Global Regulatory Brief: Green finance, July 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 climate disclosure in New Zealand to climate risk in Singapore, the following developments from the past month in green finance stand out:

• Australia: Government releases Sustainable Finance Roadmap to unlock more private capital
• Global: EFRAG and TNFD publish correspondence mapping
• New Zealand: FMA releases user guides to enhance understanding of climate-related disclosure 
• Singapore: BIS and MAS develops climate risk platform
• EU: ESAs publishes assessment of the Sustainable Finance Disclosure Regulation
• China: Ministry of Finance consults on sustainability disclosure standards
• Qatar: Central Bank launches ESG and sustainability strategy for the financial sector
• Kenya: Central Bank consults on Green Finance Taxonomy

Australia releases its Sustainable Finance Roadmap to unlock more private capital

The Albanese Government has announced the release of the Sustainable Finance Roadmap, which will help investors, companies and the broader community make the most of the global net-zero transformation. The Roadmap outlines how the Government, regulators and industry will work together to implement sustainable finance initiatives and reforms in a clear and coordinated way.

Context: The Government’s primary focus has been on introducing mandatory disclosures of climate-related financial risks and opportunities, with legislation now before the Parliament. Now, with this Roadmap, the Government’s attention will shift to delivering the next set of sustainable finance reforms.

Main elements: The Roadmap sets out what’s needed to:

• Embed the Government’s mandatory corporate climate disclosure regime
• Complete Australia’s Sustainable Finance Taxonomy;
• Develop product labeling requirements for investments marketed as sustainable, so investors can trust the sustainable finance products they are putting money into; and
• Develop a set of best practice guidelines to advise businesses on how to disclose their net zero transition plans.

Next steps: Climate-related disclosure standards are due to be finalized by August 2024. The Treasury will develop and publish best practice guidance for the disclosure of corporate transition plans by the end of 2025.

EFRAG and TNFD publish correspondence mapping

The Taskforce on Nature-related Financial Disclosures (TNFD) and EFRAG have jointly published a correspondence table between the European Sustainability Reporting Standards (ESRS) and the TNFD’s recommended disclosures and metrics, illustrating the high level of commonality achieved between the two nature and biodiversity-related reporting frameworks. 

Background and intended use: This document was prepared in response to feedback from market participants about the need to support comparability of the TNFD’s recommended disclosures and the ESRS and facilitate the work of preparers, the main target audience of this document, who are planning to disclose on both.

Key takeaways: The joint assessment highlights that all 14 TNFD recommended disclosures are reflected in the ESRS. In particular, the high level of correspondence between the ESRS environmental standards beyond climate change (E2-E5) and the TNFD recommendations and core metrics is reflected through the following:

• Both the TNFD and ESRS recommend the need to disclose nature-related impacts, risks and opportunities, including dependencies on nature to the extent that they generate material risks
• The ESRS require disclosures to be based on a double materiality principle. The TNFD approach enables different approaches to materiality, including the double materiality approach required by the ESRS
• The TNFD developed the LEAP approach for market participants to identify and assess their nature-related issues. Likewise, the ESRS state that companies may conduct their materiality assessment on the sustainability matters of pollution, water, biodiversity and ecosystems, and circular economy using the LEAP approach
• Both TNFD and ESRS are organized around four disclosure pillars: Governance, Strategy, Risk Management, and Metrics and Targets

New Zealand releases new user guides to enhance understanding of climate-related disclosure

The Financial Markets Authority (FMA) and External Reporting Board (XRB) have collaboratively released user guides to assist in understanding the climate-related disclosures (CRD) regime and interpreting climate statements. 

In summary: These guides aim to enhance comprehension of climate-related information for investors, creditors, journalists, and other stakeholders. 

The aim is to provide information about how climate change is impacting a company currently, how it might impact it in the future, and how resilient the business is to changes in the climate.

Key features: The “What You Need to Know” guide provides an overview of the CRD regime, including its purpose, legislative requirements and key considerations for users of climate statements.

• The “Navigating Climate Statements” guide offers a detailed explanation of the information disclosed in climate statements, focusing on governance, strategy, risk management and metrics/targets
• The climate statements content includes information on current and potential future impacts of climate change on the company, as well as the business’s resilience to climate-related changes
• The CRD regime requires disclosure of climate-related information but does not mandate specific actions to mitigate or adapt to climate change effects

Looking ahead: As more companies with different financial year-ends publish their statements, the number of climate statements available will grow significantly.

• Enhanced analysis: The accumulation of disclosures is expected to improve their usefulness and value, enabling more effective analysis of reporting entities
• Improved decision making: As New Zealand businesses become more proficient in producing these disclosures, both domestic and international investors should be able to make better-informed investment decisions

BIS and MAS develops climate risk platform

The Bank for International Settlements (BIS) Innovation Hub and the Monetary Authority of Singapore (MAS) have developed a blueprint for a climate risk platform that integrates regulatory and climate data to help financial authorities identify, monitor, and manage climate risks in the financial system.

Summary: The blueprint, named Project Viridis, lays out key features and metrics required for a climate risk platform and incorporates data and information on financed emissions, physical risk exposure and forward-looking assessments under different climate scenarios.

• It demonstrates how regulatory data can be integrated with climate data, which are extracted from corporate disclosure documents using natural language processing techniques
• This provides authorities with insights into climate-related financial risks, helping them form an initial view of financial institutions’ risk exposures, and to identify areas that may require deeper risk assessment
• The platform uses technology architecture developed by the BIS Innovation Hub Singapore and MAS, enhanced in collaboration with other financial authorities from around the world

Key features: The Viridis climate risk platform has several features, including: 

• Banking and financial system-wide and financial institution-level views of financed emissions
• Consolidation of reported and modeled emissions of entities that are key counterparties to financial institutions
• Mapping the geographical distribution of entities’ assets to assess the entities’ transition risk exposure arising from changes in carbon-pricing policies and exposure to different physical hazards

Future steps: The report outlines a solution design for future platform functionalities, as and when data become available and methodologies established.

The platform will evolve as standards, technologies and methodologies evolve over time. During this process, the blueprint could form the basis for financial supervisors to understand their data gaps and explore with supervised banks how to collect such data.

European Supervisory Authorities (ESAs) publishes assessment of the Sustainable Finance Disclosure Regulation (SFDR)

The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) have published a joint Opinion on the assessment of the SFDR, calling for a coherent sustainable finance framework and enhanced consumer protection.

The background: The European Commission is due to publish a comprehensive review of the SFDR in early 2025. A consultation on the implementation of the SFDR was launched in late 2023. 

Key recommendations: The ESAs recommend two voluntary product categories – a Sustainable and a Transition category – that financial market participants should use to ensure consumers understand the purpose of the products. 

The categories should have a clear objective and criteria to reduce greenwashing risks. In addition, the ESAs recommend sustainability indicators that would grade financial products such as investment funds, life insurance and pension products. 

In addition: The Opinion also covers the following areas:

• Appropriate disclosures for products outside the two categories to reduce greenwashing
• Improvements to the definition of sustainable investments
• Simplification to the way disclosures are presented to investors
• Other technical suggestions including on which products should fall under the scope of SFDR and on how to improve disclosures regarding the negative impact of investments on people and the environment
• The need for consumer testing before putting forward any policy proposals to review the SFDR, such as to introduce a categorization system and/or an indicator

Expected outcome: The ESAs have delivered this Opinion at their own initiative – the policy recommendations are not binding, but may be taken on board by the European Commission in its upcoming review of the SFDR.

China Ministry of Finance consults on sustainability disclosure standards

The Ministry of Finance of the People’s Republic of China issued for consultation its Exposure Draft on “Chinese Sustainability Disclosure Standards for Business Enterprises”. 

In more detail: The consultation proposes to introduce a disclosure framework on sustainability reporting for the local market. 

• The Exposure Draft is based on the International Sustainability Standards Board (ISSB) general sustainability disclosure standard (or IFRS S1), and is similarly structured around the four reporting pillars of governance, strategy, risk management, and metrics and targets
• A notable area of divergence from the ISSB approach relates to the proposal to adopt the “double materiality” principle, which asks companies to account for their external impacts, while the ISSB framework focuses on enterprise value
• According to the Exposure Draft, companies would be expected to disclose not only how sustainability-related issues impact their business, but also the impacts that their business might have on a particular sustainability theme in relation to stakeholders in the value chain

Looking ahead: The consultation will be open until June 24, 2024 and feedback will help inform the final policy.

Qatar launches ESG and sustainability strategy for the financial sector

The Central Bank of Qatar (QCB) has published a document outlining its strategic approach to ESG and sustainability. 

Important context: The QCB aims to lead globally on ESG issues, develop a financial sector that is resilient to climate, environmental, and social risks, and establish Qatar as a leading hub for sustainable finance innovation and capital mobilization. 

The strategy aligns with Qatar’s 2030 National Vision and highlights the importance of sustainability to Qatar’s evolving financial sector.

Summary: The Strategy is anchored around 3 Pillars, for which aspirations and specific outcomes have been defined:

• Financial sector climate, environmental and social risks management
• Capital mobilization towards sustainable finance
• A central bank leading by example on ESG and sustainability

Additionally, the Strategy includes a set of desired outcomes and initiatives, alongside cross-cutting themes aimed at capacity building and sustainable finance data infrastructure. The progress against the ESG and Sustainability Strategy will be tracked through KPIs specific to each pillar.

Central Bank of Kenya releases draft Kenya Green Finance Taxonomy

The Central Bank of Kenya (CBK) has released the draft Kenya Green Finance Taxonomy (KGFT) for public consultation. 

In summary: The KGFT is part of the outputs of the ongoing European Investment Bank (EIB) – Central Bank of Kenya (CBK) Greening Financial Systems Technical Assistance Programme that commenced in October 2023. The draft KGFT largely drew from Kenya’s Nationally Determined Contributions (NDCs) under the United Nations Framework Convention for Climate Change (UNFCC) and other National Climate Policy Documents. 

Main highlights: There is a seven-step process for determining taxonomy-alignment, with the result being a binary classification – either ‘taxonomy aligned’ or ‘not’.

• Considered sectors and activities include manufacturing, agriculture, forestry and fishing, mining and quarrying, electricity, gas, steam, and air conditioning, water supply, sewerage, waste management, and remediation, transportation and storage, real estate, construction, information & communication, and financial and insurance activities
• In order to demonstrate an economic activity’s alignment with the taxonomy, all three of the following principles must be met:
  • Principle 1: Contributes substantially towards at least one environmental objective, only assessed in the current draft of the KGFT by climate change mitigation and/or climate change adaptation
  • Principle 2: Does no significant harm to any of the other taxonomy objectives
  • Principle 3: Meets minimum social safeguards e.g. alignment with Kenyan labor laws and international standards such as the International Labour Organisation (ILO) core labor conventions

Next steps: The KGFT, which will be a live document subject to periodic updates, initially focuses on climate change mitigation and adaptation as its objectives. Other environmental objectives, such as biodiversity and related objectives, will be considered in future updates. 

Public consultation closed on June 11 2024.

View the additional regulatory briefs from this month:

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

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