Regulators around the world are keeping busy with rolling out numerous ESG disclosure and reporting recommendations to help markets avoid greenwashing and ensure the long-term risk management of sustainability factors. Here is this month’s round-up of sustainable finance regulatory updates:
In June, the European Commission launched the EU Taxonomy Compass. The online tool, accompanied by a downloadable Excel file, digitises the contents of the Taxonomy, focusing on the EU Taxonomy Climate Delegated Act as a first step. The Taxonomy Compass is searchable by activity and related criteria across all taxonomy economic sectors, allowing users to identify and monitor the applicable Taxonomy screening criteria to relevant investment or economic activities.
The European Banking Authority (EBA) issued a report on ESG risk management and supervision for credit institutions and investment firms. The document provides guidelines on the definition, management and governance of ESG factors and the integration of ESG risks into the regulatory and supervisory framework for regulated institutions. Importantly, the report features a non‐exhaustive list of ESG factors, indicators and metrics (Annex I) that could serve as an indication of the quantitative metrics credit and investment firms would need to report.
UK takes further steps towards introducing its own Green Taxonomy
In November 2020, the UK government announced plans to develop a UK green classification system for sustainable activities. On June 9, the UK government launched an independent Green Technical Advisory Group (GTAG) to advise on the standards for defining green investment. The GTAG will oversee, among other things, the delivery of a “Green Taxonomy”—a common classification system defining the criteria investments need to meet before they can be labelled environmentally sustainable.
On June 16, the U.S. Congress, by a narrow 215-214 vote, passed H.R. 1187, the Corporate Governance Improvement and Investor Protection Act. The act contains 11 titles pertaining to different ESG, climate, and sustainability disclosure topics. The legislation would require public companies to annually disclose certain ESG metrics and “their connection to the long-term business strategy” and now moves to the US Senate. This package includes a number of bills authored by several Members of the Financial Services Committee, featuring:
- Mr. Vargas’ bill, “The ESG Disclosure Simplification Act,” which requires public companies to disclose certain ESG information to shareholders as well as the impact of the ESG policies on their strategies;
- Mr. Foster’s bill, “The Shareholder Political Transparency Act,” which requires public companies to submit quarterly reports to the SEC on any and all political expenditures, including dark money;
- Ms. Velazquez’s bill, “The Greater Accountability in Pay Act,” which sheds light on pay disparities, helping to close the gender and racial pay gap.
- Ms. Axne’s bill, “The Disclosure of Tax Heavens and Offshoring Act,” requires disclosures that discourages companies’ use of tax havens and encourages repatriation of taxes to the United States; and
- Mr. Casten’s bill, “The Climate Risk Disclosure Act,” requires disclosures that encourages companies to plan for the impact of climate change on their company.
Singapore’s Green Finance Industry Taskforce (GFIT), led by the Monetary Authority of Singapore (MAS) issued the following:
- White paper on scaling green finance in the real estate, infrastructure, fund management, and transition sectors.
- Framework to help banks assess eligible green trade finance transactions
- Detailed implementation guide for climate-related disclosures by financial institutions
This follows the Singapore Green Taxonomy proposal issued earlier this year which was subject to consultation by the Green Finance Industry Taskforce (GFIT), convened by MAS, in addition to the handbook on implementing environmental risk management for asset managers, banks, and insurers.
The top 1000 Indian companies by market cap will be required to use a specific format and follow new ESG reporting requirements when making their sustainability disclosures, as announced by the Securities and Exchange Board of India (SEBI). The Business Responsibility and Sustainability Reports (BRSRs) will feature disclosures relating to ESG risks, sustainability performance, environmental metrics, and social factors.
Central bankers around the world are focusing on introducing dedicated green policies as climate change and ESG continue to have a significant economic impact:
- The Central Bank of Japan (BOJ) introduced a new policy initiative, with a new lending facility to be launched focusing on climate change. The facility will be launched later in the year.
- Brazil’s central bank Banco Central do Brasil is stepping up its ESG regulatory framework. To do so, it is putting together a list of ESG risks that banks will have to incorporate into their credit models.
- The European Central Bank (ECB) gathered in Frankfurt to examine inflation targets and the possibility of introducing climate risk disclosures for asset purchases. Interestingly, the ECB discussed central bank policy and sustainability, with a view to adjusting monetary policy in line with sustainability considerations.
The EU’s Renewed Sustainable Finance Strategy
On 6th July, the EU unveiled the latest update to its Sustainable Finance Strategy, focusing on six sets of actions:
- Extend the existing sustainable finance toolbox to facilitate access to transition finance
- Improve the inclusiveness of small and medium-sized enterprises (SMEs), and consumers, by giving them the right tools and incentives to access transition finance.
- Enhance the resilience of the economic and financial system to sustainability risks
- Increase the contribution of the financial sector to sustainability
- Ensure the integrity of the EU financial system and monitor its orderly transition to sustainability
- Develop international sustainable finance initiatives and standards, and support EU partner countries
Particularly noteworthy are the proposal for a European Green Bond Standard, as well as the adoption of the EU Taxonomy Delegated Act that clarifies what information should be disclosed by corporates and financial institutions under Art. 8 of the EU Taxonomy:
- The European Green Bond Standard proposal, also adopted on 6th July 2021, will create a high-quality voluntary standard for bonds financing sustainable investment. The Commission proposed a Regulation on a voluntary European Green Bond Standard (EUGBS). This proposal will create a high-quality voluntary standard available to all issuers (private and sovereigns) to help financing sustainable investments.
- Finally, the Commission adopted a Delegated Act on the information to be disclosed by financial and non-financial companies about how sustainable their activities are, based on Article 8 of the EU Taxonomy. The Delegated Act specifies the content, methodology and presentation of information to be disclosed by large financial and non-financial companies on the share of their business, investments or lending activities that are aligned with the EU Taxonomy.