Global Regulatory Brief: Green finance, June 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 green taxonomies in Hong Kong to sustainability disclosure in the UK, the following developments from the past month in green finance stand out:
- International: IFRS Foundation and EFRAG publish interoperability guidance
- Hong Kong: Hong Kong finalizes Taxonomy for Sustainable Finance
- UK: Government publishes implementation update on Sustainability Disclosure Requirements
- US: Biden-Harris Administration announces new principles for high-integrity voluntary carbon markets
- International: ISSB publishes IFRS Sustainability Disclosure Taxonomy
- Brazil: Brazil consults on sustainability reporting standards
- EU: ESMA publishes guidelines for use of ESG and sustainability terms in fund names
- US: Federal Reserve Board releases summary of the exploratory pilot Climate Scenario Analysis exercise
- EU: European Commission publishes summary report of the open and targeted consultations on the SFDR assessment
- Japan: Japan initiates second exercise of climate-related scenario analysis
- India: SEBI consults on revisions to ESG reporting by corporates
ISSB publishes IFRS Sustainability Disclosure Taxonomy
The International Sustainability Standards Board (ISSB) has published the IFRS Sustainability Disclosure Taxonomy to reflect disclosure requirements arising from:
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, issued in June 2023
- IFRS S2 Climate-related Disclosures, issued in June 2023
Background: The ISSB consulted on a proposal for an IFRS Sustainability Disclosure Taxonomy running from July to September 2023.
Purpose: The FRS Sustainability Disclosure Taxonomy is designed for tagging sustainability-related financial disclosures prepared applying IFRS Sustainability Disclosure Standards, and is intended to support:
- Users of general purpose financial reports to consume sustainability-related financial information digitally
- Regulators that require the digital reporting of sustainability-related financial information
- An entity to implement digital reporting of sustainability-related financial information, enabling tagging without undue cost
Published today: The materials include a full XBRL Taxonomy package as well as an Illustrated Taxonomy setting out:
- The hierarchy of the IFRS Sustainability Disclosure Taxonomy and the elements within it
- The elements’ types, such as text, monetary values or dates
- References to the parts (sections, paragraphs, clauses etc.) of IFRS S1 & S2 that define or require the disclosures these elements represent
Next steps: In the coming months the ISSB intends to publish a webcast explaining the role and benefits of the ISSB Taxonomy.
IFRS Foundation and EFRAG publish interoperability guidance
The IFRS Foundation and EFRAG have published guidance material to illustrate the high level of alignment achieved between the International Sustainability Standards Board’s IFRS Sustainability Disclosure Standards (ISSB Standards) and the European Sustainability Reporting Standards (ESRS).
The background: Having first worked during the development of the ISSB Standards and ESRS to deliver a high degree of alignment, today’s publication now provides practical support that explains how companies can efficiently comply with both sets of standards. In particular, the guidance:
- Describes the alignment of general requirements including on key concepts such as materiality, presentation and disclosures for sustainability topics other than climate
- Provides information about the alignment of climate disclosures and what a company starting with either set of standards needs to know to enable compliance with both sets of standards
Reduced fragmentation: The document has been designed to reduce complexity, fragmentation and duplication for companies applying both the ISSB Standards and ESRS.
- As companies around the world are increasingly mandated to disclose sustainability-related information through the ISSB Standards and ESRS, EFRAG and the ISSB are committed to creating efficiencies where possible to advance transparency, comparability and accountability
- Companies utilizing this guidance will be better able to collect, govern and control decision-useful data once
Biden-Harris Administration announces new principles for high-integrity voluntary carbon markets
As part of its commitment to cut greenhouse gas emissions in half by 2030 and reaching net zero by 2050, the Biden-Harris Administration released a Joint Statement of Policy and new Principles for Responsible Participation in Voluntary Carbon Markets (VCMs) that codify the U.S. government’s approach to advance high-integrity VCMs.
The principles and statement, co-signed by Treasury Secretary Janet Yellen, Agriculture Secretary Tom Vilsack, Energy Secretary Jennifer Granholm, Senior Advisor for International Climate Policy John Podesta, National Economic Advisor Lael Brainard, and National Climate Advisor Ali Zaidi, represent the U.S. government’s commitment to advancing the responsible development of VCMs, with clear incentives and guardrails in place to ensure that this market drives ambitious and credible climate action and generates economic opportunity.
Brazil consults on sustainability reporting standards
The Brazilian sustainability standard setter (CBPS) has published two exposure drafts for sustainability disclosure standards based on the ISSB’s global baseline.
Implementing the ISSB: This follows Brazil’s announcement (dated from October 2023) to incorporate the ISSB Standards into the Brazilian regulatory framework, including a roadmap to move from voluntary use to mandatory use starting from January 1, 2026.
The drafts in detail: The exposure drafts are titled CBPS 01 – General Requirements for Disclosure of Sustainability-related Financial Information here and CBPS 02 – Climate-related Disclosures here and are aligned respectively with IFRS S1 and S2.
- The first exposure draft establishes general requirements for disclosing information about sustainability-related risks and opportunities
- The second exposure draft sets out requirements for the disclosure of information on climate-related risks and opportunities that are useful to users, including as they relate to physical risks and transition risks
Feedback welcome: The exposure drafts are open for feedback until June 13, 2024.
Hong Kong finalizes Taxonomy for Sustainable Finance
The Hong Kong Monetary Authority (HKMA) has published the Hong Kong Taxonomy for Sustainable Finance (available here) alongside two accompanying documents:
- A consultation report summarizing the feedback received, together with responses and recommendations on future work
- Supplemental guidance to provide background information, illustrative use cases, and responses to FAQs
For context: The Hong Kong Taxonomy has been fine-tuned following the HKMA’s Prototype Green Classification Framework, which was submitted for consultation in 2023. It encompasses 12 economic activities under four sectors: power generation, transportation, construction, and water and waste management.
Core principles: The Hong Kong Taxonomy embeds a number of core principles:
- Alignment with the Paris Agreement required of economic activities in order to keep global warming well below 2℃, ideally aiming for 1.5℃
- Proof from greenwashing to provide more clarity about what can be considered ‘green’, and to ensure that claims of meeting this definition can be verified accordingly
- Interoperability in areas of commonality between the EU’s and China’s taxonomies. The HKT also references the EU Taxonomy particularly with respect to the concepts of Do No Significant Harm (DNSH) and Minimum Social Safeguards (MSS)
- Science-based criteria and thresholds reflecting the ambition required to meet global decarbonization objectives
Regulatory expectations: The Taxonomy is not binding, however HKMA encourages financial market participants to start using it to assess the greenness of projects and assets when labeling and developing products, as well as making disclosures.
Next steps: Going forward, HKMA will seek to expand the Taxonomy’s coverage to include other sectors and economic activities, including with a focus on transition activities. In the long run, HKMA will also consider how the Taxonomy can be incorporated into banking supervisory policies.
ESMA publishes guidelines for use of ESG and sustainability terms in fund names
Following the public statement of 14 December 2023, the European Securities and Markets Authority (ESMA) has published the final report containing Guidelines on funds’ names using ESG or sustainability-related terms.
Objectives of the guidelines: The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.
The details: The Guidelines establish that to be able to use these terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives.
Exclusion criteria: The Guidelines also apply exclusion criteria for different terms used in fund names:
- “Environmental”, “Impact” and “sustainability”-related terms: exclusions according to the rules applicable to Paris-aligned Benchmarks (PAB)
- “Transition, “Social” and “Governance”-related terms: exclusions according to the rules applicable to Climate Transition Benchmarks (CTB)
Compliance requirements: The Guidelines will start applying three months after publication in all official EU languages.
- Within two months of the date of publication of the Guidelines on ESMA’s website in all EU official languages, competent authorities to which these guidelines apply must notify ESMA whether they (i) comply, (ii) do not comply, but intend to comply, or (iii) do not comply and do not intend to comply with the guidelines
- The transitional period for funds existing before the application date will be six months after that date. Any new funds created after the application date should apply these Guidelines immediately in respect of those funds
Federal Reserve Board releases summary of the exploratory pilot Climate Scenario Analysis exercise
The Federal Reserve Board released a summary of the exploratory pilot Climate Scenario Analysis (CRA) exercise it conducted with six of the largest banks in the U.S.: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
The summary describes how the banks are using climate scenario analysis to explore the resiliency of their business models to climate-related financial risks. The banks took a wide range of approaches to consider the possible implications of different physical and transition risk scenarios. The exercise highlighted data gaps and modeling challenges that arise when estimating the financial impacts of highly complex and uncertain risks over various time horizons.
European Commission publishes summary report of the open and targeted consultations on the SFDR assessment
The European Commission has published its summary report on the SFDR implementation following the feedback it received to its SFDR consultation.
For context: The Sustainable Finance Disclosures Regulation (SFDR) started applying in March 2021 and requires financial market participants and financial advisers to disclose at entity and product level how they integrate sustainability risks and principal adverse impacts in their investment decision making processes. It also introduces additional product disclosures for financial products making sustainability claims.
Consultation process: In December 2022, Commissioner Mairead McGuinness announced a comprehensive assessment of the SFDR framework. Public and targeted consultations ran from September to December 2023.
Summary of the key messages: Respondents shared the following views as part of the consultation exercise:
- Widespread support for the broad objectives of the SFDR but divided opinions regarding the extent to which the regulation has achieved these objectives during its first years of implementation
- Consensus on the need to ensure consistency across the wider Sustainable Finance framework
- Support for setting uniform disclosure requirements for all financial products offered in the EU as well as additional disclosures for products making sustainability claims
- Strong support for a voluntary categorization system regulated at the EU level, but no clear preference for one of the two proposed approaches to a potential EU categorization system
UK Government publishes implementation update on Sustainability Disclosure Requirements
The UK Government has published a progress update on the ongoing implementation of the Sustainability Disclosure Requirements (SDR) regime.
Background: The UK’s SDR framework builds on global best practice and leading standards, supporting the UK’s ambition to become the world’s first Net-Zero Aligned Financial Centre.
Context: The progress update lays out the various components of the SDR and provides further details on the process of embedding the IFRS Sustainability Disclosure Standards within the UK regulatory framework.
Key announcements: The Government aims to take the following steps to finalize SDR implementation:
- ISSB adoption: The Government aims to make the UK-endorsed ISSB standards available in Q1 2025
- UK Sustainability Reporting Standards: The Financial Conduct Authority (FCA) will be able to use the UK Sustainability Reporting Standards to introduce requirements for UK-listed companies to report sustainability-related information. The Government will also decide on disclosure requirements against UK Sustainability Reporting Standards for UK companies that do not fall within the FCA’s regulatory perimeter
- Transition plan disclosures: The FCA plans, through its consultation on implementing UK-endorsed ISSB standards, to consult on strengthening its expectations for transition plan disclosures with reference to the TPT Disclosure Framework
- SDR and Investment Labels: The Government intends to issue a consultation to broaden the scope of SDR to include funds under the Overseas Funds Regime in Q3 2024
- UK Green Taxonomy: The Government continues to work at pace and expects to consult in due course
- Nature-related disclosures: No formal framework for introducing nature-related disclosures has been announced, however biodiversity and nature-related issues are part of the FCA’s 2024 policy priorities
Japan initiates second exercise of climate-related scenario analysis
The Japan Financial Services Agency (JFSA) and the Bank of Japan (BOJ) published their initiatives related to scenario analysis, as well as the framework of the second exercise of climate-related scenario analysis.
Background: In 2021, the JFSA and BOJ collaborated with three major banks and conducted a pilot exercise of scenario analysis using common scenarios.
- The pilot exercise analyzed the impact of climate-related risks on banks’ financial conditions
- Based on findings from the pilot exercise, the JFSA published a review on characteristics and usage of scenarios developed by the Network for Greening the Financial System (NGFS)
- The BOJ also published research papers based on their top-down scenario analysis based on short-term scenarios, as well as issues in designing scenarios
Looking ahead: The BOJ and JFSA will continue their cooperation with the three major banks to conduct the second exercise of the scenario analysis based on common scenarios for climate-related risks in FY 2024 to improve the methodology and framework of the scenario analysis.
Key features of second exercise: The target time horizon for the second exercise will be set at a shorter time frame, as compared to the pilot exercise which was a long-term scenario analysis with target time horizon of the year 2050 for transition risks and 2100 for physical risks.
- The regulators intend to focus on impact on loans (credit risk) this time
- The scenario analysis framework may examine the impact of financial institutions’ effort to achieve emissions reduction targets of investee and borrower companies, and the impact on banks’ loans and other portfolio management
SEBI consults on revisions to ESG reporting by corporates
The Securities and Exchange Board of India (SEBI) published a consultation paper on the Recommendations of the Expert Committee for Facilitating Ease of Doing Business with respect to Business Responsibility and Sustainability Report (BRSR). This is part of SEBI’s initiative to facilitate ease of doing business and scales back the Framework for assurance and ESG disclosures for value chain released in July 2023.
Background: The BRSR was an initiative developed by SEBI to encourage companies to incorporate responsible and sustainable business practices into their operations.
- The BRSR requires companies to disclose their social, environmental and governance-related initiatives and performance, and the requirements are primarily based on the National Guidelines for Responsible Business Conduct
- The goal of the reporting framework is to help companies integrate sustainability into their core business strategy
- The BRSR is applicable to the top 1000 listed companies in India (by market capitalization) for reporting on a voluntary basis for FY2021-2011, and on a mandatory basis from FY2022-2023
Key proposals in consultation: In order to facilitate the ease of doing business in India, SEBI has recommended the following key changes to scale back the ambitious BRSR framework:
- Value Chain:
- Refine the definition of value chain partners
- Make reporting prior year numbers voluntary for the first year of reporting ESG disclosures for value chain, i.e. FY 2024-25
- Replace “comply or explain” approach with “voluntary” disclosures approach for ESG disclosures for value chain and assurance
- Propose additional disclosure of the percentage of total sales and purchases covered by the value chain partners for which ESG disclosure are provided
- Green Credits: Add the number of Green Credits generated by the company and its value chain partners as an additional leadership indicator
- BRSR Core metrics: Replacing the expectation of the “reasonable assurance” of BRSR Core metrics from FY2023-24 with the less onerous option for “assessment”
Next steps: The consultation is open for feedback until June 12, 2024.
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