30 May 2023
Across the globe, multinational and state governments have implemented increasingly stringent sustainability policies. In Europe the EU Corporate Sustainability Reporting Directive (CSRD) sent companies scrambling to align with new sustainability reporting standards. The United States Inflation Reduction Act has mobilized billions of dollars for clean energy projects. In the Asia-Pacific region, several countries have implemented their own reporting criteria, including South Korea’s development of a “K-Taxonomy” to standardise green economic activities.
Increased reporting requirements, green standards and available funding for sustainable developments have particularly impacted the real estate investment sector. To further complicate an already complex web of regulation, each country seems to deploy a different policymaking strategy. The EU has largely adopted a stick approach, implementing regulations that demand compliance and enforce penalties, whereas the US has adopted a carrot approach, encouraging action through subsidies and tax breaks.
What can these different approaches tell us about the current regulatory environment? And what do these differences mean for compliance risk and corporate sustainability strategies?
The European Union
The EU has never been one to shy away from ambitious regulatory provisions and has often been praised for ‘leading by example’ when it comes to climate policies. Most regulatory developments are driven top-down by Brussels policymakers, with resulting directives being transposed into member-state legislation.
Businesses primarily engage with the policymaking process through consultations and Parliament committee hearings. Importantly, however, businesses and other interest groups are not given unadulterated access to policymakers due to strict EU lobbying rules, nor do they seem to hold the same level of influence as the business lobby in the United States. A 2008 study found that most lobbyists achieved a “compromised success” – attaining some of their requests while conceding others. Comparatively, in the US, lobbyists see increased “winner-take-all outcomes”. This phenomenon will be explored further in the subsequent section but highlights an important disparity in how business interests are integrated into policy outcomes.
Perhaps it is this “compromised success” that has led to a regulatory regime defined by minimum standards, mandatory compliance, and frequent revisions. The upcoming revisions to the EU EPBD and ongoing discussion surrounding SFDR’s PAI regime demonstrate this well. Real estate associations and interest groups have made it clear that current Energy Performance Certificate (EPC) requirements are confusing and lack consistency across countries and asset types. EPC requirements are unlikely to be discarded by Brussels, however, groups such as the European Association for Investors in Non-Listed Real Estate (INREV), have made it clear through consultations that the diversity of Europe’s EPC regimes would make compliance with a single European standard nearly impossible. Consequently, Brussels has revisited the role of EPCs across EU regulations.
For businesses with operations in the EU, regulatory compliance should be at the forefront of corporate sustainability strategies. For many, particularly large multinational companies, the inclusion of sustainability concerns within business plans is no longer an option but a requirement.
The United States
In stark contrast to the EU’s seemingly ever-growing docket of sustainability regulations, the climate change discussion at a national level in America remains stunted. Where the EU has widely accepted the necessity of ambitious climate-related action, the debate over the merits of climate policies, and at times, the very existence of climate change, continues to plague progress on sustainable policymaking at the federal level. Moreover, ambitious policymaking is often bottom-up, driven by municipal and state-level policies. Legislation such as New York City’s Local Law 97, which sets emissions limits for large buildings, far surpasses any state or federal level regulations in scope and ambition.
Nevertheless, there have been a few key milestones in national US climate action over the last couple of years. Most notable is the Inflation Reduction Act of 2022 (IRA), which makes the single largest investment in climate action in American history with over $370 billion in allotted investments. While the EU provides several financial incentives, the sole focus on funding mechanisms within the IRA distinguishes it from any European counterparts.
In addition, the United States Securities and Exchange Commission (SEC) announced plans to implement mandatory climate-related disclosures for publicly listed companies. The mandatory reporting on ESG issues, including GHG emissions, would be the first of its kind at a federal level. That said, it is not an act of Congress, but a rule published by a government organisation, and therefore does not face the Congressional legislative process so often defined by partisan deadlock. This is not to say that the rule will not face challenges. The final proposal has already been postponed several times and is facing inevitable legal action from Republican states emboldened by West Virginia v. EPA. A Supreme Court ruling released in October 2022; West Virginia v. EPA restricted the power government agencies have to regulate GHG emissions.
Business interest groups have had a lot to say on both the development of the Inflation Reduction Act and the proposed SEC climate-related disclosure rule. As noted above, businesses play a key role in the development of US policy and rulemaking. The general lack of climate regulations is partly driven by the aforementioned “winner-takes-all” outcomes of the lobbying process. Powerful interest groups, including the oil and gas industry, have historically played a key role in restricting policies that include emissions limits, carbon markets and other compliance measures, pushing for financial incentives and tax breaks instead. Conversely, however, there is general support among investors for the SEC climate disclosure, indicative of a change in how the private sector views climate-related policy.
While businesses operating in the US run a lower risk of non-compliance with sustainability provisions at a federal level, the appetite for the inclusion of climate-related concerns within private governance continues to grow. Even if partisan deadlock continues within federal legislative bodies, investors are likely to increasingly encourage sustainability reporting and SEC climate disclosure rules.
If Europe prefers the stick approach and America the carrot, APAC lands somewhere in the middle. Granted, it is difficult to analyse APAC countries as a homogenous group – with countries with such as Australia, China, and Japan boasting significantly different governance styles – but several trends can be observed, nonetheless.
Similar to the EU, China, Japan, New Zealand and South Korea have all established mandatory carbon markets that restrict the amount of GHG emissions certain industries can emit. China’s national Emission Trading Scheme (ETS), for example, regulates over 2,000 firms in the energy sector with plans to expand to additional markets in the future. The Korean Emissions Trading Scheme boasts the region’s first national and mandatory ETS regulating firms, operating not only in the energy sector but those in industrial, buildings, waste, and transportation industries as well.
Asian ESG markets have also grown in recent years. The Monetary Authority of Singapore has allocated US$2 billion for a green investment program that will provide funding for asset managers driving green development in the region. Likewise, Australia has committed A$25 billion toward its Powering Australia plan, including financial incentives for renewable energy installations and low emissions technologies.
As for green taxonomies and mandatory climate reporting, many APAC countries have implemented similar structures to the EU’s Taxonomy and SFDR. Hong Kong and Taiwan have already mandated non-financial disclosure requirements, with Japan and Singapore announcing similar plans to follow suit. As seen in the US, the initial update in mandatory disclosures was slow in the region as regulators waited and watched the rollout of European frameworks before developing their own.
As a region, APAC is still largely focused on economic development given its composition of some of the world’s largest emerging and established economic powers. Attracting foreign investment remains a priority for many countries in the region. Unlike the EU and US, who enjoy the benefits that their established financial markets provide, key APAC players see ESG as an opportunity to get ahead in a uniquely new space. Leveraged right, investment in ESG can allow relatively smaller economies like Singapore and Hong Kong, to promote growth, attract foreign investment and increase sustainable ind.
Businesses should not forsake this opportunity either. Sustainability is often thought of as burdensome reporting and regulatory requirements. However, engagement in ESG markets can offer significant opportunities as well. In a regulatory environment so dynamic as ESG, staying ahead of policy developments can not only mitigate risk but foster significant reward. The successes and failures of the EU sustainable finance regulations and related national policies will continue to inform adaptation globally, not just in APAC but in North America as well.
How Can Longevity Partners Help You?
Longevity Partners’ Policy & Regulation team tracks these policy developments globally and can support your business in staying up to date on the latest regulatory trends. We offer comprehensive legislation reviews, bespoke policy workshops, and advisory on EU Taxonomy and SFDR compliance. Get in touch today to learn more about how these regulations may impact your business today.
 Please see the Hong Kong Securities & Futures Commission’s Management and Disclosure of Climate-related Risks by Fund Managers and Taiwan’s Financial Supervisory Commission’s Guidelines on Climate-related Financial Disclosures