Global Regulatory Brief: Green finance, December edition

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 gathers speed as regulators seek to address the practical implications of new rules relating to green finance. The following developments from the past month in green finance stand out:

• EU: Member States give green light to EU Green Bond Standard
• Australia: Government consults on sustainable finance strategy
• Hong Kong: Securities regulator announces support for development of voluntary code of conduct for ESG ratings and data product providers
• UK: Financial Conduct Authority says asset managers need to improve ESG fund disclosures 
• US: Bank regulators issue principles on climate-related financial risk
• US: Global Change Research Program releases Fifth National Climate Assessment
• EU: Banking Authority publishes templates for collecting climate-related data from banks
• South Africa: Central Bank governor speaks on the role of central banks in the fight against climate change 
• Switzerland: Department of Finance outline further efforts to prevent greenwashing
• Singapore: Monetary Authority launches digital platform for ESG data collection and access

EU Member States give green light to Green Bond Standard

The EU Council representing the Member States gave the final green light to the creation of a European green bond standard. 

What it does: The regulation lays down uniform requirements for issuers of bonds that wish to use the designation ‘European green bond’ or ‘EUGB’ for their environmentally sustainable bonds.

Taxonomy-alignment: Issuers using the EUGB label will be able to demonstrate that they are funding legitimate green projects aligned with the EU taxonomy. Investors’ confidence in green investment will be enhanced thanks to a framework that reduces the risks posed by greenwashing, ultimately stimulating capital flows into environmentally sustainable projects.

Fostering transparency: To prevent greenwashing in the green bonds market in general, the regulation also provides for some voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU.

Next steps: The EUGB Regulation will be signed, and published in the EU’s Official Journal before entering into force 20 days later. It will start applying 12 months after its entry into force.

Australian Government consults on proposed Sustainable Finance Strategy

The Australian government has released Australia’s Sustainable Finance Strategy, which will support Australia’s pathway to net zero, by providing an ambitious and comprehensive framework for reducing barriers to investment into sustainable activities.  

The strategy’s policy priorities are structured in three key pillars:

• Pillar 1: Improve transparency on climate and sustainability
• Pillar 2: Financial system capabilities
• Pillar 3: Australian Government leadership and engagement  

Key objectives: The strategy is all about mobilizing the significant private capital required to achieve net zero, modernizing our financial markets and maximizing the economic opportunities associated with Australia’s energy, climate and sustainability goals. 

The paper seeks feedback on a range of specific proposals, including:

• Options for developing a labeling regime for sustainable investment products, including for managed investment products and superannuation options
• Next steps in the development of a sustainable finance taxonomy, including permanent governance arrangements to oversee and maintain the taxonomy
• Options to enhance the disclosure of corporate transition plans
• Steps to identify and address data‑related challenges faced by financial system companies and investors
• Plans to step up Australia’s international engagement on sustainable finance

Next steps: The consultation paper will close for feedback on 1 December 2024.

Hong Kong SFC supports code of conduct for ESG ratings and data products providers

The Securities and Futures Commission (SFC) has announced its support for the development of a code of conduct for voluntary adoption by environmental, social and governance (ESG) ratings and data products providers. The code of conduct will be developed via an industry-led working group.

In more detail: The initiative is the culmination of the SFC’s fact-finding exercise and industry outreach conducted since mid-2022 to understand matters related to the ESG ratings and data products providers, which are not regulated by the SFC. 

The exercise found that surveyed asset managers highlighted common concerns about data quality, transparency, and conflicts of interest management of the providers, and that the IOSCO recommendations should be encouraged for adoption by ESG ratings and data product providers. 

The key observations from the exercise and proposed way forward for these providers are summarized in a report published by the SFC.

Consultation upcoming: A first draft of the draft Voluntary Code should be issued in Q1 2024 for public consultation.

FCA says asset managers need to improve ESG fund disclosures

The FCA has published a review ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime.

Key findings: While most Authorized Fund Managers (AFMs) have made efforts to comply with the FCA’s expectations on the design, delivery, and disclosure of their ESG and sustainable funds, further improvement is needed.

Examples of poor practice include:

• Products were inconsistently aligned with their ESG and sustainability goals even if they referenced them in their name
• In some instances, fund holdings appeared inconsistent with a fund’s ESG or sustainability objectives, and some AFMs weren’t able to explain how these investments fit with their goals
• Key ESG and sustainability information was often not explained, put into context or included in disclosures, meaning relevant information was not immediately or clearly accessible to investors
• The design of AFMs’ stewardship approaches did not meet the FCA’s expectations. It was often difficult to identify the exact aim of the stewardship activities, how the activities were aligned to fund objectives, and examples of the progress they made against those aims

Going forward: The FCA will continue to monitor the market and work with AFMs in line with its usual supervisory approaches. The findings are expected to feed into the UK’s SDR Policy Statement, which is currently still scheduled for Q4 2023.

US bank regulators issue principles on climate-related financial risk

Federal bank regulatory agencies jointly finalized principles that provide a high-level framework for the safe and sound management of exposures to climate-related financial risks for large financial institutions.

In more detail: The principles are consistent with the risk management framework described in the agencies’ existing rules and guidance. 

• The principles are intended for the largest financial institutions, those with $100 billion or more in total assets, and address physical and transition risks associated with climate change
• These final principles are substantially similar to the agencies’ draft principles, with clarifications based on commenter feedback

US releases Fifth National Climate Assessment

The United States Global Change Research Program (USGCRP) released its Fifth National Climate Assessment (NCA5). 

In summary: The quadrennial report, mandated by Congress, is the US federal government’s preeminent assessment of climate science and provides state, local, and federal policymakers with a broad array of research and recommendations to address climate change.

Economic impacts: For the first time, the NCA5 examines the impacts of climate change on the US economy. 

• It assesses, with high confidence, that climate risks and associated changes to economic conditions will influence asset values and that insurance systems and public budgets will be challenged
• The report also notes that in the absence of strong global mitigation policies, forward-looking financial institutions will continue to restructure their portfolios to account for climate impacts

EBA publishes final templates to collect climate-related data from EU banks

The European Banking Authority (EBA) has published the final templates to be used to collect climate-related data from EU banks in the context of the one-off Fit-for-55 climate risk scenario analysis. The templates are accompanied by a template guidance, including definitions and rules for compiling the templates. 

Background: The one-off Fit-for-55 climate risk scenario analysis aims at assessing the resilience of the financial sector in line with the Fit-for-55 package, and to gain insights into the capacity of the financial system to support the transition to a lower carbon economy under conditions of stress. 

The one-off exercise is part of the new mandates received by the EBA in the scope of the European Commission’s Renewed Sustainable Finance Strategy, with the collaboration and coordination of the other European Supervisory Authorities (ESAs), the European Central Bank (ECB), and the European Systemic Risk Board (ESRB).

Exercise duration: The EBA disclosed the list of 110 banks participating in this data gathering exercise on credit risk, market and real estate risks. The data collection will start on December 1, 2023 and will be completed on March 12, 2024.

South Africa Central Bank governor speaks on the role of central banks in the fight against climate change

​​South African Reserve Bank (Sarb) governor Lesetja Kganyago gave a speech on climate change and policy coordination, and how climate change is affecting the core mandates of central banks. 

The role of policy: Kganyago maintained that while the combination of urgency and complexity is daunting, it is important that the global community think carefully about policy coordination. 

• The global community should think about the roles and responsibilities of the public regulatory system and how their actions impact the behavior of economic agents, firms and households
• Central banks globally have been drawn into these policy debates and while they certainly have a role to play, when it comes to broader society and economy-wide systems, it is best to think of central banks as just one important node in a neural network

The importance of price signals: Kganyago stressed that the government must create the appropriate relative price signals. Otherwise, investment and consumption decisions will continue to support brown sectors; exports will face carbon-border tax adjustments; and foreign funding will decline as investors become more considerate of climate-related issues. 

Swiss Federal Department of Finance outline further efforts to prevent greenwashing

The Swiss Federal Department of Finance (FDF) will draw up a proposal for implementing the Federal Council’s position on the prevention of greenwashing. 

Background: The decision to take further efforts to combat greenwashing comes after the Federal Department of Finance (FDF) consulted with the Swiss Financial Market Supervisory Authority (FINMA), the banking industry and non-governmental organizations, to assess how these requirements could be implemented most efficiently.  

• As a result of the input received, the FDF proposes to introduce principles-based state regulation at ordinance level, which could be supplemented by industry self-regulation

Next steps: The FDF will submit a consultation draft to the Federal Council by the end of August 2024, at the latest. 

Singapore launches digital platform for ESG data collection and access

The Monetary Authority of Singapore (MAS) launched Gprnt (“Greenprint”), an integrated digital platform that simplifies how financial institutions and the real economy collect, access and act upon ESG data.

How the platform works: The platform will integrate with a range of digital systems employed by businesses in their daily operations, including systems for utilities consumption, book-keeping and payroll solutions, payments gateways. 

• The platform will then translate and compute source data into ESG-related outputs for ESG reporting
• Businesses then have discretion to decide whom to share the reported information with 
• The platform will be managed by a newly-created entity, Greenprint Technologies Pte Ltd

Next steps: Gprnt will first focus on reporting needs of businesses, particularly the Small and Medium Enterprises (SMEs). 

• It will then progressively scale its capabilities and network of data sources next year, to serve the more advanced needs of larger multinational corporations (MNCs), financial institutions, supply chain players and national authorities 
• Greenprint Technologies Pte Ltd will continue engagement with financial institutions and technology providers to drive adoption of the platform’s automated disclosure solution, and with ESG data providers to streamline how bank users leverate data to access sustainable financing

View the additional regulatory briefs from this month:

• Trading and markets
• Risk, capital and financial stability
• Digital finance

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