Following a long and protracted run up to sustainability reporting deadlines, standard-setting bodies and regulators alike are introducing clarifications and phasing in implementation to ensure proportionality of compliance burden. Against this backdrop, the ISSB announced a relief measure that would place emphasis on climate-related disclosures in the first year of reporting. At the same time, the European Commission is creating supplementary criteria to the Taxonomy regulation to encourage alignment of economic activities with environmental objectives beyond climate change. Furthermore, the SFDR is undergoing revision, to expand the list of principal adverse impacts (PAIs) and set decarbonization targets for financial products. In furtherance of supply chain oversight, the legal affairs committee of the European Parliament approved the draft EU Corporate Sustainability Due Diligence Directive. In Germany, financial regulator BaFin is promoting investor-led engagement in corporate sustainability initiatives.
Climate concerns are soaring in the UK, as the government develops its Green Finance Strategy to support nature recovery. The UK Government is also soliciting feedback on a carbon border adjustment mechanism to encourage decarbonization across various industries. Recognizing the critical role of the banks in transition, the US Fed has shared analysis of climate risk in the financial sector.
In Asia Pacific, the HKEX is taking steps to improve ESG reporting, with a focus on climate-related reporting. Conscious of increased policy interventions worldwide, the Australian government is pushing for measures to combat greenwashing, including a sustainable finance taxonomy. Currently, the ASEAN Taxonomy Board is also releasing a new version of its taxonomy to standardize sustainable asset categorization and reinforce nationally determined contributions (NDCs). Meanwhile, the Reserve Bank of India is introducing a framework for green deposits to encourage investments in sustainable initiatives.
Global sustainability standards and regulations are reaching a stage of maturity, suggesting a new focus beyond enhanced disclosure quality to indicator comprehension and use. Once standards are set and accepted, there emerges the challenge of enabling organizations to utilize the appropriate tools for measuring progress in specialised contexts.
ISSB Sustainability and Climate Reporting Standards update
On 4th April, the International Sustainability Standards Board (ISSB) announced transitional relief for companies adopting the new S1 and S2 disclosure standards, expected to be released in Q2 2023. In the first year of reporting, companies will only need to prioritize climate-related disclosures, and are not expected to disclose sustainability-related risks and opportunities beyond climate or Scope 3 greenhouse gas emissions. This is aimed at allowing companies to familiarize themselves with the new standards and meet baseline reporting standards, regardless of their current disclosure practices. Next month, ISSB is expected to launch a consultation on its future priorities for standard-setting, including biodiversity, human capital, human rights, and integration in reporting. Read more
Europe
Call for feedback on EU Taxonomy draft delegated acts with criteria for four remaining environmental objectives
On 5th April, the European Commission launched a consultation on new EU taxonomy criteria for economic activities that contribute to non-climate environmental objectives such as sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. The draft Delegated Act is based on the recommendations of the Platform on Sustainable Finance and prioritizes economic activities that can make a substantial contribution to the environmental objectives. The draft Act also amends the Taxonomy Disclosures Delegated Act and introduces limited technical amendments to improve the implementation of the Taxonomy Climate Delegated Act. The Taxonomy Climate Delegated Act has established technical screening criteria for climate change mitigation and adaptation, but adaptation criteria for the activities included in the Taxonomy Environmental Delegated Act will be developed in the future. The consultation is open until 3rd May 2023. Read more
European Supervisory Authorities (ESAs) seek to bring clarification on the reporting of sustainability information in SFDR consultation
On 12th April, the European Supervisory Authorities (EBA, EIOPA, and ESMA) released a Consultation Paper with proposed amendments to SFDR. The proposed changes aim to address issues that have arisen since the introduction of SFDR, including extending the list of social indicators, refining adverse impact indicators, and adding product disclosures regarding decarbonisation targets. The ESAs also suggest further technical revisions to the SFDR Delegated Regulation to improve disclosures, simplify pre-contractual and periodic disclosure templates, and make other technical adjustments. The consultation is open for comments until 4th July 2023. Read more
EU lawmakers adopt legislative reforms to accelerate climate neutrality goals under ‘Fit for 55′ package
European governments and MEPs have agreed to reform the Emissions Trading System (ETS) to require specific sectors to reduce emissions by 62% by 2030 compared to 2005 levels. The revised programme includes gradually phasing out free allowances for ETS sectors from 2026, excluding the aviation sector, which will be phased out by 2026. The scope of industry coverage will also expand to include the maritime sector, and an ETS II will be created for fuel emissions from the building and road transport sector in 2027. To prevent carbon leakage from imports of goods, EU countries will implement the Carbon Border Adjustment Mechanism (CBAM) this year, with importers of carbon-intensive goods being charged the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS. Lastly, the EU Parliament has passed legislation banning the sale of deforestation-linked products in the EU, requiring due diligence statements from companies that produce palm oil, cattle, soy, coffee, cocoa, timber, and rubber, as well as derived products. Read more
EU Parliamentary committee approves draft EU Corporate Sustainability Due Diligence Directive (CSDDD)
On 25 April, MEPs reached a cross-party agreement to impose sustainability reporting requirements on large companies that will cover child labour, slavery and environmental impact. The legal affairs committee of the European Parliament approved the draft EU Corporate Sustainability Due Diligence Directive, which requires large companies to identify and address human rights abuses and environmental damage caused by their suppliers. The directive will apply to EU companies with a turnover of more than €40 million and more than 250 employees, and also to non-EU companies with a net turnover of at least €40 million in the bloc. Negotiations with EU states will now begin, and the directive could be rolled out in stages from around 2030.Read more
German Financial Authority Clarifies Collaborative ESG engagement by investors
On March 30th, BaFin, Germany’s financial regulator, shared its perspective on collaborative engagement by investors, which is particularly relevant for investors who seek to support a company’s pursuit of ESG goals. This engagement could meet the requirements of “acting in concert,” which under German law may lead investors to make a mandatory takeover offer and lose their shareholding rights if they fail to comply. BaFin presented six examples to illustrate its stance, including that investors can meet with management to discuss specific ESG topics and send joint letters to address ESG concerns, as long as they do not agree on voting behaviour. BaFin’s position appears to be rather permissive, which may provide investors with a secure space to pursue ESG goals with greater legal certainty in German companies. Read more
United Kingdom
UK Policy Paper for sustainable farming and nature recovery
As part of the UK’s updated Green Finance Strategy, with the aim to achieve targets for net zero and nature recovery, the UK government published a policy paper requiring a significant increase in funding for nature. The paper advocated private sector involvement in mobilising the necessary green finance for farmers, land managers, and coastal managers to accelerate environmental action. The framework for nature markets outlines how the government will guide and support the development of these markets to increase investment levels. It also sets out the UK’s vision for establishing integrity and principles within the market framework to build trust and confidence, allowing markets to grow in pace with the country’s environmental ambition. Read more
UK consults on carbon border adjustment mechanism (CBAM)
The UK is seeking views on introducing a carbon border adjustment mechanism (CBAM) to mitigate carbon leakage and ensure its industries can decarbonize effectively. The consultation covers a range of potential policy measures, including mandatory product standards, product labelling, public procurement initiatives, and emissions reporting to encourage decarbonization. The earliest date for implementation of a potential CBAM would be 2026, and it would impact sectors such as cement, chemicals, glass, iron and steel, and power generation. The consultation is open for comments until June 22, 2023. Read more
North America
Federal Reserve Bank of New York publishes reports on climate risk
The Federal Reserve Bank of New York released two reports on climate-related risks for financial institutions on April 7, 2023. The first report analyses US banks’ exposure to transition risks from climate change, and the second report discusses the design of climate stress tests to manage macroprudential risks in the financial sector. Although the reports do not impose legal requirements, they offer insights into the positions of banking regulators on climate-related risk management requirements and current industry practices. The reports suggest the need for additional research on the nexus between financial stability and climate risks, deeper analysis of the interactions between climate change and the overall economy, and consideration of political economy considerations. The reports conclude that further research is required to identify better models and data, suggesting that climate stress testing should not yet be used to set capital requirements. Read more
Asia Pacific
HKEX proposes mandatory climate reporting from 2024
Hong Kong Exchanges and Clearing Limited (HKEX) is soliciting feedback on proposed changes to the ESG reporting framework, with a specific focus on enhancing climate-related disclosures by listed issuers. The proposed changes include mandating all issuers to make climate-related disclosures in their ESG reports, moving away from the current “comply or explain” approach. The new disclosures would be organized under four core pillars: Governance, Strategy, Risk management, and Metrics and targets, and would cover various aspects related to climate-related risks and opportunities, governance processes, financial effects, GHG emissions, and industry-based metrics. Interim provisions would allow issuers time to comply, with emissions reporting (including Scope 3) expected for financial years commencing on or after 1 January 2026. The consultation paper is released ahead of the finalization of the ISSB Standards to give issuers more time to review and prepare for the proposed climate-related disclosures. Read more
Australian Green Taxonomy and Anti-greenwashing measures
The Australian government is taking measures to combat greenwashing, develop a sustainable finance taxonomy, and introduce a sovereign green bonds programme to speed up the country’s economic transition. The government will co-fund with industry groups the initial development of the sustainable finance taxonomy, which will include a “traffic-light” system to differentiate between green, transition, and excluded economic activities. The government will also introduce a sovereign green bonds programme once a green bonds framework is developed to increase private capital allocation to public projects needed to decarbonise the economy. Additionally, the country’s existing house energy rating scheme will be expanded and upgraded to make Australian homes more energy-efficient. These measures are part of Australia’s intensified climate change policy agenda following its pledge to reduce emissions by 43% below 2005 levels by 2030. Read more
ASEAN Updates Green Taxonomy
The Association of Southeast Asian Nations (ASEAN) Taxonomy Board (ATB) released the ASEAN Taxonomy for Sustainable Finance Version 2, demonstrating Asia’s commitment to meeting the Paris Agreement commitments. Similar to the EU Taxonomy Regulation, the ASEAN Taxonomy aims to standardize the classification of sustainable activities and assets to provide a “common language” for assessing a company’s sustainability. Version 2 includes advanced assessment methodologies, technical screening criteria, and science-based thresholds to classify activities. The ASEAN Taxonomy’s third Essential Criteria now includes social aspects, alongside “Do No Significant Harm” and “Remedial Measures to Transition.” The ATB plans to conduct consultations with stakeholders on the assessment methodology and metrics for the energy sector under the Plus Standard, aiming to finalize the TSC for the energy sector by early 2024. Read more
Reserve Bank of India issues green deposit guidelines
On 11 April, the Reserve Bank of India introduced a new framework for green deposits starting June 1, 2023. The framework encourages regulated entities to offer green deposits to promote credit flow to green projects, support sustainability agendas, and address greenwashing concerns. All commercial banks must comply with the framework, and green deposits will only be issued in Indian rupees. The framework includes clear guidelines for third-party verification and allocation of proceeds and provides categories for use of proceeds in various green sectors. Read more
Other News & Resources
- IOSCO calls on stakeholders to provide feedback on the International Auditing and Assurance Standards Board’s (IAASB) proposed new standard for sustainability assurance. The consultation period will commence in the latter half of July or early August 2023.Read more
- China and Singapore to launch Green Finance Task Force. Read more
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