Analysis of Best Practices in Environmental Disclosure Policies A review of 101 policies worldwide based on Five criteria for high-quality disclosure About IFC IFC—a member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets and opportunities in developing countries. In fiscal year 2021, IFC committed a record $31.5 billion to private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity as economies grapple with the impacts of the COVID-19 pandemic. For more information, visit www.ifc.org. © 2022 International Finance Corporation. All rights reserved. 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Internet: www.ifc.org The material in this work is copyrighted by IFC, a member of the World Bank Group (WBG). 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All other queries on rights and licenses, including subsidiary rights, should be addressed to IFC’s Corporate Relations Department, 2121 Pennsylvania Avenue, NW, Washington, DC 20433 USA. IFC is an international organization established by Articles of Agreement among its member countries, and a member of the World Bank Group. All names, logos, and trademarks are the property of IFC, and you may not use any of such materials for any purpose without the express written consent of IFC. Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. Analysis of Best Practices in Environmental Disclosure Policies A review of 101 policies worldwide based on Five criteria for high-quality disclosure Contents Contents i Foreword IFC ii Foreword CDP iii Acknowledgments iv Executive Summary v Abbreviations and Acronyms vi 1. Introduction 1 2. Methodology and Approach 3 3. Analysis of Best Practice Policies 5 Best Practices in Developed Economies 3.1.  5 Environmental integrity, addressing sustainability-related financial disclosures as well as 5 impact on people and the planet, with a holistic environmental approach Compatibility of disclosure standards 6 Enforceability 7 Technical quality and content 8 Innovation 9 3.2. Further Examples of Best Practices 11 3.3. Further Assessment of Voluntary Reporting Requirements 12 Topic-Specific Deep-Dives on Supply Chain Environmental Impact, Biodiversity, 3.4.  14 and Taxonomies Analysis of Activities in Developing Economies and High-level Advice 4.  17 4.1. Best Practices in Developing Economies 17 Environmental integrity, addressing sustainability-related financial disclosures as well as 17 impact on people and planet, with a holistic environmental approach Compatibility of disclosure standards 18 Enforceability 18 Technical quality and content 19 Innovation 21 5. Recommendations on the Process of Developing Policy 22 6. Conclusion 23 Appendix 1. List of Analyzed Policies 25 Analysis of Best Practices in Environmental Disclosure Policies i Foreword IFC As a global leader in developing frameworks for assessing gender, social and sustainability-linked bonds across environmental, social, and governance (ESG) risks, IFC dozens of currencies over the decades. is setting the bar for sustainable finance and disclosure frameworks. This report is timely as we all look to rebuild Developing countries face specific challenges in reporting more sustainably and inclusively from the impacts of the and disclosure. For example, there are countries where COVID19 pandemic. Sustainability issues, such as income sustainable finance-related reporting exists, but the key equality, good governance, poverty reduction, green performance indicators (KPIs) are limited to environment and growth, and climate change mitigation and adaptation, climate change. In these situations, social and governance are at the center of the global and local agenda. issues are not included, which means the reporting parameters are incomplete. In some countries, regulators Worldwide, more companies are reporting publicly introduce reporting templates, but high-quality reporting on on these issues through integrated reports, reports sustainability is only achieved by market leaders. to investors and, of course, as part of their listing requirements on stock exchanges. Given our role as a This report provides practical examples from developed multilateral development institution that supports private and developing markets on how to develop high-quality sector development in emerging markets, we at IFC have environmental regulation that addresses market needs seen firsthand the importance of setting up ESG reporting and investor demand. Financial-market participants, and disclosure requirements. IFC's Performance Standards whether a regulator or not, will find helpful information and Corporate Governance Methodology are globally throughout the report. In particular, the report presents recognized as guiding frameworks for emerging markets. best practice examples from developing economies, along with practical recommendations. This report rests Market regulators and stock exchanges play a critical role on IFC's approach to the corporate governance and in promoting reporting guidelines for companies around sustainability regulation ecosystem (codes, scorecards, ESG issues. These guidelines act as a lever and amplifier and reporting guidelines). It expands IFC’s ability to through their issuer base to change the broader market. support the development of sound guidelines through thought leadership. IFC has supported this work of regulators and stock exchanges in many ways. We have had a partnership with We want to thank CDP for their role in mainstreaming the UN Sustainable Stock Exchange initiative since 2018 to climate. We also acknowledge our ongoing collaboration support member exchanges in developing ESG reporting with the UN Sustainable Stock Exchange initiative guidelines. IFC's Disclosure and Transparency Toolkit is on uplifting ESG disclosure regulation among stock the foundation of our work and approach. It presents exchanges and companies. IFC's model for incorporating ESG into corporate value and reporting, coupled with the UN Sustainable Stock Martine Valcin Exchange's Model Reporting Guidance. Global Manager Corporate Governance / ESG Advisory, A robust sustainability-reporting system developed Knowledge and Learning in partnership with key stakeholders, including other International Finance Corporation multilateral development financial institutions, has supported IFC's work and credibility in issuing green, ii Foreword CDP The world of corporate reporting is going through a CDP fully supports the move toward mandatory revolution. The increased realization of the gravity of environmental disclosure and has recently published a the environmental crisis is creating a movement toward policy brief highlighting the elements of high-quality stronger and more inclusive reporting of the risks and mandatory disclosure. The elements of this brief constitute opportunities of environmental factors on business the basis of the analysis in the following pages. activities. At the same time, there is a growing realization that, without a thorough understanding of the impacts All this being said, at CDP we recognize that one size that companies have on people and the planet, the does not fit all situations, and that many jurisdictions world will not be able to deliver on the commitments of may not be in a position to implement these regulatory the Paris Agreement, the 2030 Agenda for Sustainable regimes straight away. In these cases, instruments such Development, and the upcoming Global Biodiversity as guidance and non-binding codes of conduct, issued Framework. Strong, reliable, and comparable data is by regulators or actors such as stock exchanges, can be fundamental to achieving this understanding. For over an important first step toward a stronger awareness of 20 years, CDP has been at the forefront of encouraging environmental factors. corporate disclosure, leveraging its reporting framework to support businesses in analyzing and disclosing their At CDP we strongly believe in the maxim that “you can’t environmental risks, opportunities, and impacts. manage what you can’t measure.” This document will help all actors involved in the corporate disclosure ecosystem Although voluntary initiatives have been fundamental in to improve their understanding of the best practices developing this awareness, there is a growing recognition in policy and regulation around the world in order to that, in many cases, these may not be able to reach the better measure, and therefore better manage, their necessary scale. This is why several jurisdictions (mainly, environmental risks, opportunities and impacts. but not only, in developed economies) have started to implement mandatory environmental disclosure regimes. Pietro Bertazzi Most of these tend to focus on climate and be based Global Director on the recommendations of the Task Force on Climate- Policy Engagement and External Affairs Related Disclosures (TCFD), although this is not always CDP the case. Analysis of Best Practices in Environmental Disclosure Policies iii Acknowledgments This report was prepared by CDP and the International Finance Corporation (IFC). Lead Authors Daniel Petrovics, Research Consultant, DP Research & Consulting/Research Associate, Institute for Environmental Studies, Vrije Universiteit Amsterdam Davide Cerrato, Senior Global Policy Manager—Sustainable Financial Systems, CDP Ralitza Germanova, Corporate Governance Officer, IFC The authors would like to thank the following people for their contributions (in alphabetical order): Alex Berg, Pietro Bertazzi, Charles T. Canfield, Amira El Saeed Agag, Tiffany Grabski, Anthony Miller, Malango Mughogho, Charlotte Portier, Afifa Raihana, Fiona Elizabeth Stewart, and Martine Valcin. iv Executive Summary There is a growing focus on the need to shift capital We differentiate between developed and developing effectively and rapidly toward environmentally economies for two key reasons. Developing economies sustainable solutions to innumerable challenges. tend to be at an earlier stage in their journey of setting Key questions remain, however, as to how investors, disclosure requirements. This creates an opportunity for stakeholders, and decision-makers can best assess what these jurisdictions to leapfrog and incorporate best companies, activities, or financial products are truly practices from more mature jurisdictions. Next to this, sustainable. Even when answers can be found, how can the appetite of these economies to attract investment this information best be standardized across a wide array creates a clear opportunity to act on the 2030 Agenda, of contexts? the Paris Agreement, and the upcoming Global Biodiversity Framework. Much of the common practice in sustainability reporting has been reached through voluntary disclosure Our analysis examines policies through the lens of the five requirements. However, the detailed, comparable, success criteria set out by CDP on mandatory disclosure enforceable, and decision-useful information needs requirements.1 According to these criteria, successful policy of investors and decision-makers has made it clear should (1) ensure environmental integrity, addressing that we have reached the next step in the journey of sustainability-related financial disclosures as well as impacts environmental disclosure policies. Underpinning the on people and the planet, with a holistic environmental answer to the challenges are regulatory activities that approach; (2) ensure compatibility of required or help meet the information needs of the private sector recommended disclosure standards; (3) provide an for nonfinancial and sustainability information. With enforcement system; (4) adhere to the technical quality and landmark legislation being introduced in a number of content of the reporting process; and (5) allow space for jurisdictions in the world, it is clear that the much-needed innovation and more mature disclosure. shift to mandatory disclosure requirements is under way. This regulatory development meets the need for a higher The initial aim of our analysis was to understand best granularity in the quality of information available, greater practices in developed economies and to use this clarity and comparability across the board between assessment to assist regulators in developing economies. companies and industries, and timely and accessible data. However, our analysis also highlighted that due to the special positioning of developing markets, these In order to assist regulators with an appetite for filling jurisdictions are well on the path of innovation and have this important information gap, we have produced this many lessons to offer to themselves across organizations report providing a comprehensive analysis of the state internally and to other economies. of environmental disclosure. First, we assess 101 policies to better understand what best practices exist in Based on our analysis we outline an overarching process, developed economies with deep financial markets. which regulators can use to embark on a policy (re) Second, we illustrate the current situation in these iteration process. This process can help regulators economies when it comes to environmental disclosure focus on aligning key indicators in policy with existing policy. Finally, we provide regulators with a framework standards, focus on collating disclosed information in to formulate better policies capable of helping fill the decision-useful ways, and regularly revisit and adjust information needs. disclosure requirements. 1 For more information, see CDP. 2021. “Shaping High-Quality Mandatory Disclosure: Taking stock and Building upon the TCFD Recommendations.” London: CDP. https://cdn.cdp.net/cdp-production/cms/policy_briefings/documents/000/005/863/original/TCFD_disclosure_report_2021_FINAL.pdf?1631608521. Analysis of Best Practices in Environmental Disclosure Policies v Abbreviations and Acronyms CDSB Climate Disclosure Standards Board CSRD Corporate Sustainability Reporting Directive ESG Environmental, Social, and Governance EU European Union GRI Global Reporting Initiative ICGN International Corporate Governance Network IFC International Finance Corporation IIRC International Integrated Reporting Council IFRS International Financial Reporting Standards Foundation JSE Johannesburg Stock Exchange NFRD Nonfinancial Reporting Directive PRI Principles for Responsible Investment SASB Sustainability Accounting Standards Board SDG Sustainable Development Goal SME Small and Medium Enterprise SFC Securities and Futures Commission (Hong Kong) TCFD Task Force on Climate-Related Disclosures UNGC United Nations Global Compact vi Introduction Methodology Analysis of Best Practice Policies  nalysis of Activities in Developing Economies A and High-level Advice Recommendations on the Process Developing Policy Conclusion Analysis of Best Practices in Environmental Disclosure Policies vii viii 1. Introduction The environmental reporting policy arena has gone through substantial developments in the past decade. This is fueled in part by a growing interest in connecting traditional financial activities with sustainability at large—be it through the creation of new types of investment products focused on green activities or through a shift in the products or services provided by companies themselves. Regulators are now focused more than ever on Examples of such regulatory actions are the creation of the increasing the quality and quantity of corporate Task Force on Nature Related Financial Disclosures,3 the disclosure. Stock exchanges are introducing listing development of Model Guidance on Climate Disclosure for requirements, central banks are focusing on financial stock exchanges,4 the European Union’s (EU’s) ambitious actors, and governments are adopting taxonomies for directive on Corporate Sustainability Reporting5 as well sustainable investment products, all of which signal 2 as the International Financial Reporting Standards (IFRS) a shift toward sustainable finance solutions. This shift Foundation’s International Sustainability Standards Board.6 is underpinned by a need for disclosure to support Each of these developments are important milestones in risk management within companies as well as help mainstreaming sustainability reporting, with an emphasis organizations, decision-makers, and investors better on environmental disclosure. understand the impact these companies may have on the environment and society. This in turn supports Despite these developments, there is much still to be done efforts to shift capital toward sustainable companies to achieve the ambitions set out in the 2030 Agenda, the and activities, as collecting data helps support risk Paris Agreement, and the upcoming Global Biodiversity analysis within companies while disclosing data helps Framework. The International Finance Corporation (IFC) investors shift capital. and CDP have joined forces in partnership with the UN Sustainable Stock Exchanges (SSE) Initiative to identify a In particular, there is a growing interest for climate-specific set of policy best practices for environmental disclosure reporting, enabled by robust regulatory standards. Climate applicable to regulators in developing economies, is not the only issue, however; there is a growing urgency drawing on the experience and work of regulators across to act on a wider array of environmental issues, including the world. deforestation, biodiversity loss, and water governance. 2 Van der Lugt, C. T., P. P. van de Wijs, and D. Petrovics. 2020. Carrots and Sticks 2020— Sustainability reporting Policy: Global Trends in Disclosure as the ESG Agenda Goes Mainstream. South Africa: Global Reporting Initiative (GRI) and the University of Stellenbosch Business School (USB). 3 For more information, see United Nations Development Program. 2021. “Taskforce on Nature-Related Financial Disclosures (TNFD) Launched.” https://www. unepfi.org/news/themes/ecosystems/tnfd-launch/ 4 For more information, see United Nations Sustainable Stock Exchanges Initiative. 2021. Model Guidance on Climate Disclosure: A Template for Stock Exchanges to Guide Issuers on TCFD Implementation. https://sseinitiative.org/publication/model-guidance-on-climate-disclosure-a-template-for-stock-exchanges-to-guide- issuers-on-tcfd-implementation/ 5 EU Corporate Sustainability Reporting Directive (2022).”. 6 For more information, see International Financial Reporting Standards Foundation. 2021. “Proposed Targeted Amendments to the IFRS Foundation Constitution to Accommodate an International Sustainability Standards Board to Set IFRS Sustainability Standards.” London: IFRS. https://www.ifrs.org/ content/dam/ifrs/project/sustainability-reporting/ed-2021-5-proposed-constitution-amendments-to-accommodate-sustainability-board.pdf Analysis of Best Practices in Environmental Disclosure Policies 1 This report serves as the first building block of a series of disclosure of environmentally focused sustainability and activities to support IFC’s role as advisor to financial market nonfinancial information. This means that, overall, there regulators by developing actionable, comprehensive, easily is flexibility to leapfrog and implement best practices implementable, and transformative policies targeting from other jurisdictions to achieve high-quality reporting private sector actors. This is done in admission to the role practices. Second, the appetite of developing economies of stock exchanges as regulators (in some cases) and their to attract investment creates an opportunity to act on the special role in their local financial ecosystem. CDP, as the ambitions of the 2030 Agenda and the Paris Agreement, largest global disclosure system supporting investors, and the upcoming Global Biodiversity Framework by companies, cities, states, and regions in managing their effective policy formulation. Providing a sustainability environmental impacts, provides insights and expertise to framework allows for the management of longterm risks regulators. Together, CDP and IFC aim to assist in fulfilling and impacts individual enterprises and the economy as a the Paris Agreement, the Sustainable Development Goals, whole. With this backdrop it is essential to mention that and the upcoming Global Biodiversity Framework through our analysis does not only highlight the specific attributes shifting finance toward sustainable activities and shaping of good policy but also focuses on the underlying corporate behavior. enabling environment. In this report we aim to assist regulators by the following: Section 2 of the report outlines the approach taken for (1) highlighting examples of best practices in developed the analysis and details the five criteria for successful markets with deep financial markets, (2) showing mandatory disclosure developed by CDP. This is regulators the state of play in developing economies followed by a detailed analysis of policy best practices when it comes to environmental disclosure policy, and in developed economies with deep financial markets. (3) providing regulators with a framework to formulate In this third section, it becomes apparent that the EU is better policies. a pioneer in ambition, depth, and scope when it comes to disclosure requirements, but other jurisdictions are We focus on regulators in developing economies for closing this gap as far as contextual conditions allow. two key reasons. First, admitting to the fact that policy Section 4 assesses a handful of best practice examples requirements across the globe are still at an early stage, from developing economies and the conclusion sets out jurisdictions in developing economies are at a relatively a detailed account of recommendations for regulators earlier stage in developing their policy frameworks for the active in these jurisdictions. 2 2. Methodology and Approach In our analysis we review core regulations, laws, and codes (from here on, “policies”) in a number of developed and developing economies. We do so with the aim of firstly exploring where policies stand in economies with mature reporting practice in place, secondly to better understand what the effect of policy may be on mature reporting practice, and thirdly to explore what can be learned from these first two points for deepening reporting practice in developing economies. Finally, during our review, we also identified policies in developing economies, which are innovative and may shed light on two important aspects. These policies can assist other developing economies develop the appropriate regulatory tools as they are grounded in similar contexts when it comes to the maturity of reporting practice, and they may also pave the way for these economies towards leapfrogging in ambition. In our review we consider policies that focus on integrate sustainability regulations into other disclosure public interest entities (as defined by the EU) and requirements, and how “proportional” these should be consider how rules for those companies should be to all the other regulation that already exists. Striking developed and enforced. The obvious (and inevitable) 7 the correct balance here may pose a challenge, however underpinning is that such policies will be developed if done correctly the impact can be substantial both in by existing regulators and will be additions to an terms of assessing risks for reporting entities and for already existing large body of regulation that governs economies at large. company disclosure. In total, we review 101 policies from 38 different For this reason, we review regulation from various jurisdictions. For the complete list of policies, consult ministries and governments as well as target central Appendix 1. In assessing these policies, we apply banks, securities regulators, and further financial the five criteria for successful mandatory disclosure regulators (for financial institutions). The sheer requirements developed by CDP.8 These criteria set the heterogeneity of types of regulation as well as the ambition level of ideal policy and are a suitable lens for number of regulating entities suggests that policy assessing best practices. The criteria are presented in makers around the world must decide to what extent to Figure 2.1. 7 The EU defines public-interest entities as companies with a significant public interest because of the nature of their business, size or number of employees or corporate status, including banks, insurance firms and listed companies. For more information, see European Commission. 2020. “Rules for Statutory Audit of Public-Interest Entities.” https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=LEGISSUM%3A4314939 8 For more information, see CDP. 2021. “Shaping High-Quality Mandatory Disclosure: Taking stock and Building upon the TCFD Recommendations.” London: CDP. https://cdn.cdp.net/cdp-production/cms/policy_briefings/documents/000/005/863/original/TCFD_disclosure_report_2021_FINAL.pdf?1631608521 Analysis of Best Practices in Environmental Disclosure Policies 3 Figure 2.1 Five Criteria for Successful Mandatory Disclosure Requirements 1 Environmental integrity, addressing sustainability-related financial The policy is designed to advance the environmental agenda and is designed to disclosures as well as impact on lead to real change that impacts people people and planet, with a holistic and the planet positively. environmental approach 2 Ensure compatibility of disclosure standards required If not based on existing internationally agreed standards, the policy needs or recommended to be aligned with them. If national standards are developed, these need to be compatible with international ones. 3 Provide an enforcement system The policy implementation should be monitored by the relevant government authority, and effective measures for noncompliance should be in place. 4 Adhere to technical quality and content of the reporting process To meet this criterion, reporting should focus not only on risks but also on strategy, impact, sector focus, comparability of disclosures, reliability, and accuracy. It should require forward-looking information to allow transition. 5 Allow space for innovation and more mature disclosure The regulation should not form a ceiling and create a tick box exercise but serve as a floor/minimum requirement that stimulates even more ambitious, broader, and deeper disclosure and action. Source: CDP. 2021 “Shaping High-Quality Mandatory Disclosure: Taking stock and Building upon the TCFD Recommendations.” London: CDP 4 3. Analysis of Best Practice Policies Policy best practices exist throughout developed economies with deep financial markets, and they resemble the criteria set for successful (mandatory) requirements from CDP. This section outlines such best practices in detail through the lens of the five criteria. Our analysis has also heralded a set of best practices beyond these requirements. They include sectoral guidance as well as the coupling of mandatory disclosure requirements with detailed guidance documents, called the hand-in-hand approach. Finally, this section also explores the use of voluntary reporting requirements. Despite the effectiveness of mandatory disclosure requirements, in order to ensure comparability and quality of data, voluntary initiatives have proven to be a useful first step toward the introduction of mandatory disclosure. Best Practices in Developed Economies 3.1.  Environmental integrity, addressing Financial Services Sector and Regulation (EU) sustainability-related financial 2019/2089 on Low Carbon Benchmark Regulation disclosures as well as impact provide in-depth accounts of negative characteristics of on people and the planet, with a holistic the current system (short-term financial interests environmental approach versus long-term environmental planning for example). The overall admissions by policy makers to shortcomings of nonfinancial reporting, such as boilerplate reporting Most policies in our analysis link their purpose to the or the lack of forward-looking and the presence of broader environmental agenda. Such broad policy onerous processes, also signal the environmental framing allows one to clearly define the purpose of a integrity of a policy. Such admissions are made explicit, regulation. The preambles and introductory texts in for example, in the EU’s Corporate Sustainability general carry references to broad initiatives such as the Reporting Directive.12 2030 Agenda, the Paris Agreement, or Paragraph 47 of 9 10 the UN Rio+20 conference.11 Next to such broad In addition, requirements on how entities can and should references, policies such as the EU’s Regulation (EU) use various timeframes (such as 5-, 10-, or 20-year horizons) 2019/2088 on Sustainability-Related Disclosures in the to assess risk is emerging in upcoming draft regulation.13 9 Japanese Ministry of Environment. 2018. Environmental Reporting Guidelines. Tokyo. https://www.env.go.jp/policy/j-hiroba/kigyo/2018Guidelines_E20190412.pdf 10 European Parliament and Council, Regulation on Sustainability-Related Disclosures in the Financial Services Sector (2019/2088). 11 EU Directive on Non-Financial Reporting (2014/95/EU). 12 EU Corporate Sustainability Reporting Directive (2022).” 13 United States House of Representatives, Corporate Governance Improvement and Investor Protection Act (2021). Analysis of Best Practices in Environmental Disclosure Policies 5 Such a shift can counter the structural pressures of a short- broader terms (see box 3.1 for a summary). This in effect term focus when it comes to risk assessments. equips such policies to incorporate the logic of double materiality explicitly (impact of, and on, the reporting Concurrently, establishing board responsibility in entity). See more on double materiality in section 3.2. environmental impact management and reporting Best practices linked to environmental integrity are is key to driving corporate behavioral change toward summarized in Box 3.1. environmental integrity. Listing Rule 711A of the Singapore Stock Exchange embeds such responsibility in a manner which is conducive to (1) constructing the processes Compatibility of needed for the management of environmental impact disclosure standards and reporting on it and (2) identifying the impact of activities more precisely. Similarly, in the field of (impact) In terms of the compatibility of disclosure standards, the investment, linking investment focus (for example, immediate and straightforward action, which most policies climate change) with an objective (for example, climate cater to, is spelling out recommended or required reporting mitigation) as well as including tools for screening frameworks: such as done by CDP, the Global Reporting investment products (for example, positive or negative Initiative (GRI), the International Sustainability Standards screening) can be outlined as best practices. 14 Board integrating the Climate Disclosure Standards Board (CDSB), the IFRS Foundation, the Sustainability Accounting Finally, a key takeaway from a number of policies Standards Board (SASB), TCFD, United Nations Global performing well in terms of environmental integrity Compact (UNGC), and so forth15 Guidance documents such is that their overall focus is not limited only to as the NASDAQ reporting guide16 take this a step further sustainability-related (non)financial disclosures but and spell out specific metrics, attached to the required also considers impacts on people and the planet in reporting framework.  ummary: Best Practices Linked to Environmental Integrity Box 3.1 S X Grounding preambles in broad policy frameworks X Incorporating long-term planning X Establishing board responsibility in managing environmental impact and reporting X Connecting investment focus with objective and including tools for investment screening X Admitting and mitigating existing shortcomings of nonfinancial reporting X Not limiting focus to sustainability-related financial disclosures but including impacts on people and the planet to ensure that the goals of the Paris Agreement and the 2030 Agenda are met 14 Hong Kong Securities and Futures Commission. 2021. “Circular to Management Companies of SFC-authorized Unit Trusts and Mutual Funds–ESG Funds.” https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/products/product-authorization/doc?refNo=21EC27 15 EU Directive on Non-Financial Reporting (2014/95/EU); EU Corporate Sustainability Reporting Directive (2022); European Commission. 2019. European Union Guidelines on Reporting Climate-Related Information. https://ec.europa.eu/finance/docs/policy/190618-climate-related-information-reporting-guidelines_en.pdf; Senate of California, California Senate Bill No. 964: Climate-Related Financial Risk; Proposed revisions to Japan's Corporate Governance Code (2021). 16 NASDAQ. 2019. ESG Reporting Guide 2.0—A Support Resource for Companies. https://www.nasdaq.com/docs/2019/11/26/2019-ESG-Reporting-Guide.pdf 6 Our analysis also found that in-text illustrations of the 2021, the IFRS Foundation released a climate-related strengths of various frameworks and where their use disclosures prototype. Best practices linked to the may be relevant carries concrete actionable power. For compatibility of disclosure standards are summarized example, climate-linked policies, such as the California in Box 3.2. Senate Bill on climate-related financial risk, outlines CDP and GRI as options for reporting on climate-related information.17 Finally, illustrating where potential Enforceability overlaps and alignments between existing frameworks are found can also be considered a good practice. Based on our analysis, enforceability ties in with Furthermore, the compatibility of disclosed information two simple, albeit rarely used, mechanisms. The is not only guaranteed through the explicit requirement establishment of a monitoring authority or the to use existing reporting frameworks but also by activities delegation of such responsibility to existing bodies of the standard setters. CDP, CDSB, GRI, IIRC, and SASB is key to ensuring reporting is done according to the have issued a joint statement in which they outline a requirements set by policy. For example, the EU’s shared vision for what is needed to progress toward Non-Financial Reporting Directive (NFRD) delegates comprehensive reporting. To date, this has included a this responsibility to member states,20 while the EU’s joint statement on the intent to establish a framework Corporate Sustainability Reporting Directive explicitly focused on value creation by integrating financial calls on member states to issue penalties in case of reporting with sustainability disclosure.18 In addition, CDP, noncompliance.21 In the case of the environmental, social, CDSB, GRI, IIRC, and SASB have coauthored a draft of and governance (ESG) guidelines for credit ratings set how their frameworks may feed into a draft prototype of by the European Securities and Market Authority, the a climate-related financial reporting standard borrowing authority periodically monitors the reporting of credit elements from the TCFD framework.19 In November rating authorities.22 Similarly, the Hong Kong Securities  ummary: Best Practices Linked to the Compatibility of Box 3.2 S Disclosure Standards X Reference to and requirement to use various reporting frameworks X Constructive engagement with various frameworks X The illustration of what the strength of various frameworks are and where they may be applicable X The illustration of where overlaps and alignments between existing frameworks are found . 17 Senate of California, California Senate Bill No. 964 18 For more information, see “Statement of Intent to Work Together towards Comprehensive Corporate Reporting,” September 11, 2020. https:// impactmanagementproject.com/?s=statement+of+intent. 19 For more information, see CDP, “Global Sustainability and Integrated Reporting Organisations Launch Prototype Climate-Related Financial Disclosure Standard.” Press Release, December 18, 2020. https://www.cdp.net/en/articles/media/global-sustainability-and-integrated-reporting-organisations-launch- prototype-climate-related-financial-disclosure-standard. 20 EU Directive on Non-Financial Reporting (2014/95/EU). 21 EU Corporate Sustainability Reporting Directive (2022).” 22 European Securities and Market Authority. 2019. “Guidelines on Disclosure Requirements Applicable to Credit Ratings Include Environmental, Social, and Governance (ESG) Considerations (2019).” https://www.esma.europa.eu/sites/default/files/library/esma33-9-320_final_report_guidelines_on_disclosure_ requirements_applicable_to_credit_rating_agencies.pdf. Analysis of Best Practices in Environmental Disclosure Policies 7 and Futures Commission (SFC) sets out responsibilities for Reporting Directive sets out to incorporate digital ESG fund managers to inform both the SFC and investors tagging of relevant information in sustainability reports.26 about changes to the investment focus of the fund and, This will ensure the quick and targeted accessibility of as an enforcement mechanism, can take regulatory relevant information for decision-makers and investors. action for compliance breaches in not meeting the stated In addition, the directive aims to balance the reporting objective of various funds.23 burden for small and medium enterprises (SMEs) by introducing standards tailored to the reporting capacity of Next to delegating such authority, explicit enforcement such entities—admitting to difficulties SMEs face in using of measures boils down to the introduction of penalties elaborate reporting standards. for noncompliance with reporting obligations. The most notable policy incorporating such measures is Furthermore, certain policies such as the EU’s the amendment introduced by the Government of New guidelines on reporting climate-related information27 Zealand targeting the financial sector.24 The policy links spell out reporting metrics in detail—here a best practice monetary penalties for noncompliance as well as civil is to do so by building on existing reporting frameworks liability for individuals holding responsibility within and making reference to these frameworks explicit.28 reporting entities that do not comply with the reporting Similarly, in its ESG Reporting Guide 2.0, NASDAQ outlines obligation. The UK Occupational Pension Scheme, which that ESG information is "not text but data, focusing on sets out certain reporting obligations, also includes a performance that is measurable, manageable, actionable, clause on clear enforcement measures in the case of a and reportable.”29 To this end, a further step policy makers failure to produce a “strategic report.” Best practices 25 can take is to connect reporting requirements and metrics linked to enforceability are summarized in Box 3.3. to technical initiatives such as Science Based Targets or the Paris Agreement Capital Transition Assessment. These trends are underlined by aims to align any type of Technical quality operation with the Paris Agreement, something that and content is arguably signaled by the number of net-zero initiatives emerging. In terms of ensuring high-level technical quality and content, a number of innovative best practices are Furthermore, ensuring data is continuously updated emerging. First, the EU’s Corporate Sustainability through the use of forward-looking metrics and Box 3.3 Summary: Best Practices Linked to Enforceability X The establishment of monitoring responsibility and a relevant authority with sufficient enforcement powers and funding to carry out its mandate X The introduction of penalty measures for noncompliance with reporting obligations 23 Hong Kong Securities and Futures Commission. 2021. “Circular to Management Companies of SFC-authorized Unit Trusts and Mutual Funds–ESG Funds.” 24 Government of New Zealand, Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (2021). 25 Parliament of the United Kingdom, The Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations (2019). 26 EU Corporate Sustainability Reporting Directive (2022).” 27 European Commission. 2019. European Union Guidelines on Reporting Climate-Related Information. 28 For more information, see Science-Based Targets. n.d. “Lead the Way to a Low-Carbon Future.” https://sciencebasedtargets.org/how-it-works. 29 NASDAQ. 2019. ESG Reporting Guide 2.0—A Support Resource for Companies 8 transition planning is an area of particular interest. The overall lack of such forward-looking metrics in reporting Innovation as well as their need in policy is explicitly mentioned in the EU’s Corporate Sustainability Reporting Directive (CSRD).30 Next to forward-looking metrics, quality The nonfinancial and sustainability reporting space is reporting can be ensured through setting timeframes dynamic and continuously developing. This means that for reporting periods. For example, setting a timeframe reporting practice, standards, and policies all have to keep for reporting (for example, one year) and setting a date pace with data demand, sustainability challenges, and by which the report should be published, as is done the needs of decision-makers. by the EU’s NFRD (six months after the balance sheet date),31 can serve such a purpose. Similarly, the Hong Considering the noted references to varied reporting Kong Stock Exchange requires disclosure statements frameworks throughout policies, our analysis to be published within five months after the end of the suggests there is still room for incorporating fiscal year.32 the latest developments in metrics, targets, and reporting frameworks. We therefore suggest periodic Finally, requiring the use of disclosure frameworks, amendments to mirror latest developments in reporting which aggregate data in a comparable manner and do so frameworks. One example is the latest update of by ranking and benchmarking disclosing entities against NASDAQ’s ESG Reporting Guide, version 2.0, which each other (as does CDP), can enhance the collation of incorporates new developments in the reporting timely and decision-useful information. Best practices space, such as the emergence of the TCFD, Sustainable linked to technical quality and content are summarized Development Goals (SDGs), updated GRI Standards, the in Box 3.4. transposition of the EU NFRD, and so forth. Periodically Box 3.4 Summary: Best Practices Linked to Technical Quality and Content X The digital tagging of information X Balancing the reporting burden for SMEs X Spelling out metrics based on existing reporting frameworks X Connecting to technical initiatives such as Science-Based Targets X Ensuring the continuous update of data X Setting a clear timeframe for reporting obligation X Requiring the use disclosure systems, which aggregate information 30 EU Corporate Sustainability Reporting Directive (2022).” 31 EU Directive on Non-Financial Reporting (2014/95/EU). 32 Hong Kong Stock Exchange. 2020. Leadership Role and Accountability in ESG—Guide for Board and Directors. https://www.hkex.com.hk/-/media/HKEX-Market/ Listing/Rules-and-Guidance/Environmental-Social-and-Governance/Exchanges-guidance-materials-on-ESG/directors_guide.pdf?la=en Analysis of Best Practices in Environmental Disclosure Policies 9 amending guidance documents can be an advantageous Incorporating models of best practice reporting and way of complementing disclosure requirements with illustrating expectations directly in policy can be latest developments. considered a best practice itself, particularly in guidance documents, which carry more flexibility than directives or Likewise, establishing a minimum reporting regulation. To this end, the Singapore Stock Exchange’s requirement, as in the EU’s NFRD 33 and the draft CSRD,34 practice note,36 which is attached to its Listing Rule 711A, can enhance innovation in reporting practice where outlines a full materiality matrix as well as a multiphased industry leaders choose to do so. As opposed to setting approach to reporting, including sample content of a ceilings for reporting practice, such an approach allows sustainability report. Such guidance is only one example for covering the baseline information requirements of what regulators can do to ease the reporting burden needed for decision-makers and investors, while also of reporters. It should not be treated as a one-size-fits-all allowing for innovation to emerge. The Consultation solution, however, and it should serve as an example of Paper on Climate and Diversity published by the Singapore what regulators can do. Stock Exchange applies this logic neatly by setting a minimum requirement for reporters, which is gradually Finally, purpose- and audience-driven policy making raised in scope. Initially, all reporters are expected to can enhance the functionality of internal markets. report on specific metrics based on a “comply and explain” Consequentially, reflecting on who is targeted by basis in 2022, moving to multiple sectors having to disclosure (for example, impact investors) can enhance disclose on a mandatory basis by 2024. The consultation 35 the formulation of reporting requirements. Arguably, paper also encourages reporters to go past the most of the activities feeding into the formulation of such minimum reporting requirements, which is a much- a policy will take place before the drafting of regulation. welcomed approach. This is due to much of the current Nevertheless, spelling out explicitly who the audience of reporting practice being built on such innovation from a policy is can be useful in illustrating this process. A clear the past decade, suggesting that regulators should example for such a targeted approach can be found in the not only set requirements but ensure that industry is EU’s Regulation on Sustainability-Related Disclosures interested in pushing the limits of current Targeting the Financial Services Sector.37 Best practices reporting practice. linked to innovation are summarized in Box 3.5. Box 3.5 Summary: Best Practices Linked to Innovation X Invitation or incentives to implement latest developments in metrics, targets, and reporting frameworks X A focus on models of best-practice reporting X A focus on the audience and purpose of policy 33 EU Directive on Non-Financial Reporting (2014/95/EU). 34 EU Draft Directive on Corporate Sustainability Reporting (2021). 35 For more information, see Singapore Exchange Regulation. 2021. Consultation Paper on Climate and Diversity. https://www.sgx.com/regulation/public- consultations/20210826-consultation-paper-climate-and-diversity. 36 Singapore Stock Exchange. 2020. “Practice Note 7.6 Sustainability Reporting Guide. Singapore.” http://rulebook.sgx.com/rulebook/practice-note-76- sustainability-reporting-guide 37 European Parliament and Council, Regulation on Sustainability-related Disclosures in the Financial Services Sector (2019/2088). 10 3.2. Further Examples of Best Practices A number of best practices emerge that do not necessarily a climate-related disclosures prototype, which signifies fit the categorization of the five criteria. This section the overall trend of standard setters to tailor disclosure reviews these practices. frameworks in light of climate change.41 First, the nonfinancial and sustainability reporting space Second, growing attention is being paid to sector-specific has been dealing with the question of materiality in metrics and guidance. To this end, the EU’s NFRD varied ways in the past decade. This has resulted in two set out the goal to build sectoral guidance and Key dominant interpretations of impact—one that considers Performance Indicators, building on the core regulation.42 the impact of a reporting entity on its wider environment To date, however, most sector-specific policies focus and stakeholders and the other that considers impact on on the financial sector and organize specific disclosure a reporting entity and considers risks to operations and requirements around asset management and investment long-term growth. To deal with these developments the responsibilities.43 EU’s guidelines on nonfinancial reporting introduce the concept of double materiality, which incorporates both Third, targeted policy such as regulations requiring sector- perspectives. Incorporating such an approach in policy 38 specific disclosure is most effective when considered as allows for alleviating the potential risks when considering a part of a broader package of policies. To this end, the only one aspect (for example, climate risks related to a EU is a leading example where relevant regulation makes company’s operations only versus considering the wider cross-references to other policies throughout.44 Such impacts of such operations). This is particularly true an approach ensures robust and detailed policy, which for the recommendations set out by the TCFD. These allows for the disclosure of decision-useful information. recommendations are currently the most commonly A further approach, which contributes to targeted and used tool for climate reporting. However, the framework useful reporting, is the hand-in-hand approach. A number focuses only on single materiality (risks for the financial of regulators have introduced this approach whereby a industry and companies therein).39 The European mandatory disclosure requirement is set in a regulation Financial Reporting Advisory Group is currently working and a guidance document provides the details of how on a climate standard prototype, which implies double reporting can be done.45 materiality as well as the to-date most detailed attempt at standardizing disclosure requirements of climate- Finally, a notable development is the change in types of related (non)financial information, while also building on regulators who issue policy. The growth in activity by existing frameworks.40 Similarly, the IFRS has developed financial market regulators—including stock exchanges 38 European Commission. 2019. Guidelines on Non-Financial Reporting: Supplement on Reporting Climate-Related Information. https://ec.europa.eu/finance/docs/ policy/190618-climate-related-information-reporting-guidelines_en.pdf 39 Task Force on Climate-Related Financial Disclosures. 2017. Recommendations of the Task Force on Climate-related Financial Disclosures. Basel, Switzerland. https:// www.fsb-tcfd.org/recommendations. 40 For more information see European Financial Reporting Advisory Group. 2021. “EFRAG PTF-ESRS Welcomes 'Climate Standard Prototype' Working Paper.” Press Release, September 8, 2021. https://www.efrag.org/News/Project-527/EFRAG-PTF-ESRS-welcomes-Climate-standard-prototype-working-paper?AspxAu toDetectCookieSupport=1 41 For more information see: Technical Readiness Working Group, Chaired by the IFRS Foundation, Climate-related Disclosures Prototype. https://www.ifrs. org/content/dam/ifrs/groups/trwg/trwg-climate-related-disclosures-prototype.pdf 42 EU Directive on Non-Financial Reporting (2014/95/EU). 43 See, for example, European Parliament and Council, Regulation on Sustainability-related Disclosures in the Financial Services Sector (2019/2088); Government of New Zealand, Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (2021). 44 European Parliament and Council, Regulation on Sustainability-related Disclosures in the Financial Services Sector (2019/2088); European Parliament and Council, Regulation on Low Carbon Benchmark Regulation (2019/2089). 45 See, for example, Australian Stock Exchange Corporate Governance Council. 2019. Corporate Governance Principles and Recommendations, 4th ed. Sydney. Analysis of Best Practices in Environmental Disclosure Policies 11 through listing requirements and central banks— mentioned as examples. Notable examples of suggests that setting disclosure requirements is done regulation carrying best-practice examples include the not only by governments. This illustrates 46 EU’s NFRD as well as the CSRD.47 Among guidance opportunities and flexibilities of the regulatory system. documents, that issued by NASDAQ can be mentioned Setting reporting as a listing requirement for stock as a remarkable example,48 while regarding listing exchanges, regulating disclosure requirements for any requirements the Singapore stock exchange stands out type of entity issuing securities, or regulating the as a key example. 49 Further best practices are activities of financial actors by a central bank can all be summarized in Box 3.6. 3.3. Further Assessment of Voluntary Reporting Requirements Mandatory disclosure requirements generally set environmental issues, including biodiversity loss and stringent requirements on reporting entities. While climate change, regulators have both an opportunity such requirements can lead to decision useful and responsibility to build a framework for collating information, they can also result in a sudden reporting decision-useful information. burden, potentially undermining meaningful disclosure. Mandatory requirements are useful as they help in This being said, voluntary reporting requirements carry collating information in a comparable manner, in potential in three main ways: (1) they drive innovation in which the format of information and the content reporting practice, (2) allow jurisdictions to ease reporters of disclosures can be predefined. This reduces the into reporting practice, and (3) assist in standardizing need for other entities such as data aggregators to new types of information.50 For this reason—despite collect, reformat, and collate data from sustainability the overall trend for stricter and mandatory reporting reports. Considering the urgency to act on a number of requirements—such voluntary requirements can also be Box 3.6 Summary: Further Best Practices X Explaining various takes on materiality X Issuing sectoral guidance X Establishing clear links to existing regulation X Coupling mandatory disclosure requirements and detailed guidance documents (hand-in-hand approach) X Involving an active role by regulators (stock exchanges, securities and exchange commissions, central banks, and so forth) in addition to state legislators 46 Van der Lugt, C. T., P. P. van de Wijs, and D. Petrovics. 2020. Carrots and Sticks 2020—Sustainability reporting Policy: Global Trends in Disclosure as the ESG Agenda Goes Mainstream. South Africa: Global Reporting Initiative (GRI) and the University of Stellenbosch Business School (USB). 47 EU Directive on Non-Financial Reporting (2014/95/EU); EU Corporate Sustainability Reporting Directive (2022). 48 NASDAQ. 2019. ESG Reporting Guide 2.0—A Support Resource for Companies. 49 Singapore Stock Exchange, Listing Requirement 711A (2016). 50 Singapore Stock Exchange, Listing Requirement 711A (2016). 12 useful. Nonetheless, it is highly advisable to graduate push by the International Corporate Governance voluntary measures to mandatory measures, allowing Network (ICGN) in establishing Global Governance a market to adjust. For this reason, there is no either/or Principles.54 These principles bring together boards of choice regulators should make. These choices should be directors and institutional investors through the congruent to market conditions in a given jurisdiction— creation of a common language aimed at good while ensuring that the desired information is disclosed in a governance. Furthermore, the overall emergence of timely and complete manner. scorecards also signifies tighter scrutiny as these tools allow for the measurement of corporate governance Voluntary instruments such as corporate governance in practice.55 codes and stewardship codes are increasingly making references to ESG topics. This trend has been paved in Similarly, stewardship codes are also emerging as developing economies by the King IV Report on Corporate potential vehicles of change. These documents underline Governance for South Africa in making ESG considerations investor stewardship obligations, processes, and an explicit as part of the Board’s responsibility.51 The practices. Notably, ICGN has put out a set of Global UK Corporate Governance Code, for example, sets out Stewardship Principles,56 setting a common baseline all corporate governance code activities in terms of for stewardship codes around the world. Accordingly, ‘long-term sustainable success’ of companies. Similarly, 52 the UK Stewardship Code mentions the systematic the revised Japanese Corporate Governance Code integration of material ESG topics by signatories (those sets out the incorporation of mid- to long-term value who invest on behalf of savers and pensioners) into their creation through including ESG topics explicitly linked to investment decisions. TCFD recommendations. 53 IFC’s work has enabled the creation of 145 new codes, laws, In addition, following the 2008 financial crisis, it became and regulations in markets around the world, the revision evident that the sheer existence of corporate governance of 60 corporate governance codes worldwide since 2005, codes alone has not driven the transition to actual good and the development of 20 scorecards since 2008.57 These governance. Seeing the much-needed structural shift in activities ensure that major financial players incorporate how the economy is viewed from the boardroom, it is ESG topics into investment decisions and can support a necessary not only to recognize the proliferation of structural shift toward a sustainable financial system as corporate governance codes but to assess the global well as the greening of investment decisions.58 51 Institute of Directors, Southern Africa. 2016. King IV Report on Corporate Governance for South Africa. Sandown, Sandton. South Africa. https://www.iodsa.co.za/ page/king-iv 52 UK Financial Reporting Council, The UK Corporate Governance Code (2018). 53 Tokyo Stock Exchange, Japan’s Corporate Governance Code (2021). 54 International Corporate Governance Network. 2014. Global Governance Principles. London. https://www.fsa.go.jp/en/refer/councils/corporategovernance/ reference/icgn.pdf 55 For more information on scorecards, see International Finance Corporation (IFC). n.d. “Corporate Governance Codes and Scorecards.” Washington, DC: IFC. https://www.ifc.org/wps/wcm/connect/ef902c43-9f50-4c37-9c59-ffebafcee405/Codes_Scorecards_Fact_Sheet_May2019. pdf?MOD=AJPERES&CVID=mI22mqy and https://www.ifc.org/wps/wcm/connect/6d117589-32a1-4e3c-b29c-e6ccd935c2c5/Scorecards_LL_Web_Feb2011. pdf?MOD=AJPERES&CVID=jtCx2J9. 56 ICGN, Global Stewardship Principles (2016). 57 UK Financial Reporting Council, The UK Stewardship Code (2020). 58 For more information, see IFC, 2019, “Corporate Governance Codes and Scorecards.” Washington, DC: IFC. https://www.ifc.org/wps/wcm/connect/topics_ ext_content/ifc_external_corporate_site/ifc+cg/topics/codes+and+scorecards. Analysis of Best Practices in Environmental Disclosure Policies 13 Topic-Specific Deep-Dives on Supply Chain Environmental Impact, 3.4.  Biodiversity, and Taxonomies Supply chain environmental impact In a global economy characterized by the international flows of goods and by consumer choices impacting ecosystems on different continents, the topic of supply chain environmental impact has grown in importance. With lawmakers lacking regulatory power over other jurisdictions, the question comes to how transparency on the environmental impact of multinational enterprises’ transnational activities can be brought into the spotlight. To this end, a handful of policies set out with best practices. The EU’s NFRD and, in a more explicit manner, the draft CSRD clarify the reporting obligations of non-EU headquartered companies’ subsidiaries.59 By differentiating between parent companies and subsidiaries, clarity can be brought to jurisdictional boundaries. In addition, considering the environmental impact of products in terms of lifecycles requires full transparency throughout the supply chain. For this reason, the European Union Guidelines on Reporting Climate-Related Information suggests looking at suppliers both upstream and downstream.60 Accordingly, it is not simply the activities of a company per se that fall under reporting, but the impact of activities that these companies support should also be considered. To this end, the Environmental Reporting Guidelines set by Japan’s Ministry of Environment require disclosure on a Green Procurement Policy suggesting some type of information request for both upstream suppliers and downstream products, services, and activities.61 Topic-specific examples tackling the supply chain environmental impact of reporting entities include palm oil certifications and standards,62 which implicitly suggests a certain degree of information disclosure. Furthermore, admissions to supply chain disruptions due to extreme weather events also surface in policy.63 Nevertheless, this is generally seen as a risk on the activities and financial standing of a company.64 Applying the concept of double materiality can be helpful in assessing both the risks a reporting entity faces in its operations as well as the impact it may have throughout its supply chain. Here, policy makers still have distance to travel. 59 EU Directive on Non-Financial Reporting (2014/95/EU); EU Draft Directive on Corporate Sustainability Reporting (2021). 60 European Commission. 2019. European Union Guidelines on Reporting Climate-Related Information. 61 Japanese Ministry of Environment. 2018. Environmental Reporting Guidelines. Tokyo. 62 European Parliament and Council, EU Resolution on Palm Oil and Deforestation (2017). 63 US Securities and Exchange Commission. 2010. Guidance Regarding Disclosure Related to Climate Change. Washington, DC. https://www.sec.gov/rules/ interp/2010/33-9106.pdf 64 President of the United States, Executive Order 14030: Climate-Related Financial Risk (2021). 14 Biodiversity Biodiversity loss and ecosystem decline require urgent attention from policy makers and reporting entities alike. Reporting on biodiversity highlights the interconnectedness and complexity of environmental challenges, which point to the urgency to set requirements, disclose, and act in a systematic manner. Our review of policies indicates that explicit mentions to biodiversity in overarching reporting requirements are to-date lax and that when attention is paid to this topic, it is mostly done in jurisdictions in the Global South, suggesting that learnings from best practices can also be adapted by developed economies. We overall foresee this dynamic to change in the future and encourage decision-makers to take an active stance on biodiversity disclosures. This is especially true if high-level initiatives, such as the recent Network for Greening Financial Systems / International Network for Sustainable Financial Policy Insights, Research, and Exchange Joint Study Group on Biodiversity and Financial Stability, start gaining traction and moving the discussion on the data gaps still present on this topic.65 Referring to existing and upcoming conventions and frameworks in regulation can assist in grounding disclosure requirements in evidence-based and already existent knowledge. Specific examples of such references include the Bangladesh Bank’s reference to the Convention on International Trade in Endangered Species of Wild Fauna and Flora as well as its explicit mention of deep-sea mining as an exclusionary criterion for investment decisions.66 Similarly, the Japanese Environmental Reporting Guidelines mention biodiversity as a “major environmental issue.” The guidelines clarify that indirect supply chain activities may very well link to this topic as a material issue, too.67 In an even more ambitious attempt, the Securities and Exchange Commission of the Philippines includes a reporting template in their Sustainability Reporting Guidelines for Publicly-Listed Companies, which includes explicit references to biodiversity-linked disclosures and indicators.68 Finally, in December 2022, parties to the UN Convention on Biological Diversity will meet to design the post- 2020 global biodiversity framework. We foresee an information need in this post-2020 framework, which can be advanced primarily through stricter disclosure requirements. Considering that policies (particularly in developed economies) do not tend to make explicit references to biodiversity when setting disclosure requirements, policy makers have an opportunity to contribute to the post-2020 framework by setting such requirements. 65 Network for Greening Financial Systems. 2021. Biodiversity and Financial Stability: Exploring the Case for Action. https://www.ngfs.net/sites/default/files/medias/ documents/biodiversity_and_financial_stability_exploring_the_case_for_action.pdf 66 Bangladesh Bank. 2017. Guidelines on Environmental and Social Risk Management (ESRM) for Banks and Financial Institutions in Bangladesh. Dhaka: Bangladesh Bank. https://www.bb.org.bd/aboutus/regulationguideline/esrm_guideline_feb2017.pdf 67 Japanese Ministry of Environment. 2018. Environmental Reporting Guidelines. Tokyo. 68 Philippines Securities and Exchange Commission. 2019. Sustainability Reporting Guidelines for Publicly-Listed Companies. Manila. Analysis of Best Practices in Environmental Disclosure Policies 15 Sustainable investment taxonomies Taxonomies on sustainable investment products have been emerging over the past several years. Such taxonomies are classification or standards systems aimed at assisting actors in financial markets to communicate via a common vocabulary and ultimately to compare various products and services. Such taxonomies to date include the EU taxonomy,69 China’s National Development and Reform Commission’s Green Industry Guiding Catalogue and the PBC Green-Bond Endorsed Project Catalogue,70 and the Climate Change and Principle-Based Taxonomy developed by the Bank Negara Malaysia.71 The proliferation of taxonomies is a much welcome development. They contribute to the categorization of financial products in a manner conducive to directing finance toward positive impacts on the planet, and they assist in setting a benchmark for what qualifies as sustainable or green investment products. Nonetheless, their proliferation also means that the baselines by which investment products are categorized differ across the world. This can lead to potential confusion among investors as well as those who issue financial products labeled “green” and “sustainable.” The resulting growth in detailed guidance of what constitutes sustainable financial products has led to what has been referred to by some as a “taxomania.”72 To resolve the potential confusion, a number of initiatives are under way. China and the EU, under the flagship of the International Platform on Sustainable Finance, are working on a “Common Ground Taxonomy.” Moreover, CDP is in the process of mapping existing and emerging sustainability taxonomies of economic activities within its disclosure approach, therefore laying the foundation to better integrate these frameworks into CDP’s existing platform and to enable efficient disclosure of all ESG impact data on its platform. Policy makers can ease the potential confusion emerging from over 50 taxonomies differing in focus and scope. First, including digital tagging through Extensible Business Reporting Language (XBRL) tagging has allowed for any type of disclosure to be machine readable, enhancing the accessibility of the data. Digital taxonomies using such technology can allow for a quick and streamlined comparison and assessment of large amounts of data. Second, as already noted, the International Platform on Sustainable Finance has begun the development of a Common Grounds Taxonomy, which aims to assess the commonalities of various taxonomies and lay the ground for a common framework that still respects local and regional specifics. Policy makers and private sector actors interested in developing taxonomies should consider the following: developing internationally aligned taxonomies, by using a common language but allowing for regional specificities; creating taxonomies in digital form, thus allowing systems to automatically read and work with the information contained; applying the principle of “do no harm” as the basis of any taxonomy; and not limiting taxonomies to climate-related activities but extending them beyond to other environmental issues. 69 European Parliament and Council, Sustainable finance taxonomy—Regulation (EU) 2020/852. 70 National Development and Reform Commission and the China Securities Regulatory Commission. 2020. Green-Bond Endorsed Project Catalogue. Beijing. https://www.climatebonds.net/files/files/the-Green-Bond-Endorsed-Project-Catalogue-2021-Edition-110521.pdf 71 Central Bank of Malaysia. 2021. Climate Change and Principle-based Taxonomy. Kuala Lumpur. 72 For more information, see Future of Sustainable Data Alliance. n.d. “Taxomania! An International Overview.” https://futureofsustainabledata.com/taxomania/. 16 4. Analysis of Activities in Developing Economies and High-level Advice Our analysis includes policies from developing economies to better understand what the state of play is throughout the world. A number of innovative best practices emerge in these countries and regions, as well. We consider the opportunity for policy innovation relatively high in these regions and for this reason include examples that align with best practices. For ease of use and convenience, this stock taking is structured in line with the five principles outlined previously. In the second part of this section, we outline a set of advice based on our analysis for regulators and policy makers to introduce disclosure requirements. It is worth noting at this stage that a large portion of policies in developing economies still take the form of voluntary guidance documents—something that certainly mirrors the reality that reporting entities face in these regions, but which arguably will change in the coming years with mandatory reporting measures taking precedence. 4.1. Best Practices in Developing Economies Environmental integrity, addressing SDG reporting for listed companies done by the Brazilian sustainability-related financial Securities and Exchange Commission.74 disclosures as well as impact on people and planet, with a holistic In addition, specifying priority environmental issues environmental approach with broader goals at a high granularity can also assist any type of entity falling under the jurisdiction of the given policy. An example for this is China’s most recent As is the case with policies from developed economies, Guidelines on Environmental Information Disclosure for regulators in developing economies also make linkages to Financial Institutions, which outlines a wide range of high-level frameworks such as the SDGs. More specifically, topics to be disclosed, from environmental impacts of it is worth mentioning linkages between the SDGs and investment decisions made by financial institutions to specific indicators from reporting frameworks such as the the environmental risks and opportunities of a given GRI Standards—as in the case of the Abu Dhabi Securities institution.75 Such an approach ensures from the Exchange  —as well as the report-or-explain approaches on 73 outset that, through careful reading of a regulatory 73 United Arab Emirates Securities Exchange. n.d. ESG Disclosure Guidance for Listed Companies. Abu Dhabi. https://adxservices.adx.ae/WebServices/DataServices/ contentDownload.aspx?doc=1704806 74 Brazilian Securities and Exchange Commission. 2018. Report or Explain for Sustainable Development Goals. Rio de Janeiro, Brazil. https://sseinitiative.org/wp- content/uploads/2016/07/BMFBOVESPA-Communication-to-Stakeholders-July2016-1.pdf 75 People's Bank of China. 2021. Guidelines on Environmental Information Disclosure for Financial Institutions. Beijing. https://chinadevelopmentbrief.org/ publications/guidelines-on-environmental-information-disclosure-for-financial-institutions/ Analysis of Best Practices in Environmental Disclosure Policies 17 requirement, reporting entities are knowledgeable established reporting frameworks can substantially on how to contribute to sustainable development in enhance the comparability and decision usefulness of broader terms. disclosed information. Toward this end, certain guidance documents such as the Philippines Securities and Exchange An example of the adoption of a wider lens, addressing Commission’s Sustainability Reporting Guidelines for Publicly- both sustainability-related financial disclosures as well as Listed Companies, go a step further by providing a brief impact on people and planet, can be found in the Climate comparison of the various reporting frameworks they and Sustainability/ESG disclosure guidance documents refer to.79 Such a comparison can assist reporting entities recently published by the Johannesburg Stock Exchange in identifying the most appropriate reporting framework (JSE).76 The guidance explicitly adopts a double materiality to disclose their material issues. In addition, regulations approach, recommending that all ESG issues that can such as the latest Indian SEBI regulation, outline a broad meaningfully affect a company’s operational and financial frame for what is a sufficient report in regulatory eyes. results should be appropriately disclosed in an annual For entities already reporting with various internationally integrated report; and that the organization should accepted reporting frameworks (GRI, SASB, TCFD, or also provide disclosure on its significant impacts on the Integrated Reporting) they allow simple cross-reference economy, society, and the environment; this disclosure and combined use of them to fulfil the requirements.80 is in addition to its integrated report, and should be in an appropriate format, such as a separate sustainability report or on its website.77 Enforceability Compatibility of A number of stock exchanges in developing economies disclosure standards have made it an explicit listing requirement for companies to present disclosure on ESG matters. Notable examples Overall, reference to various reporting frameworks include the Philippines Stock Exchange,81 the Hanoi Stock and the requirement to use them appears throughout Exchange,82 and the Nigerian Stock Exchange.83 Setting policies. Frameworks referred to include those issued such requirements is a simple and easily implementable by GRI, CDP, IIRC, SASB, TCFD, UNGC, Principles for measure, and considering the size and market Responsible Investment (PRI), IFRS and the IIRC. As 78 capitalization of listed firms, it also carries potential for mentioned previously, the requirement to use such considerable impact. 76 Johannesburg Stock Exchange. 2021. Sustainability/ESG Disclosure Guidance. Johannesburg. https://www.jse.co.za/our-business/sustainability; Johannesburg Stock Exchange. 2021. Climate Disclosure Guidance. Johannesburg. https://www.jse.co.za/our-business/sustainability 77 Ibid., page 12. 78 Philippines Securities and Exchange Commission. 2019. Sustainability Reporting Guidelines for Publicly-Listed Companies. Manila; State Securities Commission of Vietnam. n.d. Environmental and Social Disclosure Guide, Hanoi. https://sseinitiative.org/wp-content/uploads/2014/08/20161212_ES-Disclosure-Guideline- ENGLISH.pdf; Brazilian BM&FBOVESPA, Guia Novo Valor—Sustenabilidad Nas Empresas (2012); Colombian Superintendencia de Sociedades, Resolution 200 (2018); South African Department of Environmental Affairs, National Greenhouse Gas Emission Reporting Regulations (within National Environment Management: Air Quality Act (39/2004) (2017); Egyptian Exchange. 2016. EGX Model Guidance for Reporting on ESG Performance and SGDs. Cairo. https://www. egx.com.eg/getdoc/98b4f610-5544-4f93-a36e-636d3baf8f45/EGX-Model-Guidance-on-ESG_en-11-10-2016.aspx; United Arab Emirates Securities Exchange. n.d. ESG Disclosure Guidance for Listed Companies. Abu Dhabi. 79 Philippines Securities and Exchange Commission. 2019. Sustainability Reporting Guidelines for Publicly-Listed Companies. Manila. 80 Securities and Exchange Board of India. 2021. Business Responsibility and Sustainability Reporting by Listed Entities. https://www.sebi.gov.in/legal/circulars/may- 2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.html. 81 Philippines Securities and Exchange Commission. 2019. Sustainability Reporting Guidelines for Publicly-Listed Companies. Manila. 82 Hanoi Stock Exchange. 2015. Guidelines for Information Disclosure on Securities Market. Hanoi. https://sseinitiative.org/stock-exchange/hnx/ 83 Nigerian Stock Exchange. 2018. Sustainability Disclosure Guidelines. Abuja https://www.incsr.org/wp-content/uploads/2018/12/Sustainability-Disclosure- Guidelines.pdf 18 Explicit sanctioning is also necessary. The Law on Limited Technical quality Liability Companies in Indonesia sets out how failure to and content perform duties in disclosing environmental and social responsibility in annual reports should be sanctioned.84 Certain regulators in developing economies have paved Including such a clause in a core piece of regulation the way for global leadership when it comes to the can be considered a best practice too. The Bangladesh disclosure of nonfinancial information, specifically when Bank also spells out reporting obligations for financial it comes to detailed specifications of reporting through institutions both internally (to their management) and voluntary guidance documents and through building externally (to the Bangladesh Bank). Such an approach 85 capacity. In the majority of cases, these documents can assist in not only creating a reporting obligation, encompass corporate governance codes or stewardship but in assisting reporting entities in setting up the codes and, in some cases, sustainability reporting appropriate internal processes needed for the collection, guidelines. Despite being predominantly voluntary collation, and disclosure of large amounts of relatively measures, this momentum drives technical quality and complex information. content in developing economies. Taxonomies merit a specific mention here. The As previously mentioned, among developing economies, Bangladesh Bank’s Sustainable Finance Policy for Banks and the King IV Corporate Governance Code of South Africa Financial Institutions is worth highlighting as a specific paved the way by making ESG considerations an explicit example of ambitious regulation. The document 86 responsibility of the board of directors.89 In grounding defines sustainable finance, differentiates between a topic-specific issues such as the climate crisis on the sustainable finance taxonomy and green taxonomy, sets agenda of governing bodies, a growing set of guidance out targets as well as ratings and rewards, and outlines documents go beyond outlining good reporting inclusion and exclusion lists for products qualifying practice. Most notably, the King IV Guidance Paper on the as sustainable. Other notable policies, which include Responsibilities of Governing Bodies in Responding to Climate enforcement mechanisms, include Indonesia’s Law on Change outlines a set of actionable principles for boards Limited Liability Companies,87 and China’s Environmental when it comes to tackling climate change.90 The direct Protection Law,88 which sets out enforcement measures for link to this Paper made in the JSE Sustainability/ESG the mismanagement of the environment—however, not Disclosure Guidance shows another element that should for failing to report. be considered: that of connecting different requirements and guidance documents in order to create a harmonious Finally, it should be mentioned that to shift away from system that stakeholders can easily navigate. Connecting the perception that sustainability reporting is for market disclosure with practice also means connecting leaders only, penalizing mechanisms should also focus information needs with impact, which becomes apparent on substandard reporting. This can ensure the broad from such a suite of tools set out by the Institute of information availability needed for decision-makers. Directors in South Africa. 84 Indonesian House of Representatives, Law on Limited Liability Companies (2007). 85 Bangladesh Bank. 2017. Guidelines on Environmental and Social Risk Management (ESRM) for Banks and Financial Institutions in Bangladesh. Dhaka: Bangladesh Bank. 86 Bangladesh Bank. 2020. Sustainable Finance Policy for Banks and Financial Institutions. Dhaka: Bangladesh Bank. https://www.bb.org.bd/mediaroom/circulars/ gbcrd/dec312020sfd05.pdf 87 Indonesian House of Representatives, Law on Limited Liability Companies (2007). 88 Central Government of China, Environmental Protection Law (2014). 89 Institute of Directors, Southern Africa. 2016. King IV Report on Corporate Governance for South Africa. Sandown, Sandton. South Africa. 90 Institute of Directors, Southern Africa. 2021. “King IV Guidance Paper on the Responsibilities of Governing Bodies in Responding to Climate Change.” Sandown, Sandton. South Africa. https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/04630F89-33B7-43E7-82B3-87833D1DC2E3/King_Committee_ Guidance_paper_on_the_responsib.pdf Analysis of Best Practices in Environmental Disclosure Policies 19 Another example in developing economies is Malaysia, state-owned enterprises,93 SMEs,94 and private firms at which has recently updated its Corporate Governance large.95 Such an approach can assist in ensuring quality, Code to reflect ESG considerations in more depth. Its decision-useful reporting by tailoring the requirements to approach is worth quoting verbatim: different types of reporting entities. For example, the code targeting SMEs in Colombia tailors the responsibilities and governance processes of such companies in a Effective board leadership and manner conducive to active involvement of partners and oversight also require the integration shareholders. This includes explicit rules on the processes of the top governing body (for example, voting rights, of sustainability considerations in qualified majorities, and the disclosure of information), corporate strategy, governance, and as well as the responsibilities of administrators within the company (for example, regulatory compliance, decision-making, as sustainability statutory audit, and due diligence). Such a code for SMEs and its underlying environmental, is useful as it is grounded in the governance reality that smaller companies face, while ensuring that they are social as well as governance (ESG) suited to develop processes needed to support eventual issues become increasingly material operations at a larger scale. This in effect can help ground sustainability in decision-making as well as operational to the ability of companies to create processes of firms at an early stage. durable and sustainable value Additionally, as is the case in developed economies, there and maintain confidence of their is a parallel proliferation of both corporate governance stakeholders. 91 and stewardship codes. Notable examples of the latter include the stewardship codes from India96 and Kenya.97 As Similarly, the latest version of Vietnam’s Corporate noted earlier, stewardship codes channel financial flows Governance Code sets out board responsibility regarding and investment in specific directions. For this reason, the (1) monitoring of the effectiveness of the company’s ESG incorporation of ESG factors here carries great potential. policies and practices, (2) ensuring that ESG information is disclosed, and (3) ensuring environmental and social In terms of building capacity, a number of regulators and aspects are incorporated in contractors’ activities.92 stock exchanges provide training for listed companies. This helps not only expand skills and expertise but A further development that underpins technical quality is also position reporting in the sustainability agenda, the differentiation between the types of entity targeted from where it can cascade into managing material by various codes. Examples where a certain degree of environmental issues in a meaningful manner. The key differentiation can be found include codes governing opportunity in providing such trainings—offered by 91 Securities Commission Malaysia, Malaysian Code on Corporate Governance (2021). 92 State Securities Commission of Vietnam, Vietnam Corporate Governance Code of Best Practices (2019). Securities Commission Malaysia, Malaysian Code on Corporate Governance (2021). 93 Egyptian Institute of Directors, Code of Corporate Governance for State-Owned Enterprises in Egypt (2006). 94 Center for International Private Enterprise, Framework Code of Good Corporate Governance for Small and Medium-Size Enterprises (2004). https://ecgi. global/sites/default/files//codes/documents/framework_cg_code_columbia_31may2004_en.pdf 95 Examples include Egyptian Institute of Directors, Code of Corporate Governance for the Private Sector in Egypt (2006); and CONFECAMARAS Colombian Confederation of Chambers of Commerce. 2005. Colombian Guide of Corporate Governance for Closed Societies and Family Firms. Bogotá. https://ecgi.global/code/ colombian-guide-corporate-governance-closed-societies-and-family-firms 96 Securities and Exchange Board of India, Stewardship Code for All Mutual Funds and All Categories of AIFs, in Relation to their Investment in Listed Equities (2019). 97 Private Sector Corporate Governance Trust. 2001. Principles for Corporate Governance in Kenya. Nairobi. https://ecgi.global/download/file/fid/9295 20 exchanges such as the Abu Dhabi Securities Exchange, the by the State Securities Commission provides guidance Dhaka Stock Exchange, or the Colombo Stock Exchange98 on the performance indicators set forth under the —is that they can go hand-in-hand with assisting (new) circular requiring companies to disclose nonfinancial reporters with building the necessary capacity to disclose and sustainability information.101 Similarly, to ease the decision useful information. To this end, international work of reporters, the Philippines SEC has introduced organizations and standard setters are also active in a specific reporting template in its guidelines for listed the field. Notably, the IFC has partnered with the UN companies.102 This body has also recently put forward Sustainable Stock Exchanges initiative and the CDSB to plans to make disclosure requirements mandatory by provide free trainings on climate disclosure to interested 2023.103 Further notable countries that signify this trend stock exchanges. 99 in developing economies include Indonesia, Brazil, China, Peru, Malaysia, Vietnam, and Thailand.104 Innovation As an example, the package of policies aimed at tackling climate change put forward by Chinese regulators has an explicit reporting requirement targeting eight Further specific best practices that standout in major industries. The policy sets out a Carbon Emission their innovative nature include the following. First, Reporting and Inspection and Emission Monitoring Plan the Bangladesh Bank requires the monitoring of based on this disclosed information, ultimately providing environmental and social performance of banks’ clients the basis for a carbon emissions quota allocation by the contracting bank.100 This creates a reporting system.105 The above mentioned recently released obligation between financial institutions, adding to comprehensive policy mandating disclosure from financial the transparency of the industry at large. Second, an institutions by the People’s Bank of China can also be approach growing in popularity (as noted earlier), is mentioned.106 The granularity with which this policy the hand-in-hand approach, which is applied neatly requires disclosure is worthy of attention. by regulators in Vietnam. The reporting guide set out 98 For a complete list of sustainable stock exchanges offering trainings, see Sustainable Stock Exchange Initiative, Stock Exchange Database, https:// sseinitiative.org/exchanges-filter-search. 99 For more information, see Sustainable Stock Exchange Initiative. 2021. “UN SSE, CDSB & IFC to Provide Free Climate Disclosure Training to Exchanges and Their Issuers.” Press Release. June 10, 2021. https://sseinitiative.org/all-news/un-sse-cdsb-ifc-to-provide-free-climate-disclosure-training-to-exchanges-and- their-issuers 100 Bangladesh Bank. 2017. Guidelines on Environmental and Social Risk Management (ESRM) for Banks and Financial Institutions in Bangladesh. Dhaka: Bangladesh Bank. 101 State Securities Commission of Vietnam. n.d. Environmental and Social Disclosure Guide. Hanoi 102 Philippines Securities and Exchange Commission. 2019. Sustainability Reporting Guidelines for Publicly-Listed Companies. Manila. 103 For more information, see Dela Cruz, Anne Ruth. 2021. “SEC to Make Sustainability Reporting Mandatory by 2023.” Business Mirror, August 30, 2021. https:// businessmirror.com.ph/2021/08/30/sec-to-make-sustainability-reporting-mandatory-by-2023. 104 CVM (Brazil), Reference Form (Instruction CVM no. 480/09) (2009); President/Prime Minister Office, Presidential Regulation Republic of Indonesia No. 71/2011 on Green House Gas Inventory (2011); Chinese National Development and Reform Commission, Requirements on Key Enterprises Reporting GHG Emissions (2014); Superintendencia del Mercado de Valores (Peru). 2020. Report on Corporate Sustainability Law. Lima. Bursa Malaysia, Main Market Listing Rules (2015); Philippines Securities and Exchange Commission. 2019. Sustainability Reporting Guidelines for Publicly-Listed Companies. Manila; Hanoi Stock Exchange. 2015. Guidelines for Information Disclosure on Securities Market. Hanoi; Zimbabwe Stock Exchange, Statutory Instrument 134 of 2019. 105 Chinese Ministry of Ecology and Environment of the People's Republic of China. 2019. China’s Policies and Actions for Addressing Climate Change. Beijing. https:// english.mee.gov.cn/Resources/Reports/reports/201912/P020191204495763994956.pdf 106 People's Bank of China. 2021. Guidelines on Environmental Information Disclosure for Financial Institutions. Beijing. Analysis of Best Practices in Environmental Disclosure Policies 21 5. Recommendations on the Process of Developing Policy While admitting to the fact that there is no one-size-fits- regulators in formulating policy indicate that a number of all process to developing policy, the preceding analysis as key steps can be spelled out, which regulators can follow. well as IFC’s multi-decade long experience with assisting These are presented in Figure 5.1. Figure 5.1 Steps to Developing Policy  ormulate relevant regulations and F STEP 1 connect them to reporting.  ormulate key indicators and align them with globally recognized F STEP 2  standards and frameworks. STEP 3 Consult with relevant stakeholders about the indicators. Ensure a monitoring and implementation system is in place for STEP 4 receiving reports and analysing data. STEP 5 Generate reports and publish information. STEP 6 Revisit indicators for updates annually. In STEP 1 of the process, initial regulatory activities should the grounding of disclosure in local contexts. In STEP 4 be connected to reporting. This should be done through a monitoring and implementation system should be mandatory requirements to disclose. Following this, developed to collate reported information and analyze STEP 2 of the process should focus on the formulation findings. As part of STEP 5, regulators should also make of key indicators, and do so by aligning them to globally the collated information available to the general public— recognized disclosure standards and frameworks. This this can assist stakeholders such as investors in making will allow for the comparability and quality of disclosed decisions on where to channel capital for the highest information. In STEP 3 of the process, regulators should impact. Finally, as part of STEP 6, indicators should be consult with relevant stakeholders on the validity and revisited annually to ensure the required information is suitability of the selected indicators. This can allow for timely and relevant. 22 6. Conclusion Considering the analysis presented, a number of ensuring that the structural shifts needed to manage actionable points emerge. Regulators should consider environmental impacts are addressed in a holistic manner. these when developing environmental disclosure The focus expands beyond disclosure by establishing requirements. This is a nonexhaustive list of six a comprehensive view from the boardroom of how a sets of actions, with further guidance available on company operates at all levels to make operational change. what constitutes mature nonfinancial reporting policy.107 We furthermore provide this advice with the To this end, the IFC and CDP are active in building the admission that environmentally focused action alone is capacity of stock exchanges and market regulators, insufficient, and broader social and governance aspects primarily by training them on how to formulate disclosure should also be considered, primarily to avoid potential requirements suitable for decision-makers. As a further step negative externalities. to this environmentally focused analysis, we foresee the opportunity and need to cascade into social questions. We First, we suggest regulators consult broad, global suggest regulators familiarize themselves with the various frameworks to better understand the overall reporting frameworks, their purpose, and their use. They trends in the environmental agenda. We recommend should pay specific attention to the various conceptions assessing how the Paris Agreement, the 2030 Agenda, of materiality, bearing in mind the concept of double and the upcoming Global Biodiversity Framework are materiality, and what this means for the purpose of their applicable in various local jurisdictions and how (financial policy. Furthermore, we suggest including explicit references market) regulators can frame policy within these overall to various frameworks and, if multiple are mentioned, frameworks. In addition, we recommend scoping making the rationale explicit for why these reporting potential linkages to other, already existing regulatory frameworks are chosen and how best to use them. frameworks to see if any type of specific disclosure requirement or data collection process exists. If so, linking Third, questions surrounding compliance are more this to disclosure requirements ensures quick wins. often on the agenda of decision-makers even when codes and requirements are voluntary. This Second, to satisfy the appetite for information, stems most likely from the realization that mitigating double materiality has emerged as a central environmental problems is necessary for financial concept to many policies. This is the best approach stability. The information need for environmental integrity to ensure capital is strategically and structurally shifted and financial stability has opened the door to graduate toward environmentally focused goals. It allows for from voluntary measures to mandatory disclosure reporting entities to map the risks of their operations requirements. For example, the Singapore Stock as well as understand what their external impact is. To Exchange and the Philippines SEC plan to graduate their ensure such a shift, high-quality and timely information voluntary disclosure measures to mandatory reporting is needed, which depends on the capacity of disclosing requirements. Such an approach is useful for easing new entities to gather information, disclose it, and manage reporters into reporting practice. The necessity to act environmental impacts. Such capacity is gradually being rapidly underlines the need for readily available, high- reflected in corporate governance (codes), primarily by quality, decision-useful information. For more information, see CDP. 2021. Shaping High-Quality Mandatory Disclosure. London. CDP. https://cdn.cdp.net/cdp-production/cms/policy_briefings/ 107 documents/000/005/863/original/TCFD_disclosure_report_2021_FINAL.pdf?1631608521. Analysis of Best Practices in Environmental Disclosure Policies 23 For this reason, we recommend incorporating independent (including long-term targets, potential shortcomings, nonconflicting enforcement mechanisms into policy. and integral environmental considerations), not only Regulators should ensure that noncompliance with minimum disclosure. This can be done through training policies carries repercussions and that there are on good reporting practice, for example. On the flip appropriate actors equipped with capacity to monitor side, we also suggest ensuring the information disclosed noncompliance and implement enforcement measures. We contributes to the functioning of markets by internalizing recommend identifying the relevant category of companies potential negative externalities, such as negative to which these rules can apply; starting with the easiest environmental impacts. (listed companies and financial institutions) and working outward from that experience is desirable here. Finally, to operate efficiently, the private sector works with assessments of risks and opportunities. Fourth, the urgency to act on environmental issues Ample studies and reports have shown that the has led to an increasingly active and granular opportunities arising from mitigating environmental approach in the nonfinancial and sustainability problems outweigh the risks of nonaction. As CDP’s reporting policy space. The need to halt biodiversity loss previous reports also indicate, there are plenty of and limit climate change to a 1.5-degree rise have arguably opportunities in greening finance and effective water produced a new type of regulatory setting across the world. governance.108 These opportunities are arguably Financial market regulators are more proactive in drafting abundant in further domains, and early adapter and targeted regulations and driving the nonfinancial and leader positions amplify these opportunities. With (1) a sustainability disclosure space toward mandatory reporting. deeper understanding of what the information needs of decision-makers and investors are, (2) the drafting Accordingly, we suggest ensuring that the quality and of stricter and more granular mandatory reporting content of the information disclosed is appropriate for its requirements, and (3) the adoption of a holistic view on intended use. To this end, we suggest reflecting on who the the environmental integrity of private sector actors, it target audience is for any type of disclosure (for example, becomes a question of willingness to allocate resources investors, public authorities, direct stakeholders, and so that will drive positive change toward mitigating forth). We also recommend balancing the reporting burden environmental problems. for different types of reporting entities (for example, SMEs) and graduating reporting practice over the years (starting To this end we recommend that policy makers ground simple and targeted, eventually expanding in scope and the need for mandatory disclosure requirements by depth). Ensuring that information is disclosed in a timely introducing regulation requiring the disclosure of manner is also of great value here. We suggest, however, nonfinancial and sustainability information. To ease that policy makers innovate and consult broadly where reporters into regular and high-quality reporting practice, possible by, for example, incorporating digital tagging we call for regulators to provide appropriate support and or connecting metrics to initiatives such as the Science guidance, primarily by ensuring that the details of such Based Targets. a requirement are readily accessible. While doing so, we suggest taking sectoral differences into account. In Fifth, linked to innovation, we suggest ensuring the addition to the guidance provided here, regulators can timely incorporation of developments in reporting access the UN SSE’s Securities Regulators Database which frameworks, potentially at the level of metrics provides a list of examples of how securities regulators and targets. We recommend ensuring reporters have are contributing to the achievement of the SDGs and a good understanding of what is best practice reporting enhancing ESG management in their markets. 108 For more information on greening finance, see CDP. 2020. The Time to Green Finance: CDP Financial Services Disclosure Report 2020. London: CDP. https://www. cdp.net/en/research/global-reports/financial-services-disclosure-report-2020. For more information on CDP’s Global Water Report, see CDP. 2020. A Wave of Change: The Role of Companies in Building a Water-Secure World. London: CDP. https://cdn.cdp.net/cdp-production/cms/reports/documents/000/005/577/ original/CDP_Water_analysis_report_2020.pdf?1617987510. 24 Appendix 1. List of Analyzed Policies Country Issuer Year of Name or Region issuance DEVELOPED ECONOMIES Australia Australian Securities Exchange 2019 Corporate Governance Principles and Corporate Governance Council Recommendations, 4th Edition Financial Services Council 2015 ESG Reporting Guide for Australian Companies and Australian Council of (2015) Superannuation Investors Australian Government 2007 National Greenhouse and Energy Reporting Act European Union European Parliament and Council 2014 Directive on Non-Financial Reporting (2014/95/EU) European Commission 2022 Corporate Sustainability Reporting Directive European Parliament and Council 2019 Capital Requirements Directive CRD V 2019/878/EU amending CRD 2013/36/EU European Securities and Market 2019 Guidelines on Disclosure Requirements Applicable Authority to Credit Ratings Include Environmental, Social, and Governance (ESG) Considerations European Commission 2019 European Union Guidelines on Reporting Climate- Related Information European Parliament and Council 2019 Regulation (EU) 2019/2088—Sustainability-Related Disclosures in the Financial Services Sector European Parliament and Council 2019 Regulation (EU) 2019/2089—Low Carbon Benchmark Regulation European Parliament and Council 2017 EU Resolution on Palm Oil and Deforestation European Parliament and Council 2017 EU Shareholder Rights Directive ii Hong Kong Hong Kong Stock Exchange 2020 Leadership Role and Accountability in ESG Hong Kong Securities and Futures 2019 Circular to Management Companies of SFC- Commission Authorized Unit Trusts and Mutual Funds on Green or Environmental, Social, and Governance (ESG) Funds Hong Kong Securities and Futures 2021 Circular to Management Companies of SFC- Commission Authorized Unit Trusts and Mutual Funds—ESG Funds Hong Kong Stock Exchange 2020 Environmental, Social, and Governance (ESG) Reporting Guide—Appendix 27 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Analysis of Best Practices in Environmental Disclosure Policies 25 Country Issuer Year of Name or Region issuance Japan Ministry of Environment 2018 Environmental Reporting Guidelines Ministry of Trade, Economy and 2017 Guidance for Integrated Corporate Disclosure and Industry Company-Investor Dialogues for Collaborative Value Creation Tokyo Stock Exchange 2021 Revised Japanese Corporate Governance Code New Zealand Government of New Zealand 2021 Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill Singapore Monetary Authority of Singapore 2018 Code of Corporate Governance Monetary Authority of Singapore 2020 Practice Guidance Singapore Stock Exchange 2016 Listing Rule 711A United Kingdom Parliament of the United Kingdom 2019 The Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations (2019) Financial Reporting Council 2018 The UK Corporate Governance Code (2018) Financial Reporting Council 2020 The UK Stewardship Code (2020) Parliament of the United Kingdom 2013 The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations (2013) United States Senate of California 2018 California Senate Bill No. 964: Climate-Related Financial Risk State of California 2015 California Transparency in Supply Chains Act NASDAQ 2019 ESG Reporting Guide 2.0—A Support Resource for Companies Securities and Exchange 2010 Guidance Regarding Disclosure Related to Climate Commission Change President of the United States 2021 Executive Order 14030 of May 20, 2021—Climate- Related Financial Risk United States House of 2021 Corporate Governance Improvement and Investor Representatives Protection Act Securities and Exchange 2000 Regulation S-K Commission 26 Country Issuer Year of Name or Region issuance DEVELOPING ECONOMIES Armenia Ministry of Trade and Economic 2010 Code of Corporate Governance Development of the Republic of Armenia Azerbaijan Azerbaijan Economic Development 2010 Azerbaijan Corporate Governance Standards Ministry Bahrain Kingdom of Bahrain, Ministry of 2020 Corporate Governance Code Industry and Commerce Bangladesh Bangladesh Securities and 2018 Corporate Governance Code Exchange Commission Bangladesh Bank 2020 Sustainable Finance Policy for Banks and Financial Institutions Bangladesh Bank 2017 Guidelines on Environmental and Social Risk Management (ESRM) for Banks and Financial Institutions in Bangladesh Bangladesh Bank 2016 Integrated Risk Management Guidelines for Financial Institutions Brazil Brazilian Securities and Exchange 2018 Report or Explain for Sustainable Development Commission Goals (SDG) Brazilian Securities and Exchange 2009 Instruction No. 480/2009 Commission Comitê de Orientação para 2018 CODIM, Pronouncement no. 13, 2012. Divulgação de Informações ao Mercado Securities and Exchange 2014 CVM Instruction 552, item 7.8 Commission Brazil (CVM) Guia Novo Valor—Sustenabilidad 2012 BM&FBOVESPA Nas Empresas Environmental State Agency 2012 Resolution no. 254/2012/V/I Sao Paulo (CETESB) Central Bank of Brazil 2014 Resolution on Socioenvironmental Responsibility Policy No. 4.327 CVM (Financial Reference Form (Instruction CVM 2009 Regulator) no. 480/09) Analysis of Best Practices in Environmental Disclosure Policies 27 Country Issuer Year of Name or Region issuance China China Securities Regulatory 2018 Guidelines for Corporate Governance of Listed Commission Companies in China Central Government 2014 Environmental Protection Law Ministry of Ecology and 2019 China’s Policies and Actions for Addressing Climate Environment of the People's Change (2019) Republic of China Shenzhen Municipality 2020 Green Finance Development Regulations People's Bank of China 2021 Guidelines on Environmental Information Disclosure for Financial Institutions Chinese National Development and 2014 Requirements on Key Enterprises Reporting GHG Reform Commission Emissions Colombia Ministry of Commerce and 2018 Law 1901 for the Creation of BIC societies Superintendence of Societies Ministry of Commerce and 2019 Decree that regulates the creation of BIC societies Superintendence of Societies Superintendencia de Sociedades 2018 Resolution 200 Center for International Private 2004 Framework Code of Good Corporate Governance for Enterprise Small and Medium-Size Enterprises Colombian Confederation of 2009 Colombian Guide of Corporate Governance for Chambers of Commerce Closed Societies and Family Firms Egypt Egyptian Exchange (EGX) 2016 EGX Model Guidance for Reporting on ESG Performance and SGDs Egyptian Institute of Directors 2006 Code of Corporate Governance for State Owned Enterprises in Egypt Egyptian Institute of Directors 2006 Code of Corporate Governance for Private Sector in Egypt Georgia Association of Banks of 2009 Corporate Governance Code for Commercial Banks Georgia India Securities and Exchange Board 2017 Disclosure Requirements for Issuance and Listing of of India Green Debt Securities (CIR/IMD/DF/51/2017) Parliament of India 2013 The Companies Act 2013 Securities and Exchange Board 2018 Listing Obligations and Disclosure Requirements of India Regulations Securities and Exchange Board 2019 Stewardship Code for all Mutual Funds and All of India Categories of AIFs, in Relation to Their Investment in Listed Equities Securities and Exchange Board 2021 Business responsibility and sustainability reporting of India by listed entities 28 Country Issuer Year of Name or Region issuance Indonesia House of Representatives 2007 Law on Limited Liability Companies President/Prime Minister Office 2011 Presidential Regulation Republic of Indonesia No. 71/2011 on Green House Gas Inventory Jamaica Private Sector Organisation of 2016 Corporate Governance Code For Micro, Small, or Jamaica, Corporate Governance Medium-Sized Enterprises Committee Jordan Companies Control Department 2012 Jordanian Corporate Governance Code Kenya Capital Markets Authority 2015 The Code of Corporate Governance Practices for Issuers of Securities to the Public 2015 Private Sector Corporate 2001 Principles for Corporate Governance in Kenya Governance Trust Lebanon The Lebanese Transparency 2009 Corporate Governance Code for Listed Companies Association Malawi National Corporate Governance 2010 The Malawi Code II Review Committee Malaysia Securities Commission Malaysia 2021 Malaysian Code on Corporate Governance Bursa Malaysia 2015 Main Market Listing Rules Amendment Maldives Maldives Capital Market 2014 Corporate Governance Code Development Authority Mongolia Financial Regulatory Commission of 2006 Corporate Governance Code of Mongolia Mongolia Nigeria Financial Reporting Council of 2019 Code of Corporate Governance (2018) Nigeria The Nigerian Stock Exchange 2018 Sustainability Disclosure Guidelines Oman Sultanate of Oman, Capital market 2016 Code of Corporate Governance Authority Pakistan Securities and Exchange 2013 Public Sector Companies (Corporate Governance) Commission of Pakistan Rules Peru Capital Markets Superintendency 2015 Resolution (SMV Nº 033-2015-SMV/01) (SMV) Peruvian Capital Markets 2013 Code of Good Corporate Governance for Peruvian Superintendency Societies SMV 2020 Report on Corporate Sustainability Law Analysis of Best Practices in Environmental Disclosure Policies 29 Country Issuer Year of Name or Region issuance Philippines Central Bank of the Philippines 2020 Sustainable Finance Framework Philippines Securities and Exchange 2019 Revised Corporation Code of the Philippines (2019) Commission Philippines Securities and Exchange 2019 Sustainability Reporting Guidelines for Publicly- Commission Listed Companies South Africa Department of Environmental 2017 National Greenhouse Gas Emission Reporting Affairs regulations (within National Environment Management: Air Quality Act (39/2004) Institute of Directors, Southern 2016 King IV Report on Corporate Governance for South Africa Africa Johannesburg Stock Exchange 2021 Sustainability/ESG Disclosure Guidance Johannesburg Stock Exchange 2021 Climate Disclosure Guidance Thailand Stock Exchange of Thailand 2012 The Principles of Good Corporate Governance for Listed Companies United Arab Abu Dhabi Securities Exchange n.d. ESG Disclosure Guidance for Listed Companies Emirates Vietnam Hanoi Stock Exchange 2015 Guidelines for Information Disclosure on Securities Market State Securities Commission of n.d. Environmental and Social Disclosure Guide Vietnam State Securities Commission of 2019 Vietnam Corporate Governance Code of Best Vietnam (SSC) Practices Zimbabwe Zimbabwe Stock Exchange 2019 Statutory Instrument 134 of 2019 Source: IFC and CDP, January 2022. 30 © 2022 International Finance Corporation. All rights reserved. 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Internet: ifc.org/corporategovernance