Author: Molly Porter

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.

Europe

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.
Read more

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

Americas

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

Asia Pacific

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.

Have we missed anything?
ESG Book manages the world’s largest repository of sustainability reporting provisions with over 3,400 regulations across 71 jurisdictions globally. If there is a recent ESG regulatory development we have missed, we would like to hear from you and invite you to contribute below.
Click here to access the ESG Regulatory Provisions Contributor Form

In 2022, policy became a vehicle to reorient capital flows through multiple routes, at different levels – international and domestic. The convergence of standards and frameworks created direct links between a variety of actors in sustainable finance. Despite geopolitical turmoil and shadowy economic forecasts, regulators are pursuing the sustainability objective through timely and fortuitous interventions.

The European Union continues to be the epicenter of ESG-related policymaking. In December, the EU passed legislation banning the sale of products linked to deforestation activities. European regulators are also revisiting provisions in the Corporate Sustainability Reporting Directive (CSRD) to potentially grant exemptions to the financial services sector. The European Insurance and Occupational Pensions Authority (EIOPA) is conducting a deep study on the impact of climate and social risks on long-term investments. The Swiss government is set to launch its own version of an ESG fund labelling rule to provide decision-useful information for sustainable investing. Despite banks likely escaping the remit of EU sustainability rules, the Basel Committee has initiated vital action by providing guidance to the banking sector on integrating climate-related financial risks. In the United Kingdom, plans are underway to open consultation on the supervision of ESG ratings providers. Regulatory reform in the ESG realm continues in the U.S., with the Federal Reserve proposing a climate-risk framework for big banks. In Asia, the Green and Sustainable Finance Cross-Agency Steering Group has announced a collaboration with the Carbon Disclosure Project to help improve the quality of ESG data in Hong Kong for first-time reporting SMEs.

With a new year beginning, policymakers and practitioners will embark on an intellectual endeavour to create consistent global sustainability reporting rules. Though many challenges and pitfalls lie ahead, 2023 promises to be a substantial year characterized by increasing investment in adaptation and social sustainability.

Europe

EU reaches deal on deforestation-free supply chains

The European Union has reached an agreement to ban the sale of deforestation-linked products in the EU market. Products including palm oil, cattle, soy, coffee, cocoa, timber and rubber as well as derived products such as beef, furniture and chocolate are covered by the regulation. Companies will have to issue a due diligence statement verifying that the production of these goods has not caused damage or degradation of forest ecosystems anywhere in the world after 31 December 2020. However, banks will be exempt from the due diligence obligations for at least two years. This regulatory initiative underscores the COP15 agenda to establish a post-2020 global biodiversity framework for achieving measurable nature-positive outcomes.
Read more

Banking & finance may be exempt from CSRD requirements

On November 28, the EU Council and European Parliament reached an agreement to adopt the Corporate Sustainability Reporting Directive (CSRD). The legislation
significantly expands mandatory sustainability disclosure requirements for all large EU companies operating in the EU. More recently, the EU Council proposed to exempt banks and investment funds from CSRD following resistance from several member states including Spain, France, Italy and Slovakia. The draft proposal allows each member state to decide whether financial services providers should account for their environmental and social footprint. Speculation about the rule will continue in the banking and financial services sector until the final version is published over the course of 2023.Read more

EIOPA considers sustainable investing impact on solvency risks

The European insurance authority published a discussion paper on the prudential treatment of sustainability risks. EIOPA is working to determine whether the consideration of environmental and social factors is “warranted” under the Solvency II risk-based framework. In the discussion paper, EIOPA provides guidance on assessing transition risks and its potential impact on prudential risks related to bonds, stocks and real estate. On the climate front, the paper examines underwriting risk on non-life insurance based on climate change adaptation. EIOPA’s final focus area is prudential treatment of social risks. The regulator is
inviting feedback from stakeholders until 5 March 2023.Read more

Switzerland proposes ESG fund labelling rule

The Swiss Federal Council released a position paper on sustainable investing rules to prevent greenwashing. The proposed rule requires funds that are labelled ‘sustainable’, ‘green’, or ‘ESG’ to pursue the suggested sustainability objective by setting quantifiable targets. This suggests alignment between linked economies as regulators in the UK, US and EU are working simultaneously to formalise policies that protect financiers from being misled by exaggerated ESG-related claims. Unsurprisingly, different versions of the same rule are being announced to increase transparency and ease of comparability between financial products. In Switzerland, a working group under the Federal Department of Finance will oversee the implementation of the final rule which will be released by the end of September 2023. Read more

Basel Committee recommends integrating climate risks into existing capital rules

The Basel Committee on Banking Supervision has published responses to FAQs on how banks should incorporate climate-related financial risks. The committee of global financial regulators aims to “promote consistent interpretation” of the existing Basel Framework. Many FAQs seek to clarify best practices with respect to judging exposure of assets and credit risk ratings based on climate risks. The recommendations are also in alignment with the Basel Committee’s principles for the effective management and supervision of climate-related financial risk. Read more

United Kingdom

UK set to regulate ESG data and ratings providers

Chancellor of the Exchequer, Jeremy Hunt, announced a series of regulatory reforms to boost growth in the financial services sector following Brexit. As part of the “Edinburgh Reforms”, the UK will release a new green finance strategy early this year and, additionally, launch a consultation for the oversight of ESG ratings providers to promote “consistent standards” and transparency.  Read more

Americas

The US Federal Reserve consults on a climate-risk framework for banks

The United States Federal Reserve is seeking feedback on a high-level climate-risk framework for the largest financial institutions (over $100 billion in total assets). Eligible entities will be bound by principles for the sound management of physical risks and transition risks in terms of climate change. These principles cover internal policies and procedure, risk management, data quality, governance and scenario analysis. The proposed principles are compatible with proposals issued by other federal agencies such as the Federal Deposit Insurance Corporation. Read more

Asia Pacific

The Steering Group chaired announces collaboration with CDP to release climate-related risk disclosure by SMEs

The Steering Group will work together with the Carbon Disclosure Project to strengthen the sustainability reporting regime in Hong Kong, focusing primarily on improving data quality and accessibility. The collaboration has led to the first cross-sector template for SMEs reporting in Hong Kong for the first time. The template has three different modules to allow for a range of granularity in reporting based on company size and complexity. Read more

Other News & Resources

• EBA publishes Roadmap to Sustainable Finance. Read more
• ISSB announces guidance and temporary relief for Scope 3 emissions disclosures. Read more
• The Federal Acquisition Regulatory Council (FARC) will extend the comment period for the proposed rule on Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk by 30 days. Read more

Have we missed anything?
ESG Book manages the world’s largest repository of sustainability reporting provisions with over 3,400 regulations across 71 jurisdictions globally. If there is a recent ESG regulatory development we have missed, we would like to hear from you and invite you to contribute below.
Click here to access the ESG Regulatory Provisions Contributor Form

Tech companies are known for their low emissions profile, but what about their clients? How can big tech not just improve its own carbon footprint, but also help drive corporate sustainability in other sectors? This is what we talk about with Justin Keeble in this episode. He is Managing Director of Global Sustainability at Google Cloud, and leading several initiatives to support Google and its clients with sustainability and related decision-making. To learn more about the work of Justin and his team, see their latest thought piece here.

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COP 27 set the stage for lofty climate change aspirations to be realised. In the end, nation states hurriedly wrapped up negotiations to confront geopolitical realities. The most notable outcome of the summit was a ‘loss and damage’ fund to assist developing countries with the management of nature-related adversities. Despite the lackluster results of the summit, regulators around the world have been working hard to formulate economic policies through a sustainability lens.

 
Europe 

EU adopts Corporate Sustainability Disclosure Reporting Directive (CSRD)

A majority of the European Parliament voted in favour of adopting the Corporate Sustainability Disclosure Reporting Directive (CSRD). The rule is an outcome of an ambitious package of legislative measures under the European Green New Deal and Sustainable Finance Agenda. It will further corporate social responsibility obligations set by the Non-Financial Reporting Directive (NFRD) by helping to align companies’ key performance indicators with environmental and social objectives. The reporting of sustainability information will be phased in over time depending on company size, turnover and geographical presence. In the first phase of implementation, CSRD requires all large companies to report ESG-related matters starting June 2024. The European Council has also welcomed the passing of CSRD, marking a landmark shift in the region’s sustainability reporting regulation landscape. Read more

EFRAG publishes first set of draft ESRS

Following the approval of CSRD by the European Parliament, the European Financial Reporting Advisory Group (EFRAG) delivered the first set of draft supervisory reporting standards (ESRS) based on feedback for Exposure Drafts (EDs). EFRAG has addressed key concerns relating to the intersection of disclosure regulations and international reporting standards, materiality assessment and reducing the reporting burden on corporates and investors alike. Read more

ESMA launches consultation on fund labelling proposals

ESMA has launched a consultation on a new set of ESG fund labelling guidelines which would require any fund with a suggested sustainability/ESG focus to allocate a minimum percentage of holdings accordingly. Funds that are labelled ‘ESG’ or ‘impact-related’ (examples include climate change, sustainable water, biodiversity, global impact etc.,) should invest 80% of assets in the implied environmental or social category of that fund. If a fund is labelled ‘sustainable’ (or the name is derived from the word sustainable) at least 50% within the 80% minimum threshold should be invested sustainably. ESMA is seeking feedback from stakeholders on the quantitative thresholds for thematic and sustainable investing and will review all submissions after the consultation period closes on 20 February 2023. Read more

ECB sets deadlines for banks to adapt to climate and environmental risks

The European Central Bank (ECB) conducted a thematic review of the supervisory processes for the management of climate-related risks in the banking sector. The key findings reflect gaps in granular information and inadequate methodologies for considering the impact of climate and environmental risks on financial strategy and performance. ECB has concurrently published best practices to equip banks with an informal set of risk-assessment guidelines. The regulator will start cracking down on banks failing to meet ‘institution-specific’ deadlines. Banks must conduct a full assessment of the impact of environmental risks and appropriately categorize such risks by March 2023. The next deadline in 2024 would enforce the articulation of climate and environment considerations in a bank’s strategy, risk management and governance practices. Read more

ESAs Call for Evidence on greenwashing by the financial services sector

European Supervisory Authorities have invited comments from relevant stakeholders on identifying greenwashing risks that could distort the efficacy of sustainable finance regulations. The consultation will shed light on the scale of industry-wide greenwashing and address key concerns from the perspective of supervisory processes. Read more

Swiss government issues ‘Ordinance on Climate Disclosure’

Switzerland will require public companies and the entire financial services sector to identify and report on climate-related risks. The reporting rule requires companies to set quantifiable targets for positive outcomes and develop a plan for the management of climate risks. Covered entities must also assess the environmental footprint of its operations and publicly disclose Scope 1&2 emissions. The ordinance, which borrows from TCFD recommendations, will apply to companies with over 500 employees and revenue equivalent to or more than CHF 400. Reporting will be mandatory from 2025. Read more

United Kingdom

FCA to create a voluntary code of conduct for ESG data and ratings providers

The UK’s financial services regulator (Financial Conduct Authority) has convened a group of industry experts and stakeholders to formulate a code of conduct for ESG ratings providers. In line with their respective objectives, the FCA, the Bank of England and other significant financial regulators and government entities will act as observers to the working group.
It is already known that the group will be co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May. It will be composed of key stakeholders including asset managers, ESG ratings and data providers, and corporate entities.  Read more

UK Transition Plan Taskforce publishes disclosure framework

Aligning with the onset of COP27, the UK’s Transition Plan Taskforce (“TPT”) – a taskforce mandated by His Majesty’s Treasury to enable private sector actors in the UK create resilient climate transition plans to fulfil their net-zero commitments, released its new Disclosure Framework for corporate entities to disclose their climate transition plans. The Disclosure Framework is supplemented by the TPT’s Implementation Guidance, which outlines concrete measures enabling the private sector to develop climate transition plans, as well as details on when, where and how to publish such plans. The Disclosure Framework and Implementation Guidance are open for public consultation until 28 February 2023. Read more

FCA consultation on fund labelling rule

Britain’s financial regulator – The Financial Conduct Authority (FCA) – introduced a new set of rules that would apply from 2024 for the asset management industry.  The aim of the new rulebook is to prevent consumers from being misled by ‘greenwashing’ or embellished claims regarding the sustainability credentials of investments. The FCA proposed a package of measures, including a range of “sustainability labels” for investment products, and safeguards on how terms like ESG, ‘green’ or sustainable can be used. The FCA proposal comes at a time of heightened attention to the credibility of ESG labels, amidst efforts in the EU (SFDR) and the US (SEC fund labelling rule) to introduce more transparency and greater disclosure of financial products’ sustainability credentials. The proposal is open for consultation until 25 January 2023. Read more

Americas

Biden-Harris Administration Proposes Plan to Protect Federal Supply Chain from Climate-Related Risks

The White House unveiled a new plan which would require all federal contractors to disclose greenhouse gas (GHG) emissions. The Federal Supplier Climate Risks and Resilience Rule will address 85% of emissions linked to the federal supply chain and determine transparency requirements for suppliers based on annual contract values. Federal suppliers regulated under the rule must also Identify climate-related risks and set Paris-Aligned emissions reduction targets. The plan seeks to protect the government from climate-change related supply disruptions and Is part of President Biden’s Federal Sustainability Plan – a national strategy to reach net zero by 2050. Read more

US DOL authorizes retirement plan fiduciaries to consider climate risks for investment decisions

On November 22, 2022, the Department of Labor finalized a rule that would allow fiduciaries regulated under the Employee Retirement Income Security Act (ERISA) to consider climate risks when selecting investments. Although the rule does not reference or explicitly endorse ESG investing, it upholds the legitimacy of ERISA fiduciaries presenting an ESG-focused menu of investment options. By law, fiduciaries are bound by duties of loyalty and prudence and cannot subordinate the interests of plan participants. Therefore, all ESG investing must be backed by sound financial analysis that considers risk-return factors. The final rule also reinforces shareholder rights through proxy voting and requires fund managers to reconcile proxy voting policies for each investment plan. Read more

White House releases Nature-Based Solutions Roadmap

The U.S. announced a new strategy for scaling up nature-based solutions at COP27. The guidance will help “unlock the full potential of nature-based solutions to address climate change, nature loss, and Inequity”. To demonstrate the potential of its strategic recommendations, the administration has already allocated monies for federal agencies to invest in nature-powered infrastructure and set up a technical working group to study the benefits of nature-based options which would better Inform federal government’s development plans. The government will also support and finance pilot programs in military bases that utilize natural resources to improve resilience. Read more

John Kerry announces carbon-credit plan at COP to help decarbonize low- income countries

US Climate Envoy John Kerry announced the launch of the Energy Transition Accelerator (ETA), a carbon offset strategy that will allow companies to finance clean energy projects in developing countries and earn carbon credits that can be used to achieve national climate goals, at least partially. ETA upholds the principle of equitable transition through climate finance – one of the central themes at COP. In theory, the plan would accelerate the deployment of capital for renewable energy projects, however experts are divided on whether sufficient capital would be available for the developing world to achieve tangible outcomes. Read more

SEC finalizes Pay versus Performance Disclosure Rule

The US Securities and Exchange Commission (SEC) Introduced a new rule that will require public companies to disclose the correlation between executive compensation and financial performance. ‘Pay versus Performance’ mandates financial disclosures to be expressed in terms of shareholder returns, net income and other financial measures of performance that are most relevant for the company. The amendment to the executive compensation reporting rule adds to the agency’s growing list of transparency measures aimed at providing decision-useful Information to Investors. Read more

Asia Pacific

Singapore launches Green Finance Taskforce

The Monetary Authority of Singapore (MAS) announced a new initiative for fostering green finance solutions in collaboration with the People’s Bank of China (PBOC). The central banks will set up a Green Finance Taskforce that will support the alignment of the sustainable finance agenda across the ASEAN region through public-private partnerships. The Taskforce will mobilize capital for green finance investments in China and build on existing standards and definitions that form the basis of regulatory initiatives. Chinese stock exchange provider SGX (Shanghai Stock Exchange) and the SGZE (Singapore Exchange) also announced the launch of a new Low Carbon Index Family that may be used as a reference benchmark by product managers launching green funds in the region. Read more

Indonesia’s roadmap for decarbonization

Indonesia has entered the Just Energy Transition Partnership (JETP), a coalition that enables countries to achieve decarbonization targets through investment initiatives. JETP will accelerate Indonesia’s pathway to net zero in the next 10 years through stricter regulation of the energy sector. To foster investment-driven transition, the plan requires emissions from the power plants to peak in 2030 and provides for the early decommissioning of coal-fired plants. Additionally, Indonesia has proposed 34% of energy production through renewable energy sources by 2030. Read more

Other News & Resources

• The European Union has proposed rules for all packaging in the EU market to be recyclable by 2030. Read more
• CDP will integrate ISSB’s climate-related disclosure standards into global environmental disclosure platform. Read more
• Central Banks and NGFS launch blended climate finance initiative. Read more
• TNFD collaborates with NGFS for nature-related scenario analysis proposals. Read more
• ESMA has added ESG disclosures as one of Its priority areas in the Union Strategic Supervisory Priorities (USSPs). Read more

Have we missed anything?
ESG Book manages the world’s largest repository of sustainability reporting provisions with over 3,400 regulations across 71 jurisdictions globally. If there is a recent ESG regulatory development we have missed, we would like to hear from you and invite you to contribute below.
Click here to access the ESG Regulatory Provisions Contributor Form

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.

 
Europe 

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.

Americas
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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