ESG Global Trends Report
CHEMSOLVE Co.LTD
1. Global Trends: Continued Expansion of ESG Influence,
Centered Around Financial Investments Based on PRI
Since its inception in 2005 at the request of then-UN Secretary-General Kofi Annan, the Principles of Responsible Investment (PRI) have been jointly established by investment institutions, international organizations, and expert groups from 12 countries worldwide. Grounded in these principles, the international community has consistently strengthened corporate sustainability through the capital markets. This entails analyzing the sustainability of target companies not only in terms of financial performance but also in the environmental, social, and governance dimensions, thereby mitigating risks such as sudden company failures and fostering the sustainability of investments.
Since its initial declaration on the New York Stock Exchange in 2006, the influence of the Principles of Responsible Investment (PRI) has been expanding within the capital markets. Investment firms that have signed on to the UN PRI have witnessed a steady growth, with an annual average increase of 28%, resulting in a total of 4,395 signatories as of the end of March 2022. The assets managed by these signatories have also grown to exceed $120 trillion.
Notably, the number of signatory asset owners has shown remarkable growth, increasing from 75 firms as of the end of March 2007 to 681 firms as of the end of March 2022. The assets managed by these owners have also seen substantial growth, reaching a scale of $30 trillion. Additionally, there has been a noticeable increase in participation from insurance companies in recent years.
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UN PRI Signatory Investor/Asset Manager Trends (PRI, 2022 Signatory Update)
In line with these trends, major global investment firms such as BlackRock and Vanguard are actively incorporating ESG diagnostic results into their investment decisions. They are also enhancing shareholder engagement, actively exercising voting rights to encourage invested companies to realize ESG management practices. To achieve these goals, they are establishing evaluation metrics specific to respective industries and driving ESG assessments for businesses and companies worldwide.
Meanwhile, the International Sustainability Standards Board (ISSB) has announced sustainability disclosure standards in two areas: general requirements for disclosing sustainability-related financial information and climate-related disclosures. Through consultation and revision processes, once finalized, the sustainability disclosure standards will demand scenario analysis for climate disclosures. In terms of calculating greenhouse gas emissions, it is under consideration to encompass not only Scope 1 and 2 emissions but also Scope 3 emissions. The third set of disclosure standards from ISSB is anticipated to prioritize the field of biodiversity.
2. Regional Trends: Institutionalization of ESG Management Expanding with Leadership from Europe and
North America
When examining UN PRI signatory investors by region, active participation is notably prominent across European countries such as the United Kingdom, Germany, France, Northern European nations, and Belgium. Following closely behind are North American regions, including the United States and Canada. Other regions show a relatively smaller level of participation compared to Europe and North America, but they are steadily increasing their involvement. Notably, recent trends indicate a rising engagement from Asian countries such as China and Japan, suggesting a growing interest and participation in ESG matters.
Regional Distribution of PRI Signatory Investors (PRI 2022 Signatory Update)
The global ESG investment market has experienced continuous growth, expanding from $13.3 trillion in 2012 to $35.3 trillion in 2020. Regionally, Europe and the United States collectively account for over 80% of the global ESG investment, with Japan, Canada, Australia, and other markets comprising the remaining portion.
Global ESG Investment Size
(Unit: Billion Dollars, %)
자료: GSIA(2019); GSIA(2021)
A. Europe
The European Union (EU) is currently taking a highly proactive role in leading the global community in the dissemination and institutionalization of ESG principles and policies. The EU has been at the forefront of establishing ESG infrastructure, including recent initiatives such as: Green Taxonomy: Creating a framework to categorize economic activities contributing to environmental goals, facilitating the identification of sustainable investments. Sustainable Finance Disclosure Regulation (SFRD): Implementing regulations to enhance transparency and the disclosure of sustainability-related information by financial entities. Corporate Sustainability Reporting Directive (CSRD): Introducing guidelines for corporate sustainability reporting to enhance the quality and comparability of sustainability information disclosed by companies. Corporate Sustainability Due Diligence Directive (CSDD): Enforcing obligations for ESG due diligence in corporate supply chains. Carbon Border Adjustment Mechanism (CBAM): Introducing a mechanism to address carbon leakage risk by adjusting carbon costs for imported goods.
This comprehensive legislative framework, collectively referred to as "Fit for 55," underscores the EU's leadership in proactively legislating in five critical areas that significantly impact ESG principles and practices.
As part of its Sustainable Finance Action Plan, the European Union (EU) introduced the pioneering Green Taxonomy in July 2020. This Taxonomy serves as a means to classify and assess environmentally sustainable economic activities. It was established as a world-first initiative with the aim of providing a framework to identify sustainable economic activities from an environmental perspective.
Based on a report crafted by the Technical Expert Group on Sustainable Finance (TEG), which was established in 2018, the Green Taxonomy outlines six environmental objectives and four assessment criteria. This classification system offers concrete standards for establishing sustainable policies, promoting environmentally friendly investments, and facilitating sustainable business practices.
The Green Taxonomy is expected to have a direct impact on the technological and industrial development of European countries, as it provides specific criteria for the formulation of sustainability policies and encourages eco-friendly investments and sustainable corporate practices.
The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation introduced in two phases, with the first phase announced on March 10, 2021. It mandates that financial institutions based in the EU disclose information about how they consider sustainability when making investments or selling financial products. SFDR applies not only to EU financial institutions but also to non-EU financial institutions that intend to sell financial products to the EU or EU financial institutions. These institutions are obligated to disclose information regarding sustainability considerations from both the company and financial product perspectives.
The European Union (EU) revised the Non-Financial Reporting Directive (NFRD), which was initially established in October 2014, and announced the Corporate Sustainability Reporting Directive (CSRD) on April 21, 2021. The NFRD targeted large EU-based companies and aimed to enhance transparency and comparability of non-financial information, including aspects like environmental responsibility, social accountability, human rights, anti-corruption measures, and board diversity. The directive facilitated reporting and left the verification of disclosure content and sanctions for non-compliance to the discretion of member states.
With the introduction of the CSRD, the EU extended its commitment to sustainable practices. This directive builds upon the NFRD, expanding its scope to encompass more companies and requiring enhanced sustainability reporting, aligning with the growing importance of corporate sustainability globally.
In February 2022, the European Commission announced the [EU Corporate Sustainability Due Diligence Guidelines], which could potentially mandate ESG management for companies within the EU. This directive is intended to subject over 9,400 companies within the EU, as well as all entities conducting business with them, to regular assessments of their efforts in ESG management, including carbon neutrality, environmental pollution prevention, workplace safety, and prevention of human rights violations. The directive encompasses audits of companies' own operations as well as their entire supply chains, focusing on aspects such as human rights protection and environmental risks.
The inception of this directive dates back to November 2020 when the EU Parliament first announced it. The guidelines for corporate due diligence, based on recommendations from the Committee on Legal Affairs, were adopted on March 10, 2021. As per the European Commission's guidelines, EU member states are planning to revise their domestic laws to align with these guidelines within the next 1 to 2 years.
In July 2021, the European Commission, which has declared the goal of achieving carbon neutrality by 2050, announced the comprehensive legislative package known as [Fit for 55]. This legislation encompasses a package of twelve measures aimed at addressing climate, energy, land and forest utilization, transportation, and taxation sectors. The primary objective of this package is to reduce greenhouse gas emissions by 55% by 2030, and it also includes measures to support social fairness and transition.
The [Fit for 55] legislative package represents the EU's commitment to making significant strides towards its carbon neutrality goal by introducing a wide range of measures across various sectors, reflecting the EU's dedication to combatting climate change and promoting sustainable practices.
B. North America
The Biden administration in the United States has outlined policy objectives closely aligned with ESG (Environmental, Social, and Governance) principles. These objectives encompass a range of areas, including the restoration of democracy and strengthening of human rights, digital innovation and addressing inequality, community development, reducing educational disparities, promoting diversity and equality, enhancing corporate transparency and responsibility, and more.
On a national level, the administration has aimed to estimate the social cost of greenhouse gas emissions, develop climate change response strategies that encompass national security and diplomacy, measure and assess financial risks associated with climate change, and establish policies and regulations for its oversight. Additionally, efforts include integrating ESG factors, including non-financial risks, into retirement pension fund operations.
Overall, the Biden administration has emphasized the importance of ESG-related goals in various aspects of governance, reflecting a commitment to addressing environmental, social, and governance challenges while promoting sustainable practices and responsible corporate behavior.
The U.S. Securities and Exchange Commission (SEC) initiated a process to revise climate change disclosure regulations in response to stakeholders' demands for expanded climate-related information disclosure from companies. In March 2021, the SEC released a set of 15 topics for public input, aimed at amending and enhancing climate change disclosure regulations.
These 15 topics cover a range of areas, including methods for measuring and quantifying climate change-related risks, criteria for participants in developing disclosure standards, industry-specific climate change disclosure standards, determination of disclosure frameworks such as TCFD, SASB, and CDSB, the use of a global single ESG standard, reliability and mandatory nature of climate change disclosure, the interconnectedness of ESG and climate information disclosure, the scope of ESG supervision, and the inclusion of climate change information in business reports. The SEC's effort reflects the growing importance of climate change considerations and ESG-related information in financial reporting and regulatory frameworks.
The U.S. Securities and Exchange Commission (SEC) announced the Commission Guidance Regarding Disclosure Related to Climate Change in 2010, based on the Regulation S-K, which pertains to corporate information disclosure regulations. This guidance requires publicly listed companies to report climate change-related non-financial information in their annual reports (Form 10-K).
Under these guidelines, publicly traded companies must include information in their Form 10-K reports regarding the impact of compliance with environmental regulations on their revenues and expenditures, the scale of associated costs, and any environmental-related legal proceedings. This requirement aims to provide investors with a clearer understanding of how climate change considerations can affect a company's financial performance and potential legal risks.
On June 8, 2021, the "ESG Disclosure and Simplification Act" was narrowly passed in the United States House of Representatives by a vote of 215 to 214. This legislation addresses stakeholders' concerns about the voluntary and disparate practices of publicly traded companies in disclosing ESG-related information according to various standards. The Act aims to expand and mandate the scope of ESG disclosures.
The ESG Disclosure and Simplification Act seeks to bring consistency and accountability to ESG reporting by imposing requirements on companies to disclose relevant information related to environmental, social, and governance factors. The passage of this act reflects a growing emphasis on standardized and mandatory ESG disclosures to provide investors and stakeholders with clearer and more consistent information about companies' sustainability and responsible business practices.
On the other hand, the United States has enacted the "Inflation Reduction Act (IRA)" to accelerate participation in greenhouse gas reduction efforts.
C. Asia
The Japan Business Federation (Keidanren) unveiled the [Diversity 2.0 Action Guidelines] in 2017, outlining the direction that companies should take regarding diversity management as a social value (S) aspect of ESG, with a focus on generating long-term corporate value. This framework identifies the actions that companies need to undertake to foster a diverse workforce, encompassing various attributes such as different sensibilities, abilities, values, and experiences. By embracing and empowering a diverse range of talents, companies can encourage innovation and create new corporate value. These efforts, defined as part of the management strategy, must be pursued comprehensively and continuously throughout the organization to maximize the capabilities of each individual.
China operates on a socialist framework and, at a national level, evaluates the social credit of individuals and businesses to assess factors like tax evasion and other societal matters. Information about companies involved in social controversies, such as tax evasion, is shared socially, and disadvantages are imposed through public support policies and regulatory measures. China has also recently been implementing a policy of shared prosperity, aiming to address issues of income and wealth inequality as well as poverty eradication.
Furthermore, China has been developing and implementing ESG-related policies, such as cracking down on dominant platform companies and expanding fairness measures to enhance equity. These actions are part of efforts to promote competition, curb monopolies, and ensure a level playing field. Overall, China's approach involves evaluating social credit, addressing income disparities, and enacting ESG-related policies as part of its broader economic and social strategies.
India is unique among countries in that it mandates corporate social responsibility (CSR) as a legal obligation under its company law. In cases of non-compliance with CSR spending obligations, both companies and related executives can face criminal penalties.