ESG Policy Digest: December 2023

In this month’s Policy Digest, we dive into various developments that reflect the evolving status of the Sustainable Finance Disclosure Regulation (SFDR). Most recently, the European Supervisory Authorities’ (ESAs) Final Report on Regulatory Technical Standards (RTS) included new and updated indicators for reporting entities under SFDR. Meanwhile, the European Securities and Markets Authority (ESMA) issued high-level guidance on the interpretation of key concepts and definitions embedded within the sustainable finance framework. In the banking and financial services sector, the European Banking Authority (EBA) released the final templates and guidance for a one-off Fit-for-55 climate risk scenario analysis, involving approximately 110 EU banks. Regulation is also progressing on the sustainability ratings and data front, as European Parliament members made changes to the draft ESG ratings regulation, requiring providers to disclose the weighting of environmental, social, and governance factors. Additionally, the European Council adopted a proposal for centralized sustainability information, establishing the European Single Access Point (ESAP).

In the UK, the Financial Conduct Authority (FCA) finalised a sustainable investment fund labeling regime, introducing four labels and an Anti-Greenwashing Rule. The UK Parliament is also taking steps to enshrine “reasonable” human rights and environmental due diligence (HREDD) into law.

Moving to Taxonomy-related news, the Monetary Authority of Singapore (MAS) launched a multi-sector transition taxonomy to aid financial institutions in identifying green and transition activities. MAS also released a voluntary code of conduct (CoC) for ESG data and ratings providers. Also featured in the Asia-Pacific region update is Australia’s plan for a new Sustainable Finance Strategy. Australia’s Treasury has proposed mandatory climate-related financial disclosures, a sustainable finance taxonomy, and a labeling system for sustainable investment products under the new Strategy.

With the release of both ISSB standards and the European Sustainability Reporting Standards (ESRS) this year, regulators and standard setters alike are signaling a promising new era of alignment.  Once these standards are formally adopted and rendered in varying contexts, global regulators will start to examine the building blocks of sustainability reporting– ESG data and ratings – that have so far been outside the sphere of regulation in many jurisdictions.




ESAs release Final Report on Regulatory Technical Standards for SFDR

European financial regulators are finalising the list of mandatory and optional Principle Adverse Impact indicators as part of the disclosure rules for financial products under the Sustainable Finance Disclosure Regulation (SFDR). The SFDR, effective since March 2021, mandates financial market participants and advisers to disclose sustainability integration at both entity and product levels. On 4th December, European Supervisory Authorities (ESAs) announced the publication of their Final Report amending the draft Regulatory Technical Standards (RTS). The RTS proposes new climate and social reporting metrics, including greenhouse gas (GHG) reduction targets and mandatory social metrics such as inadequate wages and exposure to tobacco cultivation and production. Importantly, there is an ongoing targeted consultation on SFDR. The European Commission is seeking feedback from stakeholders on how SFDR has been implemented so far and even proposed a revised system of product categorisation, given that the regulation has become a de facto fund labeling regime. The targeted consultation additionally explores the relevance of the existing list of PAIs. Areas of focus include the methodology of adverse impact indicators (materiality assessment for certain indicators), disclosure costs, data quality, and clarity of legal concepts embedded within the framework.  Read more


ESMA publishes explanatory notes on key concepts in EU’s sustainable finance framework

The European Securities and Markets Authority (ESMA) has also acknowledged the recent focus on SFDR and questions around the assessment of the sustainable investment definition carried out by taking into account PAI indicators. ESMA has published three explanatory notes clarifying: a) the definition of sustainable investments; b) the application of the do no significant harm (DNSH) principle and; c) the use of estimates. These documents may be used as guidance supporting the implementation of the sustainable finance framework which includes both SFDR and the Taxonomy Regulation. SFDR introduces the key concept of ‘sustainable investment’ while the Taxonomy defines ‘environmentally sustainable’ economic activities. The Taxonomy Regulation interacts with SFDR mainly by necessitating DNSH checks for ‘environmentally sustainable’ economic activities. Despite similarities between these concepts and definitions, there may be differences in interpretation that could create practical challenges for both market participants and regulators in terms of legislative coherence. Read more


European Parliament advances ESG ratings regulation

MEPs have proposed significant changes to the draft ESG ratings regulation. The newly adopted changes would require ESG ratings providers to disclose the weighting of environmental (E), social (S), and governance (G) factors in the aggregation of ESG scores. Furthermore, the breakdown of ESG ratings should include information on the extent to which a rating considers alignment with the decarbonization objective outlined in the Paris agreement and compliance with international conventions and standards across the ‘S’ and ‘G’ dimensions. Black box methodologies have been a longstanding issue plaguing the ESG ratings industry and the European Commission’s new rule would dig deeper into ESG scoring by imposing transparency requirements in two ways. First, the MEPs have adopted a ‘double materiality’ approach as best practice for the industry and are imposing a requirement for ratings products to explicitly disclose the selected materiality approach which may consider: i) both material financial risk and the overall impact on society and the environment; ii) only one of these. Second, to prevent providers from obscuring analysis around ratings, they must publicly disclose methodological information, models and key assumptions. Therefore, while there are no prescriptive methodological standards for the industry, the rule puts the onus on providers to create better governance systems to ensure that the methodologies for assessment, underlying data and analysis are sound.  Additionally, to reduce barriers to entry for new players, the rule provides that an entity seeking to obtain more than one ESG rating will have to select at least one provider with a market share below 15%. Read more


EBA finalises template for one-off climate stress test

The EBA has finalised templates and guidance for a one-off Fit-for-55 climate risk scenario analysis, with approximately 110 EU banks set to participate. Commencing on 1st December 2023, and concluding on March 12, 2024, the exercise aims to collect climate data to assess the resilience and preparedness of EU banks in the context of climate change.  The templates cover credit, market, and real estate risks, as well as interest, fees, and commission income. Banks must report aggregated and counterparty level data based on December 2022 balance sheet data. Aggregated data will inform climate-related risks in the financial sector more broadly, whereas the aggregated data will give an idea of ‘concentration risk of large climate exposures’. The EBA will also use aggregated data to study amplification mechanisms and second round effects. Read more


EFRAG and GRI announce joint release of an ‘Interoperability Index’

In a recent board meeting, the European Financial Reporting Advisory Group (EFRAG) announced the release of a draft ESRS-GRI Interoperability Index. The Index is a mapping tool which will help companies identify the ‘commonalities between ESRS and GRI Standards’ and reduce the corporate reporting burden. The mapping establishes a connection between the paragraph-level ESRS disclosure requirements and their corresponding GRI disclosures and requirements. Based on the mapping, companies that are reporting under ESRS can be considered as reporting “with reference” to GRI standards. Furthermore, if a company reporting under ESRS voluntarily discloses additional GRI requirements not covered under ESRS, it will be “in accordance” with GRI standards. In terms of materiality assessment, the joint initiative has clarified that GRI Disclosures can be reported as entity-specific disclosures in the ESRS report, provided that ESRS does not cover the material impact of the company or to a sufficient level of granularity. The mapping file will be publicly available in Excel format once it is finalised and approved by both GRI and EFRAG. The collaboration is a clear signal that regulators and standard setters alike are working towards a global baseline for sustainability reporting.  Read more


European Council adopts the proposal for centralized sustainability information

On 27th November 2023, the Council adopted the proposal for the regulation establishing the European Single Access Point (ESAP). ESAP will function as a centralized platform for public financial and non-financial information on EU companies and investment products. The platform will give investors access to sustainability data in a free, digital and user-friendly manner. Overall, the regulation aims to empower a broad range of investors with decision-useful information and facilitate the allocation of capital towards sustainable investments. The ESAP platform is expected to launch in summer 2027 and is set to gradually become the one-stop shop for sustainability-related information by collecting data disclosed against key regulations in the EU’s Sustainable Finance Action Plan – SFDR, EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD). Read more


United Kingdom


UK FCA finalises sustainable investment fund labelling regime

On 28th November, the FCA released its final Policy Statement outlining Sustainability Disclosure Requirements (SDR) for investment labels. Based on feedback received from various stakeholders, the regulator has introduced four labels – ‘Sustainable Focus’, ‘Sustainable Improvers’, ‘Sustainable Impact’ and a newly launched ‘Sustainable Mixed Goals’ category. Firms will be able to use sustainability labels starting 31 July 2024 provided they meet the general and label-specific criteria. Each voluntary sustainability level has a distinct objective. These include criteria such as a minimum of 70% of assets aligning with the sustainability objective and general criteria applicable to all labels. The SDR also mandates sustainability disclosures at both product and entity levels, encompassing retail and professional investors. To support the implementation of SDR, specific naming and marketing rules will be established, preventing certain terms from being used in fund names. Lastly, the package of measures introduces an Anti-Greenwashing Rule that will be in force by 31st May 2024.  Read more


UK Introduces draft Commercial Organisations and Public Authorities Duty (Human Rights and Environment) Bill

Baroness Young of Hornsey introduced the Commercial Organisations and Public Authorities Duty (Human Rights and Environment) Bill to the House of Lords, aiming to make human rights and environmental due diligence (HREDD) mandatory in the UK. The bill aligns with global standards, and companies are advised to prepare for potential legal requirements. The bill mandates that commercial organisations prevent human rights and environmental harms in their operations and supply chains, emphasising stakeholder engagement. Annual reporting would be required for companies surpassing a turnover threshold. Non-compliance may result in civil penalties, fines, and exclusion from public contracts. The bill provides guidance on tailoring HREDD to an organisation’s specifics, stressing integration into policies and public reporting. Best practices include establishing board-level processes, monitoring legislation, engaging stakeholders, conducting impact assessments, and reinforcing complaint mechanisms. Read more.


Asia Pacific


Monetary Authority of Singapore launches multi-sector transition taxonomy

With the release of the latest global taxonomy, MAS has integrated the unique feature of ‘starting positions’ and emphasised inclusive economic and social development. The aim of this classification system is to aid financial institutions in identifying green and transition activities. The ‘multi-sector’ taxonomy sets out environmental objectives and activities that are in scope. It also provides metrics and thresholds for the delineated objectives, explaining how an activity can be considered ‘green’ or the levels of alignment needed to be considered ‘transitioning’. Singapore has become a regional leader in sustainable finance, due in part to of MAS’s active participation in local, regional and global taxonomy initiatives, aiming to enhance the coherence of taxonomy frameworks on a broader scale. Read more


Singapore releases voluntary code of conduct for ESG data and ratings providers

Singapore’s MAS has also launched a code of conduct for ESG data and ratings providers in a bid to enhance transparency in the industry, improve comparability and reliability ESG data and scores. This marks a substantial shift in an industry that has experienced rapid growth outside the sphere of regulation. However, the code of conduct will be rolled out on a voluntary basis, incorporating a ‘comply or explain’ approach for providers. This will be accompanied by a checklist for providers to attest to their compliance. Providers are expected to have governance structures, including written policies and procedures for assuring that the methodology and supporting analysis is sound for all data ratings products. Regulators are focused on transparency of ESG ratings methodology and data sources and preventing conflicts of interest.  Read more


Australia’s Treasury announces plans for legislative reform under the new Sustainable Finance Strategy

Australia’s Treasury department has announced the proposal of a Sustainable Finance Strategy, featuring key initiatives such as establishing a framework for sustainability disclosures, creating net-zero transition plans, developing a sustainable finance taxonomy, and introducing a labeling system for sustainable investment products. The government aims to implement mandatory climate-related financial disclosure requirements for companies and financial institutions, starting in 2024 for large businesses and phased in over the next three years for smaller entities. The proposed taxonomy, initially developed by the Australian Sustainable Finance Institute (ASFI), aims for international alignment. Additionally, the government plans to create a labeling regime for investment products marketed as ‘sustainable,’ focusing on retail investors, with Treasury commencing work on this initiative in 2024. The regime will include requirements for issuers to provide additional information on how sustainability is integrated into the investment process. Read more



Other news & resources

  • Bursa Malaysia to launch platform for mandatory ESG reporting. Read more
  • The Partnership for Carbon Accounting Financials has published standards on how its signatory banks should account for financed emissions.
  • EFRAG and CDP announce cooperation to drive market uptake of ESRS. Read more
  • TCFD has officially disbanded and integrated into ISSB. Read more


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