Global Regulatory Brief: Green finance, August 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 sustainability reporting in the EU to climate disclosure guidance in New Zealand, the following developments from the past month in green finance stand out:

• EU: ESMA sets out its vision for a functioning sustainable finance framework
• International: FSB releases stocktake of financial authorities’ initiatives on nature-related financial risks 
• US: SEC releases Spring 2024 Agency Rule List, with ESG-related rules pushed to October
• EU: ESMA publishes measures to support corporate sustainability reporting
• New Zealand: FMA consults on climate disclosure guidance
• International: IAIS consults on climate risk supervisory guidance 
• EU: European Commission publishes report on climate-related risks for financial stability
• EU: Corporate Due Diligence Directive published in the EU Official Journal

ESMA sets out its vision for a functioning sustainable finance framework

The European Securities and Markets Authority (ESMA) has published an Opinion on the EU’s sustainable finance framework, setting out a number of key recommendations for the European Commission to consider for its future policy work.

Main recommendations: ESMA believes that the framework could further facilitate investors’ access to sustainable investments and support the effective functioning of the Sustainable Investment Value Chain (SVIC). With this in mind, ESMA has put forward several proposals around the EU Taxonomy framework, ESG benchmarks, sustainability disclosure requirements, financial product labeling, and ESG data. For example, with regards to the Taxonomy Regulation, ESMA feels the EU Taxonomy should become the sole reference point for assessing sustainability and should be embedded across all EU sustainable finance legislation. Additionally, ESMA recommends introducing a product categorization system that would be able to both “sustainability” and “transition” products; such a system should be based on clear eligibility criteria and binding transparency obligations. 

Other considerations: ESMA argues the need to ensure and promote international interoperability of the EU’s sustainable finance regime and, through this, support the competitiveness of EU capital markets. ESMA’s suggestions also entail the simplification of definitions and their harmonization across the framework to ensure their consistency across legislative texts.

FSB releases stocktake of financial authorities’ initiatives on nature-related financial risks

The Financial Stability Board (FSB) has published a stocktake of financial authorities’ initiatives to identify and assess nature-related financial risks. The stocktake covers supervisory and regulatory efforts as well as central banks’ and supervisors’ analytical work on whether and how nature degradation, including loss of biodiversity, is a financial risk. 

Key observations: The report highlights a number of findings, broadly showing that regulators and supervisors globally are at different stages of evaluating the relevance of biodiversity loss and other nature-related risks as a financial risk, with approaches varying. Specific observations identified include:

• Authorities which are analysing the issue categorise nature-related risks into the same two types of risks typically used in climate-related financial risk analysis: physical and transition risks.
• Authorities that have conducted analysis note that nature-related financial risks could materialise through typical channels for financial risks (e.g. via higher incidence of defaults in different economic sectors, declines in collateral value, and from investment losses as assets reflect potential nature-related physical and transition risks).
• Since the understanding of data needs is still at a formative stage (not only in terms of data for financial risks but data on nature risks more generally), most financial authorities have either not yet conducted work on data and metrics or are still at the stage of assessing their data needs to conduct risk assessments.

SEC releases Spring 2024 Agency Rule List, with ESG-related rules pushed to October

The SEC released its rulemaking agenda for Spring 2024, which shows the status of rule proposals at various stages. 

In more detail: The SEC’s rulemaking shows that the release dates for rules addressing greenwashing, human capital management, and corporate board diversity, have been postponed from April to October 2024. 

• The SEC has proposed but not yet finalized its proposal to require disclosures by investment advisers on ESG investment practices, and plans to propose rules pertaining to human capital and corporate board diversity. 
• The SEC’s public company climate disclosure rule is currently being challenged in the US Court of Appeals for the Eighth Circuit and has been stayed pending the outcome of the case. 

ESMA publishes measures to support corporate sustainability reporting

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, published a Final Report on the Guidelines on Enforcement of Sustainability Information (GLESI) and a Public Statement on the first application of the European Sustainability Reporting Standards (ESRS). These documents will support the consistent application and supervision of sustainability reporting requirements in line with the Corporate Sustainability Reporting Directive (CSRD).

Aim of the documents: The purpose of the Guidelines is to provide guidance to build convergence on supervisory practices on sustainability reporting. The Guidelines are also meant to support large issuers in the implementation of these new reporting requirements. 

Long-term ambition: The overarching goal is twofold:

• Promoting EU capital markets as a hub for green finance – this should include efforts to clarify the disclosure of sustainability information to aid comprehension by investors, also through the use of sustainability labels/categories as necessary; reducing complexity and enhancing clarity for the industry can also serve to ease compliance burdens; and
• Improving supervisory consistency amongst EU National Authorities (NCAs) – fostering harmonised enforcement outcomes through enhanced cooperation and convergence.

Going forward: The guidelines will be translated in the official EU languages and published on ESMA’s website. After two months, NCAs must notify ESMA whether they comply or intend to comply with the guidelines.

In addition, ESMA will release in Q4 recommendations in relation to the sustainability statements of listed companies in its Public Statement on the 2024 European Common Enforcement Priorities.

FMA consults on climate disclosure guidance

The Financial Markets Authority (FMA) of New Zealand is consulting on draft guidance for companies in scope of the country’s climate-related disclosures (CRD) regime. 

Background: The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021, which came into force on 2 October 2023, requires certain large financial institutions to make climate-related financial disclosures. The FMA is responsible for independent monitoring and enforcement of the regime.  

In summary: The objective of the guidance is to help climate reporting entities in determining how they should reference their climate statements within their disclosure documents. The draft guidance outlines the FMA’s expectations with regards to: Product Disclosure Statements (PDS) for financial products; Other Material Information (OMI) to be listed on the disclose offer register for financial products; Statements of Investment Policies and Objectives (SIPO) on the disclose offer register; annual reports. 

Next steps: The deadline to provide feedback to the proposed guidance is 30 August 2024. 

IAIS consults on climate risk supervisory guidance

The International Association of Insurance Supervisors (IAIS) has launched a consultation on climate risk supervisory guidance. 

Background: The IAIS is conducting a series of our public consultations on proposed changes to guidance in various Insurance Core Principles (ICPs) to better incorporate climate risk into the global supervisory framework for insurance supervision. The IAIS conducted the first and second consultations in 2023, and a third was launched in March 2024. This is the fourth and final consultation. 

Key proposals: The consultation covers issues around supervisory reporting and disclosure regimes, as well as macroprudential considerations and supervisory cooperation in the area of climate risk for the insurance sector. The consultation encompasses two draft proposals: 

• Draft Application Paper on public disclosure and supervisory reporting of climate risk: This contains recommendations around developing supervisory reporting (ICP 9) and public disclosure regimes (ICP 20); and
• Draft supporting material on macroprudential and group supervisory issues and climate risk: This document provides further advice, illustrations, recommendations and examples of good practice to supervisors on how ICP 24 (Macroprudential Supervision) may be implemented in the context of climate-related risk drivers. It builds on the existing Application Paper on Macroprudential Supervision. The draft material also considers the need for climate-related risks to be embedded in group-wide supervision of insurers, consistent with ICP 25 (Group-wide supervision). 

Next steps: A public webinar on the consultation will be held on 27 August 2024 from 13:00-14:00 CEST. The deadline to provide feedback is 30 September 2024. 

European Commission publishes report on climate-related risks for financial stability

The European Commission has published a Report on the monitoring of climate-related risk to financial stability. The report takes stock of analytical work and policy responses carried out by the EU so far. The report is part of an ongoing learning process by regulators, supervisors and industry.

Key observations: The report covers both the transition and physical risks of climate change. It finds that the impact on financial stability varies substantially between countries and economic sectors and points to potential systemic risks.

• Recent vulnerability analyses have found that loan and investment exposures to mining, manufacturing and electricity are particularly prone to transition risks.
• On physical risks, loan exposures that subject borrowers to high physical and financial vulnerability in terms of their credit risk are concentrated in certain countries.
• Sector-specific and economy-wide stress tests have shown that all financial market participants are impacted to varying degrees.

Future actions: Despite numerous stress testing and vulnerability analyses conducted to date at the EU level, it is likely that they have underestimated the impact and risks associated with climate change. To significantly improve the precision and magnitude of such exercises future initiatives could include:

• Seizing all relevant exposures;
• Modelling interactions between the financial sector and the real economy;
• Factoring in compounding effects;
• Capturing the interactions between different segments of the financial sector; and
• Interactions with the loss of biodiversity and nature degradation.

Next steps: The report is not binding, however the Commission could build on the findings and ongoing work such as the Fit-For-55 exercise to assess possible further improvements to the micro and macroprudential frameworks for banks and non-bank financial intermediaries. 

• The Commission intends to conduct a cross-sectoral and top-down stress testing exercise to test the resilience of the financial system during the transition towards the Commission’s 2030 climate targets and the implementation of the Fit for 55 package. Policy conclusions are expected by Q1 2025.
• EIOPA is to deliver a report in 2024 and EBA a series of reports. These will provide a better basis for discussing prudential risk-based measures in Pillar 1, based on sustainability profiles, targeting ‘green’ or ‘brown’ assets, for example

Corporate Due Diligence Directive published in the EU Official Journal

The Corporate Due Diligence Directive (CS3D) has been published in the EU Official Journal. 

What is the CS3D? The aim of this Directive is to foster sustainable and responsible corporate behaviour in companies’ operations and across their global value chains. The new rules will ensure that companies in scope identify and address adverse human rights and environmental impacts of their actions inside and outside Europe.

Scope of the CS3D: The Directive applies to both EU and non-EU companies. 

• EU companies with more than 1,000 employees on average and a net worldwide turnover of more than EUR 450 million.
• Non-EU companies with a net turnover of more than EUR 450 million within the EU.
• Micro companies and SMEs are not covered by the proposed rules. However, they could be indirectly affected as business partners in larger companies’ value chains.

Enforcement and application: The rules will be enforced through administrative and civil liability provisions. 

• Member States will designate an authority to supervise and enforce the rules, including through injunctive orders and penalties. At European level, the Commission will set up a European Network of Supervisory Authorities that will bring together representatives of the national bodies to ensure a coordinated approach.
• Member States will ensure that victims get compensation for damages resulting from an intentional or negligent failure to carry out due diligence.

Next steps: Member States will have until 26 July 2026 to transpose the Directive into national law. The Directive will be phased in starting with the largest companies.

View the additional regulatory briefs from this month:

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

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