Global
Announcements made by the ISSB and IASB on climate related disclosure
At the end of June, the ISSB made a range of announcements [7] including their new two-year work plan which will focus on harmonising [8]and consolidating the disclosure landscape in relation to transition plans alongside supporting the implementation of IFRS S1 and IFRS S2. To achieve this, the IFRS Foundation will assume responsibility for disclosure-specific materials developed by the UK Transition Plan Taskforce. Other priorities of the work plan included partnerships and increasing collaboration with the Greenhouse Gas Protocol, CDP, Global Reporting Initiative (GRI) and the TNFD.
Additionally, the IASB published a discussion paper [9] providing illustrative examples of how companies should apply IFRS Accounting Standards when reporting the effects of climate-related and other uncertainties in their financial statements. This document is open for feedback until 28 November 2024.
TNFD published additional sector guidance
At the beginning of July, TNFD released Additional Sector Guidance [10] for eight real economy sectors covering Aquaculture, Biotechnology and Pharmaceuticals, Chemicals, Electric Utilities and Power Generators, Food and Agriculture, Forestry and Paper, Metals and Mining and Oil and Gas. These also include sector-specific metrics for disclosure in line with the TNFD disclosure recommendations published in September 2023.
Alongside these, TNFD also released final guidance for financial institutions which provides recommended disclosures and disclosure metrics for banks, re/insurance companies, asset managers and owners, and development finance institutions. Additional guidance on consideration of nature-related issues across value chains was also released.
Finally, TNFD have published draft sector guidance covering Fishing, Engineering, Construction and Real Estate, Construction Materials, Beverages and Apparel, Accessories and Footwear. These are all open for feedback until 27 September 2024.
NGFS published further guidance for central banks on climate and nature-related disclosure and risk management
In June, NGFS released the updated version of its guide on climate-related disclosures [11] for central banks. This revised guide is structured around the four pillars of the TCFD, offering enhanced guidance tailored for central banks. It distinguishes between “baseline” (fundamental) and “building block” (complementary) disclosure recommendations, emphasising that there is no one-size-fits-all approach.
In July, NGFS published a conceptual framework [12] on addressing nature-related financial risks for central banks, along with a report [13] highlighting the rising trend of nature-related litigation. The framework offers a principle-based approach to risk assessment, while the report identifies legal challenges facing corporations and financial institutions, such as corporate sustainability due diligence, tort, shareholder rights, and anti-money laundering.
UK
UK government plans to introduce legislation to regulate ESG rating providers
At the beginning of August, HM Treasury confirmed that the UK government will introduce legislation aimed at regulating ESG ratings providers in 2025 [14]. The new law would seek to place ESG rating providers under the supervision of the Financial Conduct Authority (FCA). Earlier in 2024, the FCA launched a voluntary code of conduct for ESG rating and data products providers. This follows the EU, Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities (ESGR) which was approved by EU Parliament on 24 April 2024 but is yet to enter into force pending formal approval by the European Council and the publication in the Official Journal of the EU.
EU
ESA’s proposed improvements to the Sustainable Finance Disclosure Regulation
In June, the three European Supervisory Authorities (European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities & Markets Authority (ESMA)) have published [15] a joint Opinion on the assessment of the EU Sustainable Finance Disclosure Regulation (SFDR) – in the context of a comprehensive review of the SFDR framework by the European Commission:
- The ESA calls for a coherent sustainable finance framework that caters for both the green transition and enhanced consumer protection.
- The ESA wants to focus on ways to introduce simple and clear categories for financial products, such as two voluntary product categories, “sustainable” and “transition”.
- The ESA recommends that the European Commission considers the introduction of a sustainability indicator that would grade financial products such as investment funds, life insurance and pension products according to a defined scale.
It will be up to the European Commission to how to consider and act on the ESA’s recommendations.
Updated Q&A document on application of SFDR has been published
On 25 July, the European Supervisory Authorities released an update [20] to their consolidated Q&As on the SFDR and its accompanying Delegated Act. This update covers several topics, including (i) the SFDR website disclosures, (ii) the definition of “sustainable investments” under the SFDR and (iii) the calculation of specific principal adverse impacts indicators. Particularly relevant to fund-of-funds strategies, the update introduces a look-though approach, requiring an assessment of the underlying assets of the target fund to determine if an investment qualifies as sustainable, which is crucial for funds classified under Article 8 and Article 9 of the SFDR
ESMA set out its long-term vision on the functioning of the Sustainable Finance Framework
The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator published an Opinion on the EU Sustainable Finance Regulatory Framework [16], setting out recommendations for long-term improvements.
Acknowledging that the Framework is already well developed and includes safeguards against greenwashing, ESMA considers that, in the longer-term, the Framework could further evolve to facilitate investors’ access to sustainable investments and support the effective functioning of the Sustainable Investment Value Chain.
Main recommendations to the European Commission include the following:
- The EU Taxonomy should become the sole, common reference point for the assessment of sustainability and should be embedded in all Sustainable Finance legislation. It should also be completed for all activities that can substantially contribute to environmental sustainability and a social taxonomy should be developed
- A definition of transition investments should be incorporated into the Framework to provide legal clarity and support the creation of transition-related products
- All financial products should disclose some minimum basic sustainability information, covering environmental and social characteristics
- A product categorisation system should be introduced catering for sustainability and transition, based on a set of clear eligibility criteria and binding transparency obligations
- ESG data products should be brought into the regulatory perimeter, the consistency of ESG metrics continue to be improved, reliability of estimates ensured; and
- Consumer and industry testing should be carried out before implementing policy solutions to ensure their feasibility and appropriateness for retail investors
While it will remain at the Commission’s discretion to decide how to act on ESMA’s recommendations, the above list demonstrates that the financial supervisor would prefer more sustainable finance regulation to develop.
ESMA published a statement on application of ESRS and enforcement guidelines
In July 2024, ESMA released its final report [17] and a video explainer on Guidelines on Enforcement of Sustainability Information (GLESI) which provides guidance to National Competent Authorities.
Alongside the report, ESMA issued a public statement on the first application of ESRS by large issuers. In ESMA’s view, the sustainability statements to be published in 2025 will constitute an “important milestone in the learning curve of issuers”, although “acknowledging this learning curve does not relieve issuers from the responsibility to ensure compliance with ESRS”.
The statement points to guidance available or under development by the Commission and European Financial Reporting Advisory Group (EFRAG) and highlights key focus areas for the first application of ESRS. These include:
- Establishing governance arrangements and internal controls that can promote high-quality sustainability reporting
- Properly designing and conducting the double materiality assessment and being transparent about it
- Being transparent about the use of transitional reliefs
- Preparing a clearly structured and digitisation-ready sustainability statement; and
- Creating connectivity between financial and sustainability information
EU Corporate Sustainability Due Diligence Directive (CSDDD) entered into force
On 25 July, the EU’s CSDDD officially came into force [18]. It aims to promote sustainable and responsible corporate practices within companies’ operations and their global value chains. It requires companies within its scope to identify and address adverse human rights and environmental impacts both within and beyond Europe. The European Commission has updated its page to reflect this development and outline the next steps. Member states are required to transpose the Directive into national law and report their progress to the Commission by 26 July 2026. The rules will then begin to apply to the first group of companies one year later, following a phased approach, with full implementation by 26 July 2029. A set of FAQs is available [19].
Commission released guidance on the implementation of CSRD & ESRS
On 7 August, the European Commission released a Draft Commission Notice [21] with 90 FAQs clarifying the legal interpretation of specific provisions in the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). These FAQs address various topics like Article 8 Taxonomy disclosures, the connection between SFDR Principal Adverse Impact (PAI) and the CSRD materiality assessment, and third-country undertakings requirements.
Earlier, on 26 July [22] a compilation of all 93 explanations since the platform launched in Q4 2023 was released. These technical explanations include guidance on calculating the reporting and defining “total revenue” for credit institutions.
For those looking to discuss any of the above further, please reach out to our authors:
Tonia Plakhotniuk, Climate & ESG Capital Markets
Daniel Bressler, Climate & ESG Capital Markets, Corporates
Roze Warren, ESG Advisory
Anika Wadhwa, Climate & ESG Capital Markets
Jennifer Yin, Climate & ESG Capital Markets
