Issues Affecting Sustainable Finance In 2022 – Finance and Banking


United States:

Issues Affecting Sustainable Finance In 2022


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If, as they say, past is prologue, then boards of directors in
the United States should follow closely lessons learned by their
European and British counterparts when it comes to the potential
role sustainable finance plays in relation to financing the
long-term strategic objectives of U.S. companies across all sectors
of the economy. Companies and investors alike are demanding
sustainable investment opportunities in the form of financial and
consumer products, and companies are facing increased pressure to
factor in sustainability in terms of long-term growth strategies.
In addition, all stakeholders continue to demand access to
comparable and reliable metrics in order to evaluate the extent to
which a particular investment or product is, in fact, sustainable.
Indeed, the foregoing is driving rulemaking initiatives by various
federal and state regulatory authorities, including the U.S.
Securities and Exchange Commission (SEC). All of these factors
deserve the attention by boards of directors.

In the last few years, regulators in the European Commission (EC
or the “Commission”) have written and implemented a broad
array of new obligations, particularly with regard to financial
products and climate disclosures, to address the evolving
importance of environmental, social and governance (ESG)
considerations across all aspects of European economic activity.
For instance, the Sustainable Finance Disclosure Regulation (SFDR)
adopted by the Commission requires fund managers to disclose how
they integrate sustainability risk in their investment
decision-making processes, as well as certain pre-contractual
disclosure requirements covering a specific fund or product. The
SFDR is intended to enhance transparency and comparability of
sustainability information with the financial markets by
standardizing disclosures in order to prevent
“greenwashing.” Relatedly, the Taxonomy Regulation sets
out a clear framework to assess which activities and investments
are environmentally sustainable. The Taxonomy Regulation requires
additional disclosures with regard to whether a fund or product is
“light green” or “dark green.” These new
regulations have required fund managers to evaluate fund and
product development policies and procedures to ensure that relevant
and reliable information can be captured and disclosed in
accordance with the new requirements. In light of these new
requirements, boards of directors and relevant board committees are
needing to reassess risk assessment methodologies and financial
disclosure systems to more closely track the intersection of
sustainable product offerings to ensure compliance with these new
requirements.

Across the channel, regulators in the United Kingdom have
undertaken their own rule-making initiatives on these matters, now
that the U.K. is no longer a member of the European Union. For
instance, the U.K.’s Financial Conduct Authority (FCA) has
issued rules focused on enhancing transparency on climate-related
risks and to align the disclosure requirements with the
recommendations of the Financial Stability Board’s Task Force
on Climate-related Financial Disclosures (TCFD). The proposed new
disclosure requirements for investment managers were published at
the same time as the proposal to extend certain climate-related
disclosure requirements to issuers of standard listed equity shares
(excluding shell companies and investment entities). Relatedly, as
we have previously discussed, in November 2021, the FCA moved
forward with its plan to make the U.K. the world’s “first net zero-aligned financial centre
by publishing Primary Market Bulletin 36.

In the United States, stakeholders are waiting for the SEC to
publish updated disclosure requirements relative to ESG
considerations, including what are expected to be enhanced
disclosure obligations relative to risks posed by climate change.
These new disclosure obligations are expected to be consistent with
public statements by SEC Chair Gary Gensler and other SEC
commissioners with respect to seeking to ensure that public
companies are collecting and disclosing credible, comparable data
and metrics relative to ESG principles and investment goals. In
addition, the markets continue to witness the evolution of, and
demand for, financial products and commercial transactions that are
underpinned by ESG principles and demand for sustainable investment
opportunities continues to rise dramatically. For example,
commercial banks have begun to offer sustainability-linked lending
products, including incentives to meeting certain targets. While
incentives have thus far been relatively modest, incentives to
meeting sustainability-linked targets may increase as the market
continues to evolve. In addition to a robust marketplace, many
companies are finding when they enter into certain ESG transactions
that they’re able to achieve cost-savings or profitable
transactions in addition to achieving their ESG goals. Whether it
is energy savings or purchasing carbon or renewable energy offsets,
many such ESG transactions present a win-win scenario where a
company can achieve its ESG goals while also generating revenue (or
savings) for more ESG initiatives or a return on their ESG
investment.

On that basis, the question is not whether companies and their
boards of directors need to be prepared to address these matters;
it is only a question of how quickly and thoughtfully can they do
so. We believe boards of directors in the United States should be
working now with senior management and outside advisors in order to
continue addressing these issues. Smart boards of directors should
be working with management and advisors to ensure that existing
financial disclosure processes and procedures will be ready to
integrate enhanced disclosure obligations into their public
reporting. This work should include evaluating the collection of,
and controls around, relevant data and metrics that will likely be
included in disclosures going forward. Likewise, boards of
directors—both as a whole and through board
committees—should ensure that they are conversant with
enterprise commitments to ESG principles and how a company is
performing relative to those commitments. Relatedly, directors
should continue to be mindful of how they communicate with
shareholders, particularly relative to being held to account for
how a company integrates sustainability and ESG considerations into
its long-term strategic growth and operations. Finally, boards of
directors should confer with legal and compliance personnel (as
well as advisors) to ensure that a company is prepared to defend
itself against evolving litigation strategies that intend to drive
companies toward a more fulsome embrace of sustainable growth
strategies. Taken together, boards of directors that proactively
address these issues are more likely to realize significant returns
when it comes to pursuing sustainable financing and opportunities
for growth.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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