Global
Basel Committee on Banking Supervision discussed the development of a Pillar 3 framework requiring disclosure of bank exposures to climate-related financial risks
Basel Committee members considered recent work [4] regarding the development of a Pillar 3 framework, requiring disclosure of bank exposures to climate-related financial risks. The framework would complement parallel disclosure initiatives such as those by the ISSB and other authorities. A consultation paper on the proposed framework will be issued by the end of the year. Committee members also agreed to further assess the use of climate scenario analyses by banks and supervisory authorities.
NGFS published a report “Stocktake on Financial Institutions’ Transition Plans and their Relevance to Micro-prudential Authorities”
The Network for Greening the Financial System (NGFS) published their report [5] which takes stock of emerging practices relating to climate transition plans and assessing the role of central banks and supervisors in relation to transition plans.
The report identified six key findings:
- There are multiple definitions of transition plans, reflecting their use for different purposes
- There is merit in distinguishing transition planning from a transition plan
- Existing frameworks speak to a mix of objectives, audiences and concerns for transition plans, but predominantly relate to climate-related corporate disclosures
- Transition plans could be a useful source of information for micro-prudential authorities to develop a forward-looking view of whether the risks resulting from an institution’s transition strategy are commensurate with its risk management framework
- There are some common elements to all transition plans which are relevant to assessing safety and soundness
- The role that micro-prudential authorities play needs to be situated in the context of the actions of other financial and non-financial regulators rather than acting in isolation
As the next step, the NGFS plans to take forward engagement with relevant international authorities and standard setters, so that they can advance their respective work on transition plans. Additionally, the NGFS will also look to advance the discussion on the relevance of transition plans to micro-prudential authorities’ mandate, supervisory toolkit, and the overall prudential framework.
UK
UK Department for Business and Trade announced call for evidence on “Smarter regulation non-financial reporting review”
The Department for Business and Trade and the Financial Reporting Council are conducting a review of the non-financial reporting requirements [6] which UK companies need to comply with to produce their annual report. The review will consider if company size thresholds (micro, small, medium and large) that determine certain non-financial reporting requirements, and the preparation and filing of accounts with Companies House, remain appropriate – including in the context of the evolving sustainability disclosure and reporting regimes (set out by the ISSB and the UK Transition Plan Taskforce (TPT).
The government is focused on assessing the costs and benefits, the value of information produced, and how the non-financial reporting regime might be improved in future.
This call for evidence is the first phase of the non-financial reporting review. It will run for 12 weeks and close on 16 August 2023. Once closed, the government will use the information collected to develop proposals for public consultation next year.
FCA voiced concerns about the sustainability-linked loan market
The FCA published [7] a communication outlining its concerns about the sustainability-linked loan market. It also published a “Dear Head of ESG / Sustainable Finance” letter outlining details of its findings which, among other observations, will be expected to be considered carefully by banks.
Key findings were as follows:
- Not realising potential. While a number of banks are keen to promote SLLs, the market is currently not achieving its potential. Increased trust and transparency could deliver wider uptake.
- Borrower concerns. Borrowers are concerned about unwelcome scrutiny if they miss performance targets. They may also consider the time and costs of doing an SLL against a more conventional loan.
- Market participants that we spoke to believe a more ‘prescriptive framework’ would improve market integrity and reduce the threat of greenwashing accusations. This could include more meaningful, science-based targets.
- There is the potential for conflicts of interest if banks accept weak targets and count the loan as part of their sustainable finance quota.
- Several banks are advocating for uniform disclosure and independent monitoring and verification of targets. This could include well disclosed targets aligned to borrowers’ published transition plans.
The FCA have recognised that some of these issues have been addressed by the recently published revision of the Loan Market Association’s Sustainability-Linked Loan Principles (SLLP). The FCA have also encouraged a broader adoption of the existing SLLPs and noted that it will continue to monitor this market, as part of their wider work on transition finance and will assess if further measures would be needed.
Notably, earlier in May, the FCA published a series of discussion (“engagement”) papers, one of which is looking into improving the documentation around GSSS bonds (including Use of Proceeds (UoP) and sustainability-linked structures).
EU
European Commission’s published broad Sustainable Finance Package
The European Commission published [8] a broad Sustainable Finance package containing new measures and guidance aimed at building on and strengthening the foundations of the EU sustainable finance framework. This is expected to be the last set of measures of this scale to be adopted by the Commission before the end of its mandate, and it is expected to inform the work of the next Commission as well as the Platform on Sustainable Finance.
The package contains:
Proposal for a Regulation on the transparency and integrity of ESG ratings. It’s worth highlighting that the proposal does NOT intend to harmonise methodologies underpinning ESG ratings. Instead, it provides for:
- Conditions for the provision of ESG ratings in the EU
- Principles on the integrity and reliability of ESG rating activities
- Transparency requirements of ESG ratings activities
- Obligations relating to the independence and conflict of interests of ESG rating providers
- European Securities and Markets Authority (ESMA) powers regarding the supervision of ESG rating providers
The proposal also states that:
- Requirements would not apply to ratings not intended for public offering nor to ratings produced internally and used for internal purposes.
- The provision of ESG ratings in the EU by third country ESG rating providers would be subject to an equivalence decision or an alternative regime for recognition.
- ESMA, the Commission or any public authorities should not interfere with the content or methodology of ESG ratings.
This is a welcome and long-awaited step that would promote accountability and transparency in the ESG rating service industry.
Recommendations on facilitating finance for the transition to a sustainable economy. The recommendations aim to provide guidance as well as practical examples for companies and the financial sector on how companies can use the various tools of the EU sustainable finance framework on a voluntary basis to channel investments into the transition and manage their risks from climate change and environmental degradation.
Guide on usability of the EU Taxonomy and additional FAQs and interpretation guidance. It offers step-by step guidance to help non-financial and financial companies assess their Taxonomy eligibility and alignment, further exemplified through 12 use cases. The FAQ provides clarification on the interactions between the concepts of ‘taxonomy-aligned investment' and ‘sustainable investment' under the SFDR. In the document, the Commission clarified that investments in ‘environmentally sustainable economic activities' within the meaning of the EU Taxonomy can be qualified as a ‘sustainable investment' within the meaning of the SFDR.
Delegated regulation on EU Taxonomy technical screening criteria (TSC) and reporting requirements:
- TSC for economic activities making a substantial contribution to the four remaining environmental objectives (water & marine resources; circular economy; pollution prevention & control; biodiversity & ecosystems).
- Targeted amendments to the delegated acts specifying the Taxonomy’s reporting requirements, including amendments to requirements around the key performance indicators (KPIs) for credit institutions.
- Targeted amendments and additions to the delegated acts specifying the TSC for climate change mitigation and climate change adaptation.
Overall, the package is helpful and confirms the Commission’s focus on the implementation of the existing tools and legislation. However, we envision that the implementation on the ground by issuers and investors won’t be an easy journey and that sustainable finance frameworks will need to continue to evolve dynamically to be able to adapt to the changing market and best practice.
ESAs published final proposed ESG disclosures for STS Securitisations
The European Supervisory Authorities – EBA, ESMA and EIOPA (commonly referred to as ESAs) – submitted final draft [9] regulatory technical standards (RTS) to the European Commission for ESG disclosures in securitisations.
The RTS specifically focus on securitisations backed by residential loans, auto loans, and leases. The EU Securitisation Regulation (EUSR) requires originators and sponsors to disclose information on the environmental performance of underlying assets. However, an amendment in 2021 allows originators to choose to disclose information on the principal adverse impacts (PAI) instead. The RTS are based on the SFDR and provide a framework for optional PAI disclosure in specific securitisations.
The RTS do not extend the optional PAI disclosure framework beyond the mentioned underlying assets. Originators can continue with the original disclosure requirements if they prefer. The final RTS will be endorsed by the European Commission, within three months, and will come into force 20 days after being published in the EU’s Official Journal (which is the formal source of legislative information in the Union).
ESAs published their Progress Report on Greenwashing in the financial sector
The ESAs have published their respective progress reports [10] on greenwashing in the financial sector. These reports include a common understanding of greenwashing as ‘a practice where sustainability-related statements, declarations, actions or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product or financial services. This practice may be misleading to consumers, investors or other market participants.’
The reports identify the areas of the sustainable investment value chain that are more exposed to greenwashing risk. The report concluded that greenwashing is the result of ‘multiple interrelated drivers’ and the fact market participants face challenges in implementing the necessary governance processes to support high-quality sustainability disclosures and transition efforts.
To mitigate greenwashing risks, the report concludes that: market participants must communicate on sustainability in a balanced manner; improved sustainability disclosures for retail investors are required; and the regulatory framework needs to mature, key concepts need to be clarified and sustainability impact be better integrated.
The ESAs will publish the reports with conclusions on greenwashing risks in May 2024 and will consider final recommendations, including potential changes to the EU regulatory framework.
Corporate Sustainability Due Diligence Directive (CS3D) – European Parliament agreed its position marking the beginning of the interinstitutional negotiations
The European Parliament has agreed on its position on the Directive on corporate sustainability due diligence (the CSDDD or “CS3D”) [11]. The CSDDD requires in-scope companies to conduct due diligence on, and take responsibility for, human rights abuses and environmental harm throughout their global value chains. This laid down a path to the negotiations among the European Parliament, Council, and Commission known as ‘trialogues’. Member States will have two years to implement the CSDDD once it’s formally adopted, expected no earlier than 2024.
Key negotiation issues include the scope of the CSDDD's applicability to the financial sector, conditions for civil liability, and the introduction of directors' duty of care.
The position of the European Parliament on the scope of the CSDDD is as follows:
- EU-based companies: Global (net) turnover: exceeding EUR 40 mln. Employees: > 250 employees
- EU-based parent companies: Global (net) turnover: exceeding EUR 150 mln. Employees: > 500 employees.
- Non-EU companies: Global (net) turnover: exceeding EUR 150 mln provided that at least EUR 40 mln was generated in the EU. Employees: N/A.
- Non-EU parent companies: Global (net) turnover: exceeding EUR 150 mln provided that at least EUR 40 mln was generated in the EU. Employees: > 500 employees.
There is an expected increase in ESG litigation, including class actions against companies for human rights violations in supply chains. Financial institutions and company directors may also face ESG litigation, as evidenced by, for example, cases against national banks and Oil & Gas companies’ board of directors in the EU and UK.
EU Parliament opened a debate on strategic technologies within the Net Zero Industrial Act
The European Parliament and the Council of the EU are discussing the NZIA current proposal [13]. There have been suggestions to replace the list of strategic net-zero technologies indicated in the Act with a reference to the EU’s green finance taxonomy, which categorises industries according to their contribution to the EU’s climate goals. The proposal to scrap the two-tier system received a mixed reception, with some lawmakers divided on the approach. The European Parliament and the Council of the EU look to reach an agreement before year end.
European Single Access Point (ESAP) – EU Institutions reached a provisional agreement
The EU is about to create a single point of access to public financial and sustainability-related information about EU companies and EU investment products. The Council and the European Parliament reached a provisional agreement on three proposals creating the European Single Access Point (ESAP) [14].
It has been clarified that the proposal does not impose any additional information reporting requirements on European companies, the ESAP will provide access to publicly available information.
The ESAP platform is expected to be available from summer 2027 and gradually phased in to allow for a robust implementation.
European Commission announced call for evidence on Industrial Carbon Management – carbon capture, utilisation and storage deployment
The European Commission launched a call for evidence [15] on the role of carbon capture, utilisation and storage technologies which are considered crucial for the EU to achieve carbon neutrality by 2050. The initiative will assess what role these technologies can play in decarbonising the EU economy by 2030, 2040 and 2050 respectively and what measures are needed to optimise their potential, including in the deployment of EU-wide CO2 transport and storage infrastructures. The feedback period is open from 8 June to 31 August 2023.
EU Directive to empower consumers for the green transition – both Parliament and Council adopted positions, beginning negotiations
MEPs have approved draft legislation [16] to enhance product labelling and durability and crack down on misleading claims. The new directive aims to empower consumers for a green transition and promote environmentally friendly choices. The approved negotiating mandate includes provisions to ban general environmental claims without detailed evidence, prohibit misleading practices, and simplify product information through the use of certified sustainability labels. The legislation also targets early obsolescence by banning design features that limit product life and functionality with third-party components. Consumers will be informed about repair restrictions, and a ‘guarantee label’ will indicate both the legally required and possible extended guarantee periods. The Council also adopted its negotiating mandate. It reinforces consumer rights, bans generic environmental claims, and introduces a harmonised graphic format, to help consumers recognise commercial guarantees of durability. Negotiations between the European Parliament and member states have now commenced to finalise the directive's exact content and wording.
