In this month’s Policy Digest, we observe efforts to enhance interoperability and establish equivalence for sustainability reporting across jurisdictions. The International Financial Reporting Standards (IFRS) Foundation and the European Financial Reporting Advisory Group (EFRAG) released the much-awaited interoperability guidance to help streamline reporting processes for companies applying both the International Sustainability Standards Board (ISSB) standards and the European Sustainability Reporting Standards (ESRS).
In Europe, legislators are in the final stages of implementing the Basel III framework which will enhance the focus of ESG risks in the prudential framework. Following a consultation on the implementation of Sustainable Finance Disclosure Regulation (SFDR), the European Commission released a summary report which revealed ‘no clear preference’ for overhauling the classification system versus maintaining the status quo with minor enhancements to the Article 8 and 9 product categories and criteria. The EU’s top securities markets regulator meanwhile introduced an important means to address greenwashing through guidelines on the proper use of ESG and sustainability-related terms in fund names.
Taking its own measures to protect end-investors from greenwashing risks, the U.K. Financial Conduct Authority (FCA), in a recent consultation, proposed extending the requirements of the Sustainability Disclosure Requirements (SDR) regulation to portfolio management services. Currently the SDR only applies to retail investors. As a follow up to the release of the Anti-Greenwashing Rule (AGR) for all FCA-authorised firms, the financial regulator also released a non-handbook guidance illustrating best practices for product communication.
Across the Atlantic, the U.S. Environmental Protection Agency (EPA), unveiled the updated methane emissions reporting rule to address gaps in reporting and enhance data collection for oil and gas facilities exceeding emissions thresholds. Although a seemingly unremarkable development, this reflects the Inflation Reduction Act’s (IRA) knock-on effect in other areas of federal regulation.
In Asia-Pacific, the Hong Kong Monetary Authority (HKMA) celebrated the launch of the Sustainable Finance Taxonomy whose development was ‘guided by the principles of interoperability, comparability and inclusiveness’. Meanwhile, Australia implemented its own sustainability classifications for certified financial products, setting standards for sustainable investment labels and furthering market transparency. Through these initiatives, regulators around the world are emphasising the urgent imperative for ESG standardisation in the private sector which holds the key to unlock and catalyse financial flows into sustainable and climate-resilient investments.
International
IFRS and EFRAG publish Interoperability guidance
On May 2nd, 2024, the IFRS Foundation and EFRAG jointly published interoperability guidance to help streamline the ISSB and ESRS disclosure process for reporting entities. It aims to minimise the reporting and compliance burden for entities disclosing against both the ISSB and ESRS frameworks. Overall, the guidance illustrates a high degree of alignment between both standards, particularly climate-related disclosure standards. The interoperability guidance can be utilised to better understand where disclosure requirements intersect and are equivalent. While there is greater focus on enabling compliance with climate-reporting requirements across both sets of standards, the guidance also includes information on general reporting requirements, interoperability of materiality, presentation and disclosures for sustainability topics beyond climate. The guidance is an important tool for improving efficiency in sustainability reporting as it allows users to cover as many points of disclosure as possible if at least one set of standards (ESRS or ISSB) has been completed. Read more
Europe
European Parliament set to implement Basel III standards
The European Parliament has finally passed the EU Banking Package with key amendments to the Capital Requirements Regulation (CRR3) and the Capital Requirements Directive (CRD). This marks an important milestone in the full implementation of Basel III reforms which would establish and enhance the assessment of ESG risks in the prudential framework. CRD amendments also require institutions to integrate ESG risks when assessing the value of collateral. Once this starts to apply from January 1, 2025, financial institutions will have to disclose ESG risks including physical risks and transition risks in accordance with technical standards developed by the European Banking Authority (EBA). Banks will also have lower risk weight for exposures to the EU Emissions Trading System (ETS). Read more
SFDR Summary Report indicates split over new category system
The European Commission published a Summary Report highlighting key takeaways from the targeted consultation on the implementation of SFDR initiated on 14 September 2023. The report shows that 80% of respondents agree that SFDR’s objective to enhance transparency through sustainability disclosures is relevant. Additionally, there is consensus on maintaining consistency across key pieces of legislation under the sustainable finance framework including the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) and SFDR. Over half of the respondents support uniform disclosure requirements for all financial products as a means for investors to accurately identify sustainable and unsustainable assets across European markets. However, 77% of respondents expressed limitations in the effectiveness of the framework due to various issues including unclear legal concepts and definitions and lack of disclosure data. The 2023 consultation proposed either converting Article 8 and 9 into formal product categories with clear and concise criteria or creating a new categorisation system that does not incorporate underlying concepts embedded in the SFDR framework. The Summary Report reveals that there is no clear preference between the two options, making it a complex task for regulators and market participants to chart a course of action. Read more
European Securities and Markets Authority (ESMA) releases finalised guidelines on the use of ESG and sustainability-related terms in fund names
The final report addresses greenwashing risks and aims to protect investors from overstated and misleading claims by regulating the use of ESG or sustainability-related terms in fund names. ESMA has retained the minimum 80% threshold for sustainable investment to meet the environmental/ social characteristics or sustainability objective. Key changes include removing the 50% sustainable investment threshold following feedback from stakeholders stating that the definition of sustainable investments under Article 2(17) SFDR is unclear and ambiguous. Instead, ESMA has introduced a commitment to invest meaningfully in sustainable investments. The guidelines further clarify exclusions criteria for different terms. Social and governance terms, along with transition-related terms, are grouped together, meaning funds with those terms in their names must apply Climate-Transition Benchmark (CTB) exclusions (tobacco cultivation and production, controversial weapons related activities, UNGC or OECD violations). The justification made here is that funds with social and governance terms promoting social or governance characteristics could be too restricted in the universe by fossil fuel exclusions. Funds with environmental and sustainability-related terms will, however, be subject to Paris-Aligned Benchmarks (PAB) exclusion criteria. ESMA is giving existing funds a transitional period of 6 months to comply or explain. New funds will have to use the guidelines with immediate effect. Read more
United Kingdom
FCA proposes expanding the scope of the UK SDR to include portfolio management services
Recently, the FCA launched a consultation on a new proposal to extend SDR to portfolio managers. Currently, only retail investors are within the scope of the regulation. The new proposal would extend the requirements to firms that manage a group of investments for consumers, with a focus on wealth management services for individuals and model portfolios for retail investors. The SDR and investment labels were part of a package of measures for asset managers including a naming and marketing rule and the Anti-Greenwashing Rule (AGR) which also applies to all FCA-authorised firms in the UK. Under the AGR, firms must communicate the sustainability characteristics of products and services fairly, clearly and consistently so as not to be misleading. Alongside the new proposal, the FCA also released a nonhandbook guidance on AGR which provides examples of best practices for product communication and emphasises the importance of evidence-based claims. The guidance confirms that the AGR does not supersede existing rules on fund names and that it aims to complement consumer protection laws and guidance from authorities like the Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA). With the release of the guidance, the FCA also confirmed that the AGR will come into effect on 31st May 2024. Read more
United States
US EPA updates Methane Emissions Reporting Rule
The final rule updates methane emissions reporting requirements for natural gas and petroleum systems under the U.S. Greenhouse Gas Reporting Program. Part of the final rule is the ‘Super-Emitter Program’ which requires owners and operators of facilities to report emissions exceeding 100 kg per hour to help ‘close the gap between observed methane emissions and reported emissions’. The EPA has also updated the Reporting Program by enhancing the collection of data to establish the total volume of pollution caused by the oil and gas industry. The EPA’s enhanced measurements of emissions will serve as a basis for calculating the waste fee for facilities with methane emissions above a certain threshold defined by the Methane Emissions Reduction Program (MERP) created under the Inflation Reduction Act (IRA). Read more
Asia-Pacific
Hong Kong Monetary Authority launches Taxonomy
The Hong Kong Taxonomy will serve as a new classification system for environmentally sustainable economic activities aiming to facilitate green finance flows. It will help guide investors on how to identify and classify activities that can be considered green and avoid investment in activities that have a negative impact. Currently, there are 12 economic activities under 4 sectors – power generation, transportation, construction and water and waste management – within the scope of the Taxonomy. There is also supplemental guidance on using the standardised framework, including thresholds and criteria to be considered eligible under the Taxonomy. The Hong Kong Taxonomy is designed to enable interoperability of global Taxonomies and is compatible with the Common Ground Taxonomy (CGT), EU Taxonomy, ASEAN Taxonomy and the Climate Bonds Taxonomy (CBT) established in Mainland China. In the next iteration of the Taxonomy, regulators plan to include transition activities and additional sectors. Read more
Australia introduces sustainability classifications for certified products
In May 2024, the Responsible Investment Association of Australasia established three fund labels – responsible, sustainable and sustainable plus and includes criteria for each label. The sustainability classification system specifies that firms must align investment activities with the sustainability objective. There is a minimum threshold of 80% sustainable investments in line with the stated objective for single asset portfolios to achieve the ‘sustainable’ label. Whereas multi-asset portfolio must have a minimum of 50% sustainable investments. ‘Sustainable plus’ funds must meet additional requirements and incorporate sustainability objectives as binding criteria in their documentation. Australia is also considering legislation to establish minimum standards for marketing investment products as sustainable. This proposed regime would cover all managed investment and superannuation products marketed to retail clients, aiming to standardize sustainability terminology and require upfront and ongoing disclosure against sustainability criteria. The reform is expected to start in 2024. Read more
Other News & Resources
- Federal Reserve Board publishes results of 2023 climate scenario analysis exerc Read more
- Japan’s Financial Services Agency (FSA) working on climate scenario analysis in the banking sector. Read more
- EFRAG updates ESRS Sector Classification to align with other reporting frameworks such as GRI, SASB. Read more
*ESG Book manages the world’s largest repository of sustainability reporting provisions with over 2,800 regulations across more than 80 jurisdictions globally. If there is a recent ESG regulatory development
