Regulatory alignment: Navigating the evolving regulatory environments

This article was written by Cinzia Chiriac, Head of ESG Regulatory Affairs at Bloomberg.

As regulatory initiatives to incentivize sustainable finance take form around the world, cross-border interoperability between regulatory agendas will be essential in delivering such outcomes effectively. At Bloomberg’s Sustainable Finance Forum, the Regulatory Alignment panel, moderated by Cinzia Chiriac, Head of ESG Regulatory Affairs at Bloomberg, panelists discussed the evolution of the sustainable finance regulatory environment and the implications for the global financial markets. Panel participants included Nikita Singhal, managing director and co-head of Sustainable Investment and ESG at Lazard Asset Management, John Morton, managing director and head of Global Advisory at Pollination Group and former climate counselor to Secretary Yellen, U.S. Treasury, Martin Moloney, Secretary General of IOSCO, and Antoine Begasse, EU Financial Services Counsellor within the European Union’s delegation to the United States.

Kicking off the discussion, Morton stated that there has been significant action over the past two years in the US, noting that shortly after President Biden came into office, he issued an executive order on climate-related financial risk and charged the FSOC to produce a report on its findings. “Six months later the regulators came back and found that climate change constitutes an emerging and increasing risk to the stability of the US financial system,” Morton said. “For the US regulatory system to define that in a unanimous fashion within the first 12 months of a new administration was a striking finding and compelled a set of actions.” Since then, the Fed, the FDIC, the SEC, and others are all moving actively on climate change and risk management, including the creation of a large set of economic incentives to capitalize on investments and transition planning.

Turning to the EU’s policy framework, Antoine Begasse commented on the history of international policy actions including the Paris Agreement and the UN Sustainable Development Goals. “We are very committed to the objective of being carbon neutral by 2050” he said, “and in order to do that, we need half a trillion of additional investment each year and public money will be essential, but it is not enough.” Begasse explained that there are critical efforts to mobilize private capital to finance the transition. In the EU, the foundation lies in three complementary and mutually reinforcing pillars: the EU taxonomy classification system covering economic activities that contribute to science-based targets; the disclosure framework, which provides transparency through reporting requirements based on a double materiality framework, looking at the risk to the company and the impact a company has on the environment; and the tools available to market participants, including benchmarks and EU green bond standards.

“We also think it’s very important to have some kind of interoperability between the global baseline, the ISSB, and the jurisdiction-led reporting requirements,” Begasse said. He noted that the International Platform for Sustainable Finance (IPSF), a coalition of jurisdictions and observers including IOSCO, is focused on increasing mobilization of private capital towards sustainable investment by promoting comparability of taxonomies or disclosure requirements.

IOSCO is helping drive convergence in regulators’ efforts internationally. Martin Moloney stated that financial markets need a certain degree of interchange and connectedness, but not necessarily a top-down, one-size-fits-all approach. Moloney also addressed the question of implementation. “One of the core conversations we’ve been having with the ISSB is how you implement those standards once they’ve been promulgated and that is not trivial. Jurisdictions will see what everybody else is doing and figure out where do they want to position themselves. Do I want to be a first mover? Do I want to come last, or situate myself in the middle?” However, he said the vast majority of IOSCO members are not asking whether they should move forward; they are asking when.

Taking a step back to reflect on ESG history, Nikita Singhal observed that predecessors include socially responsible investing and faith-based investing, dating back to the 1700s with the Methodist movement in the UK. She also commented on the role of technological innovation. “If you think about the public markets and areas like renewable energy, LED lighting, and electric vehicles, these may make up 3 to 5% of the MSCI ACWI (All Country World Index), the broadest equity index in terms of pure play companies,” she said. “But the knock-on effects through their supply chains is already impacting more than a quarter of the index and that is starting to shift how we think about company cap-ex plans, their ability to generate a certain organic revenue growth rate, and changes in their financial productivity and valuations.”

Morton also addressed the question of having a broader corporate vision. “If you’re an executive in a large multilateral, multinational corporation that means looking beyond climate and carbon and also seeing the advantages to investing in nature and biodiversity. We advise our clients to take all of these areas seriously and to be managing those next risks and opportunities at the same time,” he said.