Sustainable Finance Regulatory Update: July 2022

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

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

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

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

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


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

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

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

US Federal Reserve released a climate-related financial stability study  

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

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

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

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

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

Other News & Resources

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

Sustainable Finance Regulatory Update: June 2022

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


Provisional Agreement for EU Sustainability Disclosure Rules

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

EU agrees 40% gender quota for corporate boards

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

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

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

EU compromises on green measures including CBAM

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

EUROSIF calls for a proportionate regulatory framework for ESG ratings providers

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

ESMA publishes findings from ESG Ratings Call for Evidence

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

French regulator AMF calls for stricter regulation of ESG ratings providers

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

United Kingdom

UK aligns pension fund metrics with net-zero strategy

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

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

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


CFTC releases RFI on climate-related financial risk

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


China issues first ESG disclosure standard

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

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

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

Other News & Resources

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

ESG Quick Takes 4: Decarbonizing heavy industry

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

Guest description:

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




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

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

Spotlight on the EU Taxonomy

On 28 March 2019, the EU Parliament voted that the new taxonomy will not be used as a reporting standard for all funds. Instead of forcing all kinds of funds to disclose how their portfolios are positioned with regard to the taxonomy, MEPs decided only funds which claim that they are investing with an ESG or socially responsible investing (SRI) approach will have to report how the fund is positioned by using the taxonomy. The new legislation will make it much harder for asset and fund managers to maintain “greenwashing strategies”. Nevertheless, conventional asset managers who claim to use ESG/SRI criteria in their overall approach will not have to publish this kind of reporting and may, therefore, be able to claim they have integrated ESG/SRI criteria even if they use them only in a very limited way. 

The goal of the Sustainable Investments Taxonomy is to determine whether an economic activity is environmentally sustainable. 

The EU Taxonomy Technical Report published in June 2019 gives practical guidance for policymakers, industry and investors on how best to support and invest in economic activities that contribute to achieving a climate-neutral economy. To qualify as green, an investment needs to contribute to at least one of the following six objectives while not significantly harming any other: 

  1. Climate Change Mitigation – i.e. the activity contributes to greenhouse gas stabilisation consistent with the goals of the Paris Agreement, through certain prescribed means including, for example, the generation of renewable energy; 
  1. Climate Change Adaptation – i.e. the activity includes adaptation solutions that substantially reduce the adverse impact (or risk) of the current and expected future climate on (i) other people, nature or assets; or (ii) the economic activity itself, in each case without increasing the risk of an adverse impact on other people, nature and assets; 
  1. Sustainable Use and Protection of Water and Marine Resources – i.e. the activity substantially contributes to achieving the good status of water bodies or marine resources, or to preventing their deterioration when they are already in good status, through certain prescribed means (including, for example, through wastewater management); 
  1. Transition to a Circular Economy – i.e. the economic activity contributes substantially to waste prevention, re-use and recycling, through certain prescribed means (including, for example, by improving the recyclability of certain products); 
  1. Pollution Prevention and Control – i.e. the activity contributes substantially to pollution prevention and control through certain prescribed means (including, for example, by preventing or, where that is not practicable, reducing pollutant emissions into air, water or land (other than greenhouse gasses)); and 
  1. Protection and Restoration – i.e. the activity contributes substantially to protecting, conserving or restoring biodiversity and to achieving the good condition of ecosystems, or to protecting ecosystems that are already in good condition, through certain prescribed means (including, for example, sustainable land use and management). 

Additional considerations 

In addition to contributing to one of the six objectives described above, for an activity to qualify as an environmentally sustainable activity under the Taxonomy Regulation, the activity must also comply with the following criteria: 

  • No Significant Harm – i.e. the activity must not significantly harm any of the environmental objectives above; 
  • Compliance with Technical Screening Criteria – i.e. the activity must comply with technical screening criteria for each of the six objectives that will be specified by the European Commission; and 
  • Minimum Social and Governance Safeguards – i.e. the activity must be carried out in compliance with a number of minimum social and governance safeguards as referred to in the Taxonomy Regulation. 

Application of the Taxonomy Regulation 

The Taxonomy Regulation applies to the following parties: 

  • “Financial Market Participants” who offer “Financial Products” – financial market participants (as defined in the Disclosure Regulation) will be required to provide, in pre-contractual disclosures and periodic reports, information on how and to what extent the investments that underlie their “financial products” support economic activities that meet the criteria for environmental sustainability under the Taxonomy Regulation. As defined in the Disclosure Regulation, “financial products” include:  
  • (i) portfolios managed in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments;  
  • (ii) alternative investment funds;  
  • (iii) insurance‐based investment products meeting certain criteria;  
  • (iv) pension products;  
  • (v) pension schemes;  
  • (vi) UCITS; and  
  • (vii) pan‐European Personal Pension Products.  

For those financial products that do not invest in environmentally friendly activities, a disclaimer will need to be included by the financial market participant stating that the relevant investments “…do not take into account the EU criteria for environmentally sustainable investments.”; 

  • Financial and Non-financial Companies Falling under the Non-Financial Reporting Directive – firms in scope of the Non-Financial Reporting Directive will need to disclose information on how and to what extent the undertaking’s activities are associated with environmentally sustainable economic activities. The European Commission will publish the detailed reporting requirements by 1 June 2021; and 
  • Individual Member States and the EU – individual Member States and the EU must apply the criteria specified in the Taxonomy Regulation for determining environmentally sustainable economic activities for the purposes of any legislative / measures setting out the requirements of financial market participants or issuers in respect of financial products or corporate bonds to label such products as “environmentally sustainable”. 

2021 Key performance indicators  

Last year, financial regulators in the EU have proposed new key performance indicators, or KPIs, to measure the alignment of banks, insurers and asset managers with the EU ‘green’ taxonomy: 

  • For banks, the EBA has proposed a ‘green asset ratio’ (GAR), which would measure the value of climate-friendly loans, advances and debt securities as a proportion of a lender’s overall assets. The EBA mooted three additional indicators relating to advisory fees, trading books and off-balance sheet exposures associated with taxonomy-compliant activities. 
  • Insurance: Under EIOPA’s proposals, insurers will need to report the ratio of non-life gross premiums and investments corresponding to activities identified as environmentally sustainable in the EU taxonomy. 
  • Asset Managers: ESMA has recommended that asset managers report the total ratio of investments – both stocks and bonds – that are aligned to the taxonomy. According to the regulator, green bonds issued under existing standards should also be admissible as taxonomy-compliant investments until the completion of an overarching EU Green Bond Standard.   


The announcement of the adoption of the Taxonomy Regulation on 15 April 2020 means that the Council has adopted its position at first reading. The Taxonomy Regulation now needs to be adopted by the European Parliament at second reading, before it is published in the EU Official Journal. It will enter into force 20 days following publication in the EU Official Journal, although the measures relating to the climate mitigation and adaptation objectives will apply from 31 December 2021, while requirements relating to the other environmental objectives are due to apply from 31 December 2022. 

The Disclosure regulation is a parallel piece of legislation that will refer to the Taxonomy. The first reporting requirements for investment firms under those rules will start to apply in December 2021, with additional criteria included annually thereafter. 

Source: Bloomberg 

The EU Taxonomy: implications for corporates 

Current consultation on the appropriate set of rules for undertakings under the NFRD to include in their non-financial statements, consolidated non-financial statements or other relevant separate reports, when allowed, information on how and to what extent their operations are associated with economic activities that qualify as environmentally sustainable under the EU Taxonomy.  

This requirement will apply from 1 January 2022 for the two climate-related objectives of the Taxonomy and from 1 January 2023 for the other four environmental objectives.  

The criteria under the climate mitigation and adaptation pillars cover the economic activities of roughly 40% of listed companies, in sectors which are responsible for almost 80% of direct greenhouse gas emissions in Europe. This includes sectors such as energy, forestry, manufacturing, transport and buildings. 

The Taxonomy Regulation already specifies that, in particular, non-financial undertakings under the NFRD are legally obliged to disclose:  

  • The proportion of their turnover derived from products or services associated with environmentally sustainable economic activities.  
  • The proportion of their total investments (CapEx) and expenditures (OpEx) related to assets or processes associated with environmentally sustainable economic activities. 


TCFD Alignment Barometer: Measuring Climate Disclosure

The Task Force on Climate Related Financial Disclosures (TCFD) was established in 2015 by the Financial Stability Board to develop recommendations for more effective climate related disclosures. In 2017, the TCFD published a set of recommendations to guide companies in providing better climate related reporting, which has since become the global standard for climate disclosures. The TCFD Alignment Barometer, delivered through ESG Book, supports corporates and investors in understanding the TCFD recommendations and the reporting landscape.

To read the full article, click here.

Why the language of climate change is evolving

Since the birth of civilisation, language has been one of humanity’s greatest tools. Developing alongside human society, language has become more than simple communication and education, having the power to shape perspectives and attitudes towards the subject at hand.  

As early as the 18th century, when shipbuilding and mining were consuming increasing amounts of wood [1], people in Europe have been conscious about resource sustainability. Then, in 1975, US scientist Wallace Broecker brought the term ‘global warming’ into the public’s consciousness after including it in the title of one of his papers [2]. Public awareness of the issues around sustainability and climate change has existed for decades, even centuries, but has never been as widespread as it is today. This growing recognition can be explored by taking a deeper look at how the language of climate change has evolved and the importance that this has. 

Talking About Climate Change  

The concepts of climate change and global warming originated with the scientific community. Consequently, important evidence-based information is often communicated to the general public in scientific and technical language that hinders accessibility and understanding. The recent talk of the town of keeping global warming to less than 2 degrees Celsius by 2100, for example, bears little meaning unless it is put in context. This temperature increase could cause more than 90% of global coastlines to experience a 20cm sea level rise, increasing coastal flooding and reducing a third of per capita crop production in Southeast Asia, it could cause the annual reoccurrence of the 2015 heatwave in India and Pakistan, which killed nearly 1700 people in two of India’s worst-hit states alone [3], and it has the potential to kill all coral reefs [4]. That being said, many of these extreme events have not yet been experienced, and their future consequences can only be conjured by our imagination. 

The effects of global warming are often discussed to be materialising decades into the future. Such language reinforces the distinction between our present selves and our future selves. This separation is problematic, as studies have found that we experience difficulties forming bonds with our future selves. In fact, we have as much connection with our future selves as we do with a stranger that we pass by [5]. This future-based discussion of climate change consequently fortifies the idea that climate change is somebody else’s problem, even though our actions now will directly impact and shape the world we will be living in in the future.  

Another problematic observation of how we use language is the creation of a false dichotomy between us and nature. Phrases like ‘impact on the environment’ create the distinction that the environment is separate from us, whereas the phrase ‘impact on our environment’ emphasises that we exist as a part of it [6]. This language use cumulates in the concerning situation where climate change becomes out of sight, out of mind.  

What is more, there seems to be active underreporting with regards to climate change by some news outlets. A report on American media, for example, found that an entire year of climate news coverage was lower than what was received by the British royal baby Archie in a single week [7]. 

Figure 1: Word cloud of the commonly used words related to climate change in the Guardian from 2017 to 2020. Data obtained from The GDELT Project. 

Taking A Closer Look: Climate Change In The Eyes Of Oil And Gas Companies 

Oil and gas companies have been among the most vigorous opponents of climate related policies, with expenditure on climate lobbying reaching up to $53 million a year [8]. This defensive stance against climate change mitigation carries through in their annual reporting. An analysis of the corporate social responsibility and environmental reports from 2000 to 2013 highlights a few linguistic techniques oil and gas giants use to deflect having to take actions to mitigate climate change. 

Preference for ‘climate change’ as opposed to ‘global warming’  

‘Climate change’, while being a more scientifically comprehensive description [9], is a neutral term, whereas ‘global warming’ implies a direct consequence – the warming of the planet. Furthermore, the Oxford English Dictionary definition for ‘global warming’ assigns human activity as the cause, while human agency is omitted from the definition for ‘climate change’.  

Downplaying the strength of scientific evidence  

While scientists often use uncertainty estimates to convey their confidence levels in the accuracy of their data, companies can misconstrue this uncertainty, turning it into scepticism of the evidence presented. In phrases such as ‘the risk of eventual climate change caused by anthropogenic emission’, the use of the hedge ‘eventual’ also serves to decrease the causal relationship between emissions and climate change. 

Magnifying the importance of meeting energy demand  

Although companies acknowledge the importance of managing emissions, they often introduce growing energy demand as a factor of equal importance, as ‘meeting the enormous energy demand growth and managing the risk of GHG emissions are the twin challenges of our time.’ This then construes that companies need to balance climate change mitigation efforts with their need to meet increasing energy demand, which is a favourable strategy for the oil and gas industry. 

Relocating responsibility  

By including other stakeholders such as governments and consumers when addressing climate mitigation, companies shift the responsibility away from themselves towards a shared accountability with other societal actors. This downplays companies’ responsibility to change their behaviour or even lead the change. 

Nevertheless, a more recent analysis of the reports of three energy companies highlights that these companies have acknowledged that climate change poses a business risk. One company has even embraced it as a business opportunity, hinting at a positive shift in how the energy industry views climate change [10]. 

Putting Climate Change At The Forefront Again 

Figure 2: Use of the phrase ‘Climate Change’ compared to ‘Climate Crisis’ and ‘Climate Emergency’ from January 2015 to April 2021 in the UK parliament. Data obtained from Hansard. 

As the years pass, the negative consequences of climate change become ever more apparent. The need for us to adapt our behaviour to prevent fur ther environmental damage has been stated time and time again through protests and individual activists such as Extinction Rebellion and Greta Thunberg. The media has also taken considerable steps to change how they repor t on climate change issues, a move that has significant effects given the media’s wide reach. 

In 2019, the Guardian made a climate pledge to make six changes to the language used in their reporting. These include the rebranding of ‘climate change’ to ‘climate emergency’ or ‘climate crisis’ to reflect the urgency with which we need to take action as well as replacing ‘climate sceptic’ with ‘climate science denier’ to emphasise the robustness of scientific evidence [11]. A study of US news media content also revealed a positive shift in the language used in regards to climate change reporting. Research has found that there has been a decline in framing climate change as economically costly as well as a sharp decrease in communicating the uncertainties associated with climate science, both of which reduce an individual’s inclination to support and engage in climate action [12]. In contrast, language conducive to climate action engagement has been on the rise. These include emphasising the economic benefits of climate action and communicating climate risk in the present tense. As American feminist writer, Rita Mae Brown says, ‘language exerts hidden power, like the moon on the tides.’ Let us be mindful of and actively use this power to make a positive change in our environment. 














Should ESG data be a free public good?

The proliferation of sustainability data has come at a (not so trivial) cost to data preparers (who are usually the reporting companies themselves), investors, NGOs, academia and other stakeholders like regulators and policymakers. In light of the relatively nascent nature and obscurity of sustainability disclosures, it comes as no surprise that the collection, systematization and analysis of Environmental, Social and Governance (ESG) data metrics entails significant time resources and financial expenditure. 

As spending on ESG data continues to grow at an annual rate of 20%, it is projected to reach USD 1 billion by the end of 2021 [1]. This in turn has created arbitrage opportunities for incumbents and established market players who seek to profit from limited transparency and the high barriers to entry related to ESG data provision.

With the reliance on ESG data intensifying, there are significant opportunities for lowering the costs involved in accessing ESG data – both for reporting entities, as well as for end-users of the data. With more eyes watching, further integration of sustainability metrics in financial markets would benefit the quality and impact of sustainability information. This blog explores the idea of ESG data as freely accessible information[2].

Using and reporting ESG data are costly exercises (for now)

In a study undertaken by the European Commission on the anticipated costs of compliance for upcoming corporate disclosures under the new EU Corporate Sustainability Reporting Directive (CSRD), policymakers expect that the annual reporting cost of such disclosures for the 49,000 European companies in scope of the Directive will amount to no less than EUR 3.6 billion, with EUR 1.2 billion in one-off implementation costs. 

These rising data and compliance expenditures will fall disproportionately on smaller companies that are not as well-equipped with sophisticated corporate social responsibility (CSR) or sustainability departments, like their large counterparts. 

On the flipside, as ESG becomes increasingly relevant and disclosures – more sophisticated with more companies and other market players reporting, consuming ESG data is also becoming resource-intensive. The imperative of taking ESG into account has intensified in recent years, for reporting entities and end-users alike: ESG is truly entering the mainstream. Yet, the costs of accessing ESG data have not dropped as fast as the demand for ESG data scaled up. 

Open-sourcing ESG data

What if ESG data became a public good? More accessible ESG data can serve the needs of market participants towards making better-informed and sustainability-driven investment decisions. At the same time, having ESG information as a universally available public good can empower individuals and consumers to make the right choices when it comes to the products and services they buy and invest in daily. 

Of course, not everyone is interested (or capable) to keep track of sustainability information for their investments or purchases. But like public companies’ standard financial information, the ease of accessing standardized company data makes a world of difference. Newspapers and other media outlets facilitate information efficiency in financial markets and the economy also because the financial data of listed companies is considered a public good.

Practically, the right technology and efficiency-saving tools can reduce the marginal cost of standardized ESG data reporting and access. While it is unlikely that such a transition can take place overnight, enabling stakeholders to streamline their sustainability disclosures, centralize reporting and optimize for standardized data access can result in significant economies of scale. Capacity-building and technology will be at the heart of a better functioning sustainability data landscape that also tackles concerns of ‘greenwashing’ and misrepresentation of a company’s sustainability credentials. 

Sustainability information could fall under a ‘digital global commons’ designation, meaning that this type of data is so important for achieving our global sustainable development agenda that it should be provided and accessible for free by members of the public and the contributing community, similar to the concept of cyberspace being available and accessible to all to use. Think Wikipedia, but for ESG data. 

In the words of Mayo Fuster Morell, digital global commons info tends to be “non-exclusive, that is, be (generally freely) available to third parties. Thus, they are oriented to favor use and reuse, rather than to exchange as a commodity. Additionally, the community of people building them can intervene in the governing of their interaction processes and of their shared resources.” [3]

Further to that, in October 2020 the European Commission adopted its new Open Source Software Strategy 2020-2023. The key objective of the strategy is the possibility to reach European-wide digital sovereignty, enabling Europe to maintain its digital autonomy and spur innovation, creativity and breakthrough technological advances. 

The benefits of publicly available sustainability data

Can we consider sustainability data as a digital global commons? To optimize for the number of viewpoints and impact, there is strength in the argument for making sure that basic access to ESG data and reporting should be better accessible to everyone, from the world’s largest publicly listed companies to the smallest family-owned enterprises. This level of transparency and freedom of information and disclosure would in turn enable the more efficient flow of capital towards businesses that truly meet the criteria for sustainable investing. 

ESG data has its limits and greenwashing is a real issue. Some sustainability efforts fall under the marketing umbrella to appease consumers and investors who are willing and able to pay for an ESG ‘label’. Detailed and customized ESG analysis can become complex. Knowledge of ESG data can’t be free in all circumstances, but lowering the barrier to report and access ESG information would contribute to our joint understanding of how sustainability topics can affect our economies and long-term investment decisions. A better feedback loop between sustainability data providers (or reporting entities) and end-users would help address some of the pressing challenges behind integrating ESG data. It is an ongoing process of information retrievals, corrections and updates. Technology-driven transparency can highlight those organizations that do in fact take ESG seriously – and have them set the norm for others to follow.

[1] How to Combat Greenwashing? Find the Right Data Partner [1] These figures are additional to any EU Taxonomy related disclosure costs of EUR 1.2 – 3.7 bn in one-off costs, as well as EUR 600 – 1.500 million in recurring costs per year. Proposal for a DIRECTIVE OF THE EUROPEAN 

[2] These figures are additional to any EU Taxonomy related disclosure costs of EUR 1.2 – 3.7 bn in one-off costs, as well as EUR 600 – 1.500 million in recurring costs per year. Proposal for a DIRECTIVE OF THE EUROPEAN

PARLIAMENT AND OF THE COUNCIL amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting. 

[3] Fuster Morell, M. (2010, p. 5). Dissertation: Governance of online creation communities: Provision of infrastructure for the building of digital commons.

The Proof is in the Textual Pudding

Social media and online news have fundamentally changed the way people interact with companies. Posts on platforms like Twitter or LinkedIn, along with blogs and online news articles, provide accounts of stakeholder experiences with companies and their perception of corporate behaviour and allow for the rapid spread of these views. The latter shapes stakeholder perspectives and informs stakeholder actions. As such, social media and online news quickly mirrors and shapes corporate reputation, societal legitimacy, social license to operate, and stakeholder trust [1]. An illustrative example is H&M’s “trashgate” scandal, where store personnel were found to be damaging and dumping unsold clothes in the garbage instead of donating them. Starting with an article in the New York Times, public outrage quickly spread across social media [2]. It was one of the top-three trending topics on Twitter and remained so for several days. Only after the outrage, H&M decided to address the issue. After investigations, it was discovered that the particular New York store was violating the company’s policy which was to donate unsold clothing to charity. “Trashgate” was one of the first examples to show the ways in which social media could raise issues to news  coverage, affect corporate publicity, and force companies to change their actions [3]. It also illustrates how social monitoring can be a powerful asset in the world of sustainability, especially in terms of evaluating Environmental, Social and Governance (“ESG”) risk. 

Over recent years, the use of ESG data and analytics has boomed in capital markets [4]. Real-time news and social media data are receiving increasing attention in cutting-edge decision-making strategies. This popularity is grounded in the ability of ESG data to provide insights that are absent from typical financial data. Traditional financial information has limited usefulness to investors today as it allows for data that is both backwards-looking and that only encompasses a narrow financial base. As such, it is insufficient on its own to assess a company’s ability for future profit. For example, financial data did not indicate potential unethical behaviour by H&M, and it only picked up on the reputational (and financial) damage thereof once it had already happened. Therefore, both retail and institutional investors increasingly focus on ESG factors to assess companies. This is supported by ESG research that shows the positive relationship between a firm’s profitability and its ESG metrics [5] and illustrates that ESG data can help reduce portfolio risk [6]. 

However, ESG data in mainstream investing has three main challenges: most ESG data is qualitative, the landscape of corporate disclosures is incomplete and inconsistent, and disclosures are generally voluntary with sparse available data [7][8]. Many pertinent issues do not manifest in disclosures or regulatory filings and, if they do, the delays caused by reporting and publication cycles can cause relevant data to be out of date by the time it is in the public domain. There is also a significant bottleneck in assessing ESG performance due to the manual effort in continuously sourcing and validating disclosure data. This bottleneck is even more prominent when dealing with large volumes of unstructured text data, such as social media or news. As demand for ESG increases, the need for accurate and near real-time responses to ESG issues becomes clear, and the ability to detect and represent such issues through data sources beyond a company’s filings is paramount. In the ever-changing investment landscape, news and social media data utilisation have become critical to ESG investment strategies. 

To properly realise the potential of news data, millions of articles need to be processed daily, and one must look towards the power and capability of Machine Learning (“ML”). Latest advances in Natural Language Processing (“NLP”) increase/strengthen our ability to process unstructured text data. Moving away from pre-determined text/keyword ontologies of the past [9], advances in the field of deep learning have pushed the state-of-the-art towards Transformer-based architectures such as BERT [10]. The key advantage here is leveraging context in decision making. Language is complex – for example, homographs exist, words whose meaning is entirely dependent on context. Without contextual understanding, false positives are likely, and many prominent classical methods are known to fall into this trap. Such approaches have focused on words and the frequency of their occurrence, with words weighted by how often they appear. For example, if a corpus of articles frequently mentions the word ‘exploitation’, such techniques can systematically discount its relevance. Similarly, identifying the difference between the word ‘carbon’ in the context of greenhouse gas emissions or when discussing carbon allotropes is critical in understanding the text in question. In other words, “context is king”. 

Across the investment community, researchers and engineers are using machine learning in new and disruptive ways, analysing linguistic information from content, using ESG and sentiment data to determine a company’s commitment to ESG, and evaluating the impact of this commitment on stakeholders. [11] Sokolov et al. [12] show how BERT can be used as a classifier to aid in ESG Scoring, with aggregation approaches used on the output to construct a score. Such scores allow investors to recognise and understand what drives high and low ESG performance among their holdings, informing their approach for engagement. For instance, reflecting the impact of “trashgate” in their decision-making process for H&M. These also supplement brand and reputational risk management with a specific focus on sustainability issues and controversies.  

At Arabesque S-Ray, we are committed to providing innovative tools and incisive insight into ESG data to empower businesses and investors. This includes substantial focus on applied NLP research,  perfecting cutting-edge techniques and deepening sustainability expertise to provide granular insight into corporate behaviours. We are working to design the leading NLP-powered ESG-focused tools that will transform the way investors access and use social and traditional media signals in sustainable investing and aiding responsible business.   


[1] – Pekka Aula, (2010),”Social media, reputation risk and ambient publicity management”, Strategy & Leadership, Vol. 38 Iss: 6 pp. 43 – 49 

[2] – ‘‘Reputational risk in digital publicity’’ presented at the Viestinna¨n tutkimuksen pa¨iva¨t, February 12th, 2010, Tampere, Helsinki. 

[3] – Laaksonen SM. Hybrid narratives: Organizational reputation in the hybrid media system. Publications of the Faculty of Social Sciences. 2017 Jun 16. 

[4] – Lev, B., & Zarowin, P. (1999). The boundaries of financial reporting and how to extend them. Journal of Accounting Research, 37(2), 353-385. 

[5] – Clark, Gordon L. and Feiner, Andreas and Viehs, Michael, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance (March 5, 2015) 

[6] – Friede, G., T. Busch, and A. Bassen. 2015. “ESG and Financial Performance: Aggregated Evidence from More Than 2000 Empirical Studies.” Journal of Sustainable Finance & Investment 5 (4): 210–233 

[7] – Park, Andrew & Ravenel, Curtis. (2013). Integrating Sustainability Into Capital Markets: Bloomberg LP And ESG’s Quantitative Legitimacy. Journal of Applied Corporate Finance 

[8] – Henriksson, R., J. Livnat, P. Pfeifer, and M. Stump. 2019. “Integrating ESG in Portfolio Construction.” The Journal of Portfolio Management 45 (4): 67–81. 

[9] – Lee Y. H., W. J. Tsao, and T. H. Chu. “Use of Ontology to Support Concept-Based Text Categorization.” In Designing E-Business Systems. Markets, Services, and Networks, edited by C. Weinhardt, S. Luckner, and J. Stößer, 201-213. WEB 2008. Lecture Notes in Business Information Processing, vol 22. Berlin, Heidelberg: Springer. 2009. 

[10] – Jacob Devlin, Ming-Wei Chang, Kenton Lee, and Kristina Toutanova. 2018. BERT: Pre-training of Deep Bidirectional Transformers for Language Understanding. 

[11] – 

[12] – Building Machine Learning Systems for Automated ESG Scoring, Alik Sokolov, Jonathan Mostovoy, Jack Ding, Luis Seco, The Journal of Impact and ESG Investing Jan 2021 

Why ESG Data is Changing

Producing reliable environmental, social, and governance (ESG) data has become paramount for companies in the last few years. With it, they can demonstrate how they are reducing their carbon footprint, protecting their social capital, or complying with the booming disclosure landscape. 

Reliable ESG data helps companies identify potential risks, manage resources, and remain compliant with regulation. But it can be much more than a backwards looking tool. The most ambitious companies that we work with at Arabesque are looking to transform ESG data into a competitive advantage, producing actionable business intelligence which will set them apart from their competitors. 

The biggest hurdle to this is perhaps the most obvious. How can I ensure that I have access to reliable ESG data? What does it look like, and how can I gather it? These are the sort of questions which have, until recently, puzzled business leaders. They’re also the questions that we are answering at Arabesque. 

Looking at the first frameworks to regulate ESG data disclosure is like looking at an early map of the first railways. A hodgepodge of private enterprises, many overlapping and intertwining, suffering from a lack of unification. Today, companies have a confusing mixture of compulsory and voluntary frameworks to report against. Even if they fulfil their obligations, most reporting companies do not disclose the same data in the same way. Some are simply unaware of their obligations. 

Cutting through all this noise is crucial. Investors, underwriters, regulators (not to mention companies themselves) stand to benefit enormously from a market and supply chain greased with the oil of reliable data. But it is impossible for the vast majority of organisations to confidently gather the information required under their own steam. 

This is why companies look to the likes of Arabesque to supply global markets with transparent, accessible and coherent ESG information; to help investors respond to customer values, enable corporates to meet a growing wave of disclosure requirements, and to provide the wider market with meaningful signals that enable an informed allocation of capital.  

Our team prioritises Artificial Intelligence to help achieve this. We gather a vast amount of data; from traditional, more structured data, to a wide range of alternative sources of information such as the press, social media, or NGO activity. AI allows us to make sense of this highly complex mix of disclosed information and short-term signals. It can rationalise thousands of competing and overlapping sustainability metrics into a high-quality picture of a company’s ESG credentials. 

As the volume of sustainability data increases – in the next eighteen months we will see a slew of new regulatory requirements – it will become increasingly important for investors to work confidently with AI to make truly sustainable investment decisions. 

Customisation is now the next stage of the journey. Being able to take a detailed look at the underlying information which companies disclose, and filter through the thousands of data points to reach the specific insight which a business requires is swiftly becoming not a ‘nice to have’, but a business necessity for organisations looking to balance consumer demand with maximising returns. Arabesque’s ‘Temperature Score is just one example of this. 

Sustainability data will only become more important in years to come. The onus is now on companies to ready themselves with the tools needed to be leaders in using it. 

Throwing the net-zero baby out with the bathwater?

In the months following last November’s COP summit, a welcome urgency has entered the conversation surrounding financial markets and their role in slowing climate change. But alongside this, a growing schism is emerging that pits clean, ‘green’, investible assets against dirty, ‘brown’, soon-to-be stranded ones. We must nip this facile outlook in the bud, or risk foregoing an opportunity to rapidly reduce emissions across a vast majority of the investible universe. 

To view the world’s companies as either green or brown is to throw the net-zero baby out with the bathwater. By fixating on the extremities of this spectrum, we disregard the trillions of dollars of resource that the companies in between could deploy towards not only reducing their impact on the planet, but in some cases actively mitigating climate change elsewhere in the economy. It is time we engaged in a more grown-up conversation about the practicalities of a successful climate transition. 

Remembering that the world’s 100 biggest companies are responsible for more than 70% of global emissions it is clear that, important as it is, we cannot rely on fuelling ‘pure green’ companies to do more good as the sole solution. It is also critical that we mobilise capital to help the rest to do less bad. 

This is not permissiveness, or a concession. The global race to prevent irreversible damage to our planet is formed of multiple heats. One of these sprints, characterised by initiatives like the EU Taxonomy, is to rapidly channel capital to companies that directly slow climate change through their operations. However, another is to help companies with the resource and means to reduce their own impacts on the planet do so too. 

Out of 30,000 of the world’s biggest listed companies, only 1% of their collective revenues are derived from pure green activities as defined by the EU Taxonomy in its current form, and 12% from brown. Putting aside the wider issue of the potential bubble this may point towards, these figures demonstrate that the world’s ‘pure green’ businesses do not yet have the capacity to deploy the volumes of capital currently invested elsewhere. There simply isn’t enough room on the green bandwagon for the number of investors clamouring to get on board. 

So how can we put the remaining 87% of economic activity to good use? If we are to truly engage with those companies that are neither green nor brown, then markets need confidence that the transition is underway for them. Data and technology can and already do tell us this. 

Data show us that since the Paris Accord was signed in 2015, the share of companies in the FTSE 100 whose environmental impact is aligned to a 1.5C temperature rise limit rose from 57% to 66%. Among the S&P 500, that figure grew from 28% to 46%. With the UN’s climate panel warning that emissions must fall by half by 2030, these improvements are clearly not enough, but it is a signal that with the correct data and a market focus on these transition companies, net emission volumes among the world’s biggest companies will continue to fall. 

There are promising signs that this transition is gaining momentum. The volume of companies disclosing the sustainability data that enable markets to gauge their progress is growing. There are glimmers of harmonisation at the regulatory level, with disclosure frameworks like the TCFD being adopted by more countries. At a technical level, the International Financial Reporting Standards foundation, whose accounting standards are used by most of the world, is developing a framework for simple and consistent sustainability reporting. 

With these initiatives falling into place, the infrastructure will be there for financial markets to play their part in mitigating the climate crisis and meeting the many heady goals and ambitions set out in at COP. But to do this, we must recognise that whether we like it or not, we need more than a few companies being perfectly sustainable: we also need millions doing it imperfectly.