Global Regulatory Brief: Green finance, November edition

Bloomberg Professional Services

October 30, 2023

The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.

Green finance regulatory developments

The implementation of the global green finance agenda is gathering speed as regulators seek to provide firms with greater clarity regarding the practical implications of new rules relating to green finance. The following developments from the past month in green finance stand out:

EU: Commission launches consultations on SFDR
US: California passes legislation requiring disclosures of GHG emissions and climate-related financial risks
Hong Kong: GFANZ announces Hong Kong chapter
UK: FCA responds to ISSB consultation on priorities for next two-year work plan
Japan: FSA and BOJ test climate-related risks with banks and insurers
ASEAN: Exchanges agree on new set of ESG metrics
Singapore: SGX RegCo seeks to align listing rules with ISSB Standards
Indonesia: OJK issues new rules for carbon trading
Taiwan: FSC releases schedule for implementation of IFRS sustainability disclosure standards

From digital finance, the green agenda and financial stability, we look at vital regulatory matters for 2023 and beyond.

ASEAN Capital Markets Forum endorses transition finance guidance

The ASEAN Capital Markets Forum published its ASEAN Transition Finance Guidance designed to complement the ASEAN Taxonomy for sustainable activities and provide common standards for entities looking to demonstrate the credibility of their transition.

What you need to know: The guidance aims to incentivise companies to create more ambitious and credible transition plans, and financial institutions to channel more financing to companies that are transitioning.

Investors, real economy companies and other stakeholders may use the guidance to issue, develop, and manage transition-labeled financing instruments, provide financing that supports the transition, and build or assess fundamental climate transition capabilities
The guidance recommends several key principles that revolve around climate ambition and companies’ ability to deliver on their transition plans

Future refinements: The guidance is intended as a living document and will be continuously refined with stakeholder feedback and updated to reflect evolving global climate expectations and/or regional maturity over time.

Japan launches trading in new carbon credits market

The Tokyo Stock Exchange (TSE) launched its new carbon credit market, allowing a market based trading mechanism for J-Credit carbon credits.

The details: The establishment of the carbon credit market is based on the “GX League Basic Concept” announced by the Ministry of Economy, Trade and Industry in February, 2022 and the “Basic Policy for Realizing GX” approved by the Cabinet in February, 2023. The new market is expected to help boost the number of participants in the carbon credit system and provide economic incentives for companies and others to promote decarbonization.

How will it work? The new carbon credit market allows trading in J-Credits, which are certified by the government and have already been circulating on a voluntary basis in Japan since 2013.

The J-Credit scheme was designed to certify holders’ emissions reductions or removal of greenhouse gasses through energy-saving devices, forest management and other methods
According to the TSE, order acceptance times are divided into morning and afternoon hours, and prices are posted twice at 11.30 am and 3:00 pm

Task Force on Climate-Related Financial Disclosures publish final status report

The Task Force on Climate-Related Financial Disclosures (TCFD) established by the Financial Stability Board (FSB) in 2015, published its sixth and final status report.

The details: The report highlights steady momentum in companies disclosing TCFD-aligned information but emphasizes more progress is needed. On average for fiscal year 2022, companies reported in line with 5.3 of the Task Force’s 11 recommended disclosures, up from an average of 3.2 in 2020. While levels of disclosure are increasing, they still fall short of the 11 recommended disclosures.

Next steps: Beginning in 2024, the ISSB will assume responsibility of monitoring climate-related disclosures and reporting to the FSB.

Brazil consults on Sustainability Taxonomy Action Plan

The Brazil Ministry of Finance has launched a public consultation for the Brazilian Sustainable Taxonomy Action Plan. The Brazilian Taxonomy is part of the Ecological Transformation Plan to respond to the country’s main environmental and social challenges.

A taxonomy in the making: The taxonomy works as a “vocabulary” of financial assets and sustainable economic activities, facilitating the understanding of what is relevant to the Brazilian strategy for tackling the climate crisis.

The taxonomy puts forward a combination of environmental, climate and social objectives ranging from mitigating climate change, protecting biodiversity, and transitioning to a circular economy
It also includes the promotion of decent work, reducing inequalities, and improving quality of life

Who is in charge? A working group will be created that will act in making crucial decisions, while a supervisory committee headed by the Ministry of Finance will supervise the process.

Sectoral and thematic technical groups, in partnership with external consultants, will work on developing the taxonomy criteria.
An advisory committee will be formed with representatives from relevant industry sectors to ensure the tool is effective.

Next steps: The Sustainable Taxonomy Action Plan will be formally presented at COP28. As for implementation, the taxonomy will be voluntary at first and will become mandatory from 2026 onwards.

EU Parliament publish draft report on ESG rating activities

The European Parliament’s ECON Committee published its draft report on the proposed regulation on ESG rating activities, providing an early indication of the European Parliament’s reflections on this file.

In detail: The lead negotiator, MEP Aurore Lalucq, makes a number of proposed amendments to the Commission’s draft legal text.

A decision to expand the scope of the proposal is deferred to a review clause, which would potentially kick in three years following the file’s entry into force
Another key proposal likely to gain traction is the rapporteur’s proposal to ban ESG ratings providers from providing consulting or audit services from the same legal entity as ESG ratings
Lalucq expresses concerns over composite ratings of E, S and G factors into a single number, proposing to force disaggregation instead of the current requirement to disclose weightings

Next steps: Following amendments from Members of the European Parliament, a vote on a consolidated European Parliament position is expected in late November. Negotiations between the Parliament and Council should take place in early 2024 with a view to an agreement in the Spring.

Governor Newsom signs California corporate climate disclosure bills into law

California Governor Gavin Newsom signed into law two bills (SB 253 and SB 261) that would require large companies doing business in California to disclose their climate-related financial risks and carbon emissions.

The details: For the first time in the US, both public and private corporations operating in California would be required to publicly disclose their greenhouse gas emissions, including Scope 3 emissions, and climate-related financial risks.

Next steps: California Air Resources Board, charged with implementing the laws, would need to pass regulations by Jan. 1, 2025 with companies starting to make disclosures in 2026. Newsom has indicated that the laws will need some modifications.

Related developments: House Democrats urged the US Securities and Exchange Commission (SEC) to include robust greenhouse gas emissions disclosures in its final climate disclosure rules, particularly in light of California’s Scope 3 disclosure requirements. The SEC is expected to finalize its climate disclosure rules in the next few months.

South Korea FSS announces new disclosure standards for ESG funds

The Financial Supervisory Service of South Korea announced the creation of new disclosure standards for ESG funds that will be fully implemented in February 2024.

The background: The lack of disclosure standards for ESG funds has led to concerns about greenwashing of funds and information asymmetry for investors, and asset managers have also lacked clear guidance on the appropriate level of disclosure.

Application of the standards: The revised disclosure standards apply to public funds that include ‘ESG’ in the fund’s name, or indicate or describe ESG-related matters in the prospectus, regardless of the name, such as investment objectives and strategies.

The standards apply to existing funds as well as new funds established after the revision
ESG fund managers will have to clearly state their ESG investment goals and explain in detail the connection between fund investment strategy and ESG, including the selection criteria and procedures for investment targets, and the ESG evaluation methods they use

Next steps: The standards will become effective from December this year. A review period will follow ahead of full implementation of the new standards in February 2024.

New Zealand FMA issues record keeping guidance for climate disclosures regime

The New Zealand Financial Markets Authority issued its final guidance setting out principles and expectations for climate reporting entities (CREs) as part of New Zealand’s climate standards framework published in December 2022.

Who is guidance intended for: The document is primarily intended for climate reporting entities (CREs), their directors and other authorized bodies and persons referenced in the Financial Markets Conduct Act.

Key principles: For climate statements to be relied upon to achieve the purpose of the (Climate Related Disclosures) CRD regime, they must be supported by proper records. CRD records must be:

Readily identifiable and comprehensible;
Kept in English or te reo Māori
Available for inspection
Provide evidence of materiality considerations
Maintained within an effective system of controls
Appropriate protection and safeguards
Records kept by a third party must comply with the CREs legal obligations

Closely related: The guidelines complement the Aotearoa New Zealand climate-related disclosures which are being gradually phased in from January 1, 2023.

UAE consults on Principles for Sustainability-Related Disclosures for Reporting Entities

The members of the UAE Sustainable Finance Working Group (SFWG) are consulting on proposed Principles for Sustainability-Related Disclosures for Reporting Entities (the Disclosure Principles).

Main takeaways: The consultation sets out four principles that the signatories will treat as minimum guidance for their respective disclosure frameworks in relation to sustainability-related matters.

It remains at the discretion of each of the authorities to determine how the disclosure principles may be translated into their respective regulatory frameworks
The objective of the disclosure principles is to promote transparency in sustainability-related matters to allow investors and other stakeholders to make more informed decisions and evaluate investment risks and opportunities of entities and products

Expected outcome: Following consultation feedback, the SFWG aims to issue the final guidance in November, 2023, subject to the outcome of the public consultation.

FSB publishes annual progress report on climate-related disclosures

The Financial Stability Board (FSB) published its annual progress report on climate-related disclosures that takes stock of the progress made since the publication of the FSB’s 2021 report: Promoting Climate-Related Disclosures.

Included in the report: The report addresses the progress made by the International Sustainability Standards Board (ISSB) in developing its global baseline climate reporting standard and the work of other international standard-setters on assurance over sustainability-related reporting.

It also looks at the progress made in the area of assurance, including by global standard setting and assurance bodies
Furthermore, it provides an update on the progress made by jurisdictions on climate-related disclosure practices and steps taken by jurisdictions to adopt, apply or make use of the ISSB standard
Finally, it looks at the progress made by firms in this direction

View the additional regulatory briefs from this month:

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