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.


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.

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.

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