Sustainable Finance Regulatory Update: November 2022

COP 27 set the stage for lofty climate change aspirations to be realised. In the end, nation states hurriedly wrapped up negotiations to confront geopolitical realities. The most notable outcome of the summit was a ‘loss and damage’ fund to assist developing countries with the management of nature-related adversities. Despite the lackluster results of the summit, regulators around the world have been working hard to formulate economic policies through a sustainability lens.

 
Europe 

EU adopts Corporate Sustainability Disclosure Reporting Directive (CSRD)

A majority of the European Parliament voted in favour of adopting the Corporate Sustainability Disclosure Reporting Directive (CSRD). The rule is an outcome of an ambitious package of legislative measures under the European Green New Deal and Sustainable Finance Agenda. It will further corporate social responsibility obligations set by the Non-Financial Reporting Directive (NFRD) by helping to align companies’ key performance indicators with environmental and social objectives. The reporting of sustainability information will be phased in over time depending on company size, turnover and geographical presence. In the first phase of implementation, CSRD requires all large companies to report ESG-related matters starting June 2024. The European Council has also welcomed the passing of CSRD, marking a landmark shift in the region’s sustainability reporting regulation landscape. Read more

EFRAG publishes first set of draft ESRS

Following the approval of CSRD by the European Parliament, the European Financial Reporting Advisory Group (EFRAG) delivered the first set of draft supervisory reporting standards (ESRS) based on feedback for Exposure Drafts (EDs). EFRAG has addressed key concerns relating to the intersection of disclosure regulations and international reporting standards, materiality assessment and reducing the reporting burden on corporates and investors alike. Read more

ESMA launches consultation on fund labelling proposals

ESMA has launched a consultation on a new set of ESG fund labelling guidelines which would require any fund with a suggested sustainability/ESG focus to allocate a minimum percentage of holdings accordingly. Funds that are labelled ‘ESG’ or ‘impact-related’ (examples include climate change, sustainable water, biodiversity, global impact etc.,) should invest 80% of assets in the implied environmental or social category of that fund. If a fund is labelled ‘sustainable’ (or the name is derived from the word sustainable) at least 50% within the 80% minimum threshold should be invested sustainably. ESMA is seeking feedback from stakeholders on the quantitative thresholds for thematic and sustainable investing and will review all submissions after the consultation period closes on 20 February 2023. Read more

ECB sets deadlines for banks to adapt to climate and environmental risks

The European Central Bank (ECB) conducted a thematic review of the supervisory processes for the management of climate-related risks in the banking sector. The key findings reflect gaps in granular information and inadequate methodologies for considering the impact of climate and environmental risks on financial strategy and performance. ECB has concurrently published best practices to equip banks with an informal set of risk-assessment guidelines. The regulator will start cracking down on banks failing to meet ‘institution-specific’ deadlines. Banks must conduct a full assessment of the impact of environmental risks and appropriately categorize such risks by March 2023. The next deadline in 2024 would enforce the articulation of climate and environment considerations in a bank’s strategy, risk management and governance practices. Read more

ESAs Call for Evidence on greenwashing by the financial services sector

European Supervisory Authorities have invited comments from relevant stakeholders on identifying greenwashing risks that could distort the efficacy of sustainable finance regulations. The consultation will shed light on the scale of industry-wide greenwashing and address key concerns from the perspective of supervisory processes. Read more

Swiss government issues ‘Ordinance on Climate Disclosure’

Switzerland will require public companies and the entire financial services sector to identify and report on climate-related risks. The reporting rule requires companies to set quantifiable targets for positive outcomes and develop a plan for the management of climate risks. Covered entities must also assess the environmental footprint of its operations and publicly disclose Scope 1&2 emissions. The ordinance, which borrows from TCFD recommendations, will apply to companies with over 500 employees and revenue equivalent to or more than CHF 400. Reporting will be mandatory from 2025. Read more

United Kingdom

FCA to create a voluntary code of conduct for ESG data and ratings providers

The UK’s financial services regulator (Financial Conduct Authority) has convened a group of industry experts and stakeholders to formulate a code of conduct for ESG ratings providers. In line with their respective objectives, the FCA, the Bank of England and other significant financial regulators and government entities will act as observers to the working group.
It is already known that the group will be co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May. It will be composed of key stakeholders including asset managers, ESG ratings and data providers, and corporate entities.  Read more

UK Transition Plan Taskforce publishes disclosure framework

Aligning with the onset of COP27, the UK’s Transition Plan Taskforce (“TPT”) – a taskforce mandated by His Majesty’s Treasury to enable private sector actors in the UK create resilient climate transition plans to fulfil their net-zero commitments, released its new Disclosure Framework for corporate entities to disclose their climate transition plans. The Disclosure Framework is supplemented by the TPT’s Implementation Guidance, which outlines concrete measures enabling the private sector to develop climate transition plans, as well as details on when, where and how to publish such plans. The Disclosure Framework and Implementation Guidance are open for public consultation until 28 February 2023. Read more

FCA consultation on fund labelling rule

Britain’s financial regulator – The Financial Conduct Authority (FCA) – introduced a new set of rules that would apply from 2024 for the asset management industry.  The aim of the new rulebook is to prevent consumers from being misled by ‘greenwashing’ or embellished claims regarding the sustainability credentials of investments. The FCA proposed a package of measures, including a range of “sustainability labels” for investment products, and safeguards on how terms like ESG, ‘green’ or sustainable can be used. The FCA proposal comes at a time of heightened attention to the credibility of ESG labels, amidst efforts in the EU (SFDR) and the US (SEC fund labelling rule) to introduce more transparency and greater disclosure of financial products’ sustainability credentials. The proposal is open for consultation until 25 January 2023. Read more

Americas

Biden-Harris Administration Proposes Plan to Protect Federal Supply Chain from Climate-Related Risks

The White House unveiled a new plan which would require all federal contractors to disclose greenhouse gas (GHG) emissions. The Federal Supplier Climate Risks and Resilience Rule will address 85% of emissions linked to the federal supply chain and determine transparency requirements for suppliers based on annual contract values. Federal suppliers regulated under the rule must also Identify climate-related risks and set Paris-Aligned emissions reduction targets. The plan seeks to protect the government from climate-change related supply disruptions and Is part of President Biden’s Federal Sustainability Plan – a national strategy to reach net zero by 2050. Read more

US DOL authorizes retirement plan fiduciaries to consider climate risks for investment decisions

On November 22, 2022, the Department of Labor finalized a rule that would allow fiduciaries regulated under the Employee Retirement Income Security Act (ERISA) to consider climate risks when selecting investments. Although the rule does not reference or explicitly endorse ESG investing, it upholds the legitimacy of ERISA fiduciaries presenting an ESG-focused menu of investment options. By law, fiduciaries are bound by duties of loyalty and prudence and cannot subordinate the interests of plan participants. Therefore, all ESG investing must be backed by sound financial analysis that considers risk-return factors. The final rule also reinforces shareholder rights through proxy voting and requires fund managers to reconcile proxy voting policies for each investment plan. Read more

White House releases Nature-Based Solutions Roadmap

The U.S. announced a new strategy for scaling up nature-based solutions at COP27. The guidance will help “unlock the full potential of nature-based solutions to address climate change, nature loss, and Inequity”. To demonstrate the potential of its strategic recommendations, the administration has already allocated monies for federal agencies to invest in nature-powered infrastructure and set up a technical working group to study the benefits of nature-based options which would better Inform federal government’s development plans. The government will also support and finance pilot programs in military bases that utilize natural resources to improve resilience. Read more

John Kerry announces carbon-credit plan at COP to help decarbonize low- income countries

US Climate Envoy John Kerry announced the launch of the Energy Transition Accelerator (ETA), a carbon offset strategy that will allow companies to finance clean energy projects in developing countries and earn carbon credits that can be used to achieve national climate goals, at least partially. ETA upholds the principle of equitable transition through climate finance – one of the central themes at COP. In theory, the plan would accelerate the deployment of capital for renewable energy projects, however experts are divided on whether sufficient capital would be available for the developing world to achieve tangible outcomes. Read more

SEC finalizes Pay versus Performance Disclosure Rule

The US Securities and Exchange Commission (SEC) Introduced a new rule that will require public companies to disclose the correlation between executive compensation and financial performance. ‘Pay versus Performance’ mandates financial disclosures to be expressed in terms of shareholder returns, net income and other financial measures of performance that are most relevant for the company. The amendment to the executive compensation reporting rule adds to the agency’s growing list of transparency measures aimed at providing decision-useful Information to Investors. Read more

Asia Pacific

Singapore launches Green Finance Taskforce

The Monetary Authority of Singapore (MAS) announced a new initiative for fostering green finance solutions in collaboration with the People’s Bank of China (PBOC). The central banks will set up a Green Finance Taskforce that will support the alignment of the sustainable finance agenda across the ASEAN region through public-private partnerships. The Taskforce will mobilize capital for green finance investments in China and build on existing standards and definitions that form the basis of regulatory initiatives. Chinese stock exchange provider SGX (Shanghai Stock Exchange) and the SGZE (Singapore Exchange) also announced the launch of a new Low Carbon Index Family that may be used as a reference benchmark by product managers launching green funds in the region. Read more

Indonesia’s roadmap for decarbonization

Indonesia has entered the Just Energy Transition Partnership (JETP), a coalition that enables countries to achieve decarbonization targets through investment initiatives. JETP will accelerate Indonesia’s pathway to net zero in the next 10 years through stricter regulation of the energy sector. To foster investment-driven transition, the plan requires emissions from the power plants to peak in 2030 and provides for the early decommissioning of coal-fired plants. Additionally, Indonesia has proposed 34% of energy production through renewable energy sources by 2030. Read more

Other News & Resources

  • The European Union has proposed rules for all packaging in the EU market to be recyclable by 2030. Read more
  • CDP will integrate ISSB’s climate-related disclosure standards into global environmental disclosure platform. Read more
  • Central Banks and NGFS launch blended climate finance initiative. Read more
  • TNFD collaborates with NGFS for nature-related scenario analysis proposals. Read more
  • ESMA has added ESG disclosures as one of Its priority areas in the Union Strategic Supervisory Priorities (USSPs). Read more

Have we missed anything?
ESG Book manages the world’s largest repository of sustainability reporting provisions with over 3,400 regulations across 71 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

Sustainable Finance Regulatory Update: October 2022 

A year has passed since nations and transnational actors made ambitious pledges to cut greenhouse gas emissions at COP26 in Glasgow. In less than a week, we will find out who hit the snooze button on these timebound commitments and who was able to make the grade.

The European Union is steadfast to deliver on both climate and good governance goals by virtue of concerted policymaking initiatives. The EU Platform on Sustainable Finance released the Final Report on Minimum Safeguards which embeds principles of human rights and due diligence in the Taxonomy Regulation. A recently published report by the European Banking Authority (EBA) provides guidance for investment firms who wish to enhance their supervisory processes for ESG assessment. On the climate front, the European Council will cement decarbonization targets for new buildings with the aim of achieving net zero emissions by 2050. At the national level, German regulator BAFA has issued a questionnaire for companies reporting on the German Supply Chain Act. In neighbouring France, top-level organizations lobbying for responsible investing have penned down a sustainable finance policy roadmap for the country with the support of UNPRI. In nature-related news, France’s central bank is advocating biodiversity-stress testing for financial institutions.

Over in the UK, Taxonomy is shaping up, however, concerned technical advisors have warned the government of lobbying efforts to “water down” the regulation. The UK’s Financial Conduct Authority has proposed a fund classification system to prevent greenwashing. England’s central bank will assess compliance with a major regulation requiring firms to integrate and manage climate-related financial risk. The UK’s Financial Conduct Authority (FCA) introduced guidelines to enhance company reporting on net zero emissions.

Across the pond, in the aftermath of an extreme hurricane, US regulators are prioritizing climate issues. The Federal Reserve announced an upcoming climate-scenario analysis exercise with the six largest banking firms. A new advisory committee appointed by the Financial Stability Oversight Council will also examine the impact of environmental factors on the financial system.

In Asia Pacific, Japanese authorities have chalked out various aspects of sustainable finance in the flagship economic plan and stressed multilateral approaches to accelerate transition finance. Japan has also drafted guidelines to support human rights due diligence (HRDD) across the supply chain. Meanwhile, environmental risk has emerged as a hot button issue in the Philippines banking system, prompting the central bank to issue guidelines for sustainability risk management. Finally, in Australia, regulators are seeking input on several long-term climate-change related plans. The brief pause in policymaking was disrupted this month as consultation phases came to an end. More important decisions will be made by global participants at COP27 who will deliberate on the future of climate finance.

 
Europe 

EU Platform on Sustainable Finance finalises report on Taxonomy minimum safeguards
The advisory body published its Final Report on Minimum Safeguards which embeds the principles of human rights due diligence and good governance in Taxonomy Regulation. Minimum Safeguards (MS) are Taxonomy alignment activities which include employment rights, anti-bribery, corruption and taxation. The report clarifies linkages to SFDR and other high-level normative frameworks such as OECD, ILO and UNGP that are explicitly referenced in Article 18 of the Taxonomy. Corporate due diligence processes are the foundation for the assessment of MS compliance. The report recommends a safety-valve to establish final liability of companies in the event of non-compliance. To ensure full coverage, companies may also opt for third-party verification of compliance with OECD guidelines and incorporate controversy management strategies.

The European Banking Authority publishes Report on the integration of ESG risks in the supervision of investment firms
The Report offers insight into the efficacy of current supervisory processes for ESG assessment and outlines a ‘gradual approach’ to incorporate enhanced supervisory practices under the Investment Firms Directive. Credit institutions are encouraged to evaluate ESG risk through a materiality lens if equipped with robust data and verified methodologies.  Read more.

EU Proposes Rules Requiring All New Buildings to be Zero Emission by 2030

On 25th October, the European Council announced that its member states have agreed on stricter energy performance rules aimed at decarbonizing buildings as part of “Fit for 55,” the EU initiative to cut greenhouse gas (GHG) emissions by 55% by 2030, compared to 1990 levels. The Council’s position follows initial proposals made by the European Commission in December 2021, requiring all new buildings to as of 2030 to be zero-emission, and achieving a decarbonised building stock by 2050.

BAFA publishes Catalogue of Questions on the German Supply Chain Act

On 14 October, the BAFA (The Federal Office for Economic Affairs and Export Control) published the catalogue of questions for reporting on the German Supply Chain Act (LkSG). The document allows companies to check how they can fully comply with their reporting obligation from 01.01.2023. The document can be found here. All companies that fall under the scope of the LkSG must regularly publish a report on compliance with the statutory due diligence obligations. The report is generated from the answers in a structured questionnaire. From January 2023, an electronic portal for the reports will be available at the Federal Office of Economics and Export Control (BAFA). The full BAFA press release can be accessed here.

Sustainable finance policy roadmap for France
Leading French advocacy organizations Finance for Tomorrow and the Forum for Responsible Investment (FIR) – have partnered with UNPRI to further develop a sustainable finance policy roadmap for France. The document outlines France’s achievements thus far and proposes advancements in regulation for the benefit of policymakers and investors.

France’s Central Bank recommends biodiversity stress testing
Banque de France deputy governor, Sylvie Goulard, called for central banks to incorporate biodiversity shocks into stress-tests of financial institutions. Ms Goulard called for promoting new nature-related stress testing exercises (including both climate and biodiversity shocks) for banks and financial institutions and for global financial stability. Read more

 
United Kingdom
UK FCA clamps down on “greenwashing” with proposed restrictions on fund managers claiming to be “green” and “ESG” in fund advertising
Rules set out by the Financial Conduct Authority on 25 October embody a set of three fund labels to tell apart forms of “green” investing and imposing the next burden on corporations to again up advertising with proof. There will be three categories of labels for sustainable investment products: Sustainable focus (for products investing in assets that are environmentally or socially sustainability); sustainable improvers (for products investing in assets to improve the environmental or social sustainability over time, including in response to the stewardship influence of the firm); and sustainable impact (for products investing in solutions to environmental or social problems to achieve positive, measurable real-world impact). The consultation is open until 25 January 2023. The FCA intends to publish final rules by the end of the first half of 2023. Read more.

UK Green Taxonomy Advisory Group (GTAG) issues first recommendations
The UK’s foremost advisory board for Taxonomy Regulation has unveiled plans for the integration of technical screening criteria and developed guidance for the consideration of the ‘do no significant harm’ principle within a local context. On a separate note, the GTAG expects backlash from lobbying groups with hopes to overturn or “water down” the forthcoming regulation. Read more.

Bank of England warns banks and insurers about tougher checks
The Bank of England’s Prudential Regulation Authority warned banks and insurers under its jurisdiction about tougher scrutiny should they fail to meet the PRA’s expectations on how to appropriately deal with climate risks. Read more.

The UK’s Financial Reporting Council publishes guidance to assist companies reporting on net-zero commitments
To help companies improve their reporting on net zero commitments, the FRC Lab has published its Net zero disclosures report, which provides companies with practical tips and questions to consider when preparing disclosures in their financial reports on net zero and other Greenhouse Gas (“GHG“) reduction commitments. Companies that adopt net zero targets are increasingly required to disclose not only the targets themselves, but also supporting information, through mandatory disclosure regimes such as those aligned with the Taskforce on Climate-related Financial Disclosures (“TCFD“).  As noted in the UK Financial Reporting Council’s (“FRC“) Statement of Intent on Environmental, Social and Governance challenges, it remains the case that reporting on net zero targets is often too high-level, failing to provide stakeholders with sufficient information.  Investors are increasingly calling for better information to be provided in financial statements, including information that connects a company’s net zero targets to relevant disclosures. Read more.

Americas
US Fed announces Climate Scenario Analysis testing for banks
The pilot program will further strengthen the financial system by streamlining management of climate-related risks. Participating banking organizations will have to assess the impact of a unique climate scenario narrative on portfolios and financial strategy. The Federal Reserve will assign climate scenarios and publish the findings to provide further insight into the current level of preparedness within the context of environmental and economic variables. Read more.

Climate-related Financial Risk Advisory Committee launched by US Financial Stability Oversight Council
The Financial Stability Oversight Council has set up an official committee for the oversight and management of climate-related risks in the financial system.  The multistakeholder committee must act in an advisory capacity and is tasked with mitigating existing climate-related risks and identifying emerging threats to the stability of the financial sector.  Read more.

Asia Pacific
Japan’s Cabinet Secretariat presents latest plans on New Form of Capitalism
The Japanese government has set aside a considerable economic package of 28.9 trillion yen to battle inflation and focus on sustainable growth. The regulation emphasizes the value of ‘responsible business’ which is tied to employee rights. Additionally, it stresses the necessity of investing in climate-related technology. Read more.

Japan publish Guidelines on Respect for Human Rights in Responsible Supply Chains
On 13 September 2022, the Japanese Government published its Guidelines on Respecting Human Rights in Responsible Supply Chains, which recommend that all enterprises engaging in business activities in Japan respect human rights in their supply chains and carry out HRDD.

Australia: Current climate change-related consultations open for submission
Australia’s Government has opened consultation on the proposed National Electric Vehicles Strategy that considers employment within the context of an advanced economy on track to be net zero by 2050. If implemented, the strategy will drive support for the adoption of electric vehicles by consumers and provide adequate refueling infrastructure.

Philippines issues environmental risk guidance
The Bangko Sentral ng Pilipinas (BSP) has issued guidelines on the integration of sustainability risk management for the financial sector. It is suggested that firms adhering to these guidelines adopt risk management in proportion to their size and complexity of operations. Read more.

Other News & Resources

  • ISSB unanimously confirms Scope 3 GHG emissions disclosure requirements: At its October meeting, following careful analysis of the feedback on its proposed standards, the ISSB voted unanimously to require company disclosures on Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions, applying the current version of the GHG Protocol Corporate Standard. As part of these requirements, the ISSB will develop relief provisions to help companies apply the Scope 3 requirements. This relief will be decided at a future meeting and could include giving companies more time to provide Scope 3 disclosures and working with jurisdictions on so-called ‘safe harbour’ provisions. Read more.
  • ISSB to require companies to use climate-scenario analysis: The climate-scenario analysis inform portfolio climate resilience and the ISSB has also agreed to provide TCFD-integration guidance. Read more.
  • Financial Stability Board (FSB) publishes progress report with recommendations for draft legislation on climate-related risk. Read more.
  • The Global Treat to End Plastic Pollution: A coalition of global businesses and NGOs have signed a treaty to end plastic use. Read more.
  • Letter to EU Commission in defence of EU standards for corporate sustainability reporting: In a letter signed by 37 organisations, representing civil society and trade unions, urge the European Commissioner to stay committed to the development and adoption of an ambitious and urgent framework to improve and standardise corporate disclosure on sustainability matters in the EU. The letter wrote to decision-makers in order to dispel doubts and critiques that go against the mandate provided by co-legislators in the CSRD. Read more.
  • The G20/OECD Principles are being reviewed in light of recent evolutions in capital markets and corporate governance policies and practices.
  • GFANZ drops race to zero requirements: The coalition of climate-focused financial institutions will no longer require participants to commit to the UN’s Race to Zero campaign. Read more.

Did we miss anything?

ESG Book manages the world’s largest repository of sustainability reporting provisions with over 3,400 regulations across 71 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.
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Sustainable Finance Regulatory Update: September 2022 

World leaders and the private sector converged at Climate Week New York to discuss insights on finding growth in challenging times. In the policymaking world this month, governments resumed efforts to catalogue what constitutes a ‘good’ corporate citizen. Draft legislation in the EU is emphasizing supply chain due diligence with a focus on biodiversity and human rights. The ECB, in the same timeframe, introduced climate scores to underscore the importance of portfolio decarbonization. In a state of urgency, three ESAs submitted a final report with Regulatory Technical Standards (RTS) for disclosure of fossil gas and nuclear investment activity under SFDR. Switzerland’s asset management authority has provided guidelines which will be enshrined in a sustainability framework. Turning to the UK, corporates and investors alike noted patchwork policymaking in the region due to the delayed institution of a regulation enforcing human rights and environmental due diligence (HREDD). In contrast to the HREDD focus, the US is putting a spotlight on the governance pillar of ESG. The S.E.C. has baked ‘pay versus performance’ disclosures into listing requirements. Over in China, the government has released a ‘Plan’ which will establish a system to standardize emissions accounting methods. Further south, Australia is doubling down on its net zero commitments with the passing of an historic climate bill. The country is also reviewing the Modern Slavery Act and has encouraged the public, particularly businesses, to submit feedback. Despite the multitude and variance of policies across countries, sustainability has become the mainstay of prominent multilateral agreements. The upcoming COP27 will set the stage for state actors to deepen cooperation and collaboration.
Europe 
The European Commission presents ban on products made with forced labor in the EU market 
On September 14, 2022, the European Commission published its proposal for a Regulation introducing a ban on placing and making available products made with forced labor on the EU market. The regulation would require Member States to appoint a competent authority to review value chain risk assessment of economic operators. The degree of risk-based enforcement will vary depending on the size of the company. SMEs will be exempted from a threshold clause in the regulation that warrants forced labor investigations. Access the proposal here.
The European Parliament has requested that banks conduct due diligence to prevent their involvement in projects linked to deforestation 
MEPs voted in favor of strengthening proposals for a regulation to prevent the import of products produced in deforested areas. The draft law will expand the definition of “forests” to include “wooded land”, initially targeting six commodities that are historically linked to deforestation and human rights abuses – soy, beef, palm oil, timber, cacao and coffee. On the due diligence side, companies must verify compliance with global standards for human rights and uphold the rights of indigenous peoples. Conservation experts, though largely supportive of the new bill, argue that other ecosystems such as wetlands and drylands should be in scope of the EU Deforestation Law. Read more.
ESAs propose disclosure requirements for taxonomy-aligned fossil fuel and nuclear activity 
Three European Supervisory Authorities (EBA, EIOPA and ESMA) have proposed enhanced disclosure requirements for financial products investing in nuclear energy and fossil gas. The final report with RTS seeks to provide transparency to investors by assessing a financial product’s level of involvement in fossil gas and nuclear energy. These disclosures are aligned with the Complementary Climate Delegated Act and are complementary to existing disclosures under SFDR for nuclear and fossil gas activities. The European Commission will fast-track review of the draft RTS disclosure requirements and decide on the applicability date of the final version. Read more.
AMAS publishes guidance for implementing ESG framework  
The Asset Management Association of Switzerland (AMAS) is advocating self-regulation for sustainable portfolio management by introducing a new ESG framework. Retail investors and asset managers of Swiss collective investment schemes choosing to adopt the framework will have to report specified governance metrics and institute an organizational process to meet disclosure obligations. In addition to compliance with ESG rules, executives and other employees must demonstrate competency in sustainability risk management. Read more.
ECB introduces climate scores for portfolio management 
The European Central Bank (ECB) has introduced climate scores following an announcement to integrate climate action into its monetary policy. Climate scores are intended to help decarbonize more than 380bn euros of corporate bond holding on a long-term basis. The ECB will exclude securities with a high-level of exposure to climate-related risks and support the sale of bonds by issuers with a strong climate performance. To determine the overall rating, the regulator will assign a score based on backwards-looking emissions (Scope 1 and 2 at the issuer level), emissions modeling (at the sectoral level) and disclosure quality. Read more.
United Kingdom 
Businesses and investors lobby to support due diligence mandate  
The UK’s departure from the European Union is reflected in ESG policy misalignment and this can only be remedied with timely government intervention. More than 40 companies, investors and business associations have expressed concerns about policy gaps between the UK and the EU by issuing a joint statement in support of regulation enforcing environmental and human rights due diligence obligations. Business groups have previously also highlighted the necessity of a ‘Business, Human Rights and Environment Act’ in line with EU laws. Read more.
Americas
US Securities and Exchange Commission issues ‘pay versus performance’ rules 
Listed companies will now have to disclose how top management’s pay relates to performance and can supplement this information with metrics that relate to environmental, social and governance factors. An overview of compensation must be reported in a summary table with principle executive officer’s pay and average executive pay over the last five fiscal years (three years for small companies). The S.E.C. rule has also specified indicators of financial performance to include total shareholder returns and net income. Read more.
Asia pacific 
China Issues a Plan to Establish a Carbon Emission Statistical Accounting System  
China’s National Development and Reform Commission (NDRC), National Bureau of Statistics (NBS) and Ministry of Ecology and Environment (MEE) of the People’s Republic of China (PRC) have jointly developed the “Implementation Plan on the Accelerating the Establishment of a Unified and Standardised Carbon Emission Statistical Accounting System. The System is designed to improve the quality and comparability of carbon emissions data at the national and local level. Read more.
Australia passes landmark climate bill to achieve net zero emissions by 2050 
In a notable shift from Australia’s conservative approach to climate policy, the Parliament voted to raise emissions reduction targets to a level 50% higher than under the previous government. The newly introduced bill further requires the government’s clean financing and energy infrastructure bodies to incorporate the emissions reduction targets in the overall operations strategy. Australia’s Green Party and Labor are also set to draft supplementary legislation providing for a “safeguard mechanism” that punishes the country’s biggest industrial polluters. Read more.
Review of Australia’s Modern Slavery Act 
The Australian Government is seeking feedback from the public on the implementation of the Modern Slavery Act (MSA) over the past three years. MSA is applicable to all entities owned and operated in Australia with over A$100 total revenue. The regulation sets forth disclosure requirements for identifying and managing the risk of modern slavery in the supply chain on annual basis. As it currently stands, the law does not impose penalties on companies that fail to comply. In its final review, the Government may incorporate recommendations from interested stakeholders, including business, on how to enhance the law. Read more.
Other News & Resources 
  • NGOs walk out on the EU Taxonomy: five environmental and consumer organizations have left the EU advisory group Platform on Sustainable Finance because, they say, the European Commission had “interfered politically” in the platform’s work. Read more.
  • IOSCO Report: Education on sustainable finance helps protect investors against fraud and greenwashing. Access the report here.  
  • Singapore’s MAS releases Industry Transformation Map 2025: The plan will help guide financial market participants through the transition to a net zero economy. Read more.
  • GRI to update 2021 framework: GRI will integrate human rights reporting in the framework’s labor Topic Standards. Read more.
  • UK Green Taxonomy in discussion: The All-Party Parliamentary Group on ESG (APPG) held a high-level discussion on Green Taxonomy in anticipation of legislation later this year. The group will publish a GT report based on the internal discussion which will cover topics such as greenwashing and tools for sustainable investing. Read more.

Sustainable Finance Regulatory Update: August 2022

Policymakers are continuing to develop a comprehensive mechanism for investigating funds that label themselves as ‘ESG.’ A new chapter also begins in the ratings industry as regulators are pushing for long anticipated oversight and accountability. The long-awaited Social Taxonomy in Europe has been put on hold as regulators question the complexity of implementation. In Germany, regulators will now require risk analysis for supply chain due diligence. The Financial Conduct Authority (FCA) in the UK are independently evaluating the quality of TCFD climate disclosures. Across the Pond, U.S. President Biden has approved a landmark bill providing funding for climate and energy innovation over the next decade. In Australia, the financial services authority has issued new guidelines to help investors assess the level of preparedness in managing climate risk. Also in Asia Pacific, Japan has unveiled the world’s first code of conduct for ESG data providers. Turning to emerging markets, Nigeria’s securities exchange is taking stock of climate risk management by preparing disclosure guidelines. Countries around the world are building momentum around climate change policy by monitoring evolving threats in a local context. Global standards are not likely to be adopted by governments wholesale but may help shed some light on reporting best practices.

 
Europe 
The European Social Taxonomy postponed indefinitely 
According to sources, the EU Social Taxonomy has been postponed indefinitely due to difficulties in arriving to a common conceptual framework that would work at both the EU and global level. The EU’s Platform on Sustainable Finance published a set of proposals for the social taxonomy in February 2022, after a four-month delay from the original schedule. The list includes guidelines on pay, gender equality and sustainable supply chain practices. The recommendations did little to accelerate the process, leading up to a political stalemate. The implications for firms and investors who were looking to work with a well-defined set of ‘Social’ criteria could be significant. Read more. 

Germany’s Economic Affairs Department provides guidance to support compliance with a due diligence law 
BAFA (Bundesamt für Wirtschaft und Ausfuhrkontrolle) has issued guidance for companies required to conduct risk analysis under the German Supply Chain Due Diligence Act (SCDDA). The law requires companies to assess environment and human rights characteristics across the supply chain on an annual basis. Companies may also produce ad hoc risk reports in circumstances where there are substantiated findings or operational changes. The purpose of risk management is to help companies implement ‘appropriate’ measures to rectify negative outcomes and business impact. Read more.

 
United Kingdom 
UK’s FCA and FRC review the quality of premium listed companies’ climate disclosures 
The Financial Conduct Authority (FCA) and Financial Review Council (FRC) have independently conducted high-level analyses of TCFD aligned disclosures from premium listed companies. The reports acknowledge an uptick in climate disclosures from 2020, following the implementation of ‘comply or explain’ listing requirements since January 1, 2021. Report findings show steadily improving quality of disclosures with 90% reliability rate for governance-related metrics. However, a review of quantitative data such as scenario analysis shows that companies are having issues with TCFD recommended materiality assessment. For future disclosures, FCA and FRC recommend furnishing granular data such as climate change data across the supply chain and on a sectoral level in accordance with TCFD’s four themes. Read more. 

Americas   
Biden signs landmark US climate and energy investment bill, aiming to cut GHGs 
US President Joe Biden signed the Inflation Reduction Act on Aug. 16, providing for $370 billion in energy security and climate change spending over the next ten years. The legislation has the intention of spurring innovation in clean energy and transportation manufacturing and driving down greenhouse gas emissions. Read more.

Asia pacific 
Australia’s Financial Services Council issues climate disclosure standards for asset owners 
Australia’s financial services authority has issued new guidelines establishing ‘common baseline expectations’ for the disclosure of climate-friendly investment by investment managers. The voluntary guidelines support the management of climate risk and illuminate the investment management industry’s path to achieving net-zero commitments. Read more.  

Japan compiles code of conduct for ESG data providers 
Japan’s Financial Services Authority has become the first national regulator to prepare a code of conduct for ESG data providers. A voluntary set of guidelines provides the framework for building technical skills and competencies across the industry. The draft code is also a direct response to a report questioning the legitimacy of ESG ratings and other data published by the International Organization of Securities Commissions (IOSCO) in 2021. The code of conduct contains 6 pillars to improve the quality and transparency of data. It encourages all organizations providing ESG data in Japan to signal the robustness of evaluation and proprietary data. Read more.

Africa and middle east  
Nigeria’s stock market regulator to issue new climate disclosure guidelines 
Nigeria’s top stock exchanges will release the first set of climate disclosure guidelines to complement existing sustainability disclosure guidelines. The forthcoming guidelines will borrow from TCFD and contain best reporting practices in compliance with global standards such as GRI. A voluntary regulation will help key actors across the investment chain navigate the ESG landscape, however, the regulator is hoping the government will set mandatory ESG and climate reporting requirements. This will help create ‘deliberate partnerships’ between public and private stakeholders in Nigeria. Read more. 

Other News & Resources 

  • Call for feedback on Minimum Social Safeguards criteria: Open until 6 September 2022. The Platform on Sustainable Finance seeks public feedback on its 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 Platform’s advice will feed into Commission work on the usability of the EU taxonomy. Read more. 
  • Eurosif Survey on Climate Data & Indicators: With its survey Eurosif wants to better understand which climate-related information are truly decision-useful for investors. The survey will be open until 7 October 2022. Read more. 

ESG Quick Takes 7: US Climate and Energy Policy is behind

What does the inflation reduction act mean for business and investors and how does it impact the energy transition?

We are talking to Samantha Gross who is a fellow and director of the Energy Security and Climate Initiative at The Brookings Institution. Her work is focused on the intersection of energy, environment, and policy. Gross has more than 20 years of experience in energy and environmental affairs. She was director of the Office of International Climate and Clean Energy at the U.S. Department of Energy. Before that, Gross was director of integrated research at IHS CERA. She has also worked at the Government Accountability Office on the Natural Resources and Environment team and as an engineer, directing environmental assessment and remediation projects. Gross holds a Bachelor of Science in chemical engineering from the University of Illinois, a Master of Science in environmental engineering from Stanford, and a Master of Business Administration from the University of California at Berkeley. Follow her on Twitter for more, and see her latest article on the Inflation Reduction Act here.

DISCLAIMER

ESG Book, 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 ESG Book 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.

ESG Quick Takes 6: Investing on a Net-Zero Emissions Budget is Impossible

As a growing number of investors have Net Zero targets, the question comes up: what does a Net Zero pathway look like?

We are talking to climate scenario wizard Sven Teske, who researches energy decarbonisation pathways at the Institute for Sustainable Futures, University of Technology Sydney. Most recently, Sven Teske led the work on the One Earth Climate Model (OECM) commissioned by the UN-convened Net-Zero Asset Owner Alliance and the European Climate Foundation. In this episode, he presents a clear picture of what decarbonizing the world looks like, and puts this ambition in context with actual developments, such as the recent US Supreme Court’s decision to curb the power of the Environmental Protection Agency (EPA).

DISCLAIMER

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

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

Sustainable Finance Regulatory Update: July 2022

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

Other News & Resources

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

Sustainable Finance Regulatory Update: June 2022

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

Europe

Provisional Agreement for EU Sustainability Disclosure Rules

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

EU agrees 40% gender quota for corporate boards

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

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

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

EU compromises on green measures including CBAM

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

EUROSIF calls for a proportionate regulatory framework for ESG ratings providers

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

ESMA publishes findings from ESG Ratings Call for Evidence

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

French regulator AMF calls for stricter regulation of ESG ratings providers

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

United Kingdom

UK aligns pension fund metrics with net-zero strategy

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

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

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

Americas

CFTC releases RFI on climate-related financial risk

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

Asia

China issues first ESG disclosure standard

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

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

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

Other News & Resources

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

ESG Quick Takes 4: Decarbonizing heavy industry

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

Guest description:

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

 

 

DISCLAIMER

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

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

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.   

Timeline 

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. 
  •  

2022 

https://www.wilmerhale.com/en/insights/client-alerts/02102022-esg-the-eu-agenda-for-2022-what-you-need-to-know

https://www.jdsupra.com/legalnews/esg-2021-trends-and-expectations-for-9913234/