Global
Financial Stability Board published its work plan for 2024
The FSB has set out its 2024 work programme [2] and intends to continue coordinating international work on addressing climate-related financial risks. Work this year will include analysis of the relevance of transition plans for financial stability, alongside a stocktake of regulatory and supervisory initiatives with regards to nature-related financial risks for the G20. The FSB will also prepare a progress report on achievement of consistent climate-related financial disclosures.
UK
Biodiversity Net Gain legislation has started to apply
From 12 February, all major developments are required to deliver at least a 10% benefit for nature, with England becoming the first country in the world to make Biodiversity Net Gain a legal requirement [3]. BNG can be achieved through on-site units, off-site units, or through statutory biodiversity credits. These credits will be available as a last resort from the government, to prevent delays in the planning system. BNG will first apply to applications for major developments only and will be implemented for small sites (between 1 and 9 dwellings) from 2 April 2024. Roll-out of BNG for Nationally Significant Infrastructure Projects is expected in late 2025.
EU
Commission presented recommendation for 2040 emissions reduction target to set the path to climate neutrality in 2050
The European Commission has published its anticipated recommendation [4] to set a target to reduce net greenhouse gas (GHG) by 90% by 2040, compared with 1990 levels. In its recommendation, The Commission outlined the initial estimates for investments that would be needed to achieve the new 2040 target, in key areas including the production of clean energy and the decarbonisation of industrial processes, as well as heating and cooling in buildings and transport modes, and major investments to improve the energy efficiency of the EU economy. An additional 1.5% of GDP would need to be invested annually, compared to 2011–20 levels, with resources moving away from less sustainable uses such as fossil fuel subsidies. The private sector is seen as the primary source of these investments, enabled by a policy framework incentivising low-carbon investment and discouraging carbon intensive investment.
Other key aspects of the Commission’s recommendation included an earlier deployment of carbon capture, with industrial carbon removals complementing natural carbon removals and land-based removals sequestering carbon in biomass and soils, and a greater focus on the Just Transition. The Commission also presented a dedicated Industrial Carbon Management Communication [5] with a vision for the future policy framework and investments needed.
Net-Zero Industry Act: Council and Parliament reached a deal to boost EU’s green industry
The Council and the European Parliament reached a provisional deal on the regulation that establishes a framework to help enhance Europe’s manufacturing ecosystem for net-zero technology products, known as the ‘Net-Zero Industry Act’ (NZIA) [6]. The primary objective of this regulation is to facilitate investment in green Technology by simplifying permit issuance procedures and providing support for strategic projects.
Corporate Sustainability Due Diligence Directive did not pass final vote after preliminary political agreement was reached in December 2023
The European Council was not able to approve the legislation following objections from countries including Germany and Italy, citing concerns over the potential bureaucratic threat to business [7]. The CSDDD was first proposed in 2022 and would require companies to identify and address environmental and social harm in their supply chain. The Belgian Presidency of the Council stated that it will work to renegotiate the law with Parliament to “see if it’s possible to address the concerns put forward by member states”. There is now uncertainty as to whether the CSDDD will be passed ahead of the EU parliamentary election in June.
Platform on Sustainable Finance published report on ‘compendium of market practices’ stemming from EU Sustainable Finance framework
The Platform on Sustainable Finance published its report on ‘a compendium of market practices’, which will set the direction for future priorities on the implementation of the EU sustainable finance framework [8].
The report centres around seven stakeholder groups, including corporates, credit institutions, investors, insurers, auditors and consultants, SMEs, and the public sector, highlighting the value and benefits of the EU taxonomy and the broader EU sustainable finance framework. It is accompanied by an annex that includes concrete case studies for each stakeholder group, identifying some data and implementation challenges regarding the EU Taxonomy and wider framework.
Council and Parliament agreed on revisions to the EU Listing Act, including on disclosures of ESG matters in prospectuses of equity and debt securities
The Council and the Parliament has reached a provisional agreement on the Listing Act, a package aiming to make EU public capital markets more attractive for EU companies and make it easier for companies of all sizes, including SMEs, to list on European stock exchanges [9]. Among other provisions, the Act sets additional disclosure requirements for prospectuses on ESG matters. Companies that offer equity securities to the public or seek the admission to trading of equity securities on a regulated market should incorporate by reference in the prospectus, for the periods covered by the historical financial information, the management and consolidated management reports, which include the sustainability reporting, as required by the EU Corporate Sustainability Reporting Directive (CSRD). The Commission is also expected to set out disclosure templates specifying the ESG-related information to be included in prospectuses for non-equity securities that are advertised as taking into account ESG factors or pursuing ESG objectives (which would capture green, social, sustainability, transition and sustainability-linked bonds). Finally, the Act introduces additional requirements for prospectuses prepared for debt securities issues under the EU Green Bond Standard stating that the prospectus shall incorporate by reference the relevant information contained in the European Green Bond factsheet. The new requirements are seeking to ensure consistency between prospectuses and any advertisements regarding any material information relevant for investors, including on ESG.
European Financial Reporting Advisory Group launched public consultation on sustainability reporting standards for SMEs
EFRAG has launched a public consultation on the two Exposure Drafts on sustainability standards for both listed SMEs and a voluntary reporting standard for non-listed SMEs [10]. The standards seek to be proportionate and relevant to the scale and complexity of the activities and to the characteristics and capacities of SMEs. The consultation will close on 21 May 2024.
Council and Parliament agree to delay sustainability reporting for certain sectors and third-country companies by two years
A two-year delay (to the 30 June 2026) has been agreed for adoption of the European Sustainability Reporting Standards (ESRS) for certain sectors (agriculture, farming and fishing; food and beverage services; mining, coal and quarrying; motor vehicles; oil and gas; power production and energy utilities; road transport; textiles, accessories, footwear and jewellery) and third-country undertakings [11]. The delay will give companies more time to prepare for and implement the first set of ESRS that were adopted in July 2023, alongside specific standards for large non-EU companies. The delay will also provide more time for sector-specific sustainability standards, and standards for specific third-country companies, to be developed.
Council and Parliament agreed to establish an EU carbon removals certification framework
A provisional agreement has been reached to establish the first EU-level voluntary certification framework for permanent carbon removals, carbon farming, and carbon storage in products [12]. The aim of the framework is to speed up carbon removal, and is the first step towards a carbon removal and soil emission reduction framework in EU legislation.
Key elements of the regulation include an open definition of carbon removals, aligned with the UN Intergovernmental Panel on Climate Change (IPCC) and only covers atmospheric or biogenic carbon removals. The regulation differentiates between four types of units: permanent carbon removal (storing for several centuries); temporary carbon storage in long-lasting products (e.g. wood-based construction products with duration of at least 35 years); temporary carbon storage from carbon farming (e.g. restoring forests and soil); and, soil emission reduction from carbon farming (e.g. no tilling and cover crop practices).
Council approved legislation to protect consumers against misleading green claims
The law [13] is aiming to protect consumers against misleading green claims, including unfair claims about carbon offsetting. It also helps improve the information available to consumers to help them make circular and ecological choices. For instance, products across the EU will bear a harmonised label with information on the commercial guarantee of durability.
EU Parliament adopted Nature Restoration Law, overcoming objections
The EU Nature Restoration is aimed at restoring and protecting natural habitats and ecosystems, including a mandatory target for EU countries to restore at least 20% of the EU’s land and sea areas by 2030, and for all ecosystems in need of restoration by 2050.
The law was under threat again after the largest party in Parliament announced that it would vote against the legislation, citing concerns about the new law’s impact on farmers, including increased bureaucracy and reporting obligations [14]. The new legislation will now need to be adopted by the EU Council prior to entering into force. Member states will be required to submit their first nature restoration plans within two years after the law’s entry into force.
The European Central Bank has published a report on the risks from the misalignment of banks' financing with the EU climate objectives
The report [15] aims to quantify the most pronounced transition risks in the credit portfolio of the banking sector by comparing projected production volumes across key economic sectors with the required rate of change to meet given climate objectives. It focuses on six key sectors responsible for more than 70% of global CO2 emissions: power, automotive, oil and gas, steel, coal and cement.
The report analysed 95 banks accounting for three quarters of euro area loans and found that around 90% of them have elevated transition risks. 70% of the banks may be at risk of future legal action “as they have committed to the Paris Agreement, but their credit portfolio is not aligned with it”. These risks predominately arise from exposures to companies within the energy sector, which are characterised by their slow progress in phasing out high-carbon production processes and their delayed adoption of renewable energy production methods.
European Banking Authority published industry survey on the classification methodologies for exposures to ESG risks
The EBA has launched an industry survey [16] to receive input from credit institutions on their methodologies to classify exposures to ESG risks. Additionally, the survey seeks to assess the accessibility and availability of ESG data for this purpose.
The primary goal of the survey is to gather qualitative data on credit institutions’ current practices with a view to consider establishing a standardised methodology for identifying and evaluating exposures to ESG risks. Credit institutions can respond to the survey until 29 of March 2024.
Notably, the Basel Committee on Banking Supervision met on 28–29 February to take stock of recent market developments and risks to the global banking system. With regard to climate risks, the Committee agreed to publish a discussion paper on the use of climate scenario analysis by banks and supervisors to help inform potential future work in this area. The discussion paper will be published in the coming months [17].
