September Global Regulatory Brief: Green finance
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 climate risk in Hong Kong to sustainability reporting in Switzerland, the following developments from the past month in green finance stand out:
- Australia: Senate passes laws on mandatory climate disclosures and financial market infrastructure
- Hong Kong: HKMA issues guidelines on climate-related risk governance
- Switzerland: Federal Council consults on extending sustainability reporting
- EU: Commission publish FAQs on the Corporate Sustainability Reporting Directive
- India: SEBI consults on expanding the scope of sustainable finance in the Indian securities market
- New Zealand: Technical Advisory Group publishes recommendations for a Sustainable Finance Taxonomy
- New Zealand: Financial Markets Authority consults on climate reporting guidance
- China: Government unveils Guidelines to Accelerate Comprehensive Green Transition of Economic and Social Development
- EU: Commission publishes FAQs on the application of the Corporate Sustainability Due Diligence Directive (CS3D)
- US: Republican ESG working group releases final staff report
Australian Senate passes laws on mandatory climate disclosures and financial market infrastructure
The Australian government has introduced new legislation aimed at enhancing the resilience of the financial system and improving consumer protections, covering climate reporting and financial market infrastructure.
In summary: The legislation reiterates the broad and ambitious economic reform agenda, with the newly introduced laws supporting these objectives and facilitating a more prosperous, productive and resilient economy.
Background: The reforms focus on increasing accountability within financial institutions, ensuring they act in the best interests of consumers. Key measures include stronger regulations for financial advice and increased transparency in financial products:
Climate reporting: The new laws establish Australia’s climate risk disclosure framework, introducing standardized reporting requirements for businesses, to ensure they are making high quality climate related financial disclosures.
- The Australian Accounting Standards Board will issue internationally‑aligned standards in the near future.
- Reporting requirements will commence from 1 January 2025 for Australia’s largest listed and unlisted companies and financial institutions, and other large businesses will be phased in over time.
Financial market infrastructure: The new laws also provide regulators with more powers to manage financial market infrastructure risks, addressing a regulatory gap and implementing recommendations of the Council of Financial Regulators.
- The Reserve Bank of Australia (RBA) now has powers to step in and promptly resolve a crisis at a domestic clearing and settlement facility, to ensure Australia’s critical financial market infrastructure can continue to operate.
- The Australian Securities and Investments Commission and the RBA’s powers have been strengthened and streamlined, better equipping the regulators to manage risks.
What’s next? The government aims to implement these changes swiftly, reinforcing trust in the financial system and providing consumers with greater security and confidence in their financial dealings.
HKMA issues guidelines on climate-related risk governance
The Hong Kong Monetary Authority (HKMA) has released guidelines aimed at enhancing the governance and management of climate-related financial risks within the banking sector.
Background: The guidelines outline expectations for banks to integrate climate risk into their governance frameworks, risk management processes, and strategic planning, as well as good practices observed – these can be categorized into three main areas:
- Fostering and overseeing the effective development and implementation of a climate strategy – including setting climate goals and targets to guide their actions
- Exercising appropriate oversight of climate risk management – including incorporation of climate-related considerations into risk management frameworks and policies, and incorporating quantitative metrics in climate risk appetite statements
- Cultivating a strong organizational climate risk culture, including embedding climate-related risk considerations into performance evaluation and remuneration frameworks
Looking ahead: The HKMA encourages banks to adopt a proactive approach in addressing climate-related risks and to enhance their disclosures, ensuring alignment with global best practices and regulatory expectations. This initiative is part of a broader effort to promote sustainable finance in Hong Kong.
Swiss Federal Council consults on extending sustainability reporting
The Swiss Federal Council has opened a consultation to amend the Swiss Code of Obligations and propose an expansion of sustainability reporting obligations for Swiss companies. The proposals aim to align the country’s sustainability-related rules with the EU’s Corporate Sustainability Reporting Directive (CSRD).
More entities in scope: Large Swiss companies are already required to report on certain ESG metrics as per national law since financial years starting on or after 1 January 2023. However, the suggested changes would bring up the number of entities in scope of the Swiss Sustainability Reporting obligations from approximately 200 to 3500.
The new requirements in detail: Detailed requirements are to be included in a separate consultation report, however the Council’s proposals would mandate reporting for Swiss companies that meet at least two of the following three criteria:
- over 250 employees;
- a balance sheet total of CHF20 million; or
- a turnover of CHF40 million.
Next steps: The consultation closes on 17 October 2024. Companies would need to start applying the new reporting rules two years after these enter into force. Separately, the Federal Council is analyzing the effects on Swiss companies of the Corporate Sustainability Due Diligence Directive (CS3D), including steps to strengthen alignment between Swiss and European requirements in this area.
European Commission publishes FAQs on the Corporate Sustainability Reporting Directive (CSRD)
The European Commission has published a set of detailed FAQs clarifying the implementation of the Corporate Sustainability Reporting Directive (CSRD) covering issues including the scope of the rules, application dates, exemptions, type of information to be reported, and assurance requirements.
Background: The FAQs do not introduce new obligations – they simply clarify the existing rules and are meant to support undertakings that need to report in accordance with the CSRD. They also clarify certain provisions of the SFDR and the first set of European sustainability reporting standards (ESRS).
The FAQs in detail: The document is divided into eight sections and covers the following topics:
- Section I – Glossary of relevant terms
- Section II – Overview of the sustainability reporting requirements introduced by CSRD
- Section III – FAQs on sustainability information to be reported under Articles 19a/29a
- Section IV – FAQs on sustainability information to be reported under Article 40a
- Section V – FAQs on assurance
- Section VI – FAQs on key intangible resources
- Section VII – Additional FAQs on requirements for third-country undertakings
- Section VIII – FAQs on SFDR
Application of the rules: The CSRD entered into force on 1 January 2024. EU Member States had until 6 July 2024 to transpose the Directive into national law. The first group of companies will need to start reporting in 2025.
SEBI consults on Expanding the Scope of Sustainable Finance in the Indian Securities Market
The Securities and Exchange Board of India (SEBI) has issued a consultation on Expanding the Scope of Sustainable Finance in the Indian Securities Market.
Context: SEBI is consulting on reviewing the 2017 regulatory framework for listed issuance of green debt securities, which was updated in February 2023 to align with ICMA’s Green Bond Principles. Enhancements made in 2023 included:
- Enhancing the scope of definition of ‘green debt security’ by including new modes of sustainable finance in relation to pollution prevention and control, eco-efficient products, etc.;
- Introducing the concept of blue bonds (related to water management and marine sector), yellow bonds (related to solar energy) and transition
- bonds as sub categories of green debt securities;
- A complete definition of green debt securities is listed in Annex 1 of the consultation paper.
International frameworks: Some of the international frameworks that will be considered for SEBI’s exercise are the following:
- ICMA Principles for Green Bond, Social Bond, Sustainability Bonds, Sustainability-Linked Bonds
- Climate Bond Standard of the Climate Bond Initiative
- Sustainability-Linked Loans Principles published by the Asia Pacific Loan, Market Association, Loan Market Association and Loan Syndication and Trading Association.
External reviewers: The consultation paper also recommends appointing an independent external reviewer for these new bond categories, mirroring the existing requirements for green bonds.
Next steps: Consultation responses must be submitted by 6 September 2024.
New Zealand Technical Advisory Group publishes recommendations for a Sustainable Finance Taxonomy
The Independent Technical Advisory Group (convened by the New Zealand government) has published its recommendations for the design and development of a Sustainable Finance Taxonomy.
A bit of background: The report provides a set of recommendations for the design and development of a Sustainable Finance Taxonomy for Aotearoa New Zealand developed by an Independent Technical Advisory Group (ITAG) convened by the Centre for Sustainable Finance: Toitū Tahua (CSF).
Key elements: The recommendations are structured around five key elements:
- Credibility: Applying an evidence-based approach together with international best practices and standards to attract and direct the flow of international capital towards green solutions
- Usability: The New Zealand Taxonomy should be easy to use and fit-for-purpose.
- Interoperability: As much as possible, the New Zealand Taxonomy should align with international standards and best practices for the design of its structure.
- Culture: Iwi and Māori leaders will be represented in all governance tiers, and indigenous views of nature will be integrated in the design.
- Prioritization: Prioritization should determine the selection of environmental objectives the New Zealand Taxonomy should focus on.
Going forward: The recommendations will be reviewed by the New Zealand government as it moves toward publishing a Sustainable Finance Strategy in 2026.
New Zealand Financial Markets Authority consults on climate reporting guidance
The New Zealand Financial Markets Authority (FMA) is seeking feedback on a proposed information sheet that provides guidance on the following documents applicable to climate reporting entities (CREs):
- any current or new Product Disclosure Statement (PDS) for their financial products
- the Other Material Information (OMI) on the offer register on Disclose for their financial products
- any Statement of Investment Policies and Objectives (SIPO) on the offer register on Disclose
- any annual reports.
Background: Since 1 January 2023, around 200 large financial institutions in New Zealand have had to start making climate-related disclosures. Earlier this year, New Zealand issued new user guides to help users understand the climate-related disclosures (CRD) regime and the information provided in climate statements. The What You Need to Know guide provides an overview of the CRD regime for primary users, while the Navigating Climate Statements guide provides a more detailed explanation of the information disclosed in climate statements.
Structure of the consultation: This proposed guidance aims to assist CREs in determining how they should reference their climate statements within their disclosure documents. The consultation puts forward a number of proposals to help CREs understand the FMA’s expectations across the following documents:
- Product Disclosure Statement (PDS)
- Other Material Information (OMI)
- Statement of Investment Policies and Objectives (SIPO)
- Annual reports
- Timing for document updates
Deadline for comments: The consultation of the draft guidance closes on 30 August 2024.
European Commission publishes FAQs on the application of the Corporate Sustainability Due Diligence Directive (CS3D)
The European Commission has published an FAQ document clarifying some of the key elements and obligations of the Corporate Sustainability Due Diligence Directive (CS3D).
Background: The CS3D entered into force on 25 July 2024 and will need to be transposed by the EU Member States by 26 July 2026. The CS3D rules will then start to apply one year later, as of 26 July 2027, and will be phased in starting with the largest firms.
Content of the FAQs: The FAQ document covers questions regarding the application, scope, obligations, enforcement, safeguards, and impacts of the Directive. The FAQs are divided into eight sections:
- Objectives
- Entry into force and Application
- Personal scope
- Material scope
- Content of the obligations
- Enforcement
- Burden limitation and Safeguards
- Impacts of the Directive
Impact on financial services: The Commission expects around 6,000 EU companies and 900 non-EU companies to be in-scope.
- Non-EU companies of a legal form comparable to LLCs/partnerships with a net turnover of more than EUR 450 million generated in the EU will be scoped in. The Commission is due to publish a list of non-EU companies that are in scope.
- Financial services provided in the context of relationships with clients are excluded from the scope. However, financial firms will still need to comply with the climate transition plan requirements set out in the CS3D if they meet the turnover and employee thresholds set out in the Directive.
Going forward: In addition to these high-level FAQs, the European Commission will adopt delegated measures and various general and sector-specific guidelines to support the application of the CS3D.
China unveils Guidelines to Accelerate Comprehensive Green Transition of Economic and Social Development
The Communist Party of China (CPC) Central Committee and the State Council unveiled the Guideline to Accelerate Comprehensive Green Transition of Economic and Social Development.
The blueprint has outlined the goals for 2030 and 2035 with specific quantitative targets, emphasized the carbon peak and carbon neutrality, and discussed comprehensive measures including improving the policy mechanisms and international cooperation for green transition.
Background: The guideline is followed by the Resolution of Further Deepening Reforms Comprehensively to Advance Chinese Modernization by CPC Central Committee.
- The Resolution highlights the commitment of comprehensive reforms and sets the overall development target for 2035.
- The Resolution summarizes the major measures including building market economy, supporting private sector, spurring technology and innovation, improving macroeconomic management, deepening fiscal and tax system as well as financial system, and pursuing high-level opening-up, advancing green and low-carbon development.
Looking ahead: Every government agency (including financial regulators) and province in China is likely to announce its respective actions accordingly.
Republican ESG working group releases final staff report
The Republican Environmental, Social, and Governance (ESG) Working Group – led by Oversight and Investigations Subcommittee Chairman Bill Huizenga (MI-04)—released its final staff report.
Context: This follows the interim report that was published in June 2023. According to the announcing release, the report “is the culmination of the Working Group’s comprehensive examination of the factors contributing to the rise of ESG initiatives and the consequences for everyday investors.”
In summary: Key priorities identified in the report include, among others: reforming the proxy voting system; improving ESG rating agency accountability and transparency; demanding adherence to statutory limits from financial and consumer regulatory agencies; and protecting US companies from burdensome European Union regulations.
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