Global Regulatory Brief: Green finance, May 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 financial sector continues to face new rules and government expectations as part of the broader effort to aid the green transition. From ESG risks in credit ratings in the EU to transition planning in the UK, the following developments from the past month in green finance stand out:

• US: SEC stays climate rules
• UK: FCA confirms anti-greenwashing guidance and consults on expanding scope of SDR regime
• Hong Kong: HK Exchange publishes climate disclosures consultation conclusions
• International: ISSB to start researching nature and human capital-related risks
• China: Regulators set out policy support to strengthen financial support for green and low-carbon development
• International: NGFS publishes package of reports relating to transition plans
• EU: EFRAG seeks companies to engage in transition plan implementation guidance
• UK: Transition Plan Taskforce publishes final transition plan resources for businesses
• EU: ESMA consults on integrating ESG risks in credit ratings

SEC stays climate rules

The Securities and Exchange Commission (SEC) issued an order staying its climate disclosure rules. The SEC’s climate disclosure rules were finalized in March 2024 and are being litigated in the U.S. Court of Appeals for the Eighth Circuit.

• According to the SEC order, the Commission has discretion to stay its rule pending judicial review if it finds that “justice so requires” under Securities Exchange Act of 1934 Section 25(c)(2) and Section 705 of the Administrative Procedures Act
• The SEC noted that given the procedural complexities accompanying the consolidation and litigation of the large number of petitions for review of the rules, a stay will allow the court to focus on deciding the merits 
• The SEC further stated that, by issuing the stay, it is not departing from its view that the final rules are consistent with applicable law and within its long-standing authority to require the disclosure of information important to investors in making investment and voting decisions

FCA confirms anti-greenwashing guidance

Ahead of the anti-greenwashing rule coming into force on 31 May, the FCA is supporting industry with guidance to help them meet the standard.

The background: In November 2023 the FCA finalized the Sustainability Disclosure Requirements and investment labels regime, a substantial package of measures to improve trust and transparency of investment products and minimize greenwashing. 

Details on the rule: The anti-greenwashing rule requires FCA-authorized firms to ensure that any references they make to sustainability characteristics of their products and services are consistent with the sustainability profile of the product or service, and clear, fair and not misleading. The greenwashing rule is designed to protect consumers by ensuring sustainable products and services they are sold are accurately described.

Consistency with other requirements: The FCA clarified that for most firms, the rule does not introduce a new requirement as they should already be ensuring their claims are ‘fair, clear and not misleading’ under existing FCA requirements. 

The FCA has also reminded firms of the ASA requirements and CMA guidance around environmental claims that they should be adhering to already. The greenwashing guidance is consistent with the existing guidance.

Going forward: The anti-greenwashing rule will come into effect from May 31, 2024 

• UK-based fund managers can use the investment labels from July 31, 2024
• The naming and marketing rules for UK-based fund managers will come into effect from December 2, 2024

FCA consults expanding scope of Sustainability Disclosure Requirements (SDR) regime to portfolio management services

The UK Financial Conduct Authority (FCA) is consulting on extending the Sustainability Disclosure Requirements (SDR) and investment labels regime to portfolio management. 

Background: In November 2023, the FCA established the first iteration of the Sustainability Disclosure Requirements (SDR) regime, consisting of an opt-in labeling regime and disclosure requirements for UK fund managers with sustainability products. 

Consultation details: The FCA is proposing to apply a broadly similar approach to labeling for portfolio managers as introduced for fund managers, to have a consistent approach and create a level playing field. 

The FCA is also proposing to limit the scope to firms that provide portfolio management carried out from an establishment maintained by the portfolio manager in the UK. 

Next steps: The deadline to submit responses is June 14, 2024.

Hong Kong publishes climate disclosures consultation conclusions

The Stock Exchange of Hong Kong Limited (SEHK) has published its consultation conclusions on enhancing climate-related disclosures under its ESG framework and will adopt the proposals. 

Summary: The new requirements are developed based on the International Financial Reporting Standards IFRS S2 Climate-related Disclosures (IFRS S2) published by the International Sustainability Standards Board (ISSB) in June 2023.

• In reaching its conclusions, the Exchange took into account the Hong Kong Government’s vision and approach towards developing a comprehensive ecosystem for sustainability disclosure in Hong Kong and the International Sustainability Standards Board’s (ISSB) jurisdictional guide preview
• SEHK is among the first exchanges globally to enhance climate-related disclosure requirements based on IFRS S2

Looking ahead: The requirements, which will be implemented in phases from January 1, 2025, aim to align local sustainability disclosure with the ISSB standards. 

Closely related: The SEHK has also published an Implementation Guidance to assist issuers’ compliance with the New Climate Requirements.  

• The Implementation Guidance contains references to the relevant principles in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, and issuers are encouraged to refer to and apply the Implementation Guidance when preparing disclosures under the New Climate Requirements
• The Hong Kong Securities and Futures Commission CEO, Julia Leung, stated that the new regime will provide relevant, consistent and comparable information for investors as Hong Kong’s role as a leading international sustainable finance center grows
• The SFC will continue to work with stakeholders to provide a clear pathway on sustainability reporting

ISSB to start researching nature- and human capital-related risks

Informed by its recent consultation on future priorities, the International Sustainability Standards Board (ISSB) has announced that it will focus its agenda priorities to research risks and opportunities associated with:

• Biodiversity, ecosystems and ecosystem services disclosures
• Human capital disclosures

In detail: The ISSB has announced that it will begin researching in earnest risks and opportunities associated with human capital and biodiversity. 

• The aim is to incorporate nature-related and human capital issues into its global reporting baseline and continue building its sustainability-related disclosures beyond climate
• The ISSB’s upcoming research will enable it to embark on its own standard-setting work in key areas needed to establish more specific disclosures to build out the global baseline of sustainability-related financial disclosures 

Building blocks: The ISSB will look at how it might build from relevant pre-existing initiatives, including those already under its purview — the SASB Standards and CDSB guidance — and, additionally, relevant aspects of the work of the Task Force on Nature-related Financial Disclosures (TNFD).

Other priorities: The ISSB’s priority for the next two years will also be supporting the implementation of the ISSB’s inaugural Standards — IFRS S1 and IFRS S2. 

• The two new research projects and work to enhance the SASB Standards will be the ISSB’s other key focus areas
• Capacity will be reserved for addressing emerging needs and engaging with the International Accounting Standards Board (IASB)

China issues guiding opinions on further strengthening financial support for green and low-carbon development

Chinese regulators, including the People’s Bank of China (PBoC), the National Financial Regulatory Administration (NFRA) and the China Securities Regulatory Commission (CSRC), have issued guiding opinions setting out policy support and measures to be implemented and developed in order to promote green and low-carbon development.

In detail: The opinions set out measures relating to:

• Optimizing the green financial service standard system by formulating relevant standards on carbon footprint calculation for business operations, as well as investment and financing activities
• Strengthening environmental information disclosure and reporting by exploring disclosure mechanisms applicable to different FIs
• Promoting carbon market developments by exploring diversified financial products linked to carbon emission allowances and permitted trading channels
• Facilitating international investors’ participation by streamlining the procedures applicable to account set-up, trading, registration, liquidation and settlement, currency exchange and cross-border cash remittance

Going forward: The guidance set out in these opinions is intended to lay the groundwork and help competent regulators formulate and issue corresponding regulations.

NGFS publishes package of reports relating to transition plans

The Network for Greening the Financial System (NGFS) has published three reports furthering its work on transition plans.

Summary: These works explore the role of transition plans in enabling the financial system to mobilize capital, manage climate-related financial risks and the relevance of transition plans to micro-prudential supervision.

The reports cover the following:

• Tailoring Transition Plans: Considerations for EMDEs, which explores the needs and challenges of emerging markets and developing economies (EMDEs) related to transition plans
• Connecting Transition Plans: Financial and non-financial firms, which assesses the interlinkages between the transition plans of the real economy and financial institutions
• Credible Transition Plans: The micro-prudential perspective, which examines the credibility of financial institutions’ transition plans and processes from a micro-prudential perspective

Taking action: The reports identify three key action areas that can support the global adoption of transition plans:

• The development of international guidance for transition planning and corresponding, interacting frameworks for the disclosure of transition plans
• Holistic transition plans should integrate both transition and physical aspects of climate change while considering the ongoing loss of nature. Existing transition plans are chiefly focused on strategy, but transition planning exercises should also be informed by risk management
• Clarity about policy directions, such as national climate frameworks, and economy-wide incentives for developing and disclosing transition plans to broaden adoption and close information gaps

EFRAG seeks companies to engage in transition plan implementation guidance

​EFRAG is preparing guidance to help companies disclose their transition plans in line with the ESRS standards.

In short: EFRAG is in the process of preparing guidance to support companies in efficiently disclosing their transition plans in accordance with the adopted ESRS. 

• The upcoming guidance aims to explain the topics to be included in the transition plan and their integration into the sustainability report in line with the requirements of the adopted standards 
• The main audience of the guidance is companies subject to the CSRD reporting

Call for feedback: EFRAG is seeking insights from a diverse group of European companies subject to CSRD reporting to provide input on a variety of practices and challenges related to disclosing transition plans. 

• Interviews with interested parties will be scheduled on a first-come-first-serve basis throughout April and May
• Interested entities should complete the online application form by April 23, 2024

Transition Plan Taskforce publishes final transition plan resources for businesses

The Transition Plan Taskforce (TPT) has published its final set of transition plan resources to help businesses unlock finance for net zero.

Background: The TPT was announced at COP26 in Glasgow and launched in April 2022 to establish the gold standard for transition plans. The TPT has engaged globally with financial institutions, real-economy corporations, policymakers, regulators and civil society to develop its materials.

In short: The TPT resources are recognised as the best practice disclosure framework for transition plans. They are accompanied by a comprehensive suite of resources to support companies and financial institutions globally to mobilize transition finance.

What’s included? The materials published include:

• Sector-specific transition plan guidance for asset owners, asset managers, banks, electric utilities and power generators, food and beverage, metals and mining and oil and gas
• Sector summary guidance, with high level guidance for 30 sectors of the global economy
• Guidance on how to undertake a transition planning cycle
• A paper on the opportunities and challenges of transition plans in emerging markets and developing economies
• Independent advisory pieces from TPT working groups on adaptation, nature, JustTransition and SMEs

Going forward: The UK government has committed to consulting on transition plan requirements for the UK’s largest listed and private companies, following the release of the TPT’s final Disclosure Framework published in October 2023. 

The government also reinforced its support for the International Sustainability Standards Board (ISSB) and is considering the final ISSB Standards for use in the UK.

ESMA consults on possible amendments to the Credit Rating Agencies rules to integrate ESG risks

The European Securities and Markets Authority (ESMA) launched a consultation on proposed amendments to legislation to ensure that relevant ESG risks are systematically captured in credit ratings and to improve transparency on the inclusion of ESG risks in credit ratings and rating outlooks.

Context: In June 2023 ESMA received a formal request for Technical Advice from the European Commission regarding the framework for the compliance of credit rating methodologies. ESMA is now requesting feedback on its proposed draft advice.

Key proposed draft changes: The objective of the proposals is to ensure a better incorporation of ESG factors in the credit rating methodologies and subsequent disclosure to the public, as well as to enhance transparency and credibility in the credit rating process. In particular, they aim to:

• Ensure that the relevance of ESG factors within credit rating methodologies is subject to systematic documentation
• Enhance disclosures on the relevance of ESG factors in credit ratings and rating outlooks
• Deliver a more robust and transparent credit rating process through the consistent application of credit rating methodologies

Next steps: ESMA will consider the feedback received to this consultation by June 21, 2024. Building on that, ESMA will submit its advice to the European Commission by December 2024.

View the additional regulatory briefs from this month:

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

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