Standards related to sustainability and environmental, social and governance (ESG) factors are emerging at almost every level of financial supervision. Jurisdictions at the local, national and international level have proposed and adopted sustainability-related policies at an accelerating pace over the past several years.

Measures like the EU’s Corporate Sustainability Reporting Directive (CSRD) and the reporting standards developed by the International Sustainability Standards Board (ISSB) mean that few investors, no matter where they are domiciled, can afford to ignore these potentially sweeping changes. Companies with significant business, subsidiaries or listings in the EU could be subject to CSRD compliance even if they aren’t headquartered there. Jurisdictions representing 40% of global market capitalization are already working toward adopting or making use of the ISSB standards.

With such step changes in standards — and with potentially more still on the horizon as policymakers digest the outcomes of COP29 — the market is devoting much time and energy toward keeping sustainability strategies compliant and afloat through these uncertain times.

To tackle these issues, S&P Global Sustainable1 and S&P Global Market Intelligence convened a market engagement workshop for 20 leading European and North American banks and asset managers, which collectively represent over $1 trillion in market capitalization and $3 trillion in assets under management. Our aim was to explore their experiences, challenges and strategies for navigating the rapidly evolving regulatory landscape.

We uncovered the following key findings from this roundtable, based on participant feedback that has been aggregated and anonymized.

1. Financial institutions crave harmonization among sustainability frameworks above all. While the discussion affirmed the importance of such policies regardless of where firms are headquartered, the current global patchwork is still overwhelmingly fragmented — underpinning a desire for more harmonization to ease the data collection and reporting burden from market participants.

2. The future for ISSB standards adoption remains uncertain, but regional idiosyncrasies may merit a flexible approach. The ISSB is an example of this splintering of standards. The ISSB’s two standards, IFRS S1 and IFRS S2, were developed to consolidate and standardize global frameworks. However, several jurisdictions are incorporating or partially adopting rather than fully adopting the standards. Based on our discussion, this is contributing to potential delays in business dealings such as project finance transactions. However, financial institutions do acknowledge that regional idiosyncrasies may still merit a more flexible approach for successful implementation across borders.

3. The CSRD requirement for double materiality introduces a degree of subjectivity, which financial institutions are attempting to resolve using established taxonomies and transparent disclosure. The concept of double materiality, a core foundational element of the CSRD, presents a potentially profound shakeup of traditional financial models and prevailing notions of risk, opportunity and value. To reconcile this, many firms are adopting the Sustainability Accounting Standards Board (SASB) materiality framework and overlaying a gap analysis. However, inconsistencies are likely inevitable — possibly undermining efforts to curb market confusion. This only reinforces the need for transparent and evidence-based disclosure.

4. Technology constraints and an integration skills gap are potential challenges to overcome. Financial institutions and corporations are grappling with sustainability regulations that require coordination across teams that may lack experience in compliance controls or regulatory reporting. Many roundtable participants questioned the interoperability of various frameworks and standards for existing workflows, indicating this is not yet clear to the market as firms seek greater efficiencies as they dedicate resources to this work.

5. Information asymmetries, particularly among smaller and privately held companies, could unintentionally stifle investment decision-making in these areas. Regulatory reporting adds pressure to existing challenges around data availability for alternative asset classes like private markets. Corporate sustainability disclosure is scant below a certain market cap, while reporting templates may not account for these inequalities.

6. FIs are jumpstarting compliance before CSRD requirements kick in. Regardless of whether they are subject to the fiscal year 2024 deadline for CSRD reporting, many institutions are acting upon it now. The intricate nature of CSRD is reportedly driving this urgency, coupled with its broad applicability across large swathes of the market — be it companies listed on EU-regulated markets, large EU firms not listed, and even non-EU companies with EU subsidiaries. Many FIs are using all the time available to them — from CSRD’s announcement to its future enforcement — to get up to speed before facing any penalties.

7. Despite these hurdles, support and guidance is available. Where in-house expertise is lacking, investors are looking to leverage external information providers and accounting firms for help — for example, to provide comprehensive data and analytics to support investor analyses or to conduct the double materiality assessment required by CSRD. On the banking side, specialized consultants and other third parties, including information providers, may bring a fresh perspective and set of tools and data to support the integration of new and emerging topics like nature and biodiversity into existing regulatory frameworks.

Overall, the workshop confirmed that sustainability regulation is top of mind across numerous functions in financial institutions. Its effects could reach far beyond traditional reporting roles to business transactions, lending decisions and investment allocations. These mandates could help ease some information challenges pertaining to sustainability risks, opportunities and impacts, and with new ESG directives like the CSRD, there will be an exponential increase in the data available to the market. But of course, as with any step change, a period of adjustment is inevitable — and all the growing pains that come with it.