What happened in climate-related financial regulation last month, and what’s coming up.
Americas
The US Commodity Futures Trading Commission (CFTC) announced it will hold a second voluntary carbon markets meeting on July 19. The meeting aims to discuss private sector efforts around high-quality carbon credits, current market trends, public sector initiatives, and perspectives on how the CFTC can facilitate markets for high-quality carbon credit derivatives.
The meeting will build on information from the first meeting held in June 2022, as well as public comments submitted in response to the CFTC’s Request for Information on Climate-Related Financial Risk. The discussion may inform the regulator’s Climate Risk Unit recommendations for guidance, interpretations, or policy statements related to voluntary carbon markets.
EMEA
The European Commission has proposed easing climate and environmental, social, and governance (ESG) disclosure rules to reduce their regulatory burden on companies.
On June 9, it published a draft delegated regulation on the European Sustainability Reporting Standards (ESRS), which underpin the Corporate Sustainability Reporting Directive (CSRD) — an EU-wide rule on ESG reporting that covers around 50,000 companies in the bloc. The proposal shifts all indicators initially classified as mandatory — including greenhouse gas emissions disclosures — into the scope of a materiality assessment, meaning they only need to be reported if they’re relevant to a company.
Some mandatory data points, such as biodiversity transition plans, have also been proposed as voluntary, and certain “flexibilities” have been introduced for sustainability-related financial impacts and stakeholder engagements. The Commission also recommends phasing in some requirements over time, particularly for smaller companies. A consultation of the proposals closed on July 7.
Separately, on June 13 the Commission unveiled a package of measures to bolster the EU’s sustainable finance framework.
This includes updates to the EU Sustainable Taxonomy, new rules for ESG ratings providers, and measures to stimulate climate transition finance.
The Sustainable Taxonomy criteria have been expanded to include more economic activities that contribute to non-climate environmental objectives, such as water and marine resource protection, circular economy transition, pollution prevention, and biodiversity and ecosystem conservation. The Commission intends for these additions to help scale sustainable investments.
On ESG ratings providers, the Commission set out new organizational principles, conflict of interest prevention rules, and a requirement for providers to be authorized and supervised by the European Securities and Markets Authority (ESMA).
Finally, on transition finance, the package features recommendations that aim to provide guidance and practical examples for companies and the financial sector. These recommendations intend to channel investment into low-carbon activities and manage climate-related financial risks.
The changes to the Sustainable Taxonomy will be adopted by the Commission and sent to the European Parliament and Council for scrutiny before they take effect in January 2024. The proposal for a regulation of ESG ratings providers will be discussed with the European Parliament and Council.
The European Financial Reporting Advisory Group (EFRAG) has announced plans to create three advisory panels to develop and maintain sector-specific sustainability reporting rules for the banking, capital markets, and insurance sectors.
These panels will provide guidance and technical input for tailored reporting rules for financial institutions. EFRAG, which advises the European Commission on corporate reporting standards, is responsible for developing the European Sustainability Reporting Standards (ESRS) for companies under the Corporate Sustainability Reporting Directive (CSRD). The advisory panels, SR Banking, SR Capital Markets, and SR Insurance, will initially focus on value chain guidance for their respective sectors starting in September. Each panel will have 20 members from various fields. The application deadline for those interested is July 31.
On June 16, The European Securities and Markets Authority (ESMA) launched a Call for Evidence (CfE) to gather industry feedback on factoring sustainability preferences into product suitability assessments and product governance arrangements.
Investment firms are required to create product suitability assessments under the Markets in Financial Instruments Directive (MiFID) II, the European Union’s wide-ranging rulebook for financial markets participants. The CfE aims to help ESMA understand how MiFID II requirements are being applied by firms across the EU, as well as the challenges they face, and investor reactions to the inclusion of sustainability factors in investment advice and portfolio management services.
The Financial Conduct Authority (FCA) described hurdles to the expansion of the sustainability-linked loans (SLLs) market in the UK in a July 29 article.
The regulator conducted a fact-finding exercise earlier this year with SLL stakeholders and concluded that the market is falling short of its full potential. Specifically, the FCA found that SLL borrowers are wary of “unwelcome scrutiny” if they miss the performance targets embedded in the loans and may be put off by the extra costs and times associated with an SLL.
Market participants also said tougher SLL requirements and standards would improve market integrity and reduce the risk of greenwashing.
The FCA said it will continue to monitor the market and may introduce regulatory standards or a code of conduct if needed.
Asia-Pacific
On June 27, the Australian government launched a consultation on mandatory climate-related financial disclosure requirements for businesses and financial institutions, which is set to be implemented next year.
The proposed rules align closely with the International Sustainability Standards Board’s (ISSB) climate standards, focusing on governance, strategy, risk management, and metrics and targets. Companies will be required to disclose their transition plans, climate-related risk management processes, scenario analysis, industry-specific metrics, and Scope 1, 2, and material Scope 3 emissions.
Large entities with over 500 employees, revenues exceeding AUD$500mn (USD$333mn), and assets of more than AUD$1bn (USD$670mn) will be subject to these rules from 2024-2025 onward, with medium-sized and smaller firms following in subsequent years.
The consultation closes on July 21, after which the Australian Accounting Standards Board will draft detailed disclosure requirements. The government will then introduce legislation if needed.
On June 28, the Monetary Authority of Singapore (MAS) launched a public consultation on incorporating financing for the early phase-out of coal-fired power plants into the Singapore-Asia Taxonomy, which is used to classify investments that support a 1.5°C transition pathway.
The Taxonomy sets Technical Screening Criteria for coal-fired power plants at the facility and entity levels, which align with global science-based decarbonization pathways and take account of other guidance, such as the ASEAN Taxonomy and the Glasgow Financial Alliance for Net Zero’s report.
Stakeholders can submit comments on the additions to the taxonomy until July 28.
Also on June 28, MAS kicked off a consultation on a code of conduct for Environmental, Social, and Governance (ESG) ratings and data products. The proposed code aims to set standards in transparency, governance, and conflict of interest management. It follows recommendations highlighted by the International Organization of Securities Commissions, a global body of markets regulators.
International
The International Sustainability Standards Board (ISSB) released its first set of sustainability and climate-related disclosure rules on June 26, aiming to establish a global baseline for corporate reporting on environmental, social, and governance (ESG) risks and opportunities.
The rules consist of IFRS S1, which addresses general sustainability-related risks and opportunities, and IFRS S2, which focuses on specific climate-related disclosures. The standards incorporate recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and are based on voluntary reporting frameworks, such as the Sustainability Accounting Standards Board (SASB) and the Integrated Reporting Framework.
ISSB Chair Emmanuel Faber said the standards aim to help companies present their sustainability efforts in a robust, comparable, and verifiable manner, leading to better economic decisions. The ISSB is seeking to create sustainability and climate disclosures that complement financial statements, enabling informed capital allocation decisions by investors, while also eliminating greenwashing.
Countries like Canada, the UK, Japan, Singapore, and Nigeria are considering implementing these standards. The International Organization of Securities Commissions (IOSCO), representing 130 member regulators globally, is expected to endorse the standards, potentially accelerating their adoption.
On June 19, International Financial Reporting Standards (IFRS) Foundation, the ISSB’s parent organization, opened a new office in Beijing, China in support of the board’s efforts to internationalize its sustainability and climate standards.
The move follows the signing of a memorandum of understanding between the IFRS Foundation and China’s Ministry of Finance in December 2022. The Beijing office will support the ISSB’s work, focusing on its strategy for emerging and developing economies and acting as a forum for stakeholder engagement in Asia. It will also undertake capacity building activities for emerging economies, developing countries, and small- and medium-sized enterprises.
The office will host the first ISSB meeting in China during the week of November 13, 2023, and will co-host the IFRS Foundation’s first sustainability-focused conference in China on November 17, 2023.
The Basel Committee on Banking Supervision (BCBS) plans to consult on proposed disclosure requirements that cover banks’ exposures to climate-related financial risks.
The committee aims to release a draft Pillar 3 framework that incorporates climate by year-end. Pillar 3 is part of the Basel Framework, which sets disclosure requirements to help determine the amount of capital that banks need to set aside to cover their risks. The Committee said the proposed framework will complement and be interoperable with the ISSB standards and other disclosure initiatives.
The Voluntary Carbon Market Integrity Initiative (VCMI) launched its Claims Code of Practice on June 26, providing companies with guidance on purchasing and utilizing carbon credits. The code outlines four essential steps for making high-integrity claims regarding carbon credit usage. Companies must first meet VCMI’s foundational criteria, then choose one of three claim levels — Silver, Gold, or Platinum. They must also select carbon credits that adhere to the Integrity Council for Voluntary Carbon Markets (IC-VCM) Core Carbon Principles and disclose information supporting their claims, along with independent validation and assurance.
Claim levels correspond to different investments in greenhouse gas emissions reductions and removals. Platinum claims require companies to purchase and retire carbon credits equal to or greater than 100% of their residual emissions, while Silver claims apply to offsets between 20% and 60%. Notably, the VCMI claims can only be made by companies actively reducing their own emissions. To meet foundational criteria, companies must maintain and report an annual greenhouse gas inventory, set and disclose science-based, near-term emissions reduction targets, and commit to achieving net-zero emissions by 2050 at the latest.
More guidance from the VCMI is expected in November, including information on measurement, reporting, assurance framework, additional claim tiers, and claim names. The initiative, established in 2021 as a nonprofit organization, aims to facilitate high-integrity voluntary carbon markets that deliver tangible atmospheric benefits.
The International Public Sector Accounting Standards Board (IPSASB) announced on June 14 plans to develop the first sustainability reporting standard for the public sector.
The decision follows a May 2022 consultation paper in which respondents agreed on the pressing need for better information on public sector sustainability risks and opportunities.
The IPSASB will initially focus on a public sector-specific climate-related disclosures standard, considering climate change as a crucial issue in sustainability reporting. To support the project, the board will establish a climate working group to provide climate-related expertise and advice. Additionally, a sustainability reference group will be set up to advise on the overall sustainability reporting standards development program.
