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 will not achieve the Paris Agreement's ambition of limiting global warming to well-below 2°C. 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 create significant transition risks and negative financial impacts for portfolio companies and the asset managers invested in them if they do not begin to address these now.

Key regulatory developments in Europe and Asia

New and updated stewardship codes

The Dutch Stewardship Code, developed in 2018 by institutional investor platform Eumedion, came into force in January 2019. 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 KoreaTaiwan and Thailand all having implemented codes 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. 

Most recently, the Council of Experts on the Stewardship Code, established by Japan’s Financial Services Agency, published the second revision of Japan’s Stewardship Code in March 2020, to which 280 institutional investors have signed up. Key changes reflected in the revised code include a focus on sustainability and ESG factors, a recommendation to disclose proxy voting rationales, and clarification on stewardship responsibilities of asset owners. For example, Principle 1 includes explicit guidance for investors to “specify how they take the issues of sustainability into consideration in their policy” and Principle 4 references engagement on sustainability issues.

The Taiwan Stock Exchange also released a revised version of its Stewardship Principles for Institutional Investors in August 2020. Here as well, the revised code includes a focus on sustainability and ESG factors. For instance, Principle 1 advises investors to “integrate environmental, social, and corporate governance (ESG) factors into the investment evaluation process” and Principle 3 recommends to “use ESG factors to monitor, analyze, and evaluate the related risks and opportunities of an investee company.”

The Securities and Exchange Board of India (SEBI) has also recently developed a Stewardship Code for all Mutual Funds and all categories of Alternative Investment Funds, in relation to their investment in listed equities. This code came into effect in April 2020. Of particular interest, Principle 1 advises institutional investors to monitor and engage with investee companies on "material environmental, social, and governance (ESG) opportunities or risks". Principle 3 and 4 recommend institutional investors to "formulate a policy on monitoring" the ESG risks of their investee companies and subsequently "have a clear policy on intervention".

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.


One of the Action Plan’s major developments includes the Taxonomy Regulation which details an EU classification system for environmentally sustainable economic activities. In mid-December 2019, the European Parliament reached an agreement with the Council on the taxonomy’s climate criteria and in June 2020, the Taxonomy Regulation was published in the Official Journal of the European Union. The Taxonomy is a tool which helps investors and companies to make informed investment decisions based on the compatibility of economic activities with the EU taxonomy’s six environmental objectives. 

The Taxonomy Regulation covers six environmental objectives: climate change mitigation, climate change adaptation, sustainable and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. To be deemed environmentally sustainable, an economic activity should meet four conditions: substantial contribution to at least one of the six environmental objectives, do no significant harm to any of the other five environmental objectives, comply with minimum social safeguards, and comply with technical screening criteria. The first Delegated Act of the Taxonomy, covering the climate mitigation and adaptation objectives and describing the related technical screening criteria, should be adopted by January 2021 and enter into application by December 2021. The Delegated Acts regarding the four other environmental objectives should be adopted by the end of 2021 and will apply by the end of 2022. The newly launched Platform on sustainable finance, replacing the Technical Expert Group on Sustainable Finance, will play a key role in advising the Commission on the development of these technical screening criteria for the other four environmental objectives. 

The Taxonomy will also be a crucial guiding light in the development of the EU’s COVID-19 pandemic recovery packages. The parliament’s Environment Committee, in addition to voting against the inclusion of coal, oil and gas from the EU’s €672.5B Recovery and Resilience Facility, is backing the use of the Taxonomy’s conditions, including “do no harm”, when disbursing funds. 

Sustainability benchmarks 

The EC Action Plan also targets to develop climate benchmarks and define ESG disclosure requirements for investment benchmarks. The Technical Expert Group published its final report in September 2019 and a complementary handbook in December 2019. In July 2020, the EC adopted the Delegated Acts, which details minimum technical requirements for EU climate benchmarks. In particular, benchmark administrators must respect these minimum standards when marketing EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks. 


EU rules already require large companies to disclose publicly and regularly on the social, environmental and governance impact of their activities. These disclosures assist investors and other stakeholders to evaluate public-interest companies with more than 500 employees on their ESG performance. Directive 2014/95/EU, or the Non-Financial Reporting Directive (NFRD), will be reviewed at the beginning of 2021, as part of the EU’s strategy to strengthen the foundations for sustainable investment. For instance, large corporates will have to report on the share of their operational expenditure and capital expenditure aligned with the Taxonomy’s criteria. The public consultation process ran from February 2020 until June 2020. 

The EU is also focusing on reinforcing disclosures by financial market participants in order to enhance transparency to end-investors on how financial institutions consider sustainability and identify and manage their sustainability adverse impacts. Under the EU Disclosure regulation 2019/2088 on sustainability-related disclosures in the financial services sector, the European Supervisory Authorities (ESAs) have been mandated to develop Regulatory Technical Standards (RTS) on disclosure of climate, other environmental and social adverse impacts. The application of this Disclosure Regulation and its related RTS is planned to enter into force in March 2021 and should cover disclosure requirements for investors such as: 

  • 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.


Beyond the EC Action Plan, a range of other new regulatory developments linking finance and sustainability have emerged, both at international and regional levels. 

  • The Coalition of Finance Ministers brings together policymakers from 53 countries in leading the global climate response and in securing a just transition towards low-carbon resilient development. The coalition’s finance ministers have signed the Helsinki Principles to demonstrate their commitment to mobilize the financing needed to implement their national climate action plans and develop financial sectors capable of supporting this goal.
  • The International Platform on Sustainable Finance (IPSF) was launched in October 2019 by the European Union and relevant authorities of Argentina, Canada, Chile, China, India, Kenya and Morocco. Since the platform’s launch, Hong Kong, Indonesia, Japan, New Zealand, Norway, Senegal, Singapore and Switzerland have also joined. The IPSF, bringing together policymakers in charge of sustainable finance from its 16 members, works towards scaling up the mobilization of private capital towards environmentally sustainable investments. In October 2020, the IPSF announced the creation of a working group on taxonomies, co-chaired by China and the EU. The working group will focus on comparing existing green taxonomies and developing a Common Ground Taxonomy by mid-2021. 

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).

Additionally in December 2020, the Financial Conduct Authority (FCA) published a Policy Statement requiring all UK premium listed commercial companies to make climate-related disclosures aligned with the recommendations of the TCFD with a “comply or explain” approach, for accounting periods beginning on or after 1 January 2021.

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 July 2020, AMF revised its Position - Recommendation DOC-2020-03 regarding the information to be provided by collective investment schemes incorporating non-financial approaches. AMF clarifies its expectations towards asset management firms to ensure the quality of information provided to investors regarding sustainability or ESG offerings and prevent risks of greenwashing, in particular for retail clients.

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. Additionally, in May 2020, the People’s Bank of China issued a revised “Green Bond Endorsed Project Catalogue” for public consultation. This new catalogue would harmonize standards and practices for green bonds in China, by replacing previous standards adopted by other government agencies. Importantly, the revised catalogue no longer contained references to certain controversial fossil-fuel related activities (including the ‘clean’ utilization of coal).

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 December 2019, Bank Negara Malaysia launched its discussion paper outlining its proposed Climate Change and Principle-based Taxonomy and collected feedback until June 2020. The Taxonomy covers five principles: Climate change mitigation, Climate change adaptation, No significant harm to the environment, Remedial efforts to promote transition, and Prohibited activities.

Additionally, the Bank and Securities Commission Malaysia and Bursa Malaysia launched the Joint Committee on Climate Change (JC3) in September 2019. 19 financial institutions have joined the Committee as members to pursue collaborative actions for building climate resilience within the Malaysia financial sector.

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. Additionally, in December 2020, MAS published its Guidelines on Environmental Risk Management for banks, insurers and asset managers aiming to enhance these financial institutions’ resilience to and management of environmental risk, such as climate change, biodiversity loss, pollution and land use changes.

In October 2020, the Securities and Futures Commission (SFC) launched a consultation paper on the management and disclosure of climate-related risks by fund managers. In addition to highlighting that climate change poses financial risks for businesses and financial institutions, the consultation paper proposes to require SFC licensed fund managers “to take climate-related risks into consideration in their investment and risk management processes as well as to make appropriate disclosures to meet investors’ growing demand for climate risk information and to combat greenwashing.” Additionally, the Green and Sustainable Finance Cross-Agency Steering Group, co-chaired by the Hong Kong Monetary Authority and the SFC, launched in December 2020 their strategic plan to strengthen Hong Kong’s financial ecosystem and support the transition towards a more sustainable future.

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