In the dynamic landscape of global ESG policies, September 2023 witnessed pivotal developments across continents. In Europe, the European Commission proposed a comprehensive overhaul of SFDR categories, aiming to prevent mislabeling and align practices with the UK Financial Conduct Authority. Concurrently, the EU Parliament pursued stringent regulations to curb greenwashing and enhance consumer protection, pending final approval. Notably, France emerged as a trailblazer by enshrining CSRD into law, meeting stringent reporting deadlines. Shifting focus to the United Kingdom, regulatory bodies unveiled measures fostering diversity and inclusion within the financial sector, emphasizing non-financial misconduct considerations and transparent reporting. In the United States, the SEC adopted a fund labeling rule to deter greenwashing, ensuring transparency for investors navigating sustainable investment options. Meanwhile, Asia Pacific saw the Hong Kong Monetary Authority releasing principles guiding banks toward a net-zero economy, while Indonesia’s consideration of coal for green financing raised environmental concerns. Additionally, global collaborations, such as TNFD’s final recommendations and ISO-UNDP initiatives, underscored the international drive for standardized sustainable finance practices.
Europe
European Commission proposes overhaul of SFDR product categories
In a targeted consultation, the EU Commission has proposed overhauling product categories established under SFDR. The Commission will consider outlining “precise criteria” and formal product categories for Article 8 “light green” and Article 9 “dark green” funds to prevent the mislabeling of funds. This comes after a wave of funds were downgraded from Article 9 to Article 8 status, while Article 6 funds upgraded to Article 8 status. Market participants have expressed concern over the possibility of Article 8 and 9 being scrapped in lieu of a new categorization system. The consultation will also examine the relevance of key concepts embedded within the SFDR framework. On the positive side, the proposed changes to Article 8 and 9 criteria in SFDR would provide clearer guidelines and align with market practices, thereby reducing mislabeling and encouraging transparent sustainability disclosure. Moreover, the inclusion of Article 6 funds in the disclosure requirements would help investors uncover the least sustainable assets. Under the new SFDR category proposals, the regulation would align with the UK Financial Conduct Authority (FCA) by introducing new types of investment categories, including those with quantifiable targets, measurable sustainable solutions and thematic investments. Introducing new categories, on the other hand, may lead to transitional challenges and uncertainties for asset managers and financial institutions. A new system could cause fragmentation, increase compliance costs and potentially stifle innovation due to overcaution. However, it seems the demand for consistent and reliable sustainability data is not going anywhere and will likely increase for those products making sustainability claims. Read more
EU Parliament reaches provisional agreement to ban greenwashing and improve consumer product information
The EU is set to implement rules that will crack down on misleading marketing practices including generic environmental claims without proof of ‘recognised excellent environmental performance’. This will prohibit product communication for goods designed to limit durability, claims based on emissions offsetting and sustainability labels without approved certification schemes. Additionally, the agreement mandates the introduction of a harmonized label to highlight products with extended guarantees. The new rules would aim to protect consumers from deceptive practices, promote product durability, and ensure transparency in advertising. The agreement is pending final approval from both the Parliament and the Council, with a vote expected in November, followed by a 24-month period for member states to implement the new rules. Read more
France to enshrine CSRD into law
France has become the first EU member state to submit a draft of the national law that will impose CSRD reporting. CSRD will supersede the existing Non-Financial Reporting Directive (NFRD), with reporting taking place in three phases. In the first reporting phase, large companies with over 500 employees already subject to NFRD must begin reporting in 2025 on their 2024 financial year. All member countries are expected to codify the directive into national law and adopt the necessary regulatory provisions to support cross-border alignment of sustainability reporting rules. Read more
United Kingdom
FCA and PRA introduce diversity and inclusion measures for financial services sector
The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have launched consultations in parallel on regulatory measures aimed at promoting diversity and inclusion (D&I) within the financial sector. These proposals include integrating non-financial misconduct considerations into staff assessments, introducing reporting requirements for D&I data, mandating D&I strategies, setting diversity targets, and recognizing a lack of D&I as a non-financial risk. Smaller firms with fewer than 251 employees would face reduced regulatory burdens, while the overarching goal of both measures is to foster healthier firm cultures, reduce groupthink, unlock new talent, and better address diverse consumer needs. The framework seeks to establish minimum standards and enhance transparency without imposing sector-wide targets. These regulatory proposals represent a significant step toward addressing diversity and inclusion in the financial sector. By requiring firms to develop and publish D&I strategies and set targets for underrepresented groups, they encourage a more inclusive corporate culture and board governance. The emphasis on individual accountability and monitoring, as well as reporting and disclosure, aims to ensure ongoing progress. Read more
United States
SEC adopts fund labelling rule to prevent greenwashing
The U.S. Securities and Exchange Commission (SEC) has adopted amendments to the ‘Names Rule,’ a fund labeling regulation that requires 80% of holdings to be invested in accordance with the fund’s suggested investment focus. Funds that deem themselves ‘ESG,’ ‘sustainable’ or ‘green’ must identify securities included in the 80% basket. The rule will further transparency, enhance data comparability and help investors differentiate between investment strategies. Given the investment industry’s demand for quantitative data, the SEC has also provided a standardized methodology for reporting emissions metrics. With increasing scrutiny of ESG labels, regulators are equipping investors with the tools to better navigate the sustainable investment landscape and avoid the pitfalls of greenwashing. The SEC is no exception, as the latest rule sets a disclosure obligation for funds to substantiate effective ESG strategies. As an alternative to overwrought regulation, this clearly outlines investment conditions for ESG funds and prescribes a strategy-specific approach to disclosures. The regulation will have profound implications for asset managers who are keen to invest in more funds that are environmentally and socially conscious. Read more
US Treasury releases principles for net-zero banking
The U.S. Department of the Treasury has unveiled voluntary Principles for Net-Zero Financing & Investment aiming to guide financial institutions with net-zero commitments. The voluntary Principles are largely informed by private sector financial institutions that are effectively and credibly mobilising capital to mitigate the effects of climate change, support green transition and ultimately deliver net-zero commitments. The Treasury has compiled best practices and initiated engagement with stakeholders to develop consistent practices in net-zero financing and investment while addressing climate change’s impacts. Additionally, GFANZ has announced that over 50 US financial institutions will publish net-zero transition plans using common frameworks. The voluntary principles emphasize the importance of clear transition plans aligned with limiting global temperature increases to 1.5 degree Celsius, along with support for clients and portfolio companies in achieving net-zero commitments. Read more
California emissions disclosure bill set to become law
California’s Climate Corporate Accountability Act (CA SB 253) has been approved by the California State Assembly and State Senate and is set to become law once it is approved by Governor Gavin Newsom. The bill would require large US-based organizations operating in California, generating over $1 billion in annual revenue (an estimated 5,400 companies) to disclose their GHG emissions, including Scope 3 emissions, in accordance with the GHG Protocol. Tech giants including Apple and Google voiced their support for the bill as a key measure to “encourage others to speed up their efforts towards carbon neutrality”. CA SB3 is part of the Climate Accountability Package introduced by California lawmakers in January 2023. The package also includes a bill (CA SB 261), which would require corporations with over $500 million in annual revenue doing business in California to submit annual climate-related financial risk reports (TCFD disclosures) by 2026. Meanwhile, climate policy action at the federal level remains static at best as federal agencies face pushback from stakeholders on both sides of the political aisle. Read more
Asia Pacific
HKMA releases principles to help banks plan for net-zero transition
The Hong Kong Monetary Authority (HKMA) has issued high-level principles for transitioning to a net-zero economy to assist banks in maintaining financial stability. In 2022, HKMA introduced a two-year plan to integrate climate risk into its banking supervision, including reviewing the “greenness” assessment framework. International organizations and the Basel Committee on Banking Supervision (BCBS) have also focused on transition planning. The principles include setting clear objectives and targets aligned with net-zero goals, establishing a robust governance framework, devising appropriate initiatives, engaging with clients, performing reviews and updates, and maintaining transparency. These principles may evolve based on international developments, and HKMA will continue to engage with the industry and conduct a survey on transition planning practices in 2023. Read more
Indonesia considers coal for green taxonomy
Indonesia’s financial regulator is considering labeling coal-fired power plants that supply electricity to electric vehicle (EV) battery manufacturers as eligible for green financing, eliciting criticism from environmentalists. The country’s “green taxonomy” is being revised to align with ASEAN Taxonomy, which includes funding for retiring coal power plants and potentially extending green financing to power plants used by industries that make sustainable end-products such as electric batteries. Analysts at the Institute for Energy Economics and Financial Analysis (IEEFA) argue that this move contradicts scientific evidence and may place Indonesia at odds with global green finance standards, despite its pledge to reach net-zero emissions by 2060. Read more
Other News & Resources
- TNFD releases final recommendations. Read more
- ISO and UNDP to develop global standards for SDG reporting. Read more
- GFANZ launches consultation on transition finance. Read more
- NGFS publishes guidance following an increase in climate litigation. Read more
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