Regulatory context

RESPOND helps investors to understand how their responsible investment (RI) practices compare to current and upcoming regulations, and how they can be strengthened to ensure alignment with the Sustainable Development Goals (SDGs) and the Paris Agreement.

The pace of regulations is accelerating

Recognising that climate change and natural capital degradation will have impacts on economic growth and financial stability, regulators and policymakers are taking action. As of 2019, the PRI reported that across the world’s 50 largest economies, there have been over 730 hard and soft-law revisions supporting, encouraging or requiring investors to consider long-term value drivers, including ESG factors. Of these revisions, 97% were published after 2000, with more than 80 enacted in 2019 alone. 

Unfortunately, despite this recent momentum current regulations still fail to achieve the well-below 2°C Paris Agreement ambition. As such, the PRI warns that a forceful regulatory response to climate change, within the near term is likely, but is not yet priced into today’s markets; such an “inevitable policy response” would expose portfolio companies to significant transition risks, leaving the asset managers that invest in them at risk of negative financial impacts if they do not begin to address these now.

Key regulatory developments in Europe and Asia

New and updated stewardship codes

In 2018, pension funds, insurers and asset managers in the Netherlands developed the first Dutch Stewardship Code. Of particular interest, principle 2 of the code states that it is critical for asset managers to “consider environmental (including climate change risks and opportunities), social and governance information (including board composition and diversity) when assessing investee companies.”


In 2018, the European Fund and Asset Management Association revised its Stewardship Code to ensure alignment with the revised EU Shareholder Rights Directive. Environmental and social concerns are included in the principles’ scope.

Effective as of 1 January 2020, the new UK Stewardship Code 2020 is a substantial revision to the 2012 code. The updated code sets forth a range of new expectations specific to ESG; for example, Principle 7 asks signatories to “systematically integrate the stewardship of material environmental, social and governance issues, including climate change, into all investment decisions.” 

In Asia, voluntary stewardship codes have been a leading driver of RI, with Hong Kong, Japan, Malaysia, Singapore, South Korea and Taiwan all implementing codes at a rapid pace since 2014. Many of these codes recommend that signatory investors take actions to monitor portfolio companies’ environmental and social performance and engage company management over environmental and social issues. The codes articulate that asset owner signatories should require their external managers to implement them as well. 

Tighter and more forward-looking regulations

While older sustainable finance regulations were somewhat reactive and sporadic, the new generation are more forward-looking and holistic, leading to the establishment of comprehensive national and regional sustainable finance strategies. 

The 2018 European Commission’s (EC) Action Plan on Financing Sustainable Growth is a key example that has been driving rapid regulatory developments with multiple implications for EU-based asset managers and other institutional investors. 
In particular, the plan introduced requirements for institutional investors to disclose:

  • Policies outlining how they integrate sustainability risks into investment decision-making processes;
  • Descriptions of their investments’ impacts on sustainability factors and processes for identifying them and conducting due diligence;
  • Summaries of engagement policies; and
  • Degree of alignment with the Paris Agreement. 

Also as part of the plan, a Technical Expert Group on sustainable finance (TEG), has helped to develop:

  • A classification system for environmentally sustainable economic activities (see the “EU taxonomy” technical report here). In mid-December 2019, the European Parliament reached an agreement with the Council on the taxonomy’s criteria. Once implemented, fund managers and institutional investors should disclose how and to what extent the EU taxonomy criteria are used to determine the environmental sustainability of their investments. Large EU corporates will be expected to disclose information on the proportion of their annual turnover, Capital Expenditure (CapEx) or Operating Expenditure (OpEx), that are aligned with the taxonomy (see article 16a here);
  • An EU Green Bond Standard (see the report here), based on the taxonomy;
  • Methodologies for EU climate benchmarks and disclosures for benchmarks (see the interim report here); and 
  • Guidance to improve corporate disclosure of climate-related information. 

Beyond the EC Action Plan, a range of other new regulatory developments linking finance and sustainability have emerged, both at international and regional.
The Helsinki Principles, established in 2019, demonstrate the commitment of finance ministers from more than 23 countries to mobilise the financing needed to implement their national climate action plans and develop financial sectors capable of supporting this goal. 

National developments in major financial markets include:

The new UK Occupational Pension Schemes (Investment) Regulations, revised and launched by the Department for Work and Pensions (DWP) in September 2018, requires funds to disclose, before October 2019, their policies in relation to financially material considerations. In this regulation, the DWP explicitly defines financially material considerations to include ESG considerations (including, but not limited to, climate change).

In France, the Autorité des Marchés Financiers (AMF) announced in July 2019 the creation of a Climate and Sustainable Finance Commission, which will contribute to the new mechanism for monitoring and evaluating the climate-related commitments of financial institutions while providing technical expertise and a forum for dialogue. 

French regulators are also expanding the scope of new policies beyond climate change, to include a range of natural capital risks. In 2019, the French Parliament amended Article 173 of France’s Energy Transition Law to include biodiversity-related risk.

In 2015, The People’s Bank of China, collaborating with six other agencies, including the China Securities Regulatory Commission (CSRC), issued Guidelines for Establishing the Green Financial System, primarily aimed at financing greener economic activity. This was followed by the issuance of Green Investment Guidelines in 2018 by the Asset Management Association of China (AMAC), under CSRC’s supervision, which encourage institutional investors to assess their assets’ environmental performance and self-report annually on their ESG performance to the AMAC.

In November 2019, Securities Commission Malaysia issued a Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market, which outlines measures needed to expand the issuance of sustainable securities, but also identifies the need for Malaysian asset owners to leverage and learn from leading external asset managers’ expertise, as well as for home-grown asset managers to develop their own RI capabilities. 

In November 2019, the Monetary Authority of Singapore announced a green finance action plan that will include the issuance of environmental risk management guidelines, including for asset managers and a US$2B Green Investments Programme that will award investment mandates to asset managers with demonstrable capabilities in integrating environmental considerations into their investment process. 

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