‘True’ sustainability:  As renewable energy component of the world’s Total Energy Consumption increase, it brings pressure on the natural resources including water, land use, forestry and marine resources as more resources are required for the renewable infrastructure.  Furthermore, indirect impact on biodiversity cannot be ignored. For instance, hydropower or open-cycle power plants involve significant thermal discharges, which could impact the biodiversity. It also raises questions as to whether submerging ecosystems under water by building hydropower dams is less destructive.

Sustainable renewables should be the focus rather than just ‘going green’ by utilising renewable sources, so that the new renewable investments are without the collateral damage and unintended negative consequences. As the pace of transition picks up, and we lay the foundations for a new and sustainable future, it is better to get it right during the transition, than to spend billions correcting the actions decades later.

Energy Transition and the diversification of Oil and Gas business

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To keep global warming to below 1.5 degrees C this century, the global energy system needs to be transformed from being largely based on fossil fuels to being largely based on renewable energy. This global energy transition shifts the production and consumption away from non-renewable fossil fuels towards the use of low carbon and renewable energy solutions. 

The International Renewable Energy Agency (IRENA) in its Global Renewables Outlook: Energy Transformation 2050 sets out an ambitious outlook to cut 70% of the world’s energy-related carbon dioxide (CO2) emissions by 2050. Over 90% of this reduction would be achieved through renewables and energy efficiency measures.  IRENA estimates that around 260GW of renewable energy capacity was added globally in 2020, beating previous record by almost 50%.

In the context of this fast-progressing energy transition, Oil and gas companies are faced with the existential challenge of how to diversify away from their current reliance on fossil fuels without losing the value and cash generating potential of their current business.  The expected decrease in demand for fossil fuels and concerns over damage from climate change is creating business risks for oil and gas companies and could result in a significant number of stranded assets and loss of value. In the long run, this could also lead to the transformation for some of the major oil and gas companies into completely new businesses.

Diversification, in the context of the global energy transition, is to broaden the core business of oil and gas companies into new low-carbon energy products and markets.  At present,

there are limited low-carbon diversification options available to invest in, and the options are in industries that are themselves nascent or require a huge amount of R&D investment to improve profitability.  Each option comes with some opportunities and some downside risks.  The challenge is to select the optimal option, given firm-level capabilities, economic, social, and political conditions, to effectively diversify away from a fast- disappearing value source, whilst managing the risks and opportunities.

The impact of ESG on business valuations

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ESG, which stands for Environmental, Social, and Governance (ESG), has become one of the key criteria in the evaluation process, when assessing potential investments. Under the three ESG areas, a set of standards, is used to evaluate the organisation’s operations.  It is unlikely that an organisation scores the best in all ESG criteria.  Investors take the outcome of the evaluation and incorporate it both qualitatively and quantitatively into their decision making.

Although ESG and related performance of organisations has been included in mainstream investment decisions for more than a decade, an area which is still evolving is how ESG should be quantified and included in the business valuations. To understand the significance of including ESG impact in the valuation, let’s look at the two main traditional valuation methods – Discounted Cash Flow (DCF) method and Multiple of Earnings method.

Discounted Cash Flow method

Under the DCF method, the Free Cash Flows of a company are discounted with the expected cost of capital to arrive at the valuation. In simple terms, Free cash flow (FCF) is the money a company has left over after paying its operating expenses and capital expenditures and Cost of Capital represents the risks related to the cash flows.

ESG impact can be included in either of the two main components, namely Free Cash Flow and the Cost of Capital, to influence the business valuation.  By doing this, the positive or negative impacts of ESG criteria evaluation, on the future cash flows of the company, and hence its valuation can be considered.  For instance, in the case of a company with higher ESG risks, cash flows can be adjusted down, or cost of capital can be increased, and vice versa. Often in making such adjustments, one need to consider the materiality of the impact of the relevant ESG criteria.  The materiality would be specific to the company and its industry. To reduce the subjectivity involved in determining the materiality, analysis of multiple scenarios and techniques such as weighted average analysis should be used.

Multiple of Earnings method

Under the multiple of earnings method, the value of a company is determined by applying a multiple to the company’s earnings. It is a relative valuation method and seeks to evaluate similar companies using the same set of standardised financial metrics. A commonly used multiple is Price-to-Earnings (P/E) multiple.

ESG impact can be included in the multiple used for the valuation.  The impact of ESG criteria results in a higher or lower multiple, relative to those achieved in comparable transactions.  For instance, a Private Equity buyer who considers the impact of ESG criteria, and the resulting risks and/or opportunities during the due diligence phase can optimise the price paid. Similarly, a corporate seller, doing a divestment of a non-core asset, can effectively use the positive impact of ESG criteria on the company’s operations, in influencing a higher valuation multiple for the transaction.  

As mentioned previously, multiples are influenced by the prices achieved for transactions involving comparable transactions in the market.  There is not yet full transparency regarding the influence of ESG criteria in both public and private transactions.  Hence there are limitations in identifying comparable transactions which included ESG criteria or the level of inclusion of ESG criteria.  In addition, there is the risk of arbitrary adjustments to the multiple.  As more data becomes available, inclusion of ESG criteria in multiples can be further refined.

The inclusion of ESG criteria in business valuation has gained more prominence recently.  There are several ways ESG is incorporated in the valuations, and it continues to evolve.  As more instances of ESG application in valuation becomes available, across various industries and geographies, best practice models are expected to emerge. 

ESG

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ESG is the latest acronym which you see everywhere in the corporate world.  Boardrooms, senior management, consultants, press, webinars or blogs, everyone talks about the importance of ESG.  Every policy, strategy, or investment is now evaluated with an ESG lens.  You just can’t miss it!  So, what is it?

ESG stands for Environmental, Social, and Governance (ESG), a term which first appeared in the August 2005 Conference Report ‘Investing for Long-Term Value’. The conference in Zurich, Switzerland was part of the Who Cares Wins initiative by the United Nations Global Compact, voluntary corporate citizenship initiative launched by the United Nations Secretary-General Kofi Annan. The objective of the conference was to Integrate environmental, social and governance value drivers in asset management and financial research.

Subsequently in April 2006, the United Nation’s Principles for Responsible Investment was launched by the UN Secretary-General.  The principles were developed during a nearly year-long process, coordinated by the United Nations with participation by a group of the world’s largest institutional investors, who became the initial signatories to the principles.  It also resulted in the formation of The UN Principles for Responsible Investment (PRI), an international organization that works to promote the incorporation of environmental, social, and corporate governance factors into investment decision-making.

There are six Principles for Responsible Investment, which have been adopted by the signatories, to develop a more sustainable global financial system.  These six Principles for Responsible Investment offer a menu of possible actions for incorporating ESG issues into investment practice. They are as follows:

  • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
  • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
  • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
  • Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
  • Principle 6: We will each report on our activities and progress towards implementing the Principles.

There are more than 2500 participating financial institutions. These institutions participate as signatories and file regular reports on their progress towards implementing the six principles in making their investments.