2023 marks a considerable shift in priorities at the intersection of politics and business. This was evident at the World Economic Forum in Davos, where regulators and industry leaders set out key objectives to revitalize the global economy and promote sustainable development in an increasingly turbulent and fragmented world. In the aftermath of a global energy crisis, regulators are vying for market stability and a steady decoupling from unsustainable fossil fuel assets. Consequently, clean energy financing was widely debated in Davos as part of a larger incentive scheme across the EU. In the policymaking world this month, the European Central Bank was in the spotlight after launching a new set of indicators to help banking organizations measure emissions and track green finance flows.
Ahead of Davos, US governmental bodies announced a series of policy measures to accelerate growth and investment in ‘green’ economic activities. First, the US Securities and Exchange Commission (“SEC”) confirmed the issuance of a finalized Climate Disclosure rule in April 2023. Also, this month, the White House revealed a nature-based accounting system to measure the value of natural resources in economic terms. Turning to the banking sector, the US Federal Reserve launched a pilot exercise to gain insight into the banking sector’s preparedness and resilience in terms of climate-related risks.
In other parts of the world, ESG policies focused on regulating companies and data providers. Australia’s carbon trading scheme is under scrutiny after an independent investigation of emissions offsetting methods. In South Korea, the Financial Supervisory Service (FSS) has created guidance for ratings agencies that conduct ESG-bond evaluations.
Sustainability regulation around the world provides the necessary checks and balances for financial markets whose logic is often embedded in oscillating behavior-driven choices. Although the number of ESG policy interventions restores optimism in the pace of transition, we must also acknowledge the influence of a growing list of ESG critics and polarized debate. Regulators need to stand up to the challenge of providing market certainty and clarity, while not stifling innovation and entrepreneurship.
ECB launches statistical indicators to help banks analyze climate-related risks
The ECB introduced a set of indicators to help assess climate-related risks in the financial services sector and monitor the flow of green transition finance. The ‘analytical’ indicators – financed emissions (FE) and carbon intensity (CI) – measure carbon emissions financed by the financial services sector. Financed emissions would measure an issuer’s total greenhouse gas emissions weighted by the investment as a share of the company’s total value. The resultant Financed Emissions is a unit of measure that can be compared to the production value of the company to calculate Carbon Intensity, with an additional consideration of transition risk indicators and exposure of loans and securities to high-emitting economic activities. The ECB has also included sustainable finance indicators in the data set to track the progress of sustainability-linked bonds in the EU market. At this stage, the ECB metrics are ‘experimental indicators’ and the ECB has advised to use them ‘with caution’. The ECB welcomes comments and feedback, however, no deadline regarding the implementation of the indicators has been specified.
US clean energy package encourages EU lawmakers to introduce centralized green incentives system
The United States earmarked a substantial portion of the federal budget for clean energy subsidies. European legislators noted that the multi-billion-dollar package would create a huge windfall for clean energy businesses in America. To remain competitive with the US, several member states are now calling for an EU-wide measure to scale investment in alternative energy. Regulators and industry leaders also discussed the reality of record high energy prices which necessitate a shift towards renewable energy. However, currently, there is no stopgap EU-wide measure that would expedite the permit process for renewable energy companies.Read more
SEC confirms final Climate Disclosure Rule in April
The SEC announced that it would release the final rule to enhance climate-risk reporting for investors in April. Central to the rule is a GHG emissions reporting requirement to facilitate comparability between investment securities. Emissions metrics will be a critical component for the standardization of ESG data, which, in turn, will help funnel capital inflows towards climate-related investment opportunities. Additionally, the rule seeks alignment with international standards for climate disclosures. The SEC has integrated nearly all TCFD recommendations – the leading authority on climate-related risk disclosures used by most corporates, investors and securities regulators. However, the regulator has faced continuous backlash in the form of pre-emptive policymaking in conservative state legislatures. Many state treasuries have also taken concrete steps to oppose the rule within their jurisdiction by placing ‘woke’ asset management firms such as BlackRock on a divestment list. Though the rule is favored by a majority of SEC regulators, a handful of dissidents have commented on the pecuniary implications of compliance as auditing costs will more than double for covered entities. Read more
Biden-Harris administration unveils national strategy for nature-based accounting
On January 19, the White House released a national strategy to measure the economic value of natural resources with statistical data and drive sound policy decisions. Special Envoy for Climate Change, John Kerry announced the plan during a speech at the Word Economic Forum in Davos, Switzerland stating that the initiative “will put nature on the national balance sheet”. The accounting of natural capital in the US economy provides insight into the value of healthy ecosystems through an economic lens. Executive branch organizations and agencies can use this data to examine the impact of climate change on long-term economic growth. This, in turn, can help regulators identify depleting natural assets and integrate environmental risk into economic policy. A national biodiversity strategy will also have broader implications for the private sector, creating opportunities for industries that are least impacted by nature loss and natural disasters, such as renewable energy, to attract investment. Read more
US Fed launches Climate Scenario Analysis Exercise for banks
The Federal Reserve is conducting a climate scenario analysis (CSA) for six large US banking organizations. Participating banks must provide an estimate of the impact of scenarios on specific assets in their loan portfolios. For physical risk assessment, a banking organization must show how climate scenarios affect commercial and residential real estate portfolios over a one-year time horizon in 2023. The transition-risk module considers the effect of scenarios on corporate loans and real estate loan portfolios altogether over a 10-year time horizon from 2023 to 2032. Data from physical risk and transition-risk modules must be supplemented by quantitative responses on climate-risk management practices. The Federal Reserve will collect responses until July 21, 2023. Read more
Australian carbon trading scheme set for reform
An independent review of Australia’s scheme for providing carbon credits raises questions around the efficacy of greenhouse gas emissions reduction methods. This means that entities purchasing credits on the carbon market may not offset their emissions in real terms such as avoided deforestation and human-led native forest regeneration. To remedy the discrepancy in the carbon credits scheme, the review panel has proposed a new ‘carbon abatement integrity committee’. The Australian government has concluded that the scheme is functioning adequately, however it plans on incorporating recommendations from authorities in future. Read more
South Korea’s FSS introduces ESG ratings guidelines
The Financial Supervisory Service (FSS) of Korea introduced a set of guidelines for the standardization of ESG ratings methodologies. Credit ratings agencies that validate ESG bonds can incorporate assessment criteria in the “Guidelines” and consequently establish consistent standards across different agencies. Agencies that provide comparable evaluation reports and verify the use of funds can help provide decision-useful information to investors and prevent the occurrence of greenwashing practices in a nascent industry. The FSS also proposed minimum investment ratios as part of disclosure requirements for ESG bond evaluation. The guidelines will be effective from February 1, 2023, and Korea’s Financial Services Association will recognize the ESG certification process as best practice. Read more
Other News & Resources
- EBA publishes Roadmap to Sustainable Finance: The leading standard-setting body will finalize climate-related risk disclosures and a biodiversity framework for corporate reporting in 2023. Read more
- Indian financial institutions unprepared to deal with climate risks. Read the latest report by think-tank ODI’s Sarah Colenbrander, in partnership with researchers from the Climate Bonds Initiative and adviser auctusESG.
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