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.
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.
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.