December 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 ESG ratings in Hong Kong and UK to ESG investment vehicles in Abu Dhabi, the following developments from the past month in green finance stand out:
- Hong Kong: SFC Circular on Due Diligence for Third-Party ESG Ratings
- Philippines: BSP issues adoption guidance for Sustainable Finance Taxonomy
- US: SEC charges investment adviser for making misleading statements about ESG investment considerations
- UK: HM Treasury publishes draft statutory instrument on ESG ratings
- UK: Government publishes Transition Finance Market Review
- EU-China: Common Ground Taxonomy expanded to include Singapore Taxonomy
- Abu Dhabi: FSRA publishes guidance for ESG-focused Investment Vehicles
- UK: Select Committee calls for reform on Modern Slavery Act
- EU: Commission publishes guidance on the Disclosures Delegated Act under the EU Taxonomy
HK SFC Circular on Due Diligence for Third-Party ESG Ratings
The Hong Kong Securities and Futures Commission (SFC) provided asset managers with regulatory guidance on conducting due diligence when engaging third-party ESG ratings and data products providers.
In summary: The circular requires asset managers to conduct reasonable due diligence and ongoing assessments of third-party ESG service providers, ensuring they understand how ESG products are produced, their limitations, and intended uses.
- The SFC encourages asset managers to take into account the principles and recommended actions of the finalized Hong Kong Code of Conduct for ESG Ratings and Data Products Providers (VCoC) during their due diligence and ongoing assessment process.
- The VCoC was created with reference to the global standards for ESG service providers suggested by IOSCO, emphasizing good governance, transparency, effective systems and controls, and conflicts of interest management.
- Asset managers may leverage group resources and adopt group policies as long as they adhere to similar or higher standards.
In more detail: At the SFC-backed VCoC launch event held at Bloomberg Hong Kong, the SFC CEO Julia Leung emphasized that “The VCoC together with our related guidance to asset managers will bring us a step closer to making more creditable ESG information available in the financial market […] this should boost Hong Kong’s efforts to steer capital towards investments that can drive our net zero and other sustainable development goals”. See press release here.
What this means for asset managers: Users are encouraged to reference the VCoC or other comparable/higher standards that are aligned with IOSCO principles. Where ESG service providers have signed the VCoC and completed the self-attestation document, asset managers can use the information for due diligence and ongoing assessments of ESG service providers and their products.
BSP issues adoption guidance for Sustainable Finance Taxonomy
The Bangko Sentral ng Pilipinas (BSP) has issued new guidelines on the adoption of the Philippine Sustainable Finance Taxonomy Guidelines (SFTG) for banks, following the recommendations of the Financial Sector Forum (FSF).
Philippine Sustainable Finance Taxonomy Guidelines: The Philippine Sustainable Finance Taxonomy Guidelines (SFTG) was first formulated through collaborative efforts between the Bangko Sentral ng Pilipinas (BSP), Securities and Exchange Commission (SEC), and Insurance Commission (IC).
- This initiative was carried out under the auspices of the FSF in line with the directives outlined in the Philippine Sustainable Finance Roadmap.
- The primary goal of the SFTG is to channel and amplify capital towards economic endeavors that further sustainability goals, such as lowering greenhouse gas (GHG) emissions and bolstering climate resilience.
- Additionally, it fosters transparency and reliability by reducing the likelihood of greenwashing and facilitates a fair transition to a sustainable economy.
Updates to the SFTG: The revised SFTG aims to facilitate the assessment process in determining if an economic activity contributes to the SFTG’s environmental objectives (i.e. climate change mitigation and climate change adaptation) and meets the essential criteria of Do No Significant Harm and Remedial Measures to Transition, and that the entity executing the activity fulfills the Minimum Social Safeguards criterion.
Seven steps: The guidelines recommend that banks undertake the following seven steps:
Check if the activity is an ‘Excluded Activity’ such as gambling or weaponry, as adopted from the Philippines Sustainable Finance Framework.
- Check if the activity complies with Philippine law. If not, then the activity is out of scope.
- Check if the activity substantially contributes to at least one Environmental Objective (EO).
- Check if the activity does no significant actual/potential harm to the other Environmental Objective (DNSH).
- If there is harm/potential harm, check if it has been or will be remediated within the defined period (RMT).
- Check if the entity complies with the MSS.
- Classify the activity as Green, Amber or Red
Next steps: The BSP will engage banking industry associations in relation to the roll-out of capacity building activities on the local taxonomy as well as the consultations for the further update of the SFTG.
SEC charges investment adviser for making misleading statements about ESG investment considerations
The U.S. Securities and Exchange Commission (“SEC”) charged an investment adviser (“the Adviser”) for making misleading statements about the percentage of assets under management (“AUM”) that integrated environmental, social, and governance (“ESG”) factors in investment decisions. The Adviser agreed to pay a $17.5 million civil penalty to settle the charges.
In more detail: The SEC’s order notes that, from 2020 to 2022, the Adviser told clients and stated in marketing materials that between 70 and 94 percent of its AUM were “ESG integrated,” a term used to indicate that ESG factors were incorporated into investment decisions. However, these stated percentages included a substantial amount of assets that were held in passive ETFs that did not follow an ESG-related index. Additionally, the order notes that the Adviser had no comprehensive set of written policies and procedures concerning how it would determine the percentage of firmwide AUM that was ESG integrated. Instead, the order found that the Adviser based its analysis on assessments of its investment teams’ general ESG integration approach rather than analysis at a fund or strategy level.
Continued focus: The action follows similar charges against a separate investment adviser last month for failing to adhere to its own investment criteria for ESG-marketed funds. Additionally, a recent SEC Division of Examinations Risk Alert notes that examiners continue to observe mischaracterizations in registrants’ sales literature regarding their use of ESG factors in investment decision-making processes.
HM Treasury publishes draft statutory instrument on ESG ratings
HM Treasury (HMT) has published its response document to its earlier consultation on the future regulatory regime for ESG ratings providers in the UK, alongside a draft statutory instrument (SI) which frames how the regulatory perimeter for ESG ratings provision will be established.
In summary: HMT has confirmed that the regulatory perimeter will be expanded to capture ESG ratings which are “likely to influence” a decision to make a specified investment under the UK’s Regulated Activities Order (RAO). For example, this could include ESG ratings that are likely to be used to inform asset allocation and portfolio construction, or pre-initial public offering (IPO) ratings. In-scope ESG ratings providers would need to obtain authorization from the UK Financial Conduct Authority (FCA) and comply with detailed requirements around governance, conflicts of interest management, and transparency.
Next steps and timing: The draft SI will be open to feedback until 14 January 2025, with the Government planning to introduce secondary legislation in early 2025 (subject to Parliamentary timing). Once legislation is finalized, the FCA will develop and consult on detailed policy proposals to underpin the future regime. Designing, developing and commencing the ESG ratings regulatory regime is expected to take approximately four years.
UK publishes Transition Finance Market Review
The UK has published its Transition Finance Market Review (TFMR) outlining key recommendations in terms of policy actions on how the UK can lead in developing norms and practices for transition finance that facilitate an economy-wide shift towards sustainability. The Review’s recommendations include a roadmap detailing the necessary next steps needed from government, regulators and the market.
Background: The 2023 Green Finance Strategy announced that the government will commission a review into how the UK can become the best place in the world for raising transition capital.
Objectives: The Review sets out a framework for public-private collaboration, with a focus on the role of the private sector. The objectives are centered on:
- Scaling transition focused capital raising with integrity. We want to scale transition finance and grow the UK market for transition finance services, which should be designed as attractive, investible instruments to unlock long term capital (such as sustainability linked debt and transition bonds), while maintaining the integrity of climate goals and helping to build trust in financial solutions
- Maximizing the opportunity for UK based financial services to develop, structure and export high integrity transition finance services
- Positioning the UK’s professional services ecosystem as a global hub – supporting this innovative activity and ensuring market confidence (legal, audit, consultancy, data and analytics, skills and education).
Additional considerations and next steps: The Review leverages the Transition Plan Taskforce (TPT) work and recommends a forthcoming transition plan consultation, as well as the FCA’s further work to implement TPT-aligned disclosures alongside its implementation of UK-endorsed International Sustainability Standards Board (ISSB) reporting standards.
- In addition, the Review recommends that the Government moves to issue a consultation on the use cases for a UK Green Taxonomy, including a plan to move from green to transition taxonomies so that activities are appropriately time bound and/or bound to follow a progression framework.
- This could include a traffic light system to show how they will change over time to remain aligned with a credible decarbonization pathway.
EU-China Common Ground Taxonomy expanded to include Singapore Taxonomy
The International Platform on Sustainable Finance (IPSF) published the Multi-Jurisdiction Common Ground Taxonomy (M-CGT), mapping out commonalities across the sustainable finance taxonomies of China, Singapore and the EU.
What this means: Following the publication of the M-CGT, the bilateral EU-China CGT will be expanded to include the Singapore-Asia Taxonomy, enhancing the interoperability of taxonomies across the three jurisdictions.
Background: The M-CGT was developed jointly by the People’s Bank of China (PBOC), the EU Directorate-General for Financial Stability, the Financial Services and Capital Markets Union, and the Monetary Authority of Singapore (MAS).
- It serves as a technical reference document for a wide range of market participants including financial institutions, corporates, investors and external reviewers.
- It allows them to assess what could be considered green across the three jurisdictions in scope, based on the activities, environmental objectives, and criteria covered in the M-CGT.
Key findings from the mapping exercise: Findings from the mapping exercise revealed that:
Around 60% of common activities extracted from the three taxonomies could be clearly defined with the most stringent criteria, mainly across the manufacturing, transportation, water and waste sectors.
- The criteria for 5% of the common activities, mainly in the electricity generation and construction sectors, was aligned across the taxonomies.
- The criteria for around 33% of common activities was not directly comparable across the taxonomies. In such cases, to be aligned with the M-CGT, an activity has to meet at least one of the taxonomies’ criteria. This was seen more commonly in sectors in which local regulations, standards or certifications are conventionally referenced, such as the construction and agriculture and forestry sectors.
Looking ahead: The M-CGT will also serve as a reference for jurisdictions that are developing their domestic green taxonomies and has been designed to accommodate the comparison of more jurisdictions’ taxonomies in the future. This will increase the number of taxonomies that are interoperable and help facilitate cross-border green capital flows.
Abu Dhabi publishes guidance for ESG-focused Investment Vehicles
The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) published guidance to support its regulation of sustainable investments and ESG related products.
In summary: This guidance provides clear expectations for the management and marketing of ESG-focused investment vehicles and services.
- The guidance is intended to mitigate the risk of greenwashing such that ESG-focused investment vehicles and services are marketed in a manner that is clear, fair and not misleading; and
- The guidance is intended to encourage disclosure of ESG-related information in line with global best practices.
Final guidance: To view the final guidance, please click here: Guidance on ESG Funds and Model Portfolios in ADGM.
Select Committee calls for reform on UK Modern Slavery Act
The House of Lords Select Committee on the Modern Slavery Act (2015) (‘MSA’) published a new report evaluating the impact and effectiveness of the MSA.
Background: In January 2024, the House of Lords Select Committee was appointed by Parliament to review the impact and effectiveness of the Act. The review aimed to understand if the Act has kept up with evolving human rights developments globally, how the Act’s provisions have been implemented, and whether the Act requires improvement.
The Committee’s primary recommendations include: Introduce legislation requiring companies meeting the threshold to undertake modern-slavery due diligence in their supply chains and to take reasonable steps to address problems.
- Make UK due-diligence law compatible with equivalent standards being introduced elsewhere to make compliance easier.
- Consider introducing import laws which ban goods being brought into the UK if they are produced by companies known to use forced labour.
- Make publication of statements on the modern slavery registry mandatory.
- Introduce proportionate sanctions for organisations that do not comply with supply chain requirements.
- Improve the implementation of its guidelines so that compliance is proactive rather than passive, encouraging companies to report modern slavery if they come across it.
Wider context: The recommendations would bring the UK into closer alignment on mandatory due diligence legislation with other jurisdictions such as the EU, which has implemented the Corporate Sustainability Due Diligence Directive (CS3D).
Next steps: The Government must respond to the report by December 16. Should it decide to proceed with any of the recommendations, the Government will need to enact primary legislation which may involve a stakeholder consultation process.
EU Commission publishes guidance on the Disclosures Delegated Act under the EU Taxonomy
The European Commission has published Frequently Asked Questions (FAQs) on financial entity reporting under Article 8 of the Taxonomy Regulation in the Official Journal (OJ) of the EU.
Context: These FAQs are the third in a series of Commission Notices published with the intention of helping the industry with the implementation of Taxonomy reporting requirements under the Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD).
In detail: The FAQs cover general questions around the scope of entities, consolidation of reporting for financial undertakings, and the assessment of groups and specific exposures as well as the verification of compliance. The second section responds to targeted questions related to credit institutions, insurance undertakings and asset managers.
Non-binding: The FAQs do not impose additional requirements on companies in scope of the EU Taxonomy. They merely clarify the rules and provide guidance with the interpretation and implementation of the reporting requirements.
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