EU Council adopts a new European green bond standard

The EU Council has adopted regulation to create a European green bond standard (GBS), setting out the requirements for issuers that wish to use the designation of ‘European Green Bond’ or ‘EuGB’ for their green bonds. All proceeds of an EuGB will need to be invested in economic activities that are aligned with the EU taxonomy for sustainable activities (for sectors covered by it). A flexibility pocket of 15% is created for activities not yet covered by the EU taxonomy, subject to further re-evaluation. The regulation also establishes a registration system and supervisory framework for external reviewers of European green bonds. To help prevent greenwashing in the wider sustainable bond market, the regulation also includes voluntary disclosures for other environmentally sustainable bonds and sustainably-linked bonds (SLB) issued in the EU. It will be signed and published in the EU’s Official Journal before entering into force 20 days later and will start applying 12 months after its entry into force.

US regulators finalise a high-level framework for climate-related financial risks for large financial institutions

Federal bank regulatory agencies finalised principles that provide a high-level framework for the management of exposures to climate-related financial risks at large financial institutions (with $100 billion or more in total consolidated assets); including credit, market, liquidity, operational, and legal risks. The principles specify that management should provide board members with timely and accurate information on potential climate risks, be responsible for measuring and monitoring risks, and should regularly report on “material climate-related financial risks” to the board. The principles also clarify how they should be applied to large foreign banking organisations, the role of the board of directors and the removal of a reference to compensation practices. Jerome Powell, Fed chair, stressed that the Fed was not a “climate policymaker” and that the principles are “squarely focused on prudent and appropriate risk management”. However, not all regulators supported these final principles with Fed governors Michelle W. Bowman expressing it will “create confusion” and Christopher J. Waller disagreeing that climate change poses a “serious risk” to financial stability.

Reporting: Navigating global scrutiny – accuracy, transparency and potential for conflicts of interest of ESG ratings

ESG ratings can have significant influence in determining which stocks and bonds make it into the $2.8tn of sustainable investment funds, according to Morningstar. This influence has now led to increased regulatory scrutiny, with regulators (globally) looking to bring about transparency in terms of how such ratings are derived. The Transatlantic divide resulted by political pressures and new reporting requirements will add complexity to the task of regulating rating agencies. This could potentially push the industry towards proprietary algorithms and machine learning tools, making it more difficult to make sense of the already opaque methodologies. This combined with an evolving regulatory environment will further bring into the spotlight the importance of neutrality and a widening pool of data for firms to utilise to enhance the utility and validity of ESG ratings for investors. 

Reporting: Demand for data-screening services by investors has soared (or Demand from investors for data-screening services has soared)?

According to a report by Morgan Stanley, over 20% of fund assets under management worldwide were invested using at least one restriction screen, a tenfold increase compared to 2020. The report pointed out that demand for more “exclusionary” investments has increased not only in response to investors’ changing values, but also due to rapid changes in regulatory requirements — such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), which outlines mandatory ESG disclosures for asset managers. There have also been substantial developments in the capabilities of technologies that provide data for ESG screening, such as different types of artificial intelligence, e.g., machine learning, natural language processing, and symbolic AI. There are several challenges for those screening investments on ESG criteria, including the quality of the original data and managing the evolving regulatory landscape.

Reporting: A record 23,000+ companies disclose environmental impact through CDP following announcements of alignments with reporting standards

Companies’ environmental data disclosure has reached record numbers, with 23,000+ companies disclosing through CDP in 2023. There has been a 24% increase in the number of companies that disclosed in 2022 and over a 300% increase of reporting through CDP specifically, since signing the Paris Agreement in 2015. Although environmental data disclosure has increased and improved, the majority of companies are not providing fully comprehensive disclosures, with only 1% reporting on all three of CDP’s key areas (climate change, water security and deforestation). CDP announced in November 2022 that it will align the International Financial Reporting Standards (IFRS) International Sustainability Standards Board (ISBB) climate disclosure standard in 2024. The announcement signalled a commitment to delivering robust environmental disclosure to the market and providing consistency of climate-related information; reducing the reporting burden of entities through this alignment. Furthermore, the CDP has committed to reflecting the SEC’s upcoming climate disclosure the European Sustainability Reporting Standards (ESRS) in its disclosure system.

Ratings and data: TPT launches “Gold Standard” framework for climate transition plan disclosure

The Transition Plan Taskforce has launched its ‘gold standard’ Disclosure Framework, which will enable companies and financial institutions to outline their climate transition plans in a credible and robust manner in annual reporting. The framework aims to facilitate the creation of consistent and comparable company reports, whilst reducing the complexity firms face when disclosing climate-related information. The guidance includes high-level sectoral guidance across 40 sectors as well as legal considerations for companies that use the Disclosure Framework to prepare their reports.

Ratings and data: EU Commission to delay adoption of SRS by 2 years and the release of its 2024 commission work programme

The European Commission has adopted its 2024 Work Programme which focuses on simplifying rules for EU citizens and businesses, aiming to reduce reporting requirements by 25% to boost EU competitiveness and assist SMEs. Reports on the progress achieved toward the 25% reductions will be tracked in annual burden surveys, starting with the 2023 edition. The Programme aims to increase digitalisation, streamline reporting requirements, reduce costs, and make it more efficient for businesses. Under the proposals, the Commission will continue its focus on the European Green Deal, ensuring a fair and inclusive green transition. The Commission will work with the European Parliament and Council to reach agreements by the end of the Commission’s mandate. Consultations with stakeholders, including companies and SME envoys, will be carried out to identify problematic issues and priorities.

Ratings and data: TCFD reveals TCFD reveals drastic rise in company climate-related disclosures

Companies are disclosing climate-related risks and opportunities at a significantly higher rate compared to a few years ago, according to the Task Force on Climate-Related Financial Disclosures (TCFD) 2023 status report. The report finds that 58% of companies disclosed in line with at least five of the eleven recommended disclosures in 2022, up from only 18% in 2020. Notably, climate-related disclosures increased most significantly over these 2 years. Some recommendations remain challenging: only 11% of firms disclosed their strategies under climate related scenarios in 2022, while 90% of companies rated this recommendation as ‘challenging to implement’. This is the TCFD’s final annual update, with the IFRS Foundation’s ISSB, which incorporates TCFD recommendations, now responsible for monitoring the progress of climate-related reporting. The TCFD sees the results as encouraging, but note that there is still a need for improved transparency “on the actual and potential impact of climate change” on businesses.

Primary and Secondary Market

For analysis and information on the Primary Market, along with updates on the Secondary Market, please take a look at the full monthly newsletter on Agile Markets. If you do not have access to Agile Markets, please contact us here.

Tokyo Stock Exchange launches carbon credit trading to propel Japan’s climate goals

Japan’s Tokyo Stock Exchange (TSE) has begun trading carbon credits, in a crucial step towards addressing climate change. As the world’s fifth-largest CO2 emitter, Japan is striving to achieve carbon neutrality by 2050, aligning with other major economies. In April, Japan introduced a phased carbon pricing scheme to encourage emissions reduction by companies and cities. The TSE’s new market aims to facilitate the buying and selling of credits and enhance transparency in carbon pricing. On the first trading day, 3,689 metric tons of CO2 were traded, with prices for J-Credits varying by category. A market maker mechanism will be introduced later to boost trade liquidity.

Global organisations standardise responsible investment definitions to combat greenwashing

The UN Principles for Responsible Investment (PRI), CFA Institute, and Global Sustainable Investment Alliance (GSIA) have released standardised definitions for five common responsible investment strategies to combat greenwashing and ensure consistent terminology in the global asset management and wealth management sectors. The report outlines definitions for “screening”, “ESG integration”, “thematic investing”, “stewardship”, and “impact investing”, offering practical guidance for each approach. This initiative responds to regulator calls for standardisation in sustainable investment terminology amid growing industry scrutiny.

Franklin Templeton launches actively-managed green bond ETFs and corporate investment-grade ETF

Franklin Templeton has introduced two actively-managed green bond exchange-traded funds (ETFs) and a European investment-grade corporate ETF with environmental and social investments. The Franklin Sustainable Euro Green Sovereign UCITS ETF and Franklin Sustainable Euro Green Corp 1-5 Year UCITS ETF meet the EU’s Article 9 classification, committing to at least 90% of assets being in sustainable investments. These funds primarily invest in green bonds, with up to 25% allocated to sustainable conventional bonds. Additionally, Franklin Templeton launched the Franklin Euro IG Corporate UCITS ETF, investing in investment-grade corporate green bonds in Europe, adhering to Article 8 classification.

Redwheel launches biodiversity fund to address loss of ecosystems and sustainability

Sustainable investment firm Redwheel has introduced its inaugural biodiversity fund, which targets companies addressing biodiversity loss. The fund, supported by undisclosed internal seed funding, is now accessible to institutional and wholesale investors. Redwheel’s Biodiversity Strategy prioritises sustainable materials, terrestrial and aquatic ecosystems, and circularity and waste management as investment opportunities with significant potential. Despite the pressing need, biodiversity investment remains underfunded, with only $39 billion annually invested in ecosystem services, far below the estimated $125-140 trillion required to combat biodiversity loss. The fund will be managed by Amanda O’Toole and Sebastien Bidault, who also oversee Redwheel’s clean economy strategy.

Regular articles from us on market-moving themes, and updates on what we are doing to further our ESG commitment.

• Do two-engine frameworks get you further?
• Welcome back: The Sustainability-Linked Bond market reopened post-summer
• NatWest Social & Community Capital approved over a million pounds to charities in 2022
• New technology solution supports saving over a million electronic devices from becoming landfill

For the full monthly newsletter login to Agile Markets. Don’t have access? Contact us here.

Or, for Corporates looking to discuss any of the above further, please reach out to our authors:

• Dr Arthur Krebbers, Head of Corporate Climate and ESG Capital Markets 
• Gustavo Brianza, Head of Debt & ESG Advisory
• Daniel Bressler, Climate and ESG Capital Markets
• James Lander, Credit Trader
• Philippe Bradshaw, Head of European Syndicate
• Rui Zu, ESG Advisory
• Thomas Gidman, ESG Advisory
• Dean Shahfar, Sustainable Finance UK
• Pietro Stimamiglio, Climate and ESG Capital Markets 
• Niceasia Mc Perry, Climate and ESG Capital Markets

*For any unfamiliar terms used within this article please refer to our Insights glossary.