2024 is going to be a landmark year for ESG regulation

2023 has been a big year for ESG regulation and finance. Across the world, governments and regulatory bodies have been introducing regulation to whip the corporate world into shape to fight climate change. With 2024 approaching, complying with these regulations is no longer a choice for most financial institutions. Not only are they required by law, but with forward-thinking FIs already turning ESG into a competitive advantage, it’s also a matter of staying in the race.

Introduction to action

2024 is already shaping up to be a watermark year for ESG regulation, with years of preparation set to ramp into action. This is especially the case in the EU where, after introducing multiple regulations, over the past three years, the focus is shifting to execution.

The headline regulation in the EU is the Corporate Sustainability Reporting Directive (CSRD), which will expand the scope of ESG reporting requirements to about 50,000 companies, including financial institutions, with significant business activity in the EU. Alongside this, financial institutions will soon have to publish their Financed Emissions, a new key performance indicator (KPI) that measures the proportion of FI’s share of GHG emissions of their loans and investments. This KPI will become mandatory for EU FIs in 2024.

In the US, the ESG picture for FIs is a little more complicated. Climate change is so deeply entwined with the USA's culture wars that many states have actually introduced anti-ESG regulation, which punishes businesses (including banks) that carry out pro-environment practices such as boycotting fossil fuel companies. The US Security and Exchange Commission's (SEC) proposed climate disclosure rules are expected to be finalised this year, but, many FIs are pushing for more detailed sustainability criteria from the regulators.

Further afield, however, there are plenty of reasons for optimism. We expect more countries to introduce similar regulations as the EU, while ESG frontrunners Japan and Korea will most likely have a role-model effect for the Asian market. Much of this domestic regulation is increasingly being supported by global initiatives such as International Sustainability Standards Board (ISSB), which is expected to become the global norm for sustainability reporting. In a subtle but clear indication of the shift towards unified global standards, the ISSB is also set to absorb the monitoring responsibilities of the Task Force on Climate-Related Financial Disclosures (TCFD).

But while initiatives like the ISSB show a convergence of global standards, interoperability of standards remains a key challenge for large, multinational institutions as well as investors using the standards to compare sustainability related performance. For example, FIs with operations in Europe will not only have to meet the incredibly comprehensive CSRD requirements but also the unique reporting requirements of other initiatives they have committed to, such as the TCFD or PCAF (Partnership for Carbon Accounting Financials) and PBAF (Partnership for Biodiversity Accounting Financials) as well as those of any other markets they are operating in.

An opportunity in disguise

In amongst all this regulation and compliance, Patschke and the SAP Fioneer team see a wealth of opportunities for FIs. “Firstly, regulations and business opportunities are closely coupled. If you shine in front of the regulator, you are likely to be very well positioned to also start leveraging business opportunities and consequently drive positive impact. Take the GAR, the higher the ratio, the more taxonomy aligned business. FIs that are forward thinking will start thinking about extending their workflows to create their own sustainable finance frameworks.”

The numbers back this up. Companies that implement policies and practices to address sustainability experience stronger financial performance, generating higher equity returns and a reduction in downside risk. Commercial banks that adopt a strategic focus on ESG outperform their rivals too, according to a recent report from Deloitte. Non-compliance, of course, carries an immediate sting, manifesting as regulatory fines or reputational damages. But a subtler, perhaps more detrimental risk is the gradual erosion of stakeholder trust.

So what’s the solution? Just as the fight against climate change depends on a robust synced-up approach, so too does aggregating, curating, and synthesising the data FIs require to not only comply with the growing list of regulations but leverage them to develop new ESG-centric products, establish pricing models, and, most importantly, deliver unprecedented value to stakeholders.

Want to find out more? Sign up for SAP Fioneer’s ‘Business potential beyond reporting: How to leverage ESG data through transparency’ webinar on 26 October 2023