Heating Up: the SEC Rules on Climate Disclosure

“What gets measured gets managed.” This quote by Peter Drucker also applies the other way around. Failing to measure corporate climate exposure and impact results in a lack of management, or even mismanagement in the face of climate risks and opportunities. Among the wide range of ESG topics that might be relevant information to investors, emissions can be seen as the ‘clearest’ data point to measure. Hence, it is emissions disclosure we must focus on to optimize our investment for positive (financial) impact, according to The Economist. Indeed, the recent Inflation Reduction Act in the US indicates a new momentum for the US pushing ahead on addressing climate change, with subsequent transition risks for companies.

To read the full article, click here.

ESG has the ‘S’ Factor

Amidst all the media focus on climate and environmental concerns, it is easy to overlook another important facet in sustainability – the ‘S’ of ESG. Unlike the Environmental dimension, social impacts are often subjective, and identifying what to measure is a key first step in quantifying a firm’s social impact on the community in which they operate. While social indicators such as diversity ratios, presence of human and labour rights policies, and workplace accident rates have been used by ESG data providers to quantify a company’s social impact, many other possible indicators of a company’s impact on the community still pass by under our radar due to a lack of awareness or understanding about how they can impact society.

One such unknown aspect that can greatly impact society is design. The design of a physical or virtual object or space is traditionally viewed as simply the aesthetic inclination of the designer. However, the design of objects and spaces defines how we interact and engage with our daily lives. At its heart, design is as much a social tool as it is an aesthetic one, where design choices that does not account for disabilities for instance is discriminatory and can be a source of lawsuits. More importantly beyond legal risks, we must be conscious about how we design our society to not only ensure that everyone in our community can participate equally, with comfort and dignity, but also to guide individuals towards more sustainable decisions for themselves and for society.

To read the full article, click here.

Sustainable Finance Regulatory Update: July 2022

As wildfires in the US and rising temperatures in European countries augment the Anthropocene reality, regulators worldwide underscore the responsibility of corporations to mitigate the effects of climate change. Europe’s central bank published results illustrating the capacity, or lack thereof, of banks to verify climate risk stress-testing against existing frameworks. EU’s Platform on Sustainable Finance issued a call for feedback on EU Taxonomy and will soon update the minimum safeguards for upholding governance and human rights principles. Asset managers in the EU will now be accountable for meeting investor ESG expectations under a new MiFID II obligation. In a separate call for attention to biodiversity, TNFD published the second version of its nature-related risk framework. The UK introduced legislation to support the redirecting of capital flows towards green activities. In the Americas, the US Fed released a study on climate-related financial stability risks. Brazil’s judiciary branch set landmark precedent in the region by acknowledging climate rights as human rights. Brazil also identified pension funds as a vehicle for sustainability risk management, issuing guidance for soon to be mandatory materiality assessment for insurers. Asia’s path towards sustainable finance continues with Singapore leading by example. The country’s exchange authority MAS published sustainability reporting guidelines for ESG-labeled funds. In India, the central bank RBI is taking steps to assess the banking sector’s climate resilience. This month’s regulatory roundup indicates continued concerns around sustainability issues extending beyond the ‘E’ in ESG.

Europe
Draft report by the Platform on Sustainable finance on minimum safeguards
On 11 July 2022, the Platform on Sustainable Finance issued a call for feedback on a draft report on minimum safeguards. The minimum safeguards set out in Article 18 of the Taxonomy Regulation require that companies implement procedures to comply with OECD Guidelines for multinational enterprises and the UN guiding principles on business and human rights. The report on minimum safeguards aims to provide advice on how compliance with minimum safeguards could be assessed. The deadline for comments on the draft report is 22 August 2022. Read more.

ECB’s climate stress test exercise results published
Banks must sharpen their focus on climate risk, ECB supervisory stress test shows. The results of the European Central Bank (ECB) climate risk stress test published on 8 July 2022 show that banks do not yet sufficiently incorporate climate risk into their stress-testing frameworks and internal models, despite some progress made since 2020. The results of the first module show that around 60% of banks do not yet have a climate risk stress-testing framework. Similarly, most banks do not include climate risk in their credit risk models, and just 20% consider climate risk as a variable when granting loans. Banks currently fall short of best practices, according to which they should establish climate stress-testing capabilities that include several climate risk transmission channels (e.g., market and credit risks) and portfolios (e.g., corporate and mortgage). Read more.

Share of banks currently including climate risk in their stress test frameworks

ECB (2022 climate risk stress test – Findings on bank’s climate risk stress-testing capabilities), ING

 

New MiFID II obligation requires asset managers to identify client sustainability preferences
A new ESG rule requiring discretionary fund managers to identify clients’ sustainability preferences came into force on August 2. The rule which was introduced as an amendment to the Markets in Financial Instruments Directive (MiFID II) requires asset managers and financial advisers to consider and incorporate the preferences of retail clients. First, the rule creates a redressal mechanism for investors who otherwise would not be able to hold asset managers accountable for low performing ESG funds. Second, it provides clients with three options under its definition of sustainability – an alignment with the EU Taxonomy, percentage investments defined in SFDR and consideration of PAIs. Read more

TNFD releases beta version of nature-related risk framework
TNFD released the second version of its disclosure framework that includes metrics and guidelines for producing nature-positive outcomes. The Taskforce was established in June 2021 to create an integrated nature-related risk management and disclosure framework for companies. Currently, TNFD is developing a science-based approach with measurable objectives by building on feedback from market participants and aligning with standard setters, regulatory bodies, and other policy practitioners. Read more.

United Kingdom
UK Parliament introduces Financial Services and Markets Bill
The UK House of Commons has introduced legislation to implement the outcomes of the Future Regulatory Framework and regulate the financial services sector within the context of an EU-emancipated market. The government seeks to maintain the UK’s position as an international financial hub in a post-Brexit world and encourages the financial services sector to become globally competitive, green, and technology driven to deliver its vision. The omnibus bill also aligns the growth objectives of the financial services sector with net zero emissions targets. If adopted, the net zero principle would be codified in UK environmental law. In the bill, new powers have been delegated to UK authorities – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).FCA and PRA will provide guidance and conduct reviews of regulated entities in the financial services sector. Read more.

Americas
US Federal Reserve released a climate-related financial stability study  

The United States Federal Reserve published a study on financial system vulnerabilities of climate change. In the report, the Fed uses several modeling approaches and literature review of Climate-Related Financial Stability Risks (CRFSRs) to identify and assess vulnerabilities in the United States. A key objective of this report is to illustrate the use of major methodologies to evaluate the potential vulnerabilities of the financial system to climate change. The key findings reveal “thin” CRFSRs data and lack of certainty due to qualitative assessments. The Fed concludes that a single methodology fails to address, in practice, salient challenges such as long-time horizons, incorporating technological change and modeling disruptions to measure economic impacts of climate change. For a comprehensive analysis of CRFSRs the report recommends using several combined methodologies. Read more.

Brazilian Supreme Court recognizes the Paris Agreement as a human rights treaty
Brazil’s judiciary issued a ruling related to a series of climate change litigation cases acknowledging the underuse of resources in the Climate Fund that should be annually allocated. The ruling indicts the Federal Government that is tasked with the allocation of fund resources towards sustainability issues. Read more.

Brazilian regulator issues sustainability requirements guidelines for the insurance sector
The Brazilian Superintendence of Private Insurance has set forth mandatory ESG reporting requirements for the Brazilian insurance sector. The regulation includes guidance for integrating sustainability-related risk management. Upon enforcement, regulated entities including insurance companies and pension funds must prepare a triennial materiality assessment to identify and classify the risks to which entities are exposed. The materiality assessment extends to indirect exposure through product and services. Read more.

Asia
Singapore exchange authority issues guidelines for issuing ESG funds
Singapore financial regulatory authority MAS has declared that any ESG labeled fund will have to provide evidence of compliance in accordance with its recently published reporting and disclosure guidelines. The latest regulation tackles the issue of greenwashing and increases transparency for retail investors. ESG funds will be monitored on an ongoing basis and investors will be required to provide disclosure as the need arises. Funds will have to account for the integration of ESG KPIs in the investment strategy and portfolio construction. Funds that use “sustainable” and “green” as a key or limited aspect of communication must ensure that net assets are invested according to the non-financial investment strategy included in the prospectus. Read more.

India’s Central Bank calls on industry to set green finance targets
The Reserve Bank of India (RBI) has released a discussion paper on Climate Risk and Sustainable Finance and invited comment from regulated entities in the banking sector and relevant stakeholders. The comment period closes by September 30, 2022. In the discussion paper, the RBI assesses the preparedness and resilience of banks in the face of climate risks and environmental risks. The RBI proposes an elaborate strategy or “risk appetite framework’ for assessing climate-related risks which can be implemented in the short, medium, and long-term. Examples of good practices for the integration of climate-related risk indicators include carbon metrics such as carbon intensity and absolute emissions. The proposed strategy, if adopted, would also require banks to publish stress tests and scenario analysis. Read more.

Other News & Resources

  • International Securities Lending Association calls for clarity on ESG collateral rules: Industry body suggests the market would benefit from regulatory certainty on the extent to which asset owners and managers should consider ESG risks when accepting collateral.
  • ICMA issues KPI Registry for sustainability linked bonds: The association published guidelines to clarify targets for SLBs and support the growth of the sustainable bond market.
  • ISSB publishes ‘landmark’ draft sustainability disclosures: The standard-setting body released much awaited draft disclosure framework that could serve as a global baseline for sustainability disclosures.
  • ISSB request for feedback to inform the development of its disclosure for digital reporting: IFRS is consulting on the first two proposed disclosure standards until July 29, 2022.
  • CBI formulates a climate resilience taxonomy: The Climate Bonds Initiative announced its plan to release a ‘climate resilience taxonomy’ once it has revised its methodologies for green bonds, social and sustainability bonds.

ESG Quick Takes 5: All the Problems with ESG Investing

For episode 5 of our ESG Quick Takes podcast, we explore ESG from a capital market perspective.

Guest description:

Mark Zurack teaches investing courses at Columbia Business School, and Cornell University, including ESG investing. Prior to this, Zurack worked at Goldman Sachs for 18 years where he started Goldman’s equity derivatives business and led its international expansion. His capital markets background gives him an interesting take on ESG, which we discuss in this podcast.

 

 

DISCLAIMER

ESG Book is the trading name of Arabesque S-Ray GmbH, UK Branch. Arabesque S-Ray GmbH, UK Branch, registered with Companies House under Company No. FC035689 and UK establishment no. BR020774, and with registered office at Fifth Floor, Jamestown Wharf, 32 Jamestown Road London, NW1 7BY, is the UK branch of Arabesque S-Ray GmbH, a limited liability company organized under the laws of Germany, with registered number HRB 113087 in the commercial register of the court of Frankfurt am Main, and having its seat and head office at Zeppelinallee 15, 60325 Frankfurt am Main, Germany.

NOT AN OFFER – The information on this podcast is provided for information purposes only and does not constitute, and should not be construed as, investment advice nor a recommendation to buy, sell or otherwise transact in any investment. RELIANCE – ESG Book makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and accepts no liability for any loss, of whatever kind, howsoever arising, in relation thereto, and nothing contained herein should be relied upon. CONFIDENTIALITY – This podcast has been prepared on a confidential basis solely for the use and benefit of the recipient. No confidentiality nor privilege is waived nor lost by any error in transmission.  If you are not the intended recipient (or have received this communication in error), you must not read, copy, forward, nor print this communication nor any attachment, use them for any purpose, nor disclose their contents to any other person. VIEWS EXPRESSED – Any views or opinions presented are solely those of the guest speaker, and do not necessarily represent the views or opinions of ESG Book. ENQUIRIES – Any enquiries in respect of this podcast should be addressed to ESG Book or its affiliates.

Machine Learning Models Don’t Work

*Without Good Design.

Machine learning (ML) is a branch of artificial intelligence that uses data and algorithms to imitate human behaviour (Brown, 2021). It is used in a variety of financial applications such as fraud detection, automatic trading, robo-advisors, loan underwriting, and targeted advertising. Machine learning revolutionizes how we invest, trade, advertise, and do business more broadly.

Machine learning also transforms how we conduct research and generate business insights. It offers unprecedented opportunities to use big data to identify patterns and extend our understanding of mechanisms. For example, creditors increasingly use ESG information to assess default risks. Currently, this assessment is predominantly of qualitative nature meaning that the analyst screens available material and incorporates the resulting impression into their assessment. Research involving machine learning could allow us to systematize the interrelations and generate tangible and actionable insights, including quantitative prediction of credit default probability.

A key question that arises upon this new opportunity is how to integrate machine learning in research design. Is it an add-on? Or a replacement? Or does using machine learning in research require a completely new way of designing studies altogether? This article discusses different ways to integrate machine learning into research design and their implication for knowledge generation and product creation. We use ESG and credit default as an illustrative case study. Specifically, we demonstrate the applicability of an ML-driven research design approach to determine the inter-relationships between ESG factors and credit default probability.

To read the full article, click here.

Sustainable Finance Regulatory Update: June 2022

In this month’s regulatory roundup, the EU comes one step closer to finalizing mandatory corporate sustainability disclosure rules and setting quotas for women on corporate boards. The political implications of including certain activities in the EU green taxonomy become apparent,  as EU parliament members seek to rule out nuclear and gas from being classified as “green investment”. The Parliament has also changed its tone with respect to the carbon trading scheme seeking lighter reform. With the proliferation of ESG ratings companies, regulators across Europe are proposing regulation of the ratings market and assessing the implications of variance in ratings methodologies. The UK is accelerating its net-zero vision by accounting for climate risk in pension funds and adding material risk assessment to actuarial standards. At the heels of the SEC’s proposed climate-risk disclosure rules, the CFTC is seeking clarity on the impact of climate risk on derivatives and commodities markets. As we turn to Asia, China has issued ESG disclosure standards for the first time, for which it has released guidance. The journey to sustainable growth around the world is marked by modest reforms that underscore a permanent shakeup in ‘business as usual’.

Europe

Provisional Agreement for EU Sustainability Disclosure Rules

The Council and EU Parliament confirmed a provisional agreement on the Corporate Sustainability Reporting Directive (CSRD). The CSRD will tighten sustainability reporting rules which were first established under the Non-financial Reporting Directive (2014). By law, the EU requires all large companies, listed companies and SMEs to report on the impact of business activities on environment and human rights. Sufficient flexibility baked into the new rules provide for SMEs to be exempt from the application of the directive until 2028. Read more

EU agrees 40% gender quota for corporate boards

The EU has agreed that companies will face mandatory quotas to ensure women have at least 40% of seats on corporate boards. From 30 June 2026, large companies operating in the EU will have to ensure a share of 40% of the “underrepresented sex” – usually women – among non-executive directors. The EU has also set a 33% target for women in all senior roles, including non-executive directors and directors, such as chief executive and chief operating officer. Read more

EU Lawmakers Vote to Keep Nuclear and Gas out of Green Investment Taxonomy

In a statement announcing the committees’ vote on Tuesday, the MEPs while acknowledging the role of nuclear and gas in providing a stable energy supply through the transition to a sustainable economy, clarified that their inclusion in the Taxonomy “do not respect the criteria for environmentally sustainable economic activities.” Read more

EU compromises on green measures including CBAM

The European Parliament has agreed to a compromise package of green measures including some tightening of the EU’s high-profile carbon trading system and a new scheme to penalise import of commodities like cement from countries with lax emissions rules. The packaged includes a revised EU Emissions Trading System and Carbon Border Adjustment Mechanism. Read more

EUROSIF calls for a proportionate regulatory framework for ESG ratings providers

Eurosif released its response to the EU’s consultation on creating an appropriate framework for the regulation of ESG data providers. In the paper, Eurosif suggests that instead of attempting to achieve full comparability of ESG ratings, regulatory regimes should emphasize transparency in methodologies and conflicts of interest. Eurosif estimates that rating methodologies will eventually converge, as standard-setters such as EFRAG and ISSB articulate reporting frameworks for corporates. Read more

ESMA publishes findings from ESG Ratings Call for Evidence

The EU’s securities market regulator shared key findings from its study on ESG ratings providers. According to the study, the structure of the market indicates a high concentration of small EU entities and a few large non-EU providers. Typically, the users of ESG ratings are contracting for these products on an investor-pays basis from more than one provider simultaneously. The rationale for selecting several providers is to expand coverage of assets, geographic area and to have diversified ESG assessments. Read more

French regulator AMF calls for stricter regulation of ESG ratings providers

French stock market regulator, AMF, is also advocating for the regulation of European ESG ratings providers. ESG ratings are becoming widely accepted signals for investors and asset owners seeking to include or exclude companies based on reputation risk. The AMF has acknowledged the current level of variance between ratings methodologies. To solve this, it has suggested a thorough examination of all aspects of ESG ratings and services. The focus of any forthcoming regulation being transparency in company objectives and methodologies. Read more

United Kingdom

UK aligns pension fund metrics with net-zero strategy

The UK government has introduced an initiative that will allow pensioners to see the impact of their investments on climate change mitigation. Pension schemes will now be required to publish climate-risk reports measuring the alignment of investments with UK’s net-zero strategy. The concluded consultation seeks to boost green investments and support transition to a sustainable economy. Read more

UK Financial Reporting Council to require actuaries to include climate and ESG-related risks

In a published consultation, the Financial Reporting Council proposed changes to the technical actuarial standards (TAS 100) that would require practitioners to consider all material risks and factors while conducting actuarial duties. The existing technical standards are embedded in a “principles-based” approach and lend themselves to varied interpretations of non-traditional risk analysis. The FRC plans to release guidance to provide further clarity to practitioners on ESG methodologies and best practices.  Read more

Americas

CFTC releases RFI on climate-related financial risk

The United States Commodities and Futures Trading Commission released a request for information on how climate risk is related to derivatives and underlying commodities markets. THE RFI is intended to inform the CFTC’s next steps in establishing climate-related financial reporting requirements and support feedback on the 2021 Report on Climate-Related Financial Risk from the Financial Stability and Oversight Council. Read more

Asia

China issues first ESG disclosure standard

The China Enterprise Reform and Development Society (CERDS), Ping An Insurance Company of China and dozens of other companies in the country have developed its first environmental, social and governance (ESG) disclosure standards, which come into effect June 1, 2022. The Guidance for Enterprise ESG Disclosure, which was published by CERDS, is based on relevant Chinese laws, regulations and standards while considering China’s context. It includes a corporate disclosure indicator system with three dimensions – environmental, social and governance – and provides a basic framework for their disclosure. Read more

ACRA and SGX set up advisory committee to create roadmap for Singapore’s sustainability reporting

The Accounting and Corporate Regulatory Authority and Singapore’s Exchange Regulator announced a new Sustainability Reporting Advisory Committee to advise on a roadmap for Singapore’s sustainability reporting. The Committee will consider the applicability of international reporting standards in Singapore. SGX introduced mandatory sustainability reporting as of 2016 and will implement climate reporting from 2022. Read more

Other News & Resources

  • International Securities Lending Association calls for clarity on ESG collateral rules: Industry body suggests the market would benefit from regulatory certainty on the extent to which asset owners and managers should consider ESG risks when accepting collateral. The International Securities Lending Association has appealed to regulators for clearer guidance on the extent to which ESG policies should govern securities lending practices. Read more.
  • French President Emmanuel Macron and UN Secretary General’s Special Envoy for Climate Ambition and Solutions Michael R. Bloomberg Announce a Climate Data Steering Committee to advise how to Capture and Create Open, Centralized Climate Data to Accelerate the Transition Towards a Resilient, Net Zero Global Economy. Read more.
  • The Basel Committee on Banking Supervision has released a set of principles for the effective management and supervision of climate-related financial risks. The principles promote good management practices and provide a common baseline for internationally active banks and supervisors, while maintaining sufficient flexibility given the evolving regulatory landscape.
  • Eurosif Report: Eurosif released a report on EU sustainable Finance & SFDR: making the framework fit for purpose. The report provides an overview of challenges faced by market participants applying SFDR provisions and gives recommendations on tackling these challenges. Read more.
  • Free online course: Enhancing Confidence in ESG Information. WBCSD – World Business Council for Sustainable Development and AssuranceMark have teamed up to design a free online course to provide investors with a toolkit they can use to navigate the ESG landscape and demand better quality information. Register here.

ESG Quick Takes 4: Decarbonizing heavy industry

For our first Quick Takes, we look into how we talk about climate change, and how that changed over time.

Guest description:

This week’s guest is Marian Chertow, Professor of Industrial Environmental Management at Yale University. Prior to Yale, Professor Chertow spent ten years in environmental business and state and local government including service as president of a bonding authority that built a billion dollars worth of waste infrastructure. Professor Chertow and her research team are working together with the World Bank on an open data platform to promote opportunities for the reuse of waste material and other resources.

 

 

DISCLAIMER

ESG Book is the trading name of Arabesque S-Ray GmbH, UK Branch. Arabesque S-Ray GmbH, UK Branch, registered with Companies House under Company No. FC035689 and UK establishment no. BR020774, and with registered office at Fifth Floor, Jamestown Wharf, 32 Jamestown Road London, NW1 7BY, is the UK branch of Arabesque S-Ray GmbH, a limited liability company organized under the laws of Germany, with registered number HRB 113087 in the commercial register of the court of Frankfurt am Main, and having its seat and head office at Zeppelinallee 15, 60325 Frankfurt am Main, Germany.

PROFESSIONAL ADVICE – This podcast is provided for general information purposes only and does not constitute professional advice. If professional advice is required, services of a competent professional should be sought. THIRD PARTY INFORMATION – Certain information contained in this document has been obtained from sources outside ESG Book. While such information is believed to be reliable for the purposes used herein, no representations are made as to the accuracy or completeness thereof and none of ESG Book or its affiliates accepts any responsibility for such information. RELIANCE – ESG Book makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and accepts no liability for any loss, of whatever kind, howsoever arising, in relation thereto, and nothing contained herein should be relied upon. VIEWS EXPRESSED – Any views or opinions presented are solely those of the speaker, and do not necessarily represent the views or opinions of ESG Book. ENQUIRIES – Any enquiries in respect of this podcast should be addressed to ESG Book or its affiliates.