ESG Policy Digest: July 2024

18th July 2024

Global regulators and standard setters are actively working to unravel the complexities of the ESG ‘alphabet soup’ while addressing the practical challenges related to the quality and credibility of sustainability data.

The Global Reporting Initiative (GRI) is collaborating with EU regulators to clarify how GRI Standards can serve as a foundation for sustainability reporting in the EU. The International Financial Reporting Standards (IFRS) Foundation is committed to fulfilling the promise of the ‘global baseline’ and will consider the importance of transition plan disclosure for investors as part of its two-year work plan. Meanwhile, with regulators looking to determine the credibility of net zero strategies and plans, the International Organization for Standardization (ISO) has offered a solution with an independently verifiable net zero standard set to launch in 2025. And to enrich the reporting toolkit, the Taskforce for Nature-related Financial Disclosures (TNFD) has also provided tailored guidance for eight ‘real economy’ sectors.

In the EU, the spotlight remains on the implementation and transposition of the Corporate Sustainability Reporting Directive (CSRD). The European Securities and Markets Authority (ESMA) has issued guidelines on the enforcement and supervision of CSRD reporting by national competent authorities. In an accompanying Public Statement, ESMA called for transparency on CSRD ‘transition reliefs’ designed to give issuers some leeway due to data limitations. First-time reporting entities are on the lookout for information about all aspects of the CSRD, including double materiality. To address these knowledge gaps, the Authority for Financial Markets (AFM) in Netherlands has articulated a systematic approach to the double materiality process.

In Switzerland, the Federal Council is taking measures to ensure that voting on corporate sustainability reports is binding. The Federal Council has also proposed changes to the Swiss Code of Obligations to ensure consistent sustainability reporting in line with the CSRD and other prominent reporting frameworks. Following a prolonged phase of pushback, the EU has published the Corporate Sustainability Due Diligence Directive (CSDDD) in the Official Journal of the European Union. The CSDDD could however displace or water down an existing German supply chain due diligence law, legal experts warn. And on the topic of greenwashing, the European Supervisory Authorities (ESAs) have highlighted room for improvement and made recommendations to enhance various aspects of the Sustainable Finance Disclosure Regulation (SFDR).

The United States may be a unique case where states such as California exceed the requirements of the federal Securities and Exchange Commission (SEC) Climate Rule. In October 2023, lawmakers in California approved legislation to advance quantitative and qualitative reporting of climate-related risks but have recently proposed amendments to delay the implementation of these rules by two years.

Finally, in Asia-Pacific, Australia dropped plans to introduce differentiated sustainability reporting standards and align more closely with the International Sustainability Standards Board (ISSB) global baseline. Australia’s chief competition regulator has also drafted a guide to inform businesses about legal risks and compliance requirements for sustainability collaborations under competition law.

The updates in this month’s Policy Digest provide a snapshot of key policy priorities for regulators. As elections take place around the world, with uncertain implications for climate and ESG regulation, there is significant work underway to promote globally consistent and harmonised sustainability reporting.

INTERNATIONAL

GRI publishes FAQs on ESRS interoperability and double materiality assessment

The FAQs confirm a high level of compatibility between the GRI Standards and the ESRS. Where possible, the European Financial Reporting Advisory Group (EFRAG) has aligned ESRS disclosure requirements with concepts and definitions from the GRI. To facilitate this transition, interoperability and mapping tools have been published to assist GRI users in preparing for ESRS reporting starting in 2025. The GRI has also launched a new GRI-ESRS Linkage service in collaboration with EFRAG and jointly developed educational resources with a focus on training and capacity building. The CSRD’s double materiality approach requires companies to report on both business risks and broader impacts, allowing the use of equivalent standards like GRI and ISSB, which could help companies meet CSRD requirements and benefit those affected by its extraterritorial reach. Read more

ISSB to consider transition plan disclosure guidance

At London Action Climate Week, the International Financial Reporting Standards (IFRS) Foundation announced a two-year work plan to deliver harmonised corporate sustainability reporting. As the sustainability disclosure landscape evolves through regulation and voluntary initiatives, the IFRS Foundation will play a crucial role in creating standardised approaches and practices for the disclosure of high quality, comparable disclosure information. The standard-setter is exploring additional aspects of disclosure as transition plans become increasingly relevant and decision useful information for investors. Tailored guidance on transition plan disclosure would not impact the structure of the IFRS S2 Climate-related Disclosures but rather enhance the application and use of the standard. Read more

TNFD releases guidance on nature-related reporting for eight sectors

The TNFD released sector-specific guidance, including recommended disclosure metrics, to assist companies and financial institutions with nature-related reporting. Organizations in eight “real economy” sectors—aquaculture, biotechnology and pharmaceuticals, chemicals, electric utilities and power generators, food and agriculture, forestry and paper, metals and mining, and oil and gas—can utilize tailored guidance for nature-related disclosures. TNFD has provided additional guidance for financial institutions, assisting banks, insurers, reinsurers, asset managers, asset owners, and development finance institutions in issuing nature-related disclosures. Read more

ISO to launch Net Zero Standard in 2025

The new Net Zero Standard is expected to launch in November 2025 at the COP30 conference. ISO’s net zero standard will provide ‘clarity, credibility and trust’ to organizations’ targets and strategies to achieve net zero. The process will build upon the Net Zero Guidelines by creating an independently verifiable net zero standard suitable for organizations of all sizes, sectors and geographies. Read more

EUROPE

ESMA releases Guidelines on the Enforcement of Sustainability Information (GLESI) and Public Statement on ESRS application

The purpose of the Guidelines is to establish uniform and robust supervisory approaches on sustainability reporting. National authorities may use these recommendations to align with the Corporate Sustainability Reporting Directive (CSRD) and accompanying ESRS framework as well as the Article 8 of the Taxonomy Regulation. ESMA will continue to monitor the application of sustainability reporting practices and GLESI in 2025. In addition to these Guidelines, ESMA has issued a Public Statement on the first time application of ESRS with the aim to support large issuers progressing through a ‘learning curve’ during the initial reporting period. In the Public Statement, ESMA has also called for transparency on transitional reliefs in CSRD to accommodate issuers who may not meet the data requirements of ESRS. Read more

AFM releases 10 waypoints to clarify CSRD double materiality process

Dutch regulator Authority for Financial Markets (AFM) has published guidance on CSRD double materiality assessment to support companies that will start to report from 2025. The 10 waypoints provide a circular pathway to conduct double materiality analysis emphasising transparency throughout the process that begins with stakeholder engagement, proceeded by due diligence to identify materially relevant sustainability topics. The double materiality concept integrates both financial materiality – how sustainability-related issues affect a company’s financial performance and impact materiality – which emphasises a company’s impact on the environment and the society. Read more

Swiss Federal Council clarifies binding vote on the CSRD

On 29^th May, 2024, the Swedish Parliament voted to adopt a bill to transpose the CSRD into national law. As large Swedish companies prepare to align with the EU wide regulation, the Federal Council in Sweden has clarified, through a new proposal, that the vote to approve sustainability reports at annual general meetings will be binding and not consultative. The new rules would also regulate the quality of sustainability information disclosed by entities by requiring verification from an auditor or ‘conformity assessment body’. Accreditation adds a layer of credibility, mirroring the EU’s limited assurance mandate for CSRD reports. As well, the Federal Council of Switzerland has opened a consultation until October 17, 2024, proposing changes to non-financial reporting obligations under the Swiss Code of Obligations to align with international sustainability standards, including the CSRD, requiring more entities to report on environmental, human rights, and corruption risks, and allowing them to choose between ESRS or equivalent alternatives, with mandatory assurance for reports. Read more

CSDDD published in the Official Journal of the European Union

On 5th July 2024, the Corporate Sustainability Due Diligence Directive (CSDDD) was published in the Official Journal of the EU. This directive is a key piece of legislation setting mandatory obligations for companies to address their negative impacts on human rights and the environment, clearing a major hurdle towards the implementation of the new law. The CSDDD requires companies to prevent and end or mitigate potential or actual harm to human rights and the environment, such as child labour and biodiversity loss. It also requires remediation of actual adverse impact caused. The regulation will apply in stages, depending on a company’s turnover and employee count. In the first stage, companies with over 5000 employees and 1500 million euros turnover will have 3 years to comply with CSDDD. Member States are required to impose penalties for non-compliance, which may include fines of up to 5% of a company’s net turnover. Read more

German supply chain regulation may be replaced early with EU CSDDD

Germany plans to reduce the scope of its national supply chain due diligence legislation (LkSG), decreasing the number of firms impacted by the LkSG from 5200 to fewer than 1000. Replacing the LkSG with the CSDDD could violate EU law as legal experts note provisions of the CSDDD that prohibit lowering existing protections. The CSDDD will be fully effective from 2027 and Member States will have two years from the date of enforcement to transpose the directive into national law. Read more

ESAs propose enhancements to SFDR framework and new ‘transition product’ category

The Joint Statement from the European Supervisory Authorities – the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and ESMA – have recommended enhancements to the Sustainable Finance Disclosure Regulation (SFDR) to improve transparency and investor protection. Key proposals include a categorisation system for financial products, defining “Sustainable” and “Transition Product” categories, with minimum sustainability thresholds. The statement emphasises the need for clearer definitions of sustainable investments under Article 2(17) of the SFDR, urging the EU Commission to align it with the EU Taxonomy. Additionally, it suggests improvements in the disclosure framework for principal adverse impacts, government bonds, and simplification of pre-contractual disclosures. The ESAs also call for restrictions on the use of sustainability-related terms in product naming to combat greenwashing and ensure that product names accurately reflect their sustainability profile. Read more

UNITED STATES

California may delay implementation of climate disclosure rules

On June 28, 2024, the Newsom administration proposed amendments to California’s climate emissions disclosure and financial risk reporting laws, signalling its commitment to address concerns with the current legislation. Key proposed revisions include a two-year delay for the implementation of both SB 253 and SB 261, allowing the California Air Resources Board (CARB) more time to develop regulations; modifications to Scope 3 emissions reporting to allow CARB to set specific disclosure schedules; consolidation of emissions reporting at the parent company level; and granting CARB discretion in contracting with nonprofit reporting organizations. These amendments are still subject to negotiation, with State Senator Scott Wiener opposing the changes. Negotiations are expected to continue through July and possibly into August. Read more

ASIA-PACIFIC

Australia to use ISSB standards as the baseline for sustainability disclosure regime

Australia is shifting its sustainability standards to align more closely with the International Sustainability Standards Board (ISSB) standards, moving beyond a climate-only focus. This change follows significant feedback from the investor community and the financial sector, emphasising the need for comprehensive sustainability reporting. The AASB has indicated plans to adopt IFRS S1 voluntarily as reported by Responsible Investor, however climate disclosures will be mandatory. The reversal of Australia’s decision to deviate from the ISSB standards may be a lesson learned for global regulators tasked with the delicate balancing act between interoperability and meeting local needs. Read more

Australia initiates consultation on draft guide on Sustainability Collaborations

The ACCC’s draft guide on Sustainability Collaborations aims to inform businesses about potential legal risks arising from collaborations to achieve positive environmental outcomes. The Australian Competition & Consumer Commission (ACCC) is the top authority that ensures compliance with the Consumer & Competition Act 2010. Businesses may seek official authorisation from the ACCC to ensure that these agreements are in compliance with competition law. Read more

Other News & Resources

WBCSD publishes report on avoided emissions. Read more
NGFS releases complementary reports on nature-related risks. Read more

*ESG Book manages the world’s largest repository of sustainability reporting provisions with over 2,800 regulations across more than 80 jurisdictions globally. If there is a recent ESG regulatory development we have missed, we would like to hear from you and invite you to contribute below. Click here to access the ESG Regulatory Provisions Contributor Form.

ESG Policy Digest: June 2024

18th June 2024

The June 2024 edition of the Policy Digest explores latest international updates including the International Financial Reporting Standards (IFRS) Foundation’s new Guide to support the jurisdictional adoption and use of the IFRS S1 and S2 standards, and the Global Reporting Initiative’s (GRI) proposed changes to labour and employment standards.

In the European Union, legislation progressed on several fronts with the adoption of the Corporate Sustainability Due Diligence Directive (CSDDD) and Net-Zero Industry Act. ESG disclosure remains a top supervisory priority for EU regulators, who are pivotal in providing entities subject to reporting rules with essential tools for capacity-building and ensuring effective supervision. A recent development in this realm was the European Securities and Markets Authority (ESMA) Final Report on Greenwashing, which presented recommendations aimed at enhancing the supervisory activities of National Competent Authorities (NCAs) and reducing greenwashing risks. In parallel efforts to enhance sustainability reporting, the European Financial Reporting Advisory Group (EFRAG) finalised Materiality Assessment Implementation Guidance (MA IG 1) for the European Sustainability Reporting Standards.

Meanwhile, the UK government confirmed that it will postpone the endorsement of its sustainability reporting framework to Q1 of 2025. Next year, the government will also decide whether to make climate reporting mandatory for listed entities in the UK by 2026.

Our North America update this month features the White House’s new initiative to promote voluntary carbon markets. This measure reflects the Biden administration’s commitment to catylse climate action.

Moving to the Asia-Pacific region, China laid the foundation for ISSB-styled corporate disclosure standards by 2030. India’s Securities and Exchange Board of India (SEBI) proposed updates to its Business Responsibility and Sustainability Reporting (BRSR) Framework by shifting from reasonable assurance to assessment, and in Hong Kong, the International Capital Markets Authority (ICMA) introduced a draft Code of Conduct for ESG ratings and data providers.

Stay informed with these crucial updates and many others that are shaping global sustainability practices today.

International

IFRS Foundation publishes Inaugural Jurisdictional Adoption Guide to support the adoption and use of ISSB standards

The IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and S2 Climate-related Disclosures define the global baseline for sustainability reporting and are gaining traction across global jurisdictions. Ensuring the consistency and comparability of sustainability disclosures is a key priority for regulators, but this must be balanced with national considerations. The IFRS Foundation’s Guide has defined jurisdictional approaches for the adoption or incorporation of the ISSB standards ranging from full transposition to ‘functionally aligned’ outcomes. Along with this, the IFRS Foundation plans to publish ‘high-level jurisdictional profiles’ which will include information on the pathway to adopt or use the standards, existing regulations for sustainability-related disclosures and an up-to-date status on jurisdictional approaches.

GRI updates labour standards for greater workplace transparency and workers’ rights

The Global Reporting Initiative (GRI) recently updated its labour-related standards to enhance how companies report on their impact on workers and increase transparency regarding labour practices and human rights in the workplace. This initiative includes revising standards such as “GRI 402: Labor/Management Relations,” “GRI 401: Employment,” and “GRI 202: Market Presence.” The proposed disclosure standards cover employment factors, including non-standard employment types, data privacy and hiring and turnover metrics. Other revisions relate to employee conditions, policies and practices including remuneration issues, working hours, skill development, retention, gender pay gaps, and social protection. GRI also announced two additional consultations within the next year. These will focus on reporting aspects concerning career development, workers’ rights, and protections, leading to updates across a total of 11 GRI standards.

Final CSDDD agreement reached

The CSDDD – the EU’s supply chain due diligence law – was finally adopted on 24^th May, 2024. The Directive requires companies to prevent and address the risk of adverse impacts on human rights and the environment linked to business activity. The final text incorporates changes to the scope of the regulation and implementation timeline. Large companies (over 5,000 employees and €1,500 million turnover) will have to comply with CSDDD by 2027, followed by medium sized companies (over 3,000 employees and €900 million turnover) by 2028. Companies with 1,000 employees and €450 million turnover will have until 2029 to comply. The regulation is expected to directly impact approximately 5,400 EU companies. It will also affect franchising or licensing deals in the EU as well as non-EU companies.

EU Council adopts Net Zero Industry Act

The European Council has given final approval to the Net Zero Industry Act to scale investments in net-zero technologies. The regulation will simplify the permit granting process for eligible projects and facilitate market access to renewables by implementing sustainability and resilience criteria in public procurement. Additionally, the Act will support carbon capture utilisation and storage projects. The EU is targeting an increase in manufacturing capacity of net-zero technologies to roughly 40% of the EU’s deployment needs.

ESAs jointly publish Final Report to end Greenwashing

The report provides advice on greenwashing risks and calls for the effective supervision of sustainability disclosures. In particular, the text highlights the importance of market participants substantiating sustainability claims clearly and without misleading information. ESAs have emphasised the role of competent authorities in supervising compliance and the need for effective cooperation among authorities to ensure adherence to key legal provisions such as the Taxonomy Regulation, the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD). The report also promotes standardisation and machine-readability of sustainability reports.

EFRAG finalises ESRS Materiality Assessment Implementation Guidance

The implementation guidance IG 1 offers a practical materiality assessment process for organisations and clarifies underlying concepts and their interplay (such as financial and impact materiality) through examples. IG 1 also includes FAQs to facilitate the effective disclosure of sustainability-related impacts, risks and opportunities under ESRS. The final version of IG1 has a new section underscoring the need for transparency in reporting significant issues within subsidiaries. It clarifies that serious problems in a subsidiary, like human rights violations, should be considered important for the whole company.

UK government updates timeline for final sustainability reporting framework

The Department of Business and Trade announced a delay in the creation of the UK Sustainability Reporting Standards (SRS), previously slated for release in July 2024. According to the UK government, the decision to create the standards will be finalised by Q1 of next year. The delayed timeline is to provide businesses, especially first-time reporting entities, additional time to gather input on reporting requirements. The UK’s top watchdog – the Financial Conduct Authority (FCA) – will determine the mandatory application of standards for listed companies. The UK will also consider mandatory climate reporting from 2026, however this will be decided in the second quarter of next year.

White House publishes Fact Sheet on Voluntary Carbon Market Principles

On May 28^th, 2024, the Biden-Harris administration issued a Joint Statement on Voluntary Carbon Markets Joint Policy Statement and Principles. The statement provides an overview of the current state of voluntary carbon markets (VCMs) and their potential. It also outlines voluntary principles that U.S. market participants are encouraged to adopt to support the development and operation of carbon credit markets. The Joint Statement highlights that many crediting methodologies have so far failed to produce the claimed results in decarbonisation. To address these issues, best practices include improved standards, tracking systems, and market infrastructure to enhance credit transparency, quality, and market participation, supported by renewed civil society, corporate, and government efforts.

China set to implement ISSB-styled corporate disclosure standards by 2030

China’s Ministry of Finance launched a consultation on Corporate Sustainability Disclosure Standards: Basic Principles, marking the first step towards establishing an ISSB-based disclosure regime. Feedback and opinions on the draft standards can be submitted up until 24^th June 2024. The draft standards aim to standardise the disclosure of corporate sustainability information by gradually phasing in mandatory reporting for Chinese companies. The Ministry of Finance hopes to develop ‘unified national standards’ including climate standards by 2027 and by 2030 require all listed and non-listed entities and small and medium sized enterprises (SMEs) to adopt the standards.

SEBI proposes changes to the BRSR Framework

In 2021, India’s top financial regulator introduced mandatory sustainability reporting for the top 1,000 listed companies by market capitalisation under the BRSR. SEBI has since released a Consultation Paper on the Recommendations of the Expert Committee for Facilitating Ease of Doing Business with respect to BRSR. The consultation paper summarises key changes including the definition of value chain, a new leadership indicator related to green credits and replacing the term assurance with assessment. By substituting the terms assurance with assessment, SEBI will allow companies to choose between assessment and reasonable assurance for FY2023-2024 disclosures. For reports FY2024 onwards, disclosures shall be subject to assessment. The rationale to require assessment instead of assurance is to alleviate the compliance burden for companies and facilitate ease of doing business.

International Capital Markets Authority (ICMA) publishes draft Hong Kong Code of Conduct for ESG ratings and data providers

A draft code of conduct for ESG ratings and data providers was released on 17^th May, 2024. The voluntary code of conduct (VCOC) is based on the recommendations of the International Organization of Securities Commissions’ (IOSCO) and focuses on comparability and international interoperability. The VCOC contains six principles and follows the IOSCO structure to ensure four key outcomes – good governance, systems and controls, management of conflicts of interest and transparency. Guidance for the practical application and interpretation of each principle ensures that providers have the appropriate policies and procedures in place to ensure high quality and reliability of product offerings. ESG ratings providers will have a 6-month implementation period, while data providers will have 12 months to comply. By signing up, providers will have to make information on their data and ratings methodologies publicly available.

Qatar Central Bank publishes sustainability strategy for the financial sector. Read more
GRI launches XBRL Taxonomy. Read more
National Stock Exchange (NSE) publishes FAQs on BRSR Core. Read more
Network for Greening the Financial System (NGFS): Sustainable and responsible investment in central banks’ portfolio management: Practices and recommendations. Read more

ESG Policy Digest: May 2024

20th May 2024

In this month’s Policy Digest, we observe efforts to enhance interoperability and establish equivalence for sustainability reporting across jurisdictions. The International Financial Reporting Standards (IFRS) Foundation and the European Financial Reporting Advisory Group (EFRAG) released the much-awaited interoperability guidance to help streamline reporting processes for companies applying both the International Sustainability Standards Board (ISSB) standards and the European Sustainability Reporting Standards (ESRS).

In Europe, legislators are in the final stages of implementing the Basel III framework which will enhance the focus of ESG risks in the prudential framework. Following a consultation on the implementation of Sustainable Finance Disclosure Regulation (SFDR), the European Commission released a summary report which revealed ‘no clear preference’ for overhauling the classification system versus maintaining the status quo with minor enhancements to the Article 8 and 9 product categories and criteria. The EU’s top securities markets regulator meanwhile introduced an important means to address greenwashing through guidelines on the proper use of ESG and sustainability-related terms in fund names.

Taking its own measures to protect end-investors from greenwashing risks, the U.K. Financial Conduct Authority (FCA), in a recent consultation, proposed extending the requirements of the Sustainability Disclosure Requirements (SDR) regulation to portfolio management services. Currently the SDR only applies to retail investors. As a follow up to the release of the Anti-Greenwashing Rule (AGR) for all FCA-authorised firms, the financial regulator also released a non-handbook guidance illustrating best practices for product communication.

Across the Atlantic, the U.S. Environmental Protection Agency (EPA), unveiled the updated methane emissions reporting rule to address gaps in reporting and enhance data collection for oil and gas facilities exceeding emissions thresholds. Although a seemingly unremarkable development, this reflects the Inflation Reduction Act’s (IRA) knock-on effect in other areas of federal regulation.

In Asia-Pacific, the Hong Kong Monetary Authority (HKMA) celebrated the launch of the Sustainable Finance Taxonomy whose development was ‘guided by the principles of interoperability, comparability and inclusiveness’. Meanwhile, Australia implemented its own sustainability classifications for certified financial products, setting standards for sustainable investment labels and furthering market transparency. Through these initiatives, regulators around the world are emphasising the urgent imperative for ESG standardisation in the private sector which holds the key to unlock and catalyse financial flows into sustainable and climate-resilient investments.

International

IFRS and EFRAG publish Interoperability guidance

On May 2nd, 2024, the IFRS Foundation and EFRAG jointly published interoperability guidance to help streamline the ISSB and ESRS disclosure process for reporting entities. It aims to minimise the reporting and compliance burden for entities disclosing against both the ISSB and ESRS frameworks. Overall, the guidance illustrates a high degree of alignment between both standards, particularly climate-related disclosure standards. The interoperability guidance can be utilised to better understand where disclosure requirements intersect and are equivalent. While there is greater focus on enabling compliance with climate-reporting requirements across both sets of standards, the guidance also includes information on general reporting requirements, interoperability of materiality, presentation and disclosures for sustainability topics beyond climate. The guidance is an important tool for improving efficiency in sustainability reporting as it allows users to cover as many points of disclosure as possible if at least one set of standards (ESRS or ISSB) has been completed. Read more

Europe

European Parliament set to implement Basel III standards

The European Parliament has finally passed the EU Banking Package with key amendments to the Capital Requirements Regulation (CRR3) and the Capital Requirements Directive (CRD). This marks an important milestone in the full implementation of Basel III reforms which would establish and enhance the assessment of ESG risks in the prudential framework. CRD amendments also require institutions to integrate ESG risks when assessing the value of collateral. Once this starts to apply from January 1, 2025, financial institutions will have to disclose ESG risks including physical risks and transition risks in accordance with technical standards developed by the European Banking Authority (EBA). Banks will also have lower risk weight for exposures to the EU Emissions Trading System (ETS). Read more

SFDR Summary Report indicates split over new category system

The European Commission published a Summary Report highlighting key takeaways from the targeted consultation on the implementation of SFDR initiated on 14 September 2023. The report shows that 80% of respondents agree that SFDR’s objective to enhance transparency through sustainability disclosures is relevant. Additionally, there is consensus on maintaining consistency across key pieces of legislation under the sustainable finance framework including the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) and SFDR. Over half of the respondents support uniform disclosure requirements for all financial products as a means for investors to accurately identify sustainable and unsustainable assets across European markets. However, 77% of respondents expressed limitations in the effectiveness of the framework due to various issues including unclear legal concepts and definitions and lack of disclosure data. The 2023 consultation proposed either converting Article 8 and 9 into formal product categories with clear and concise criteria or creating a new categorisation system that does not incorporate underlying concepts embedded in the SFDR framework. The Summary Report reveals that there is no clear preference between the two options, making it a complex task for regulators and market participants to chart a course of action. Read more

European Securities and Markets Authority (ESMA) releases finalised guidelines on the use of ESG and sustainability-related terms in fund names

The final report addresses greenwashing risks and aims to protect investors from overstated and misleading claims by regulating the use of ESG or sustainability-related terms in fund names. ESMA has retained the minimum 80% threshold for sustainable investment to meet the environmental/ social characteristics or sustainability objective. Key changes include removing the 50% sustainable investment threshold following feedback from stakeholders stating that the definition of sustainable investments under Article 2(17) SFDR is unclear and ambiguous. Instead, ESMA has introduced a commitment to invest meaningfully in sustainable investments. The guidelines further clarify exclusions criteria for different terms. Social and governance terms, along with transition-related terms, are grouped together, meaning funds with those terms in their names must apply Climate-Transition Benchmark (CTB) exclusions (tobacco cultivation and production, controversial weapons related activities, UNGC or OECD violations). The justification made here is that funds with social and governance terms promoting social or governance characteristics could be too restricted in the universe by fossil fuel exclusions. Funds with environmental and sustainability-related terms will, however, be subject to Paris-Aligned Benchmarks (PAB) exclusion criteria. ESMA is giving existing funds a transitional period of 6 months to comply or explain. New funds will have to use the guidelines with immediate effect. Read more

United Kingdom

FCA proposes expanding the scope of the UK SDR to include portfolio management services

Recently, the FCA launched a consultation on a new proposal to extend SDR to portfolio managers. Currently, only retail investors are within the scope of the regulation. The new proposal would extend the requirements to firms that manage a group of investments for consumers, with a focus on wealth management services for individuals and model portfolios for retail investors. The SDR and investment labels were part of a package of measures for asset managers including a naming and marketing rule and the Anti-Greenwashing Rule (AGR) which also applies to all FCA-authorised firms in the UK. Under the AGR, firms must communicate the sustainability characteristics of products and services fairly, clearly and consistently so as not to be misleading. Alongside the new proposal, the FCA also released a nonhandbook guidance on AGR which provides examples of best practices for product communication and emphasises the importance of evidence-based claims. The guidance confirms that the AGR does not supersede existing rules on fund names and that it aims to complement consumer protection laws and guidance from authorities like the Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA). With the release of the guidance, the FCA also confirmed that the AGR will come into effect on 31^st May 2024. Read more

United States

US EPA updates Methane Emissions Reporting Rule

The final rule updates methane emissions reporting requirements for natural gas and petroleum systems under the U.S. Greenhouse Gas Reporting Program. Part of the final rule is the ‘Super-Emitter Program’ which requires owners and operators of facilities to report emissions exceeding 100 kg per hour to help ‘close the gap between observed methane emissions and reported emissions’. The EPA has also updated the Reporting Program by enhancing the collection of data to establish the total volume of pollution caused by the oil and gas industry. The EPA’s enhanced measurements of emissions will serve as a basis for calculating the waste fee for facilities with methane emissions above a certain threshold defined by the Methane Emissions Reduction Program (MERP) created under the Inflation Reduction Act (IRA). Read more

Asia-Pacific

Hong Kong Monetary Authority launches Taxonomy

The Hong Kong Taxonomy will serve as a new classification system for environmentally sustainable economic activities aiming to facilitate green finance flows. It will help guide investors on how to identify and classify activities that can be considered green and avoid investment in activities that have a negative impact. Currently, there are 12 economic activities under 4 sectors – power generation, transportation, construction and water and waste management – within the scope of the Taxonomy. There is also supplemental guidance on using the standardised framework, including thresholds and criteria to be considered eligible under the Taxonomy. The Hong Kong Taxonomy is designed to enable interoperability of global Taxonomies and is compatible with the Common Ground Taxonomy (CGT), EU Taxonomy, ASEAN Taxonomy and the Climate Bonds Taxonomy (CBT) established in Mainland China. In the next iteration of the Taxonomy, regulators plan to include transition activities and additional sectors. Read more

Australia introduces sustainability classifications for certified products

In May 2024, the Responsible Investment Association of Australasia established three fund labels – responsible, sustainable and sustainable plus and includes criteria for each label. The sustainability classification system specifies that firms must align investment activities with the sustainability objective. There is a minimum threshold of 80% sustainable investments in line with the stated objective for single asset portfolios to achieve the ‘sustainable’ label. Whereas multi-asset portfolio must have a minimum of 50% sustainable investments. ‘Sustainable plus’ funds must meet additional requirements and incorporate sustainability objectives as binding criteria in their documentation. Australia is also considering legislation to establish minimum standards for marketing investment products as sustainable. This proposed regime would cover all managed investment and superannuation products marketed to retail clients, aiming to standardize sustainability terminology and require upfront and ongoing disclosure against sustainability criteria. The reform is expected to start in 2024. Read more

Other News & Resources

Federal Reserve Board publishes results of 2023 climate scenario analysis exerc Read more
Japan’s Financial Services Agency (FSA) working on climate scenario analysis in the banking sector. Read more
EFRAG updates ESRS Sector Classification to align with other reporting frameworks such as GRI, SASB. Read more

ESG Policy Digest: April 2024

16th April 2024

Reflecting on headlines from the past month, there was a stark contrast between litigation in the United States aiming to strike down the climate disclosure rule and another ruling from Europe’s top court agreeing with 2,000 Swiss women that governments have human rights obligations to combat the adverse effects of climate change. Against this backdrop, global regulators must steadfastly maintain the founding principles of sustainability regulation.

Despite Europe’s exemplary track record in terms of shaping sustainability disclosure, there remain some cases, such the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), where legislative consensus is hard to reach. However, in March, the directive was revived after legislators reached an agreement on a limited scope that would only affect the largest businesses in Europe. The European Parliament also advanced an EU-wide certification scheme for carbon farming and carbon removal technologies.

Following a request for Technical Advice from the Commission, the European Securities and Markets Authority (ESMA) launched a consultation on transparency in credit ratings methodologies incorporating ESG factors. In France, lawmakers are doubling down on climate priorities by introducing a compulsory shareholder vote on transition plans reported under the Corporate Sustainability Reporting Directive (CSRD). The reporting boundaries for ESRS S1 (subsidiaries) were further defined in April by the European Financial Reporting Advisory Group (EFRAG), while in parallel, EFRAG released amendments to the materiality assessment guidance.

Across the pond, the U.S. Securities and Exchange Commission (SEC) is at the centre of a legal battleground as several Republicans states challenge the climate disclosure rule, consolidating lawsuits in the United States Court of Appeals for the Eight Circuit. In contrast, Canadian regulators are forging ahead as planned with the proposed set of Canadian Sustainability Disclosure Standards (CSDS).

In Asia-Pacific, Japan and China are framing the adoption of international standards for sustainability reporting in a localised context. The Sustainability Standards Board of Japan (SSBJ) has released exposure drafts for the transposition of ISSB-aligned standards with certain jurisdictional exemptions. Meanwhile, China is following the EU’s lead in adopting a double materiality approach for sustainability reporting, as confirmed by the latest guidelines for sustainability reporting released by the Shanghai Stock Exchange. Furthermore, in the banking and financial sector, India’s central bank – the Reserve Bank of India (RBI) – published a draft disclosure framework for reporting climate risks.

Regional updates in Africa and the Middle East this month cover Saudi Arabia’s latest policy tool – the green financing framework – for the efficient allocation of capital towards sustainable investments. In Kenya, the central bank is proposing a series of reforms, including higher capital requirements for banks that lag in terms of managing climate risks. These efforts and many more signify a global push from regulators to contextualise the adoption of international standards, such as the International Financial Reporting Standards (IFRS 1 and 2), to align with national priorities and economic growth objectives.

Europe

EU Council reaches decision on the CSDDD

The latest draft of the EU’s supply chain due diligence law narrows the scope of the regulation to apply to only the largest organisations doing business in Europe, with over 1,000 employees and over 450 million euros in annual turnover. In effect, 70% of companies that were previously covered under the legislation will now be exempt. CSDDD implementation will be staggered over the next few years based on employee and turnover thresholds. In the first phase, companies with over 5,000 employees and a turnover exceeding 1.5 billion Euros must comply within three years. The amended version of the CSDDD also eliminates the need for separate climate transition plans for companies already complying with the CSRD to ensure consistency. The CSDDD will undergo further deliberation in the European Parliament before being enacted into law. A decisive vote is essential to ensure the due diligence law successfully passes and is implemented.

EU Parliament approves ‘world’s first’ certification scheme for high-quality carbon removal

The European Parliament adopted a provisional agreement with Member States for a framework that may be used voluntarily to certify carbon farming and carbon removal technologies. The certification framework outlines qualifying criteria for carbon farming such as restoring forests and soils, avoiding soil emissions and specifies rules for carbon capture and minimum requirements for binding carbon in durable products (35 years). The aim of the regulation is to track compliance with the applicable EU-wide standards, crack down on greenwashing and ensure credibility to the certification process. This voluntary initiative can potentially unlock financing for innovative carbon removal technologies, thereby supporting the growth of a low-carbon economy. The European Commission plans to establish an EU-wide registry in four years to provide greater transparency on certified carbon removals.

ESMA initiates consultation to enhance transparency of ESG factors within credit ratings methodologies

ESMA is consulting on proposed amendments to the Credit Ratings Agencies Regulation (CRAR) following a request for Technical Advice from the European Commission last year. The proposed amendments would require CRAs to disclose ESG factors incorporated in credit rating methodologies. Specifically, CRAs must list quantitative and qualitative ESG factors, where these are considered in the methodology, and provide a rationale for using these factors to determine creditworthiness. Overall, the proposal emphasises transparency by requiring CRAs to publicly disclose the full scope of judgement within methodologies, data sources and other underlying characteristics used in the credit ratings process. The consultation will be open until December 2024.

France tables amendments to generalise ‘Say on Climate’ for companies reporting under CSRD

French legislators have recently put forward two amendments to a bill which would make it mandatory for listed companies reporting under CSRD to submit climate transition strategies to shareholders. Shareholders would receive two resolutions on climate transition strategy and the implementation of climate transition strategy. If either resolution is rejected, it would directly result in a 50% reduction in company director bonuses. The amended version of the bill aims to facilitate dialogue between companies and investors that should be made aware of credible plans and targets for meeting climate commitments.

EFRAG publishes amendments to materiality assessment guidance

EFRAG’s Sustainability Technical Expert Group (TEG) approved the draft Materiality Assessment Implementation Guidance (MAIG) with adjustments, adding new sections and FAQs addressing group and subsidiary considerations. The guidance stresses the need for diverse methodologies in group materiality assessments, indicating aggregation may not fit all sustainability issues. The draft clarifies evidence sourcing and impact assessment methods, notably for environmental concerns. ESRS 2 disclosure requirements on management awareness of material impacts are highlighted. The draft now moves to EFRAG’s Sustainability Reporting Board for final review.

US SEC pauses implementation of climate disclosure rule

After facing several legal challenges from states and business groups, the SEC has voluntarily stayed the adoption of the climate disclosure rule. The Commission acknowledges that lawsuits have created ‘regulatory uncertainty’ for affected companies and therefore plans to resume implementation after establishing the validity of the rule in a court of law. The SEC argues that it has the authority as an independent financial regulator to require the disclosure of investor-useful information. In March, the Commission finalised the much-awaited rule after two years of debate and deliberation. The regulation requires registrants to report greenhouse gas emissions (Scope 1 and 2) and other climate-related financial information. Despite repeatedly facing roadblocks, the rule signifies a significant advancement in reinforcing international norms of sustainability reporting established under the European Sustainability Reporting Standards (ESRS) and the ISSB standards. It also follows California’s example of progressive rulemaking for the disclosure of material climate-related risks. Read more

Canada opens consultation on sustainability disclosure standards adoption

On March 13^th, 2024, the Canadian Sustainability Standards Board CSSB released two exposure drafts: the CSDS 1 General Requirements and CSDS 2 Climate-related Disclosures replicating the structure of the ISSB standards. The CSSB also released further details on additional considerations for the Canadian context. Once finalised, these standards will be voluntary. The CSSB offers temporary relief in multiple ways – first, by suggesting the standards take effect a year later than the ISSB’s (2025 onwards), second – by allowing companies to focus on climate-related disclosures and extending the requirement to furnish details by two years (2026), and lastly, providing an additional year for Scope 3 emissions disclosure.

Japan releases draft ISSB aligned sustainability reporting standards

The SSBJ issued three exposure drafts (EDs) aligned with ISSB sustainability disclosure standards. These drafts incorporate key elements from the IFRS S1 General Requirements and IFRS S2 Climate-related disclosures and offer jurisdiction-specific exemptions. The SSBJ has divided IFRS S1 into two parts: a ‘Universal Sustainability Disclosure Standard’ and a ‘Theme-based Sustainability Disclosure Standard No.1’. The Universal clarifies central concepts embedded in the IFRS framework while Disclosure Standard No.1 contains ‘core’ reporting content in IFRS S1. The third draft, ‘Theme-based Sustainability Disclosure Standard No.2’, focuses on climate-related reporting following ISSB’s IFRS S2 guidelines. The SSBJ has opened consultation on the EDs until July 31st, 2024. These proposed standards build upon Japan’s previous regulatory initiatives to promote and enhance mandatory sustainability reporting over time. The FSA expects to finalise rules by 2025 to align with regional peers like Malaysia, Singapore and Australia in harmonising global sustainability disclosure.

China finalises double materiality guidance as part of listing rules

Chinese stock exchanges have upheld the concept of Double Materiality in their recently released final guidelines, signaling a positive move towards integrating ESG factors into corporate reporting. Key highlights of the guidelines include provisions on stakeholder engagement, with specific articles emphasising engagement protocols, as well as a clear definition of stakeholders encompassing various groups affected by a company’s activities. Notably, the guidelines do not mandate third-party assurance, offering flexibility in reporting mechanisms. Additionally, an Annex provides an index of 21 topics for reference, streamlining reporting processes and ensuring comprehensive coverage of ESG aspects. This development reflects a significant step forward in aligning Chinese corporate reporting practices with global sustainability standards and underscores a growing commitment to transparent and responsible business practices.

India’s central bank releases Disclosure Framework on Climate-related Financial Risks

The Reserve Bank of India (RBI) has incorporated the four thematic TCFD pillars (governance, strategy, risk management, metrics and targets) into the framework and set forth baseline and enhanced disclosure requirements for each pillar. Covered entities can provide information on a voluntary basis relating to policies and procedures for identifying, monitoring and mitigating climate-related financial risks and opportunities. Metrics and targets can also be used to assess exposure to climate risks. This can include Scope 1, 2 and 3 GHG emissions and specific targets to measure alignment with climate commitments. The RBI has specified that the guidelines are applicable to all scheduled commercial banks (excluding local area banks, payments banks and regional rural banks), all Tier-IV Primary (Urban) Co-operative Banks (UCBs), all all-India financial institutions, and all top and upper layer non-banking financial companies.

Saudi Arabia launches green finance framework

Saudi Arabia has become the second country in the region after Oman to publish a sustainability finance framework. The Green Financing Framework focuses on enabling sustainable funding for climate mitigation and adaptation measures. It delineates eight types of projects eligible for funding through green bonds, including renewable energy, energy efficiency, sustainable transport, climate adaptation, carbon capture and storage, green hydrogen, emissions reduction across industries, and sustainable water management practices. Additionally, the framework organises projects across key environmental objectives including sustainable management of natural resources and land use, pollution prevention and control and biodiversity. Two committees in the Ministry of Finance (MoF) will be tasked with the assessment of eligible projects based on the degree of negative or positive impact.

Kenya announces plan to raise capital requirements for banks exposed to climate risks

The Central Bank of Kenya (CBK) is currently working on a policy measure that would penalise banks for poor management of climate risks by levying higher capital requirements. In parallel, the central bank has announced that it will release ISSB aligned standards of reporting for banks. The CBK will release more details on the “second phase of reforms” for the banking and financial sector, which include a Green Taxonomy and other regulatory initiatives to promote financial market stability.

GRI and TNFD announce interoperability guide slated for Q2 2024. Read more
UK Transition Plan Taskforce releases sectoral guides. Read more
UN completes draft report on ESG index and data provider human rights responsibilities. Read more

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The SEC’s Climate Rule*

20th March 2024

On March 21st, 2022, the United States Securities and Exchange Commission (SEC) released a draft rule for the Enhancement and Standardization of Climate-Related Disclosures for Investors. The passing of the SEC climate rule on March 6th, 2024, is a landmark moment in U.S. climate policy and sets a precedent for future legislation on sustainability-related financial reporting in the U.S. But what does this mean for companies and investors?

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ESG Policy Digest: March 2024

14th March 2024

This month’s Policy Digest covers both triumphs and setbacks in the shaping of sustainability reporting standards and regulations. We start with the positive – the International Sustainability Standards Board (ISSB) standards continue to be adopted by countries across the globe. On the back of this policy momentum, the ISSB has released a jurisdictional adoption guide for countries, acknowledging the specificity of use cases and local needs.

In Europe, a make-or-break vote on the EU Corporate Sustainability Due Diligence Directive (CSDDD) was postponed once again. In effect, this means that until Member States reach a legislative consensus, the fate of the EU’s supply chain due diligence law will hang in the balance. By contrast, EU lawmakers made headway on the EU Nature Restoration Law for the restoration of vulnerable ecosystems and struck a deal on a regulation prohibiting products made with forced labour.

In the same month, the European Council and Parliament reached a provisional agreement on the world’s first voluntary framework for the certification of carbon removals and advanced a new sustainable packaging law. Recognizing the gravity of risks associated with environmental harm, Members of European Parliament (MEPs) also approved legislation establishing penalties, including imprisonment and fines, for environmental offences.

Large EU companies are grappling with the implications of sustainability regulation, none as far-reaching as the Corporate Sustainability Reporting Directive (CSRD). With the reporting deadline for CSRD fast approaching, Sweden has proposed a one-year delay for covered companies within its jurisdiction to comply with the regulation. The EU’s collective policy measures have led to increasing scrutiny of a company’s non-financial performance. With regulators taking on enforcement functions, ESG ratings providers (ERPs) have emerged as intermediaries, bridging the gap between companies and regulators by providing third-party opinions on ESG performance. The EU expects to finalise the regulation for the authorisation of ERPs soon. However, questions on the proportionality of compliance burden for small providers remain.

Moving to the United States, the Securities and Exchange Commission (SEC) finally adopted the much-anticipated climate disclosure rule. Under the new rule, Scope 1 and Scope 2 emissions disclosure will be mandatory for large companies. But disclosure requirements of Scope 3 emissions – those generated by supply chains and the use of products and services – were abandoned in the final proposal, raising the question of whether the legislation goes far enough.

Meanwhile, regulators in Asia-Pacific are working to fast-track the implementation of ISSB standards. Singapore confirmed that it will introduce mandatory climate reporting rules from 2025 and Malaysia launched a consultation on ISSB adoption, proposing to start reporting from December 2025. China is also paving the way forward for transparency by mandating climate disclosures for listed companies. Among other regional updates, the final version of the ASEAN Taxonomy (version 2) has taken effect. Finally, the Reserve Bank of India (RBI) set forth requirements for banks to disclose climate-related risks starting in April 2025.

Combined, these developments mark continuity and consistency in the realm of ESG regulation. As seen in this month’s Policy Digest, global regulators are betting big on policies that support a global baseline for sustainability disclosure requirements.

International

International Financial Reporting Standards (IFRS) foundation releases preview of ISSB adoption guide

In February, the IFRS foundation released a preview adoption guide to support jurisdictions integrating and adapting concepts from the ISSB standards into regulatory frameworks. Several countries have already drafted proposals and strategic roadmaps for the adoption of the IFRS S1 General Requirements for the Disclosure of Sustainability-related information and the IFRS S2 Climate-related Disclosures. The forthcoming adoption guide aims to enhance transparency in the ISSB’s view on varied approaches for global ISSB adoption. The IFRS Foundation revealed ‘four pillars’ of proportionality, transition reliefs, phasing-in of requirements and capacity building to create pathways for the consistent application of ISSB-aligned reporting standards across countries. In many countries, a deferral of disclosure rules will allow first-time reporting entities ample time for the assessment and evaluation of financial material topics and ESG performance.

Decisive vote on EU CSDDD still pending

The EU CSDDD has yet again failed to secure a qualified majority as member states remain divided on the scope and obligation of the regulation. The final text of the regulation published on January 30^thstipulates that in-scope companies must incorporate due diligence policies for monitoring, identifying and mitigating adverse impacts in the value chain. In-scope companies are also obligated to end partnerships with companies responsible for adverse impacts that cannot be prevented or ended. Given the increased policy focus on business sustainability across the supply chain, the legislation is likely to remain a key priority for legislators. However, it may take time and political compromise for it to reach the finish line.

EU Parliament adopts Nature Restoration Law

Members of the European Parliament (MEPs) successfully voted to adopt the EU Nature Restoration Law. The new law sets a target for EU countries to restore 30% of covered habitats (including but not limited to forests, grasslands, and wetlands to rivers, lakes, and coral beds) in poor condition by 2030. EU countries will have to monitor progress towards improving the biodiversity of agricultural ecosystems and restore peatlands as a means to reduce emissions in the agricultural sector. These targets may only be suspended in case of exceptional circumstances such as meeting adequate food production requirements.

EU lawmakers advance regulation for sustainable packaging

The European Parliament and Council have reached a provisional agreement on new rules to enhance sustainability in packaging within the EU. The measures aim to reduce, reuse, and recycle packaging, minimise harmful substances, and promote a circular economy. Key aspects include targets for packaging reduction, bans on certain single-use plastics, and the prohibition of “forever chemicals” in food contact packaging. The agreement also encourages the use of reusable packaging, sets minimum recycled content targets, and mandates better waste collection and recycling practices. The agreement must be formally approved before implementation.

EU to enforce ban on products made with forced labour

The European Parliament and Council have reached a provisional agreement on a regulation that would ban products in the EU market made with forced labour. The regulation establishes a framework for investigating human rights violations across the supply chain. Once a company is found in violation of the regulation, the export and import of those products made with forced labour shall be suspended at the EU’s borders and the company will also be forced to withdraw goods that have already entered the EU market. Furthermore, the Internal Market and International Trade Committees are proposing that reintroduction of previously banned goods to the market would necessitate corrective actions. MEPs have called for the establishment of a list identifying high-risk regions and sectors, and in such cases, the burden to prove compliance with international human rights standards would fall on companies.

EU Council and Parliament reach provisional agreement certification scheme for high-quality carbon removals

The framework may be used voluntarily for certifying carbon farming and carbon removal technologies. This certification framework outlines qualifying criteria for carbon farming such as restoring forests and soils, avoiding soil emissions, rewetting peatlands and efficient farming practices. It also specifies rules for carbon capture and minimum requirements for binding carbon in durable products (35 years). The aim of the regulation is to monitor and measures compliance with EU-wide standards, crack down on greenwashing and ensure credibility to the certification process. The Commision has stated that an EU registry will be established in four years to provide greater transparency on certified carbon removals. This initiative will help unlock financing for innovative carbon removal technologies, thereby supporting the growth of a low-carbon economy.

EU to impose environmental crimes, fines and penalties

MEPs voted to adopt new rules on environmental crimes and sanctions. This includes an updated list of ‘qualified offences’ including illegal timber trade and depletion of water resources. Depending on the severity of environmental harm, offenders may face fines, imprisonment or be required to reinstate the affected environment. The regulation provides that companies may be fined up to 5% of their annual turnover or up to 40 million euro depending on the nature of the crime.

EU ESG Ratings Regulation on the horizon with exemptions for small providers

The EU Parliament and member states reached an agreement last month for the authorisation and supervision of ESG ratings providers (ERPs) by the European Securities and Markets Authority (ESMA). The new rules seek to address deficiencies in the operations of ESG ratings providers and enhance transparency around methodologies for sustainability ratings and scores. Regulators have included measures to prevent potential conflicts of interest under the new rules. The latest agreement clarifies that smaller providers will be subject to a lighter touch, optional registration regime of three years for smaller providers. Providers that choose to comply must adhere to general organisational and governance principles, as well as transparency requirements with regard to ratings users. ESMA is authorised to conduct site inspections, investigations and request information at will. Once the temporary exemption is lifted, smaller providers will be within full scope of the regulation and must pay full supervisory fees to comply.

Sweden proposes delay to CSRD implementation

By design, the European Union’s landmark sustainability reporting rule – the Corporate Sustainability Reporting Directive – requires Member States to transpose the directive into national law by July 6^th 2024. The Swedish government has however raised concerns about lack of preparedness for full scale reporting in the upcoming financial year and accordingly proposed a deferred timeline for the adoption of CSRD. The proposal submitted to the Swedish Council on Legislation suggests that listed companies with more than 500 employees should begin following reporting regulations from the fiscal year starting after June 2024. This differs from the EU directive, meaning Swedish companies under the CSRD would start reporting from FY 2025, instead of FY 2024 as required by the EU. If approved, large Swedish companies within scope of the CSRD will lag in sustainability reporting compared to other EU companies.

US SEC adopts long-awaited corporate climate disclosure rule

The United States Securities and Exchange Commission (SEC) recently adopted a regulation mandating climate-related financial disclosures for public companies, aiming to provide investors with decision-useful information to assess climate change risks in their portfolios. This regulation, which follows a protracted rulemaking process, sets a precedent for sustainability-related financial reporting legislation in the U.S. In 2023, California enacted two climate disclosure bills, surpassing the SEC in some respects, notably requiring Scope 3 emissions reporting. Despite controversy and delays, the SEC rule will encourage companies to integrate climate considerations into their strategies and aid investors in making well-informed decisions based on the sustainability characteristics of their assets. However, challenges remain, such as potential obstacles to effective enforcement and concerns over the limited scope of disclosed information. Ultimately, this regulatory push signals a significant step towards enhancing transparency and comparability in climate-related financial reporting, aligning with broader efforts towards convergence of global climate reporting standards.

Singapore switches from ‘comply or explain’ to mandatory climate reporting in 2025

The Accounting and Corporate Regulatory Authority (ACRA) and the Singapore Exchange Regulation (SGX RegCo) released details on the adoption of mandatory climate-related financial disclosures in accordance with the ISSB standards. Based on feedback from the initial consultation, Singapore will introduce a phased approach for the implementation of climate-related disclosures (CRD). Large listed companies will be the first group obligated to report Scope 1 and 2 emissions from FY 2025 and Scope 3 emissions in FY 2026. Mandatory climate reporting (Scope 1 and 2) will take effect in FY 2027 for large non-listed companies and Scope 3 data must be provided by non-listed entities by FY 2029 at the earliest. The regulatory bodies have defined large non-listed companies as entities with minimum annual revenues of SG $1 billion and assets of at least SG$500 million. The timeline also provisions for listed and non-listed entities to obtain limited assurance for Scope 1 and 2 emissions by 2027. Singapore’s CRD notably provides exemptions for large non-listed companies with parent companies reporting against ISSB, ESRS and other national ESG disclosure rules, while those following recognized reporting frameworks like Global Reporting Initiative (GRI) and TCFD will receive transitional relief.

Australian companies advocate for one year delay to mandatory climate reporting

In a recent press release, the Business Council of Australia (BCA) voiced concerns over the expedited implementation of a new law mandating climate-related reporting. Australia’s Treasury released draft legislation earlier this year requiring large companies that meet size, revenue and assets thresholds to report climate-related risks and opportunities and GHG emissions across the value chain. While agreeing with the necessity of climate-related financial disclosures, the BCA has requested additional time to develop skills and capabilities for comprehensive sustainability reporting. The BCA has also called for alignment with international standards and extended liability safe harbors until 2030 to keep climate litigation at bay until auditing requirements take effect.

Malaysia launches consultation on ISSB adoption

The consultation highlights the Malaysian context where alignment with ISSB standards is critical for an ‘export-oriented country that is intricately integrated into global supply chains’. The Advisory Committee on Sustainability Reporting (ACSR) under the authority of the Malaysian Securities Commission (SC) is seeking feedback on the use and application of IFRS S1 and IFRS S2 standards, with transition reliefs as a requirement. The Committee is also weighing its approach in relation to a sustainability assurance framework. Malaysia announced its intent to incorporate ISSB standards into its National Sustainability Reporting Framework last year. The Consultation paper aims to build on existing sustainability reporting requirements and proposes adoption of IFRS S2 with reliefs and IFRS S1 with reliefs for Main Market listed issuers by 2025 and 2026 respectively. The consultation will close on 21^st March 2024.

Chinese Stock Exchanges Announce Mandatory Rules

The Shanghai Stock Exchange, Beijing Stock Exchange and Shenzhen Stock Exchange announced that they will enforce climate disclosure rules for listed companies starting in 2026. Several countries in the region have endorsed convergence with the ISSB standards that takes on a financial materiality approach for the assessment of material risks. According to recent reports, China may go one step further by adopting a double materiality approach for sustainability reporting. This process would mirror the European regulation – CSRD’s – double materiality approach for identifying both impacts of business activities on the environment as well as risks posed by environmental factors on the business. Although the regulations contain provisions limiting the applicability of reporting requirements for listed companies, the disclosures have the potential to capture critical climate-related information including Scope 1 and 2 emissions.

Reserve Bank of India (RBI) releases draft disclosure framework for climate-related financial risks

The RBI has released a draft disclosure framework aimed at addressing climate-related financial risks for regulated entities (REs). The framework establishes baseline disclosure requirements across four pillars – Governance, Strategy, Risk Management and Metrics and Targets – in line with TCFD. Scheduled commercial banks, financial institutions, and larger non-banking financial companies (NBFCs) will need to disclose this information starting from FY 2026, with specific metrics and targets required by fiscal year 2028. The RBI emphasizes the importance of consistent and comparable disclosures to prevent mispricing of assets and misallocation of capital due to inadequate information about climate-related financial risks. The draft framework is open for public comments until April 30.

ASEAN Taxonomy Version 2 takes effect

In 2023, the Association of Southeast Asian Nations (ASEAN) Taxonomy Board (ATB) released the final version ASEAN Taxonomy for Sustainable Finance (Version 2), demonstrating Asia’s commitment to meeting the Paris Agreement commitments. Similar to the EU Taxonomy Regulation, the ASEAN Taxonomy aims to standardize the classification of sustainable activities and assets to provide a “common language” for assessing a company’s sustainability. Version 2 includes advanced assessment methodologies, technical screening criteria, and science-based thresholds to classify activities. The ASEAN Taxonomy’s third Essential Criteria now includes social aspects, alongside “Do No Significant Harm” and “Remedial Measures to Transition.” After receiving feedback from member states and multiple stakeholders, the ATB has released the final version of the Taxonomy. This will serve as voluntary guidance for member states who wish to follow one of two assessment approaches – the Foundation Framework (FF) or the Plus Standard (traffic-light classification system for green and amber activities).

EFRAG announces public consultation on draft XBRL Taxonomy for ESRS Set 1. Read more
Hong Kong Monetary Authority (HKMA) to launch physical risk assessment platform. Read more
UNPRI introduces ‘Progression Pathways’ to support responsible investment practices. Read more
UNPRI unveils 2030 EU Policy Roadmap. Read more
SGX Regco consultation seeks feedback on mandatory sustainability reporting. Read more

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ESG Policy Digest: February 2024

12th February 2024

As organizations gear up for a fresh reporting year, regulators and standard-setting bodies are actively working to provide enhanced guidelines, with the aim of facilitating the disclosure of usable sustainability information.

Early this year, the Global Reporting Iniative (GRI) announced a series of updates including a new Biodiversity Standard, Mining Sector Standard and interoperability considerations for GHG emissions for companies applying GRI and ISSB standards. These initiatives aim to ease the reporting burden for entities and offer comprehensive guidance to improve the availability of consistent and comparable sustainability information. Once the reporting process is complete, auditors and experts in the field are tasked with verifying the credibility of sustainability information, which presents its own set of ethical challenges. Recognizing this, the International Ethics Standards Board for Accountants (IESBA) released Exposure Drafts on global standards for ethical considerations in sustainability reporting and assurance.

Moving to EU news, regulators maintained the ambitious policy momentum in the ESG realm. On 5^th February, the EU Council and Parliament reached a provisional agreement on an ESG ratings regulation, creating a lighter-touch regime for small providers. In the banking and financial services sector, the EBA launched a consultation on draft guidelines on the management of ESG risks for the active supervision and management of risks as a measure of resilience.

Building on previous efforts, the European Financial Reporting and Advisory Group (EFRAG) also released exposure drafts to facilitate the implementation of a simplified standard for listed SMEs and non-listed SMEs. Separately, EU lawmakers announced a delay in the adoption of sector-specific standards for the implementation of the European Sustainability Reporting Standards (ESRS), from 2024 to 2026. Members of the European Parliament (MEPs), as evidenced by the approval of the Greenwashing Directive on January 17, 2024. We observe that EU regulators have so far exhibited a high standard for establishing a rules-based system to efficiently allocate capital towards sustainable economic activities. Recently, the Platform on Sustainable Finance’s published a- ‘compendium of market practice’ – which underscored the legitimacy of the EU sustainable finance framework.

Sustainability regulation can progress on several fronts, including the enhancement of existing rules. We see this in the UK, with the Financial Reporting Council (FRC) taking measures to enhance existing ESG reporting rules by updating its Corporate Governance Code for listed companies. In North America, Canadian regulators announced the next steps towards the adoption of localized ISSB standards.

In Asia-Pacific, we examine a range of policy measures supporting alignment with international standards and rules. Australia’s government is consulting on mandatory climate-related reporting standards which would be consistent with the IFRS S2 Climate-related Disclosures. In Hong Kong, the Green and Sustainable Finance Cross-Agency Steering Group announced plans to further sustainable finance initiatives this year and revealed a roadmap for the adoption of IFRS Sustainability Disclosure Standards that is in the works.

This month’s ESG Policy Digest highlights regulators’ efforts to demystify and streamline the sustainability reporting process, particularly for first-time reporting entities, while also working towards establishing best practices for entities already engaged in ongoing reporting. Collaborative initiatives, such as the one between GRI and ISSB highlight the need for standard-setters to streamline reporting criteria. The global policy landscape continues to evolve, with regulators exemplifying a broader trend towards alignment with international standards and model ESG reporting regulations.

International

IFRS GRI publish GHG Emissions Reporting Guidelines

In a new joint publication, the IFRS Foundation and GRI have outlined interoperability considerations for companies disclosing Scope 1, 2 and 3 GHG emissions using GRI and ISSB standards. The analysis includes a mapping table with a comprehensive comparison of GHG emissions metrics, illustrating a high degree of alignment between the two disclosure frameworks. These insights can enhance reporting efficiency for companies by identifying cross-cutting requirements between GRI: 305 Emissions and IFRS S2 Climate-related Disclosures.

GRI launches new Biodiversity 2024 Standard

On 24th January, GRI launched a revised version of GRI 304: Biodiversity 2016 which aligns with international best practices and key intergovernmental instruments in biodiversity. GRI notes that the significance of monitoring, assessing and disclosing biodiversity-related risks was underscored by the adoption of the Kunming-Montreal Global Biodiversity in 2022. The new GRI 101: Biodiversity 2024 differs in its scope from GRI 304, covering new and complementary disclosure requirements such as supply chain, direct drivers of biodiversity loss, location-specific information. Overall, the standard emphasizes site-level reporting and supports alignment with TNFD and the UN Convention on Biological Diversity. GRI 101: 2024 was launched against the backdrop of increasing focus on nature-related financial disclosures. It will come into effect on January 1st 2026, however organizations can adopt it earlier. Companies can provide information on relevant biodiversity information on a voluntary basis as GRI has not established baseline disclosure requirements.

GRI launches sector-specific mining standard

The GRI Mining sector program introduces standards for 40 sectors, emphasizing those with major impacts, including site-specific disclosures for biodiversity, waste, and water. It recommends gender-sensitive human rights due diligence, sector-specific health and safety measures, and community engagement, including seeking consent from Indigenous Peoples. Detailed disclosures are required for involuntary resettlement and artisanal mining impacts on the environment and communities.

IESBA initiates consultation on ethics standards to enhance sustainability reporting

The International Ethics Standards Board for Accountants (IESBA) initiated a public consultation on two Exposure Drafts (EDs) outlining global standards on ethical considerations in sustainability reporting and assurance. As reporting entities prepare to comply with global sustainability disclosure regulations, these drafts seek to consider the ethical matrix within which the reporting process is embedded. One of the drafts focuses on International Ethics Standards for sustainability assurance and the other addresses the use of external experts. With increasing demand for sustainability information across various sectors, the consultation provides a feedback loop for key actors in the sustainability reporting ecosystem, including regulators, investors and accountants. The IESBA encourages feedback by May 10, 2024, for the Sustainability Assurance ED and by April 30, 2024, for the External Expert ED. This initiative is part of a broader push for the robust implementation of sustainability rules by regulators and standard-setters alike. So far, it has received support from the International Organization of Securities Commissions (IOSCO) – a leading organization in the global financial regulatory landscape.

EU Council and Parliament reach agreement on ESG ratings regulation

On 5 February 2024, the Council and Parliament reached a provisional agreement on a regulation for the oversight of ESG ratings providers. The purpose of the regulation is to increase transparency in ratings and scoring methodologies, verify integrity in operations of providers and prevent potential conflicts of interest. As the ESG reporting landscape matures, European regulators aim to underscore the importance of investor confidence in ESG ratings to scale sustainable finance and transition initiatives in the EU. The provisional agreement clarifies which ESG ratings and products fall under the scope of the regulation and explains exemptions for authorization by the European Securities and Markets Authority (ESMA). As the regulation focuses largely on the supervision of EU-based providers, the agreement also looks at territorial scope and what constitutes operating in the EU. In parallel, the Council and Parliament have added conditions for the recognition of non-EU providers. The agreement goes a step further by incorporating amendments from the Sustainable Finance Disclosure Regulation (SFDR) establishing requirements for financial market participants and advisers to disclose methodologies on their websites if ESG ratings are used as part of marketing communications. The agreement also includes guidelines for weighting of ESG factors for a single rating as well as separate E, S and G ratings. A sticking point of the negotiations during the trilogue was stringency of rules for small providers. In conclusion, the Council and Parliament agreed to introduce a lighter-touch regime and optional registration for three years for small undertakings and proportional supervisory fees. These providers will have to comply with basic transparency requirements and adhere to certain governance principles.

EFRAG proposes Sustainability Reporting Standards for SMEs

EFRAG has released exposure drafts proposing sustainability reporting standards for small and medium-sized enterprises (SMEs) in line with the EU’s Corporate Sustainability Reporting Directive (CSRD). The drafts include the Exposure Draft for listed SMEs (ESRS LSME) and the Exposure Draft for the voluntary reporting standard for non-listed SMEs (VSME). The Exposure Draft on ESRS LSME addresses public-interest SMEs, including those listed on regulated markets, and is designed to be effective from January 1, 2026, with a two-year opt-out option. The second ED on VSME offers a voluntary reporting tool for non-listed SMEs to respond efficiently to sustainability information requests. Both drafts are part of EFRAG’s efforts to support SMEs in unlocking sustainable finance and are open for public consultation until May 21, 2024, including a field test that focuses on feasibility, costs, challenges, benefits, and suggested improvements. Concurrently, EFRAG has published two working papers on ESRS sector-specific standards SEC1 and SEC2. SEC1 highlights standards for high impact sectors including agriculture, financial institutions and mining and SEC2 outlines a general approach to sector-specific ESRS and considers interoperability with GRI, Pillar 3 and other reporting frameworks.

EU delays adoption of sector specific ESRS

EU lawmakers agreed for a two-year extension in the adoption of sector specific ESRS for the implementation of CSRD rules. The decision to allow a breathing period for the adoption of ESRS was highlighted in the 2024 Commission Work Programme released last year. The proposed delay was agreed upon by MEPs, despite the CSRD mandate to finalize sector specific standards by the end of June 2024. Sector-specific standards are expected to add clarity on reporting topics for companies based on their industry and sector. However, the rationale to delaying the adoption of these standards was based on the assessment of regulators that companies would face undue regulatory and compliance burden in the near-term. The new proposal also contains a recommendation to delay ESRS disclosure for non-EU companies operating in the EU who were initially set to start reporting in 2028. During this 2-year timeframe, companies can focus on the disclosure of the first set of ESRS and the EFRAG can also develop new standards

EBA releases draft guidelines on the management of ESG risks

The European Banking Authority has launched a consultation on ‘Guidelines on ESG risks management’. These guidelines seek to establish minimum standards and methodologies for identifying, monitoring, measuring and managing ESG risks. The EBA has recommended a range of measures for managing ESG risks including robust data processes and varied methodologies such as exposure-based, portfolio-based and scenario-based approaches. According to the guidelines, institutions must conduct materiality assessments and identify ESG risks systematically, over short, medium and long-term horizons, including a time horizon of at least 10 years. To ensure the resilience of institutions, EBA calls for the integration of ‘forward-looking’ ESG risks into institutions’ strategies, policies, risk management framework and internal controls. Notably, the regulator has identified environmental factors as a primary risk impacting other financial risk categories. The draft Guidelines were developed in line with the EBA’s roadmap on sustainable finance and will address the mandate of setting specific climate-related scenarios. These guidelines outline the necessary tools and plans to address transition risks as the EU accelerates its ambitious plans to become a climate neutral economy.

EU finalizes rule to ban greenwashing

Members of the European Parliament (MEPs) have approved a new directive aimed at improving product labeling and prohibiting misleading environmental claims, addressing issues like greenwashing and premature obsolescence of goods. The directive seeks to protect consumers by adding misleading marketing practices to the EU’s list of banned commercial practices. The rules include a ban on general environmental claims without proof, regulation of sustainability labels based on official certification schemes, and the promotion of goods with extended guarantees through a new harmonized label. The directive also prohibits unfounded durability claims and prompts to replace consumables prematurely. The law, which aims to promote transparency in marketing and combat throwaway culture, is expected to change the way Europeans make purchasing decisions. The directive awaits final approval from the Council before being published in the Official Journal, with member states having 24 months to transpose it into national law. The directive will work in conjunction with the upcoming green claims directive, which will provide more detailed conditions for using environmental claims.

The Platform on Sustainable Finance publishes its report on the ‘compendium of market practices’

The Platform on Sustainable Finance, an advisory body to the European Commission, has released a report on a compendium of market practices related to the EU sustainable finance framework. The report highlights the effective adoption of the EU sustainable finance tools, such as the EU taxonomy and the European Green Bond Standard, by various market stakeholders. These tools are being utilized for setting transition strategies, structuring financial transactions, and reporting sustainability efforts. The report includes case studies for different stakeholder groups and emphasizes the positive impact of the EU sustainable finance framework on the ground. The report identifies challenges and recommends peer-to-peer recommendations to enhance the framework’s value. The Platform on Sustainable Finance will present the report in a webinar, and the EU Commission will collaborate with the Platform to monitor tool uptake and provide guidance for effective implementation.

UK FRC updates the 2018 Corporate Governance Code

The UK Corporate Governance Code for 2024, effective from 2025, has been updated with a focus on Board Leadership and Company Purpose, Division of Responsibilities, Composition, Succession and Evaluation, Audit, Risk and Internal Control, and Remuneration. Operating on a ‘comply or explain’ basis, the Code includes changes such as a new provision (Provision 29) requiring boards to declare the effectiveness of material internal controls. A new Principle encourages companies to report on outcomes and activities. The Code applies to companies with a premium listing on the London Stock Exchange. The 2024 Code will be in effect for financial years beginning on or after January 1, 2025, with Provision 29 applicable from January 1, 2026.

Canada to open consultation on sustainability disclosure standards adoption

In March 2024, the Canadian Sustainability Standards Board (CSSB) plans to initiate a consultation on the initial sustainability standards for Canada, referred to as CSDS 1 and CSDS 2. Canada has been progressing towards aligning its standards with the global baseline since the introduction of the IFRS Standards last year. The CSSB collaborates with the International Sustainability Standards Board (ISSB) to promote the adoption of ISSB standards in Canada, address pertinent Canadian issues, and ensure compatibility between ISSB and future CSSB standards. The Canadian Securities Administrators (CSA) are overseeing the development of climate-related disclosure requirements for reporting issuers in Canada. CSA staff intend to conduct additional consultations to adopt disclosure standards based on ISSB Standards, with necessary modifications for the Canadian context.

Australian Treasury proposes mandatory climate-related disclosure rule

The Australian government unveiled Exposure Drafts on a new legislation proposing mandatory requirements for large and medium sized companies and financial institutions to disclose their climate-related risks and opportunities. Importantly, the legislation would enforce mandatory reporting of greenhouse gas emissions across the value chain. The legislation would apply to public companies and large proprietary companies meeting specific size thresholds. Scope 3 emissions reporting are likely to be phased-in as the proposed law also introduces assurance requirements for climate-related reporting. The consultation period is open until 9th February.

Hong Kong confirms plans to further sustainable finance initiatives this year

In a recent regulatory update, Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group outlined three key initiatives to capitalize on sustainable finance opportunities in the Asia-Pacific Region’s low-carbon transition. The group, co-chaired by the Hong Kong Monetary Authority and the Securities and Futures Commission, is developing a roadmap for the local adoption of International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards. Additionally, they plan to leverage technology for sustainability reporting, showcasing green fintech use cases, and enhancing their website with digital tools. The Steering Group is also prioritizing the development of transition finance, aiming to broaden the local taxonomy and collaborate with regional and international partners for capacity building, thereby reinforcing Hong Kong’s role as a leading sustainable finance hub.

China amends Company Law to protect small and medium shareholders

China has adopted revisions to its Company Law aimed at enhancing corporate governance structures. The amendments focus on strengthening the role of the board of directors, specifying the responsibilities and authority of independent directors, and encouraging the establishment of specialized committees. The changes also introduce provisions related to the protection of shareholders’ rights and interests, emphasizing transparency and accountability in corporate decision-making processes. These revisions reflect China’s commitment to improving corporate governance practices and aligning with international standards to foster a more robust business environment.

UNPRI releases new guidance on corporate governance and human rights. Read more
TNFD announces early adopters. Read more
Financial Services Agency (FSA) establishes dialogue on enhancing sustainability investment products. Read more
FSA publishes annual booklet introducing best practices in financial disclosure. Read more

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ESG Policy Digest: January 2024

18th January 2024

The sustainable finance policy and regulation landscape continued to evolve and mature at the end of 2023 and the hope is that policymakers double down on the impetus to bolster sustainable investment this year. A new year of sustainability reporting will require global regulators to confront challenges relating to sustainability data, making the release of International Capital Markets Association’s (ICMA) code of conduct for ESG ratings and data providers a timely policy intervention. Europe is one jurisdiction where formal regulation is progressing on this front. In December, legislators agreed on a negotiating position for the regulation of ESG ratings providers in the EU with some newly highlighted points on the scope of application and registration of providers.

Overall, December 2023 was a very busy month in Europe, as regulators voted on key pieces of legislation including the Corporate Sustainability Due Diligence Directive (CSDDD). MEPs decided that the directive will temporarily exclude the financial sector from its scope. The banking sector will, however, be subject to certain ESG disclosure requirements as the EU Commission would soon adopt the final elements of Basel III and implement the framework into EU law. Additionally, the European Banking Authority (EBA) released final guidelines on benchmarking diversity practices and gender pay gaps to further transparency in the financial services sector.

Meanwhile, the European Supervisory Markets Authority (ESMA) announced a number of updates including a delay in the release of guidelines for using sustainability-related terms in fund names and new draft guidelines for the enforcement of sustainability information prepared under EU law. Furthermore, ESMA has launched a common supervisory action (CSA) to systematise national-level oversight of benchmarks with an ESG objective. European regulators have also indicated that at the beginning of this year, there may be more certainty on the status of the Sustainable Finance Disclosure Regulation (SFDR). On December 4th, European Supervisory Authorities (ESAs) published a revised list of principle adverse impact indicators and will review the draft RTS in the coming months. Moving to insurance and pension funds, the European Insurance and Occupational Pensions Authority (EIOPA) has opened a consultation on the prudential treatment of sustainability risks until March 2024.

Over to the UK, the Competition and Markets Authority (CMA) released informal guidance on how competition law applies to environmental sustainability agreements. The UK Government’s advancements in the climate policy realm included the finalisation of a Carbon Border Adjustment Mechanism (CBAM) by 2027 and an upcoming Emissions Trading Scheme (ETS).

Asia-Pacific also closed the year with notable policy news as the Monetary Authority of Singapore (MAS) launched the Singapore-Asia Taxonomy and simultaneously, a code of conduct for ESG ratings and data providers. Further south in Australia, legislators agreed on a nature repair market bill for biodiversity loss prevention and restoration.

These developments and many more will shape the future of ESG regulation for years to come. We anticipate a flurry of regulatory activity in 2024 and will do our best to keep our readers informed on the latest news in sustainable finance regulation. Please continue to watch this space!

International

ICMA publishes voluntary code of conduct for ESG data and ratings providers

Following a mandate by the UK’s Financial Conduct Authority (FCA), on December 14, 2023, the International Capital Market Association (ICMA) released a voluntary code of conduct which may be applied in global jurisdictions where there is no regulation currently in place. This is intended to serve as a globally consistent, voluntary Code of Conduct for ESG ratings and data providers, aligning with IOSCO recommendations. Emphasising transparency and good governance, the Code aims to establish international standards in the sector. ICMA, appointed by the FCA in 2022, developed the Code together with the International Regulatory Strategy Group (IRSG). Following a consultation period ending on October 5, 2023, the final Code was published, with ICMA taking ownership. The Code promotes transparency and trust in the ESG data and ratings market, endorsed by Sacha Sadan, FCA Director of ESG. A January 31, 2024 event at the London Stock Exchange will discuss the Code’s practical implementation and international implications, encouraging engagement from ESG data and ratings providers. Read more

Europe

European Council and Parliament reach provisional agreement on partial inclusion of the financial sector under CSDDD

On 14 December 2023, the Council and Parliament reached a provisional deal on CSDDD that finalised the scope of the regulation. For corporates, the directive will apply to large companies with more than 500 employees and net turnover over €150 million. Three years from the directive’s entry into force it will also apply to non-EU companies with a net turnover over €150 million generated in the EU. The deal last month reinforces CSDDD provisions concerning the obligation of large companies to adopt and implement a (means based) transition plan for climate change mitigation. After prolonged negotiations between MEPs, the directive will temporarily exclude the financial services sector from its scope. The decision to include the financial downstream sector will be revisited later based on a comprehensive impact assessment. Other parts of the directive focus on liabilities for non-compliant companies and outline an exhaustive list of specified rights and prohibited activities in line with UN human rights conventions. Similarly, the deal defines environmental impacts more broadly to include any measurable environmental degradation. Read more

The Commission Banking Package adds final elements of Basel III

The Commission has finally decided to adopt remaining elements of Basel III in the banking package and implement the framework into EU law. On the ESG side, European co-legislators are focused on the disclosure and management of climate and social risks in the banking sector. Specifically, the Commission Banking package would introduce a mandate for banks to draw up transition plans under the prudential framework which must uphold the commitments made by banks under various pieces of legislation included in the EU Sustainable Finance Action Plan. The Commission has proposed that supervisory authorities oversee how banks integrate ESG risks and factors in the annual supervisory examination review. ESG disclosure requirements will also start to apply to all EU banks, with proportionality of burden for smaller banks. Finally, it was agreed that banks financing infrastructure projects or activities with a positive or neutral environmental impact may be authorised to enjoy a favourable risk weight treatment. This system of checks and balances is designed to bolster financial stability, enabling the EU’s banking sector to demonstrate resilience in the context of climate and social change. Read more

ESMA postpones guidelines on using sustainability-related terms in fund names

ESMA has announced a new timeline for the release of guidelines on the use of ESG and sustainability-related terms in fund names. This decision comes due to advancements in AIFMD and the UCITS Directive which specify circumstances where the name of an AIF or UCIT is unclear, misleading or unfair. If the amended texts are released on time, ESMA’s guidelines will be published and formally adopted in Q2 2024. The Guidelines will take effect three months after their publication. Managers of newly managed funds must adhere to the Guidelines for those funds starting from the application date. For managers of funds already in existence before the application of the Guidelines, compliance with the Guidelines for those funds is expected within six months from the application date. Read more

ESMA launches “common supervisory action” (CSA) for ESG disclosures under EU BMR

The European Securities and Markets Authority has launched a CSA with National Competent Authorities (NCAs) to provide oversight of ESG disclosures made under the EU’s Benchmark Regulation (EU BMR). The objective of this exercise is to establish a system for the “consistent and effective” supervision of benchmark administrators across the EU. Specifically, the CSA will assess compliance of EU-based and global benchmark administrators against requirements for the disclosure of ESG risks in Annex II of EU BMR with further explanation of ESG factors considered in the benchmark methodology statement. The CSA will also cover the disclosure requirements for climate benchmarks methodology. A key feature of BMR is the year-on-year decarbonisation trajectory for EU climate benchmarks with stricter thresholds for those aligned with the Paris agreement climate scenario of 1.5/2C. Read more

EIOPA consults on the prudential treatment of sustainability risks

The European Insurance and Occupational Pensions Authority (EIOPA) has launched a consultation on the prudential treatment of sustainability risks, as mandated by the Solvency II Directive. This marks the second phase of EIOPA’s approach, assessing whether dedicated prudential treatment for assets or activities linked to environmental or social objectives is justified. Sustainability risks are increasingly relevant for insurers, and EIOPA aims to ensure the prudential framework adequately addresses these, prioritising consumer protection and financial stability. Stakeholders can provide feedback via the EU Survey until March 22, 2024. In addition, EIOPA announced a new catastrophe data hub which captures EU wide data on insured losses for past events and other exposure data on flood and windstorm disasters. Read more.

European Supervisory Authorities publish revisions to SFDR

As the Sustainable Finance Disclosure Regulation continues to evolve, ESMA, EIOPA and EBA have jointly published their proposed revisions to the list of principle adverse indicators (PAIs). The ESAs are adding additional social indicators to the list and will add further nuance to climate reporting by introducing product disclosures on greenhouse gas emissions reduction targets. Additional changes include some technical amendments to the treatment of derivatives and the calculation of sustainable investments, among others. The Commission will review the draft RTS and decide on whether to endorse them in the next three months. Read more

EC agrees negotiating position on ESG ratings regulation

The EU Council agreed on a negotiating mandate for a regulation on ESG ratings to boost investor confidence in sustainable products. The rules aim to improve the reliability of ESG ratings by enhancing transparency, requiring authorization and supervision by the European Securities and Markets Authority (ESMA), and addressing conflicts of interest. Key points include clarification of scope, exemptions, and the introduction of a temporary registration regime for small ESG rating providers. This agreement, alongside the European Parliament’s mandate in December 2023, sets the stage for interinstitutional negotiations expected to commence in January 2024. Read more

EBA publishes final guidelines on DEI and gender pay gaps for financial services sector

On 18^th December 2023 the European Banking Authority (EBA) released final Guidelines on benchmarking diversity practices, encompassing diversity policies and gender pay gaps under the Capital Requirements Directive (CRD) and Investment Firms Directive (IFD). These guidelines enhance transparency on the EBA’s work regarding diversity and gender equality, improving data quality and stakeholder awareness. Applicable to institutions and investment firms, the guidelines mandate data provision on management body diversity and gender pay gaps, collected every three years from a representative sample. The EBA Board of Supervisors determined technical aspects for the sampling of institutions. The reporting format, effective from 2025, will collect data as of December 31, 2024, in accordance with legal mandates outlined in the CRD and IFD. Read more

ESMA launches consultation on the enforcement of sustainability information prepared under EU law

ESMA is seeking input until March 15, 2024, on draft Guidelines for the Enforcement of Sustainability Information. The guidelines aim for consistent supervision by national authorities over listed companies’ sustainability information, ensuring alignment with the Corporate Sustainability Reporting Directive (CSRD), European Sustainability Reporting Standards (ESRS) and Article 8 of the Taxonomy Regulation. The objectives include fostering convergence in supervision and robust approaches to both sustainability and financial information, enhancing reporting connectivity. The consultation targets listed companies, investors, users of sustainability information, auditors, and assurance service providers. ESMA plans to release the final Guidelines in Q3 2024 after considering the feedback received. Read more

United Kingdom

CMA issues its first informal guidance to help green initiatives

The UK’s Competition and Markets Authority (CMA) has responded to a request for informal guidance under its Green Agreements Guidance, which clarifies how competition law applies to environmental sustainability agreements. The CMA’s open-door policy allows businesses and organisations to seek guidance on proposed sustainability agreements. The response pertains to the Fairtrade Foundation’s Shared Impact initiative, targeting sustainability and resilience in food supply chains, particularly addressing emissions in the food and drinks industry. The initiative aims to offer longer-term contractual stability for producers adopting environmentally sustainable farming practices. Read more.

Addressing carbon leakage risk to support decarbonisation

After a consultation from March 30 to June 22, 2023, gathering over 160 submissions, the UK government has decided to implement a carbon border adjustment mechanism (CBAM) by 2027. The CBAM will levy charges on carbon emissions in imports from sectors like aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron, and steel. Further refinement of CBAM delivery will be subject to additional consultation in 2024. The government also plans to collaborate with industry for voluntary product standards promoting low-carbon products and to develop an embodied emissions reporting framework, with both measures undergoing further technical consultations in 2024. Read more.

UK Emissions Trading Scheme: consultation and future markets policy

The UK Emissions Trading Scheme (UK ETS) Authority, comprised of the UK, Scottish, Welsh Governments, and Northern Ireland’s Department of Agriculture, seeks input on proposals to enhance future market policies. The consultation, closing on March 11, 2024, aims to optimize ETS markets policy for managing risks effectively in a maturing scheme, fostering stable conditions for decarbonization. Stakeholders, including companies in various sectors, ETS market traders, financial institutions, investors, and environmental groups, are invited to provide views on identifying significant risks, assessing policy options, and designing individual market stability policies. Read more.

Asia Pacific

MAS releases multi-sector Sustainable Finance Taxonomy

Singapore’s latest initiative exemplifies its status as a regional leader in sustainable finance policy and regulation. This will be the first Taxonomy to include guidance on identifying and classifying activities that can be considered green or transitional, thereby considering starting positions and ensuring just transition in the region. MAS has adopted the traffic light system to distinguish between investments towards “green” activities, which can be identified based on specific metrics and thresholds, and “amber” or transition activities “that do not meet the green thresholds now but are on a pathway to net zero or contributing to net zero outcomes”. The Taxonomy will cover eight sectors and will use a “measures-based approach” that encourages capital allocation towards decarbonisation processes that are aligned with a 1.5C outcome. An additional section of the Taxonomy document provides criteria for transitioning away from coal-fired plants, allowing transition finance to support early coal phase out deals. Read more

Singapore finalises code of conduct for ESG ratings and data providers

The Monetary Authority of Singapore has also released its code of conduct (CoC) which largely relies on ratings and data providers to self-attest adherence to the CoC ‘Checklist’ for compliance. The CoC aims to crack down on black box methodologies which may obscure analysis around ESG ratings and data. The industry standards are based on recommendations from IOSCO. Similar to legislation in the EU, there is emphasis on preventing conflicts of interest and reforming governance structures to ensure integrity of ESG scores and data. MAS has added that although not necessary, those that adopt the CoC can provide assurance or audit where possible. A list of providers that adopt the CoC will also be available on the ICMA website. Read more

Australia has passed a nature repair market bill to restore biodiversity habitats.

The Australian government and Greens have agreed on a nature repair scheme, fast-tracking the expansion of the water trigger to all unconventional gas projects. The deal prohibits trades in the new nature market as offsets for habitat destruction. The nature repair bill aims to establish a market encouraging private investment in biodiversity projects, with businesses receiving tradeable certificates. Amendments, including the exclusion of trading credits as offsets, addressed earlier controversies. The expanded water trigger now covers all unconventional gas forms. Read more.

Other News & Resources

The IFRS Taxonomy Consultative Group is seeking new candidates from April 1, 2024. Read more
NGFS released recommendations for the development of nature-related financial risk scenarios. Read more
The EFRAG and TNFD signed a cooperation agreement to advance nature-related sustainability reporting. Read more
The Dubai Financial Services Authority and the Hong Kong Monetary Authority announced a partnership to enhance cross-border collaboration for the development of sustainable finance policies and regulations across the Middle East and Asia regions. Read more
ESMA publishes methodological approach for modeling climate risks in the fund sector, along with analysis of the financial repercussions of greenwashing.
The US Treasury Internal Revenue Service issue guidance on sustainable aviation fuel credit. Read more

2023: Year in Review:

Below are the main ESG Regulatory Developments that took place in 2023:

Adoption of Global ESG Standards and Frameworks

Evolution of international sustainable taxonomies: EU, Singapore, Brazil, UK Green Taxonomy

ESG Ratings providers regulation: SEBI, EU, Japan, Singapore Code of Conduct

US Climate focus: SEC Climate rule postponed, California climate disclosure package passed

Supply chains: CSDDD and EUDR adoption

Global fund labelling regimes: US SEC Fund Labelling Rule adopted, UK Sustainability Disclosure Requirements (SDR), SFDR proposed formal product categories, SEBI ESG mutual fund scheme

COP28 aims to restore faith in Voluntary Carbon Markets

*ESG Book manages the world’s largest repository of sustainability reporting provisions with over 2,400 regulations across more than 80 jurisdictions globally. If there is a recent ESG regulatory development we have missed, we would like to hear from you and invite you to contribute below.

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Beyond 1.5C – January 2024 Update

15th January 2024

Scientists at the EU’s climate agency Copernicus released their findings last week on the state of the planet’s climate. It made for stark, if not unexpected reading. The headline was that the planet was 1.48° Celsius hotter in 2023 compared to pre-industrial times. That’s a mere whisker below the 1.5° Celsius target set by countries in the 2015 Paris Climate Agreement to avoid the most severe effects of warming. But is it strictly right to compare this 1.48°C with the target set in Paris?

To read the full article, click here

ESG Book Response to Targeted consultation on the implementation of the Sustainable Finance Disclosures Regulation

20th December 2023

Last week (14th December), ESG Book submitted its response to the latest EU Commission Targeted consultation on the implementation of the Sustainable Finance Disclosures Regulation (SFDR), addressing concerns about the regulation’s current ambiguity and lack of clarity in defining ‘sustainable investment.’

ESG Book’s response underscores the importance of clarity, standardization, and collaboration in implementing SFDR to enhance transparency and comparability in sustainable finance reporting.

To read the full article, click here

INTERNATIONAL

GRI publishes FAQs on ESRS interoperability and double materiality assessment

ISSB to consider transition plan disclosure guidance

TNFD releases guidance on nature-related reporting for eight sectors

ISO to launch Net Zero Standard in 2025

EUROPE

ESMA releases Guidelines on the Enforcement of Sustainability Information (GLESI) and Public Statement on ESRS application

AFM releases 10 waypoints to clarify CSRD double materiality process

Swiss Federal Council clarifies binding vote on the CSRD

CSDDD published in the Official Journal of the European Union

German supply chain regulation may be replaced early with EU CSDDD

ESAs propose enhancements to SFDR framework and new ‘transition product’ category

UNITED STATES

California may delay implementation of climate disclosure rules

ASIA-PACIFIC

Australia to use ISSB standards as the baseline for sustainability disclosure regime

Australia initiates consultation on draft guide on Sustainability Collaborations

Other News & Resources

International

IFRS Foundation publishes Inaugural Jurisdictional Adoption Guide to support the adoption and use of ISSB standards

GRI updates labour standards for greater workplace transparency and workers’ rights

Europe

Final CSDDD agreement reached

EU Council adopts Net Zero Industry Act

ESAs jointly publish Final Report to end Greenwashing

EFRAG finalises ESRS Materiality Assessment Implementation Guidance

United Kingdom

UK government updates timeline for final sustainability reporting framework

United States

White House publishes Fact Sheet on Voluntary Carbon Market Principles

Asia-Pacific

China set to implement ISSB-styled corporate disclosure standards by 2030

SEBI proposes changes to the BRSR Framework

International Capital Markets Authority (ICMA) publishes draft Hong Kong Code of Conduct for ESG ratings and data providers

Other News & Resources

International

IFRS and EFRAG publish Interoperability guidance

Europe

European Parliament set to implement Basel III standards

SFDR Summary Report indicates split over new category system

European Securities and Markets Authority (ESMA) releases finalised guidelines on the use of ESG and sustainability-related terms in fund names

United Kingdom

FCA proposes expanding the scope of the UK SDR to include portfolio management services

United States

US EPA updates Methane Emissions Reporting Rule

Asia-Pacific

Hong Kong Monetary Authority launches Taxonomy

Australia introduces sustainability classifications for certified products

Other News & Resources

Europe

EU Council reaches decision on the CSDDD

EU Parliament approves ‘world’s first’ certification scheme for high-quality carbon removal

ESMA initiates consultation to enhance transparency of ESG factors within credit ratings methodologies

France tables amendments to generalise ‘Say on Climate’ for companies reporting under CSRD

EFRAG publishes amendments to materiality assessment guidance

North America

US SEC pauses implementation of climate disclosure rule

Canada opens consultation on sustainability disclosure standards adoption

Asia Pacific

Japan releases draft ISSB aligned sustainability reporting standards

China finalises double materiality guidance as part of listing rules

India’s central bank releases Disclosure Framework on Climate-related Financial Risks

Africa & Middle East

Saudi Arabia launches green finance framework

Kenya announces plan to raise capital requirements for banks exposed to climate risks

Other News & Resources

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International

International Financial Reporting Standards (IFRS) foundation releases preview of ISSB adoption guide

Europe

Decisive vote on EU CSDDD still pending

EU Parliament adopts Nature Restoration Law

EU lawmakers advance regulation for sustainable packaging

EU to enforce ban on products made with forced labour

EU Council and Parliament reach provisional agreement certification scheme for high-quality carbon removals

EU to impose environmental crimes, fines and penalties

EU ESG Ratings Regulation on the horizon with exemptions for small providers

Sweden proposes delay to CSRD implementation

North America

US SEC adopts long-awaited corporate climate disclosure rule