In the fleeting month of February it may be easy to overlook a flurry of regulatory activity that signals the continuity and confluence of ESG in policymaking matters. This month’s ESG Book Policy Digest explores a coincidental set of global initiatives aimed at mobilizing green bond markets. In Europe, legislators made strides in setting up voluntary EU green bond standards (EUGBS) to provide a legitimate system for the issuance of green bonds by financial market participants. The depth and breadth of sustainability reporting is also under review by the European Central Bank (ECB), which expressed its approval of the draft European Supervisory Reporting Standards (ESRS) that outline ESG metrics for demonstrating compliance with the Corporate Sustainability Reporting Directive (CSRD). The EU has additionally underscored a focus on its ‘Green Industrial Plan,’ hinting at a ‘laissez faire’ approach that will enable the growth of a competitive clean energy economy. In the EU Parliament, the Environmental Committee issued a legislative mandate that would require all private sector entities to achieve climate neutrality by 2050. Oversight activity related to climate risk will also extend to the own risk and solvency assessment (ORSA) in 2023, as evidenced by the European Insurance and Occupational Pensions Supervisory Authority’s (EIOPA) latest action plan. In neighbouring UK, the Capital Markets Authority (CMA) has issued guidance to help firms reach environmentally sustainable agreements without breaching competition rules.
In India, the Reserve Bank of India (RBI) has announced new guidelines for climate risk management. India’s Securities and Exchange Board of India (SEBI) became the latest authority to formulate its own fund labelling regime in lockstep with global regulators such as the U.S. Securities and Exchange Commission (SEC) and the European Securities Markets Authority (ESMA). Additionally, SEBI released a set of operational guidelines for green bond issuers. Also in Asia Pacific, Chinese regulators are reportedly due to instate mandatory ESG disclosure requirements for listed firms. Finally, in the Philippines, the Securities and Exchange Commission created draft guidance on sustainability bonds that will be applicable to ASEAN-based issuers.
This month’s ESG Policy Digest updates signal that regulators worldwide are emphasising the idea that sustainability regulation does not necessarily overwrite existing rules, but rather serves to provide guidelines for the consistent interpretation of a modified rules-based system of governance for more robust financial markets.
International
Nations Agree Historic Oceans Treaty
After a decade of negotiations, nations have achieved a landmark accord to safeguard the world’s oceans. The High Seas Treaty seeks to secure and restore marine ecosystems by designating 30% of the oceans as protected areas by 2030. The accord was reached at the UN headquarters in New York on 4th March, after 38 hours of discussion, resolving disputes over funding and fishing rights that had delayed negotiations for years. The most recent international agreement on ocean conservation was the UN Convention on the Law of the Sea, which was signed 40 years ago in 1982. This agreement recognized the high seas as international waters where all countries have the right to conduct research, fish, and navigate, but only 1.2% of these waters are currently safeguarded.Read more
Europe
Provisional agreement reached on European Green Bond Standard
Key negotiators in the European Parliament have established the first ‘best-in-class’ green bond standard. Companies issuing green bonds in accordance with the standards can communicate the use of proceeds in a substantive disclosure. Disclosures would provide decision-useful information to investors, allowing them to suitably add sustainable technologies and businesses to their portfolio. In addition to enhancing transparency, companies that adopt the EUGBS will be aligned with the EU Taxonomy’s classification system for sustainable economic activities.Read more
ECB publishes staff opinion on draft ESRS
The European Central Bank has expressed support for the draft ESRS which strengthens the implementation of sustainability disclosure requirements under CSRD. The draft ESRS would help financial and credit institutions enhance the assessment of climate-related risk and resilience. In its draft form, the ESRS incorporates environmental reporting metrics such as Scope 1, 2 & 3 emissions and requires the disclosure of transition plans in line with a Paris-aligned climate scenario. Furthermore, to comply with CSRD, the reporting standards require private entities to provide estimates of physical and transition risk. Overall, ECB staff welcomed the definition of standards, targets and quantitative metrics as this will improve the availability of granular data relevant to ECB and other European Supervisory Authorities. Additionally, by making ESRS E1 mandatory, irrespective of materiality assessment, the ESRS also address the cross-cutting data needs of other EU climate legislation. The ECB has stated that its data collection efforts could, however, be distorted by an exemption from reporting for subsidiaries included in the consolidated reporting of the controlling entity. In conclusion, the ECB staff opinion letter notes that consistent and comparable data is the key to ensure the effective implementation of CSRD and any data aberrations could negate efforts to reduce the reporting burden.Read more
European Commission unveils Green Industrial Plan and ‘transition framework’
Following the passage of the Inflation Reduction Act (IRA) in the US, EU lawmakers pushed for a centralized plan to provide clean energy financing and subsidies that would help maintain competitiveness with US businesses. Last month, the European Commission announced the release of its ambitious Green Industrial Plan to expedite the scaling of net zero technologies and products and further the EU’s climate neutrality objectives. The industrial initiative relaxes state aid rules and eases the regulatory burden for companies operating in the EU. Members of the European Parliament strongly believe that the EU Single Market will undergo a transformation through the allocation of funding for clean technologies and training and development for green jobs. The Plan includes a production capacity framework that will ensure strategic dependencies in the global supply and value chain are accounted for and ‘do not put green transition at risk’.Read more
EU Parliamentary committee votes to strengthen climate “due diligence” obligations
In a landmark move, the EU environment committee voted to put in place stricter climate due diligence obligations for large companies and SMEs. CSRD is the newest legislation that requires companies to minimize adverse environmental impacts and prevent human rights violations across the value chain. For years, companies in the EU have outsourced carbon emissions abroad, where it may be easier to eschew manufacturing processes oversight. The Environment Committee within the EU Parliament voted to impose a mandate on the private sector to achieve climate neutrality by 2050, by primarily reducing greenhouse gas emissions. This means companies will have to formalize transition plans and monitor negative environmental impacts that conflict with the targets outlined in the 2015 Paris Agreement.Read more
EIOPA issues 2023 supervisory convergence plan focusing on ESG risks
The European pensions and Insurance regulator EIOPA published a Supervisory Convergence Plan for 2023 which includes a section on enhancing quality capital requirements (the second pillar of Solvency II plans). This means that the own risk and solvency assessment (ORSA) under the EU’s Solvency II directive may be adapted within the context of climate change. EIOPA currently supports the oversight of materiality assessment for climate-related risks and advocates for the integration of climate risks in ORSA. In 2023, EIOPA plans to monitor greenwashing and identify solutions to clarify consumers’ contractual obligations based on key findings from natural catastrophe insurance coverage (behavioural study). Furthermore, the authority will incorporate ESG risks into the upcoming comparative study on Life risk modeling. Read more
United Kingdom
UK CMA publishes guidance on competition laws applicable to environmental sustainability agreements
The UK’s Competition and Markets Authority (CMA) issued guidance for firms seeking opportunities to collaborate without breaching competition laws. The regulator illustrated use cases where rules would be “permissive” to help competitors share the costs and burden of mitigating climate change. According to the proposed guidelines, firms that enter into collaborative agreements that positively contribute towards environmental sustainability would not be in violation of competition laws. The CMA’s draft guidance is open for consultation until April 11, 2023. Read more
Asia Pacific
Indian central bank announces regulatory guidelines on climate risk and sustainable finance
On July 27, 2022, the Reserve Bank of India (RBI) published a discussion paper on climate risk and sustainable finance to solicit feedback from regulated entities on proposed changes in monetary policy. Based on public comments and analysis of feedback, the RBI released a framework for the acceptance of green deposits, disclosure requirements for climate-related risks and guidance on climate scenario analysis and testing. Before testing the preparedness of regulated entities, the RBI will consolidate resources for climate-risk management and issue guidelines in a phased manner. Read more
Indian securities regulator sets operational guidelines on green bonds
Under the new set of green bond guidelines, issuers of green debt instruments must outline sustainability objectives in the offer document. Issuers must also disclose details for determining the eligibility of financed projects and the use of proceeds. For increased transparency, green debt issuers will have to provide third-party verification of the use of proceeds and institute processes to assess continued eligibility of green bond projects and activities. The operational guidelines will be in effect from April 1, 2023.Read more
SEBI proposes new categories of ESG schemes for mutual funds
The Securities and Exchange Board of India (SEBI) proposed a new rule to create five new types of ESG mutual fund schemes – exclusions, best-in-class, integration, positive screening, impact and sustainable objectives. SEBI’s latest regulatory initiative allows asset management companies to launch only one of each fund type with a minimum of 80% investment in securities related to the thematic ESG focus. ESG funds will have to identify the sustainable investment strategy and details of the chosen ratings provider in disclosures. This follows similar initiatives by the US SEC, ESMA and the FCA in the UK to provide a fund-classification system that boosts transparency for investors. Read more
Chinese regulators poised to adopt mandatory ESG disclosure requirements
Regulatory authorities in China are considering the introduction of mandatory ESG reporting requirements for all public companies listed in China. According to the proposal, regulators are initially looking at having the new disclosures apply on a ‘comply or explain’ basis. The proposal builds upon a voluntary set of ESG reporting guidelines that came into effect on 1 June 2022, as well as the Chinese Securities Regulatory Commission proposal issued in May 2022 focusing on a revised disclosure regime for publicly listed entities. Once the new regulation comes into force, the first entities in scope would be state-owned enterprises who would be expected to issue their first reports as early as December 2023. Read more
Philippine SEC introduces guidance on sustainability-linked bonds
On February 2, 2023, the Securities and Exchange Commission (SEC) of the Philippines released a preliminary memorandum circular (MC) for public feedback regarding the issuance of sustainability-linked bonds (SLB) in the Philippines, in accordance with the ASEAN Sustainability-Linked Bond Standards (ASEAN SLBS). This aims to promote the use of sustainability-linked bonds in financing companies that prioritize sustainability. According to the guidelines, the entity issuing the bonds must either be an ASEAN issuer or a non-ASEAN issuer that has key performance indicators (KPIs) associated with an ASEAN member nation. Final comments on the proposal were due by 17 February 2023. Read more
Singapore Green Taxonomy in final consultation phase
Singapore is set to finalize its green and transition taxonomy for financial institutions. The final consultation seeks input from stakeholders on thresholds and criteria for five sectors: agriculture and forestry/land use; industrial; waste and water; information and communications technology; and carbon capture and sequestration. The Green Finance Industry Taskforce (GFIT) is deliberating a ‘measures-based’ approach to account for the uncertainty in technological solutions to achieve net zero in the industrial sector. This approach would complement Singapore’s traffic light classification which sets targets and criteria for transition activities that allow for a ‘progressive shift towards a net zero outcome across different sectors.’ Read more
Other News & Resources
- IFRS Sustainability and Climate Reporting period to begin in 2024. Read more
- NGFS seeks feedback on climate scenarios from interested stakeholders. Read more
- ASCOR publishes consultation report for the first public investor framework to assess sovereign bond issuers on climate change. Read more
- GRI Mining Standards open for stakeholder consultation. Read more
- SBTi adds land metrics to target-setting framework. Read more
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