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.
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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.
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