As investors navigate an ever expanding regulatory landscape for sustainable investing, it is helpful to take a step back and reflect on the purpose and intentions of the various regulatory activities. Without oversimplifying the complexity of financial markets regulation, the ultimate concern for many regulators is how to ensure that financial markets can respond to new developments, such as sustainable investing, without compromising investors’ trust in the market. In this context, sustainable investing could be a concern in a number of ways.
Investor ability to take informed investment decisions - The complexity of sustainability-related issues and the lack of their common understanding could result in investors’ inability to understand or compare investment products, which could impair their ability to take informed investment decisions. It can also give rise to false or unsubstantiated claims on product credentials (‘greenwashing’).
Systemic risks - Many sustainability-related issues, such as climate change for example, could also give rise to more systemic changes whose economic impact is still difficult to understand, quantify and/or is far into the future. Such issues could nonetheless have material impact on the financial system as a whole.
Value for money for investors- The proliferation of sustainable investment products also poses the question to what extent such products deliver value for their investors, both in terms of asset management costs and performance.
With this context in mind, this paper brings together the recent sustainability-related regulatory developments aimed at addressing these challenges within the asset management industry, and highlights the main developments in the regulators’ approaches – mostly centered around standardisation and market transparency aimed to support investors’ understanding and decision-making; measures to monitor and maintain industry resilience, and/or investor value for money among others. The review covers the European Union (the ‘’EU’’), the United Kingdom (the ‘UK’), The United States (the ‘US’), Australia, Singapore, Hong Kong and Japan.
Standardisation and market transparency
Definitions - Regulators are increasingly developing their own definitions of sustainable economic activities (‘taxonomies’) and/or sustainable investment funds.
Disclosures - Requirements to provide more data to end investors are also increasing. The complexity and depth of sustainability-related disclosure requirements varies across jurisdictions, but in the most prescriptive regimes, such as the EU, it also includes specific indicators such as carbon emissions. Industry-developed disclosure initiatives, such as the TCFD and ISSB, also enjoy widespread support, with the UK and Hong Kong mandating TCFD-aligned disclosures, while Australia and Singapore encourage voluntary TCFD reporting.
Product-specific standards or labels are also in place or being developed:
- sustainability labels for investment products - under development in the EU and the UK
- sustainability-linked debt instruments – guidance already exists or is under development in Japan, Hong Kong and the EU
- sustainability-related data quality and availability – regulators in Japan, the EU, UK and the US looking at how to either bring data providers in scope of their oversight or issuing guidance.
ESG/sustainability governance is becoming a higher priority for the regulators, however in practice this is mostly restricted to setting explicit expectations on organisational climate risk management and/or organisational integration of sustainability concerns
Climate change-related investment risks are now recognised by the regulators across most reviewed jurisdictions, with the regulators mandating climate risk disclosures and planning to conduct scenario analysis and/or stress testing for the investment industry. The EU (and to some extent, the UK) is distinct in considering a full spectrum of sustainability risks and impacts.
Value for money for investors
While the cost and relative financial performance of sustainable investment products are not yet widely addressed by financial regulators, some regulatory action exists in the form of market analysis and monitoring (e.g. these concerns form part of market reviews published by ESMA, FCA and JFSA).
Regulators continue to focus on investment stewardship in the sustainable investment context - the Stewardship Codes in the UK, Singapore and Japan have been reviewed and updated in the recent years.
Regulators are also actively working on upskilling and building sustainability knowledge capacity within their own resources and the financial industry as a whole through multi-stakeholder collaboration initiatives, training and qualification programs.