ISSB made key announcements regarding the implementation of climate-related disclosure standards in 2023
The International Sustainability Standards Board (ISSB) has launched a new global ‘Partnership Framework’ for global implementation of climate-related disclosure standards. In its statement, the ISSB said the framework aims to build capacity in developing and emerging economies, and ultimately assist in the development of a “truly” global baseline of climate disclosure standards. There are over 20 member organisations forming the new partnership, including the Association of Chartered Certified Accountants, Deloitte, the UN development programme and more.
This comes at a time where the ISSB is engaging with jurisdictions globally and regularly consults with the International Organization of Securities Commissions (IOSCO) in preparation for potential IOSCO endorsement of the proposed international standards. It is a signal of significant momentum around the world, as more jurisdictions undertake work to consider how to incorporate the ISSB’s standards into their domestic systems of reporting. As a reminder, the ISSB is expected to finalise its first set of climate and sustainability-related standards by the end of 2022.
TNFD released the third iteration of its disclosure framework on nature-related financial disclosures
The Taskforce on Nature-related Financial Disclosures (TNFD), which was established in 2021 to help organisations factor nature into key business decisions, released the third iteration of its beta framework with updates such as new supply chain traceability disclosure recommendations, further guidance on risk and opportunity assessment, and target-setting developed with the Science Based Targets Network (SBTN).
The Taskforce has also issued discussion papers on scenarios and nature-related risk management and disclosure on societal considerations to incorporate feedback from market participants and key stakeholders. Supply chain dependencies and risks, the measurement of impacts, disclosure metrics guidance, and stronger support for priority sectors such as agriculture, aquaculture, and mining will be some of the major focus areas for the final draft version of the framework (v0.4).
Since the v0.2 release in June, a growing number of institutions (over 700) from across five continents are now part of the TNFD Forum supporting the Taskforce.
COP27: IOSCO launched consultations on carbon markets
The International Organization of Securities Commissions (IOSCO) has released two discussion papers on compliance and voluntary carbon markets – open for feedback until 10 February 2023.
The report on compliance (regulated) carbon markets provides twelve recommendations regarding primary and secondary functions of compliance carbon markets with a particular focus on transparency, structure, and integrity. The report also includes recommendations for relevant authorities such as policymakers and securities markets regulators to help establish effective regulated carbon markets.
The other report covers voluntary carbon markets, where market participants can buy carbon credits to offset a part or all their carbon emissions. The IOSCO has conducted a fact-finding exercise with stakeholders like standard setters, academics, and market participants to consider and identify the role of financial regulators in this market. The main concern raised was about market integrity which can be viewed from three different perspectives:
- Concerns at project level, regarding the integrity of carbon credits.
- Issues relating to the trading environment of these credits and how they are transferred, and the behaviour of market participants in doing so.
- Issues regarding greenwashing and misleading information, especially regarding the communication around the buyers of carbon credits.
This report seeks feedback on a potential approach that regulators and market participants could take to help develop well-functioning voluntary carbon markets and, therefore, help these markets scale to allow them to achieve their environmental objectives.
The UK FCA announced the creation of a group to develop a Code of Conduct for Environmental Social and Governance data and ratings providers
The UK FCA announced the formation of an independent group to develop a Code of Conduct for Environmental Social and Governance data and ratings providers to support greater transparency and trust in the market for ESG data and ratings services – in line with the earlier published Feedback Statement on ESG integration in UK capital markets (FS22/4). M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter & May will co-chair the group. The International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) have been appointed as the Secretariat to lead this work.
Given that development of consistent global standards is so crucial, the code will also consider developments in jurisdictions such as Japan and the EU.
The ECB set deadlines for banks to comply with its guide on climate and environmental risks
In its most recent thematic review, the European Central Bank (ECB) published results that a proportion of banks still has some way to go towards properly managing climate and environmental risks.
The review adds that many banks are falling behind in developing sophisticated methodologies and providing detailed information on climate and environmental risks as well as having solid execution capabilities. This led the ECB to set staggered deadlines for banks to meet supervisory expectations as mentioned in its Guide on climate-related and environmental risks.
Two key upcoming deadlines are set for the end of 2023 and 2024; by the end of 2023 the ECB expects banks to include climate and environmental risks in their governance, strategy, and risk management and by the end of 2024 institution-specific deadlines have been introduced to encourage full alignment with its expectations. Alongside the review, the ECB also published a compendium of ‘Good practices for climate related and environmental risk management’ aiming to assist banks in complying with the ECB’s guide.
EFRAG adopted the first set of European Sustainability Reporting Standards
The European Financial Reporting Advisory Group (“EFRAG”) announced the submission of the first set of draft European Sustainability Reporting Standards (“ESRS”) to the European Commission for adoption.
In May 2022, EFRAG released its initial drafts of the standards and announced the launch of a 100-day consultation period to receive feedback. EFRAG notes in its letter to the European Commission that its goal is that the companies which comply with ESRS should also be considered as complying with the ISSB standards to avoid unnecessary multiple reporting.
In the updated submission there is also a significant reduction in the number of disclosure requirements and, significantly in terms of value chain reporting, the obligation to obtain data from value chain partners will not be required for the first 3 years (during which time undertakings use in-house data to provide insights on their value chain), except when value chain data is needed to enable users to comply with the requirements of other pieces of EU legislation.
The European Commission will now consult EU bodies and Member States on the draft ESRS which will then be scrutinised by the European Parliament and Council of the EU. The ESRS are expected to be adopted by way of delegated act in June 2023.
ESAs launched a call for evidence to better understand greenwashing risks
The European Supervisory Authorities (ESAs) published a call for evidence (CfE) seeking input on potential greenwashing practices in the EU financial sector. The CfE is asking for views across the financial sector on:
- How to understand greenwashing and the main drivers of greenwashing
- Examples of potential greenwashing practices across the EU financial sector relevant to various segments of the sustainable investment value chain and of the product lifecycle
- Evidence on potential greenwashing practices within and outside the scope of current EU sustainable finance legislation
- And, any available data to help the ESAs gain a concrete sense of the scale of greenwashing and identify areas of high greenwashing risks.
The deadline for responses is 10 January 2023, after which a progress report is expected by the end of May 2023 and a final report by the end of May 2024.
ESMA included ESG disclosures as a new strategic supervisory priority and launched a consultation on guidelines for the use of ESG or sustainability-related terms in funds’ names
ESMA is changing Union Strategic Supervisory Priorities (USSPs) to include ESG disclosures alongside market data quality.
With the increasing popularity of ESG-related financial products, ESMA is looking to foster comprehensibility and transparency of ESG disclosures across the sustainable finance value chain, such as investment managers, issuers, and investment firms, to tackle greenwashing. To further promote transparency and comprehensibility of ESG disclosures ESMA plans to build supervisory capabilities around sustainable finance into its supervisory practice.
Looking ahead, the ESMA will monitor the areas of ESG disclosures, market data quality, and the evolution of costs as a key element for investors’ protection.
Following the above, ESMA launched a consultation on draft guidelines on the use in investment funds’ names of ESG or sustainability-related terms (open until 20 February 2023). In order not to mislead investors, ESMA believes that ESG and sustainability-related terms in funds’ names should be supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy. ESMA is particularly seeking stakeholders’ feedback on the introduction of quantitative thresholds for the minimum proportion of investments sufficient to support the ESG or sustainability-related terms in funds’ names, such as:
- A quantitative threshold (80%) for the use of ESG related words;
- An additional threshold (50%) for the use of “sustainable” or any sustainability-related term only, as part of the 80% threshold;
- Application of minimum safeguards to all investments for funds using such terms (exclusion criteria);
- Additional considerations for specific types of funds (index and impact funds).
ESMA proposes that the draft guidelines would become applicable from 3 months after the publication of their translation on the ESMA website. Furthermore, a transitional period of 6 months is suggested for those funds launched prior the application date, to comply with the guidelines.
EU Taxonomy Technical Screening Criteria for remaining environmental objectives
The EU Platform on Sustainable Finance (PSF) published a report with supplementary advice on methodology and technical screening criteria (TSC) for the climate and other environmental objectives of the EU Taxonomy. This report complements the advice submitted by the Platform in March 2022 (Report with recommendations on TSC for the four remaining environmental objectives and Annex). This additional advice will inform the Commission’s next steps as the Commission is yet to adopt legislation to set out technical criteria for the rest of the environmental objectives beyond climate change mitigation and adaptation.
EBA is gathering feedback on ways to support green mortgages and loans to SMEs
The European Banking Authority received a Call for Advice from the European Commission on the definition and the potential tools that support green loans and green mortgages for retail and SME borrowers. This request is part of the European Commission’s Strategy for financing transition to a sustainable economy.
The Biden-Harris administration proposed plan to address greenhouse gas emissions and protect federal supply chain from climate-related risks
The Biden administration announced the ‘Federal Supplier Climate Risks and Resilience Proposed Rule’ which would require suppliers to set emissions reductions goals aligned with the Paris Agreement, and publicly disclose their greenhouse gas emissions as well as climate-related financial risks.
Contractors that have more than $50m in annual business with the government would have to disclose Scope 1, 2 and 3 emissions. Those with $7.5m to $50m in contracts would be required to report Scope 1 and 2 data, and those with less than $7.5m in business would be exempt.
The US government is the world’s largest buyer of goods and services, purchasing more than $630 billion annually on supplies and services. The proposed rule represents a significant step toward greening the government’s operations and one that could swell across the USsupply chain.