3 Aug, 2021

Sustainable Finance Regulatory Update: July 2021


EFRAG-GRI Statement of Co-operation
On 8 July, The EFRAG Project Task Force on Non-Financial Reporting Standards signed a Statement of Co-operation with the Global Reporting Initiative (GRI). This collaboration will enable both organizations to leverage their respective strengths in developing new sustainability reporting standards for the European market. EFRAG’s Project Task Force on European Sustainability Reporting Standards is leading the development of the new standards, set out in the EU’s Corporate Sustainability Reporting Directive (CSRD), and the partnership will allow the GRI to share its technical expertise. In 2020, it was estimated that around 54% of EU companies use GRI standards for their non-financial reporting requirements.

EU Social and Harmful Activities Taxonomy
On 12th July, the European Commission published draft reports on the establishment of a Social Taxonomy as well as an extended Taxonomy providing further clarity on transition and significantly harmful activities.

Built on the foundation of international norms and principles like the sustainable development goals (SDG) and the UN guiding principles for businesses and human rights, a Social taxonomy would help investors to contribute to finance solutions around ensuring decent work, enabling inclusive and sustainable communities and affordable healthcare and housing, in addition to other important socially-focused objectives. A social taxonomy in this regard could be a significant step forward in helping investors identify relevant opportunities and most importantly, encouraging them to contribute to the ones most aligned with their values. 

The Commission has launched calls for feedback regarding both proposals, open until 27th August 2021:

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:

  1. Extend the existing sustainable finance toolbox to facilitate access to transition finance
  2. Improve the inclusiveness of small and medium-sized enterprises (SMEs), and consumers, by giving them the right tools and incentives to access transition finance.
  3. Enhance the resilience of the economic and financial system to sustainability risks
  4. Increase the contribution of the financial sector to sustainability
  5. Ensure the integrity of the EU financial system and monitor its orderly transition to sustainability
  6. 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 TaxonomyThe 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.

SASB Standards Board initiates standard-setting project to address renewable energy standards for power industry

On 13th July, Sustainability Accounting Standards Board (SASB) announced its standard-setting project on renewable energy in the Electric Utilities & Power Generators industry.

The project, currently at the initial research stage will investigate different ways to assess how the utility company(s) perform as they transition to renewable energy on a decarbonization pathway. Incorporating sector specific research and market feedback, this might study could encourage SASB to consider addition of new metrics or the revisions of current ones to address the transition and increase applicability of the standards (wherever, applicable).

The complete list of ongoing projects can be accessed here.

SBTi is releasing a new strategy that raises the bar to 1.5°C

On 15th July, The Science Based Targets initiative (SBTi), the global body which enables and mobilizes  businesses to set emissions reduction targets, shared its progress in unveiling a new strategy to advance growth in the adoption and implementation of 1.5°C aligned science-based targets. (Particularly from companies in high-emitting sectors and across G20 countries).

This announcement comes just weeks ahead of the Intergovernmental Panel on Climate Change (IPCC) Working Group I contribution to the Sixth Assessment Report, which is due to be released on 9 August 2021 and can be a potential step forward towards decarbonization and in building a net zero future.

CFA’s ESG Disclosure Standards for Investment Products

CFA Institute has published an update on the ESG Disclosure Standards for Investment Products: In addition, it has now published the exposure draft for the related verification procedures, which has been put together by the ESG Verification Subcommittee and the CFA Institute Standards team. These procedures are intended to be used by independent verifiers to test the disclosures that an investment manager makes for a particular investment product.

You can read the exposure draft here.

Central Banks:

  • A coalition of international organisations including central banking body the Network for Greening the Financial System and the UN Sustainable Insurance Forum have launched a ‘Climate Training Alliance’ for central banks and supervisors. The Alliance will allow central banks and supervisors access to training from NGFS members, as well as the Bank for International Settlements, in an attempt to improve the accessibility of climate-related risk training, especially in emerging markets.
  • Bank of Russia recommends that public joint-stock companies disclose information about ESG factors: Public companies are encouraged to disclose information about how they take into account factors related to the impact on the environment, the social sphere and corporate governance (the ESG factors), as well as how they implement these factors into their business model and development strategy.

IOSCO introduces public consultation on ESG Ratings and Data Providers to address data gaps across multiples rating providers

On 26th July, The Board of the “International Organization of Securities Commissions (IOSCO)” put forward its consultation paper proposing a set of recommendations regarding Environmental, Social and Governance (ESG) Ratings and Data Providers.

With this, IOSCO brings forth a set of recommendations aiming to address – gaps and inconsistencies in ESG ratings, lack of transparency about the methodologies underpinning these ratings and challenges faced by users of products and services from these ratings and data providers.

This initiative shall guide IOSCO member countries in understanding the implications of ESG ratings and data products providers and in subsequently establishing different frameworks to mitigate risks arising thereof.

The public consultations end on 6 September 2021.

IOSCO Outlines its Vision for Sustainability Disclosure

On 28th June, IOSCO (The International Organization of Securities Commissions) published its final new report concerning issuers’ sustainability-related disclosures.

The report reiterates the urgent need to improve the consistency, comparability, and reliability of sustainability reporting for various investors and strengthens IOSCO’s expectations from the IFRS Foundation’s ongoing work towards establishing an investor-focused sustainability standards.

PRI, the Generation Foundation and UNEP FI collaborate with law firm Freshfields to release a new legal framework for Sustainable Impact

On 21st July, UN PRI, the Generation Foundation and UNEP FI, together with global law firm “Freshfields Bruckhaus Deringer (Freshfields)” released a new report titled “A Legal Framework for Impact” which provides the first of its kind analysis on how far the law requires or permits institutional investors in taking deliberate steps to tackle sustainability challenges while also discharging their duties.

The report identifies possible interventions for both investors and policy makers to pursue sustainability goals while meeting financial objectives.

The jurisdictions covered are Australia, Brazil, Canada, China, the EU, France, Japan, Netherlands, South Africa, the United Kingdom, and the United States.