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Explore our FSR Outlook 2023

Regulatory scrutiny is widening to include an array of new concerns as watchdogs extend environmental and governance standards

In a nutshell:

  • Regulatory focus is expanding beyond climate change-related risks on the financial system to broader environmental issues such as deforestation, biodiversity and others (the "E").
  • While regulators expand their toolkits, disclosure remains the principal tool for mitigating environmental risks but governance of financial institutions (the "G") will also be a key focus.
  • Investor protection considerations linked to greenwashing continues to drive "E" and "G" regulatory developments.

The unprecedented challenges to energy transition created by the energy crisis are unlikely to slow down the development of ESG regulation. We consider some of the themes emerging in the regulation of the "E" and "G" of ESG in 2023.

E – Expanding beyond climate change

The initial focus on climate change within the "E" is expanding to include a broader set of environmental issues. At an international level, the Taskforce on Nature-related Financial Disclosures will publish its final recommendations on a nature-related risk-management and disclosure framework in September 2023. In the EU, the focus is shifting beyond pure climate change to areas such as biodiversity, supply chain concerns and deforestation: eg, the proposed Deforestation Regulation may prohibit financial institutions from doing business with any entity involved in deforestation. Meanwhile, the EU Platform on Sustainable Finance continues work on the technical screening criteria for the remaining four environmental objectives in the EU Taxonomy (water and marine resources, circular economy, pollution, and protection and restoration of biodiversity and ecosystems). Similarly, the Monetary Authority of Singapore (MAS) has repeatedly emphasised that environmental risk goes beyond climate change to include risks relating to pollution, loss of biodiversity and changes in land use. The Hong Kong Monetary Authority has also stressed in its climate risk guidance that banks should not overlook the risks and opportunities brought by other environmental issues, such as biodiversity.

Enhancements to Disclosure and Labelling

Enhancing sustainability disclosures and improving the quality of information available to financial market participants remain at the core of the regulatory agenda.

The International Sustainability Standards Board will publish two global sustainability disclosure standards by the end of 2022. Various regulators have already contributed to this work, including the Australian Securities and Investments Commission (ASIC) and the European Banking Authority (EBA). Some jurisdictions (eg, the UK and Hong Kong) have signalled their intention to build their sustainability disclosure requirements in line with the standards.

By the end of 2023, the EU will review its Sustainable Finance Strategy (which encompasses various initiatives, including some aimed at enhancing disclosure requirements such as the Sustainable Finance Disclosures Regulation), the proposed Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive.

In the UK, final rules on sustainability disclosure requirements and sustainable investment labels are expected by the end of Q2 2023. The FCA will leverage the output of the UK Government’s Transition Plan Taskforce, expected by the end of 2022. In line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, larger UK listed companies and financial firms will need to incorporate these metrics in their transition plans, with first disclosures due in 2023.

In Singapore, the Singapore Exchange requires listed issuers to publish sustainability reports on an annual basis. Climate reporting (based on the TCFD recommendations) currently applicable to all issuers on a "comply or explain" basis, will become mandatory for issuers of certain industries (including the financial industry) from FY2023.

In Australia, the Australian Treasury and the Australian Accounting Standards Board are expected to develop and introduce climate reporting standards for large businesses and financial institutions. The Australian Sustainable Finance Initiative’s Technical Advisory Group is developing an industry-led Australian sustainable finance taxonomy.

In Hong Kong, the Securities and Futures Commission’s (SFC) revised guidance to management companies of ESG funds came into effect on 1 January 2022. It sets out, among other things, the SFC's regulatory expectations relating to naming of funds, disclosure in offering documents, as well as at least annual assessments and reporting of how funds have attained their ESG focus.

Beyond disclosure and labelling

On governance, there has been a shift in the EU from ensuring transparency through disclosures to integrating ESG in firms' investment decision-making processes. An example is EU legislation integrating sustainability into existing financial services legislation, such as that relating to product governance and suitability assessments. The SFC in Hong Kong recently implemented guidance to require collective investment scheme managers to take climate-related risks into consideration in their investment and risk management processes.

Prudential regulation and stress-testing are also expected to play a prominent role in the regulation of the "G". Both the European Central Bank and Bank of England have conducted their first stress tests integrating ESG risks; the results will drive the regulators' next steps. The Hong Kong Monetary Authority conducted a climate risk stress test pilot exercise in 2021; a further round of climate risk stress tests is expected between 2023 and 2024. In Singapore, MAS' Guidelines on Environmental Risk Management (Banks) sets out its expectations that banks should develop capabilities in scenario analysis and stress testing to assess the impact of material environmental risk on the banks' risk profile and business strategies.

In the EU, the EBA will publish its final report on the role of environmental risk in the prudential framework for credit institutions and investment firms in 2023. In Australia, the Australian Prudential Regulation Authority (APRA) is leading the Climate Vulnerability Assessment which gathers input from Australia’s five largest banks to assess their potential exposure to climate risk and the mitigating measures they could apply. APRA's Prudential Practice Guide on Climate Change Financial Risks contains best practice in managing climate change-related financial risks.

Greenwashing, enforcement and shareholder activism

Investor protection considerations linked to greenwashing are also driving "E" and "G" regulatory developments. In the EU, each of the European Supervisory Authorities are expected to publish a report on greenwashing risks and the supervision of sustainable finance policies in 2023. France, a pioneer in ESG regulation, has long had criteria for non-financial communication and 'green' marketing to prevent greenwashing. The UK FCA is currently consulting on a general "anti-greenwashing" rule, to apply from mid-2023, which reiterates existing requirements that sustainability-related claims must be clear, fair and not misleading.

To combat greenwashing, MAS recently published a circular which sets out MAS’ expectations on the disclosure and reporting standards that must be met by retail funds in Singapore with an ESG focus or ESG strategy. Its Guidelines on Environmental Risk Management (Asset Managers) set out MAS' expectation that asset managers should exercise sound stewardship to help shape the corporate behaviour of their investee companies positively through engagement, proxy voting and sector collaboration.

In Australia, regulators have been increasingly vocal in threatening enforcement action, with ASIC taking its first enforcement action for greenwashing and indicating that several further investigations are underway.

Stewardship and shareholder activism also play a role in 'soft enforcement' of ESG. The UK government has stressed the importance of investor stewardship in holding companies to account for the credibility of their net-zero commitments and their transition strategies. Activist groups in Australia have pressurised companies, including lodging complaints with regulators and commencing proceedings alleging misleading disclosure.

In France, where legislation provides a compensation framework for environmental prejudice, we also expect claims against financial market participants to increase. A French NGO recently gave formal notice to a French credit institution to cease financing of finance pollutant industries, threatening legal proceedings should the institution not do so.


Regulatory pressure and engagement with financial market participants is expected to increase in 2023 and international co-ordination will remain key to ensuring cross-jurisdictional interoperability.


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