Global

• NGFS released a package of publications on transition plans
• IFRS Foundation and EFRAG have published guidance material on the interoperability of the ISSB and European sustainability reporting standards
• ISSB to focus on risks and opportunities related to human and nature capital

UK

• UK Transition Plan Taskforce published final sector guidance and additional advisory resources 
• UK Prudential Regulation Authority to update work on climate risk management
• Bank of England explores approaches to using climate scenario analysis
• UK government released consultation on Carbon Border Adjustment Mechanism

EU

• ESMA Publishes Final Guidelines for ESG and Sustainability-related Fund Names
• The Platform on Sustainable Finance proposes a methodology for monitoring financial flows into sustainable investments
• ESRB has published official advice to EIOPA on a dedicated prudential treatment of environmental and social risks 
• EIOPA has launched a public consultation that will re-evaluate how catastrophe risk will be measured in the standard formula

The FCA has published finalised guidance on the anti-greenwashing rule under the SDR regime 

The Financial Conduct Authority (“FCA”) published its finalised guidance to help financial institutions meet the requirements of the anti-greenwashing rule (“AGR”) adopted in November 2023 and taking effect from 31st May 2024 [1]. 

This new rule is designed to protect consumers by ensuring that claims around sustainability of financial products and services are “clear, fair and not misleading”. In short, the rule asks that such claims are consistent with the actual sustainability characteristics of that product or service and are fair, clear, and not misleading. This means that sustainability claims must be:

• accurate and capable of being evidenced
• presented in a way that can be understood
• not leave out important information
• consider the full life cycle of the product or service especially where comparisons are made to other products or services.

In the European Union, Financial Services regulators are also considering measures to mitigate the risk of greenwashing. To this end, the European Supervisory Authorities, which include European Securities and Markets Authorities (ESMA), European Banking Authority (EBA) and European Insurance and Occupational Pensions Authority (EIOPA), are expected to publish their final report on Greenwashing by May 2024.

Issuers / Borrowers

While focused on FIs, the knock-on effect of the AGR will likely impact how issuers promote their sustainability credentials to investors and how they market sustainability-labelled transactions. As investors may rely on sustainability data to substantiate their own claims, issuers and borrowers can expect enhanced ESG due diligence. At the margin, this guidance being enshrined by a financial regulator may dissuade companies with a less well developed ESG narrative from issuing labelled debt. It is likely to also lengthen the process of structuring updated sustainable finance frameworks, certainly for companies accessing the UK market.

Investors / Lenders

Financial firms, including banks and asset managers, need to review their marketing communications and product documentation to ensure compliance with the AGR regarding sustainability claims.

According to the Investment Association’s survey [2], the following issues present the biggest challenges:

• Volume and type of material to review at entity and product level (including all communications, images, banners etc.);
• Absence of FCA guidance (including more detail on what disclosures are permissible, use of sustainability terms, use of imagery, examples of what good practice looks like, how firms should apply the ‘claims should be complete’ guidance principle);
• Establishing process to ensure future new documentation and communications comply (including ownership of responsibilities, identifying key persons, keeping record of evidence), and
• Timeline for updating internal documents and guidance (including challenges around communicating large scale changes  to investors).

The new guidance is expected, at the margin, to limit the number of new sustainable fund launches, certainly by firms not set up to ensure the claimed ESG investment strategies are fully implemented. It may even lead to some deciding to remove the ESG label / claims from existing funds when these are seen to be non-core. The survey validates this: only 29% of investors expect “some change”.

Global

NGFS released a package of publications on transition plans

The Network for Greening the Financial System (NGFS) [3] has published three reports on transition plans to investigate how transition plans support the financial system in capital mobilisation, management of climate-related financial risks, and their importance to micro-prudential supervision:

1. Tailoring Transition Plans: Considerations for EMDEs explores the needs and challenges of emerging market and developing economies (EMDEs) related to transition plans.
2. Connecting Transition Plans: Financial and non-financial firms assesses the interlinkages between the transition plans of the real economy and financial institutions.
3. Credible Transition Plans: The microprudential perspective examines the credibility of financial institutions’ transition plans and processes from a micro-prudential perspective.

Based on the reports, three key actions have been identified in support of the global adoption of transition plans:

1. Development of international guidance for transition planning and disclosure.
2. Transition plans should integrate both transition and physical aspects of climate change while considering the ongoing loss of nature and should also be informed by risk management.
3. Enable conditions for adopting transition plans, including clarity about policy directions, such as national climate frameworks, and economy-wide incentives for developing and disclosing transition plans to broaden adoption and close information gaps. 

Interoperability of the two frameworks has been a key issue for companies operating in global markets, and hence the guidance is a welcome step. The guidance was published [4] to illustrate the high level of alignment between the International Sustainability Standards Board’s (ISSB) IFRS Sustainability Disclosure Standards and the European Sustainability Reporting Standards (ESRS) and how a company can comply with both sets of standards. The guidance describes the alignment of general requirements including on key concepts such as materiality, presentation, and disclosures for sustainability topics other than climate. It also provides information about the alignment of climate disclosures and what a company starting with either set of standards needs to know to enable compliance with both sets of standards. 

Following recent consultations on future priorities, the ISSB has confirmed [5] it will commence research projects focusing on the disclosure of risks and opportunities associated with biodiversity, ecosystems and ecosystem services and human capital. These disclosure areas were noted by investors as key areas needing improvement. The research projects will help ISSB assess and define any limitations within current disclosure, and identify possible solutions or potential standard setting. As a reminder, last year the ISSB published its climate-related disclosure standards (IFRS S1 – general sustainability related, and IFRS S2 – climate related), which became effective on 1^st January 2024.

UK

The UK’s Transition Plan Taskforce (TPT) has published its final sector-specific transition plan guidance for seven sectors [6] chosen for the sectors’ GHG emissions, their need for transition finance in the UK, and based on the quality of existing guidance available in the market. Alongside these, the TPT also published additional support on how to undertake a transition planning cycle, a paper on the opportunities and challenges of transition plans in emerging markets and independent advisory pieces from TPT Working Groups covering topics such as adaptation, nature, Just Transition and SMEs. 

The UK Prudential Regulation Authority released its 2024/25 business plan [7] indicating that it will update its existing 2019 guidance to banks and insurers on managing the financial risks from climate change. 

The Bank of England’s latest bulletin [8] explores current approaches to measuring climate-related financial risks using scenario analysis. It examines how financial institutions can adapt broad macro-climate scenarios to conduct detailed asset-level evaluations of financial risks, using examples from sovereign bonds, corporate bonds, and residential mortgages. It also explores the integration of scenario analysis results into the existing financial modelling tools used by financial institutions. Although this approach to scenario analysis represents the forefront of measuring climate-related financial risks, it still faces several limitations. As a reminder, in 2022 the Bank of England published the results of its first exploratory scenario exercise on climate risk, involving the largest UK banks and insurers.

The UK government has launched a consultation [9] considering the introduction of a UK Carbon Border Adjustment Mechanism (CBAM) which would introduce a carbon levy on the most emissions intensive industrial goods that are imported into the UK. The proposed CBAM would be expected to apply from 1 January 2027. Example commodities identified for inclusion include aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron, and steel. The consultation is open until 22 June 2024. 

EU

Following a public consultation, ESMA published [10] final Guidelines on funds’ names using ESG or sustainability-related terms. The Guidelines aim to make sure that investments in the fund are consistent with its name, specifying minimum investment threshold and exclusions that may need to be applied. 

Specifically, the requirements include the following:

• Funds using any ESG, sustainability, environmental, social, governance, impact or transition-related terms must invest at least 80% to meet the corresponding characteristics or objectives stated in the fund’s name.
• Funds using environmental, impact or sustainability-related terms must apply the exclusions aligned with the EU Paris-Aligned Benchmarks (PAB) rules, restricting investments in fossil fuels and high emission activities.
• Funds using transition, social or governance-related terms must apply the less stringent exclusions aligned with the EU Climate Transition Benchmarks (CTB) rules.
• A new “transition” category is introduced for terms like “improving”, “progress”, “evolution”, allowing some fossil fuel exposure for companies transitioning, while applying CTB exclusions.
• Funds using “sustainable” or related terms must also invest meaningfully in sustainable investments as defined under the EU Sustainable Finance Disclosure Regulation (SFDR).

These new rules should apply to funds being marketed in the EU, three months after translations in all EU official languages have been published on ESMA’s website. With the implementation of these rules, investors will have to review the composition of the sustainability / ESG funds and may need to recalibrate their fund names – in particular between “sustainable” and “transition” focused funds

The Platform on Sustainable Finance, which is a technical advisory body to the European Commission, is devising a system to track financial investments into sustainable projects [11]. It will also carry out and publish an initial analysis using this new methodology based on available data.

The purpose of the recently published intermediate report titled ‘Monitoring Capital Flows to Sustainable Investments’ is to measure how financial contributions support the goals of the European Green Deal and to inform future policy action. The Platform will focus its analysis for debt instruments on green bonds and the methodology will not initially include sustainability-linked bonds (SLBs). The report notes that “Integrating these instruments would require an in-depth assessment of the materiality and ambition of SLB targets, in light of criticism of some SLBs in the market… in the absence of this assessment, it is not possible to ascertain the share of SLBs that should be considered as supporting the transition.”. Although SLBs and conventional bonds will not be classified as sustainable investments, the Platform indicated they could be included in a separate analysis of ‘entities in transition’ that will be determined based on revenues by activity. The Platform will refine the methodology before the final report is submitted to the European Commission by the end of the Platform’s mandate in Q4 2024.

Following consultations with the European Systemic Risk Board (ESRB), the European Insurance and Occupational Pensions Authority (EIOPA) is evaluating whether assets or activities closely linked to environmental or social risks merit a distinct prudential approach [12]. The document released presents the ESRB’s guidance to EIPOA in this matter, offering insights from a systemic risk viewpoint. In line with the approach adopted during its consultations, the ESRB’s recommendations specifically address environmental risks, which are poised to also influence social risks. ESRB concluded that it is important to act on sustainability risks as a matter of urgency but believes that at this stage the tools and provisions in the revised Solvency II Directive can help address sustainability risks. Finally, ESRB considers that scenario analysis could be particularly suited to better identify and help address sustainability risks.

The European Insurance and Occupational Pensions Authority (EIPOA) initiated a public consultation [13] aimed at updating the standard formula for assessing risks associated with natural catastrophes. Since the last evaluation in 2018, new insights, data, and models have promoted EIOPA to reconsider the parameters that gauge risks from earthquakes, floods, hail, windstorms, and subsidence. Following the 2023/24 reassessment, EIPOA proposes introducing new risk factors for 25 specific perils across these five categories, with flood risk adjustments planned for ten countries. EIPOA also recommends expanding the standard formula to include additional countries that face certain natural catastrophe risks which were previously not accounted for. Looking ahead, EIPOA is considering the inclusion of wildfires, coastal floods, and drought as new perils under the standard formula to better reflect evolving environmental challenges. 

• Tonia Plakhotniuk, Climate & ESG Capital Markets
• Daniel Bressler, Climate & ESG Capital Markets, Corporates
• Roze Warren, ESG Advisory
• Jennifer Yin, Climate & ESG Capital Markets 

[1] The FCA has published finalised guidance on the anti-greenwashing rule under the SDR regime

[2] SDR IMPLEMENTATION SURVEY RESULTS

[3] NGFS released a package of publications on transition plans

[4]  IFRS Foundation and EFRAG have published guidance material on the interoperability of the ISSB and European sustainability reporting standards

[5] ISSB will initiate research focusing on disclosure of risks and opportunities related to human capital, biodiversity, ecosystems and ecosystem services

[6] UK TPT publishes final sector guidance and additional advisory resources

[7] The UK Prudential Regulation Authority released its 2024/25 business plan; The Bank of England’s latest bulletin explores current approaches to measuring climate-related financial risks using scenario analysis

[8] The Bank of England’s latest bulletin explores current approaches to measuring climate-related financial risks

[9] UK government consults on CBAM

[10] https://www.esma.europa.eu/press-news/esma-news/esma-guidelines-establish-harmonised-criteria-use-esg-and-sustainability-terms

[11] The Platform on Sustainable Finance has released an intermediate report which proposes a methodology for monitoring financial flows into sustainable investments

[12] ESRB has published its official advice to the EIOPA on whether a dedicated prudential treatment of environmental and social risks would be justified

[13] EIOPA has launched a public consultation that will reevaluate how catastrophe risk will be measured in the standard formula