Recent UK, EU and globally significant policy developments and implications for investors, lenders, issuers, and borrowers

• The UK Government announced its broad Energy Security Plan ‘Powering Up Britain’, together with an array of policy documents to deliver on its net zero and growth agendas.
  

Other announcements and publications

Global

• The Taskforce on Nature-related Financial Disclosures (TNFD) published v0.4 Beta framework (pre-final) on nature-related financial disclosure.
• The Partnership for Biodiversity Accounting Financials (PBAF) is prioritising helping financial institutions with assessments of biodiversity materiality.  
• “High Seas Treaty”: UN member countries reached historic agreement on protecting marine biodiversity in international waters. 
• Intergovernmental Panel on Climate Change (IPCC) published AR6 Synthesis Report 2023.
• Integrity Council for Voluntary Carbon Markets (ICVCM) published its Core Carbon Principles (CCPs) which are intended to act as a global benchmark / standard for high-integrity carbon credits.

UK 

• Bank of England (BoE) published a report on climate-related risks and the regulatory capital frameworks. 
• UK Financial Conduct Authority (FCA) published a “Dear CEO Letter” to benchmark administrators outlining where improvements are needed in ESG benchmarks.
• FCA provided an update on its Sustainability Disclosure Requirements and investment labels consultation.
• UK Competition and Markets Authority (CMA) published draft guidance on competition laws applicable to environmental sustainability agreements.

EU 

• European Commission (EC) published the Net Zero Industry Act, a framework for strengthening Europe’s net zero technology products manufacturing ecosystem.
• European Central Bank (ECB) and the European Supervisory Authorities (ESAs) called for enhanced climate-related disclosure for structured finance products. 
• EC adopted a proposal for a Directive on Green Claims – to help prevent greenwashing in consumer goods.
• EC asked ESAs to conduct the assessment of the financial system’s resilience to stress in the climate transition to the EU’s 2030 goals. 
• EU reached an agreement for banning new combustion-engine cars as of 2035.
• EU adopted regulations on effort sharing and the land use and forestry sector, as part of its “Fit for 55” package.
• EU Parliament adopted position on the Energy Performance of Buildings Directive. 
• European Financial Reporting Advisory Group (EFRAG) announced the delay in the release of sector specific sustainability reporting standards to prioritise work on the horizontal standards.

US 

• 21 Republican state attorneys general published an open letter to over 50 US asset managers expressing legal concerns over their ESG goals and practices

UK Government announced its broad Energy Security Plan ‘Powering Up Britain’

On 30 March 2023, the UK Government launched multiple key announcements on green finance, net zero and energy security. This included a very large package of documents, consultations and announcements:

Strategies and Plans

• Net Zero Growth Plan [1]: sets out the government’s revised net zero strategy and its response to Chris Skidmore’s net zero review.
• Energy Security Plan [2]: sets out the government’s steps to ensure that the UK is more energy independent, secure and resilient.
• Green Finance Strategy [3]: provides an update to the government's 2019 Green Finance Strategy.
• Powering Up Britain [4]: sets out how the government aims to enhance the UK's energy security, seize the economic opportunities of the low carbon transition, and deliver the government's net zero commitments. 
• Nature Markets Framework [5]: identifies proposals on developing a market for nature within the UK.
• International Climate Finance Strategy [6]: identifies the ambitions and policies of the government on the provision of climate finance globally.
• UK 2030 Strategic Framework for Climate and Nature [7]: sets the direction for the UK’s approach to international action on nature and climate to 2030.

Consultations

• Consultation [8] on the regulation of ESG ratings providers.
• Consultation [9] on options for dealing with carbon leakage, including proposals for a UK carbon border adjustment mechanism (CBAM).

The revised Green Finance Strategy has the stated objectives of providing greater private investment in the green economy, increased financial stability against key climate risks, and aligning global financial flows with climate and nature benefits [10]. Some of the most notable announcements in the strategy include:

• Consulting on transition plan requirements for large UK companies: A number of large UK-listed companies will be required to disclose transition plans on a ‘comply or explain’ basis. This initiative would be supported by the UK Transition Plan Taskforce, which is developing best practices for companies and investors seeking to disclose transition plans.
• Commitment to update Environmental Reporting Guidelines with more guidance on collecting and reporting data on Scope 3 emissions.
• Commitment to set up a framework to assess International Sustainability Standards Board (ISSB) standards for their suitability for adoption will be set up as soon as ISSB standards are published (expected June 2023).
• Consultation on the UK Green Taxonomy to take place in Autumn 2023, and nuclear power, in some form, will be included as an eligible (environmentally sustainable) activity.
• Commitment to provide clarity to unlock voluntary markets for carbon and nature whilst ensuring environmental integrity, including publishing of the Nature Markets Framework which sets out principles and priorities for the development of high-integrity markets to attract investment in natural capital and plans to set our comprehensive suite of nature investment standards. 

The overall impact of the Green Day announcements remains to be seen, with many of the policies at this stage providing limited detail on specifics but instead committing the government to consult on possible future measures. 

Key considerations for sustainable finance market participants

Issuers / Borrowers

Public and large companies should be aware that the UK will continue to support the sustainability reporting standards of the ISSB – and assess their suitability for introduction into the UK once they are published (expected in summer 2023). This would be assessed together with the reporting and disclosure recommendations by the UK Transition Plan Taskforce. For smaller issuers, the Government is working with Bankers for Net Zero (alongside NatWest) to assess the potential for automating sustainability reporting by small and medium enterprises (SMEs).

While the UK announced a series of initiatives, the UK Green Taxonomy timing was pushed to later this year. However, it’s now more certain that the UK intends to proceed with the adoption of a green taxonomy, and that the Government did specify that it would propose some nuclear power-related activities to be included in the taxonomy – potentially as ‘green’ or ‘transition’.  Other key announcements applied to issuers in specific sectors such as power generation and energy efficiency; hydrogen, heating and transport have clear guidance that there will be government support on specific initiatives that support the UK net zero goal. Notably, Alison Rose, NatWest Group CEO, co-Chairs the Energy Efficiency Taskforce that was recently created by the Government to support the reduction of energy demand through speedy delivery of energy efficiency across the UK economy. The Government remains committed to promoting carbon capture usage and storage (CCUS) technology (with as large as £20bn of funding pool allotted) as there is recognition that CCUS is necessary for some of the hardest to abate sectors. 

Investors / Lenders

Despite the criticism that the Government’s package repeats many previous announcements, it provides better clarity and confirms the UK’s position on the direction of travel for some strategic sectors and industries (as mentioned above) as well as forthcoming areas of work. More specifically, separate net zero investment roadmaps are expected to be published in 2023 and 2024 for the strategic industries. The roadmaps are intended to attract international private capital to these industries in the UK. To this end, an offshore wind roadmap has been published already, with roadmaps on the roll-out of heat pumps, CCUS and hydrogen expected imminently and with those for agriculture to be launched later in the year. The Government will conduct further industry-led reviews into how the UK can grow the market for raising transition capital and will set up a ‘Net Zero Business & Investment Group’ to help support wider government targets. 

Nature markets framework sets out how the government will guide and support the development of nature markets i.e. helping channel more private financing into nature; including sustainable farming. The government has set a target to raise at least £500m in private finance to support nature's recovery each year by 2027, before increasing this to more than £1bn per year by 2030. The framework also outlines the next steps to be taken by the government, which includes:

• Development of rules – to clarify how farmers and other land and coastal managers can access markets and to combine income streams between markets / public funding.
• Establish high-integrity nature investment standards based on robust science to facilitate the development, operation and scaling of markets for a wide range of ecosystem services. 
• Consider appropriate institutional arrangements, regulatory roles and market infrastructure to ensure good market governance (including in the voluntary carbon market, that is increasingly being seen as integral to nature markets). 

Updates on these actions should be provided over the next 12 months.

The consultation on potential regulation of ESG rating and data providers is highly relevant and is a welcome step, given that investors remain key customers of these service providers. The government will seek to: 

• Improve transparency and good conduct in the ESG ratings market but NOT to harmonise the varying methodologies and objectives of ESG ratings providers.
• Help deal with challenges raised by market participants around “ESG ratings providers methodologies and objectives” and “interaction between ESG ratings providers and rated entities”.
• Cover a wide range of ESG ratings used in financial markets, irrespective of the actual label i.e. score, mark, assessment, opinion, solution etc.
• Cover ratings provided by both UK and overseas firms to UK-based users.
• Place providers of ESG ratings under the supervision of the FCA. 

The delay in the publication of the UK Green Taxonomy is unfortunate as this leaves investors and companies (particularly those with a large EU and UK presence) in limbo as to how similar the two will be, and whether they can be mapped to each other in a straightforward way. The investors and asset managers that must report on the proportion of sustainable investment under the EU SFDR in 2023, may need to revise their approaches to defining sustainable investment for future reporting to consider if the UK Taxonomy can be reflected.

Global 

TNFD publish v0.4 Beta framework (pre-final) on nature-related financial disclosure

The Taskforce on Nature-related Financial Disclosures (TNFD) published the fourth version (pre-final) of its framework [11] to help companies outline and disclose nature-related risks and impacts in alignment with corporate reporting. Importantly, the framework includes 14 core global metrics, which all businesses are “strongly” encouraged by the TNFD to disclose on, where relevant, on a ‘comply or explain’ basis:

Core global metrics: impacts and dependencies

• Climate change: Scope 1, 2 and 3 greenhouse gas (GHG) emissions (refer to TCFD)
  
• Land/freshwater/ocean use change: (1) Extent of land/freshwater/ocean use change, by type of ecosystem and business activity. (2) Extent of land/freshwater/ocean use change, by type of ecosystem and business activity, for prioritised ecosystems
• Pollution removal: (1) Total pollutants released to soil split by type. (2) Volume of water discharged and concentrations of key pollutants in the wastewater discharged by type. (3) Total amount of hazardous waste generated by type. (4) Total non- GHG air pollutants by type.
• Resource use/ replenishment: (1) Total water withdrawal and consumption from areas of water stress. (2) Quantity of high-risk natural commodities sourced from land/ocean/freshwater split into types. (3) Quantity and share of natural commodities sourced from priority ecosystems split into types.

Core global metrics: Risks and opportunities

• Nature-related risks: (1) Proportion and total annual revenue exposed to a) physical risks and b) transition risks. (2) Proportion and value of assets exposed to nature related a) physical risks and b) transition risks. (3) Proportion and value of assets/total annual revenue exposed to risks by risk rating. (4) Proportion and total annual revenue/value of assets with substantial dependence on ecosystem services or with a high impact on nature. (5) Value of capital allocated to nature-related opportunities, by type of opportunity, with reference to a jurisdictional green taxonomy.
  

Further to these core metrics, the final framework will include additional disclosure metrics for certain sectors and subsectors. The framework is set to be published in September 2023 based on feedback gathered and pilot testing, following a 60-day consultation process between 30 March to 1 June 2023. 

PBAF prioritises helping financial institutions with assessments of biodiversity materiality  

The Partnership for Biodiversity Accounting Financial (PBAF), an industry-led partnership supporting the financial industry in assessing and disclosing their impact and dependency on biodiversity, will focus on helping financial institutions overcome their struggles to assess biodiversity materiality. Following COP15 and an increased focus on biodiversity, there is growing willingness to report on biodiversity amongst financial institutions. However, many struggle with assessing and understanding biodiversity risks including acquiring data, remedying instances if there is insufficient data; handling third party providers; and supply chain challenges.  

PBAF’s aim is to translate the results of the TNFD, Science Based Targets Network and the European Commission-funded Align project (aligning accounting approaches for nature) into practical steps that financial institutions can take [12]. In addition, PBAF also plans to launch the third version of its impact standard this year which aims to define the conditions that need to be met by the data behind biodiversity impact and dependencies. PBAF will also launch an additional working group focused on ecosystem services and look to cooperate more closely with TNFD. 

“High Seas Treaty”: UN member countries reach historic agreement on protecting marine biodiversity in international waters 

The United Nations member countries have reached an historic agreement [13] to safeguard the oceans beyond national borders, following over a decade of discussions. This landmark agreement, known as the UN High Seas Treaty, is expected to combat the depletion of biodiversity and promote sustainable development, according to environmental organisations [14]. However, there is a considerable amount of work to be done before the treaty can be fully implemented.

The primary strategy to achieve the global target of safeguarding 30% of the world's oceans by 2030, as agreed at the 2022 UN biodiversity conference (COP 15), is to establish marine protected areas (MPAs) in international waters. While these designated areas will allow certain activities, such as fishing and shipping, they must align with the conservation objectives and avoid harm to marine life. Restricting fishing activities, shipping lanes, and deep-sea mining exploration may be necessary. 

In addition, the treaty includes two significant provisions: Provisions for the distribution of marine genetic resources, and Stipulations for conducting environmental impact assessments (EIA) for deep-sea undertakings, such as mining. Marine genetic resources refer to the biological components of oceanic plants and animals that can offer societal advantages, including medicinal and nutritional benefits.

Countries have committed to dividing any deep-sea discoveries equitably among them. This was particularly critical for less prosperous nations, which argued that they may not have the means to conduct such research autonomously. 

Before the treaty can be enforced, countries must reconvene to formally approve the agreement and undertake considerable work. It will take effect once 60 countries have ratified it and passed corresponding legislation in their respective nations. After ratification signatory countries must determine the practical implementation and management of the proposed measures. As this treaty establishes a framework for the conservation and sustainable use of marine biodiversity, it can be referenced by issuers for use-of-proceeds ‘blue bonds’; the impact from such projects should focus on elements such as marine protected areas or measures to address illegal, unreported, and unregulated fishing.

IPCC published AR6 Synthesis Report 2023

The fourth and final version of the sixth assessment report [15] (AR6) has been released by the Intergovernmental Panel on Climate Change (IPCC), which is the world's leading climate scientists' body. This report draws together the key findings from the preceding three main sections, providing a comprehensive review of global knowledge of the climate crisis.

The first three sections focused on the physical science of the climate crisis, including observations and projections of global heating, the impacts of the climate crisis, adaptation measures, and ways of reducing GHG emissions. They were published in August 2021, February 2022, and April 2022, respectively. Additionally, the synthesis report also incorporates three other shorter IPCC reports published since 2018, which examined the impacts of global heating of over 1.5ºC above pre-industrial levels, climate change and land, and climate change and the oceans and cryosphere (the ice caps and glaciers). Its purpose is to condense thousands of pages of scientific research into a concise format, culminating in a "summary for policymakers" serving as a scientific basis for worldwide climate initiatives. Although scientists draft the report, representatives from nearly 200 UN governments debate (and can adjust) the wording of the findings, which some argue may undermine its message.

The report's primary objective is to inform the upcoming UN climate summit, COP28, hosted by the United Arab Emirates in Dubai, on 30 November 2023. At this event, nations will yet again assess their progress in reducing GHG emissions since the 2015 Paris climate accord.

ICVCM published its CCPs, which are set to act as global benchmark/standard for high-integrity carbon credits

The Integrity Council for the Voluntary Carbon Market (Integrity Council or ICVCM), independent international governance body for the voluntary carbon market, has published its Core Carbon Principles (CCPs) which are intended to act as a global benchmark / standard for high-integrity carbon credits. The CCPs set rigorous requirements on disclosure about the quality of carbon credits and their contribution to sustainable development. The publication is seen as a significant milestone towards the scaling of the voluntary carbon markets.

The 10 Core Carbon Principles

Governance

1. Effective governance

2. Tracking

3. Transparency

4. Robust independent third-party validation and verification

Emissions Impact

5. Additionality

6. Permanence

7. Robust quantification of emission reductions and removals

8. No double counting

Sustainable Development

9. Sustainable development benefits and safeguards

10. Contribution towards net zero transition

According to latest estimates, the global temperature is on track for 2.6°C warming by 2100. There is a growing recognition that the world needs every tool available working at full speed to secure a liveable future. A high-integrity voluntary carbon market (VCM) can help unlock urgently needed finance to reduce and remove billions of tonnes of emissions. Historically there have been many well justified controversies about the credibility of this market and carbon offsetting strategies; the ICVCM’s guidance, alongside other related initiatives, is expected to help increase confidence in VCM.

UK 

BoE publishes report on climate-related risks and the regulatory capital frameworks

A new report released by the Bank of England (BoE) sets out areas where the Bank’s work has progressed, including on time horizons, ways of tackling uncertainty, and the impacts of climate risks on the existing microprudential and macroprudential frameworks.

The bank has engaged with a range of stakeholders to inform this work, including through a call for research papers and hosting a high-profile, focused research conference, as well as undertaking its own internal work. 

Key findings

• Existing capability and regime gaps create uncertainty over whether banks and insurers are sufficiently capitalised for future climate-related losses. 
• Effective risk-management controls within Prudential Regulation Authority (PRA)-regulated firms can reduce the quantum of capital required in the future for resilience, but the absence of controls might suggest a greater quantum of capital will be required.
• The unique characteristics of climate risks mean that their capture by capital frameworks requires a more forward-looking approach than used for many other risks.
• Current evidence suggests that the existing time horizons over which risks are capitalised by banks and insurers are appropriate for climate risks.
• Further work is needed to assess whether there may be a regime gap in the macroprudential framework.
• Research on the conceptual challenges of incorporating climate risks into the capital frameworks appears to be limited based on submissions to the Bank’s call for research papers.

This report does not introduce any policy changes but sets out the Bank’s thinking and identifies areas for future work.

FCA publishes a “Dear CEO Letter” to benchmark administrators, outlining where improvements are needed in ESG benchmarks

In September 2022, the FCA sent its first letter to benchmark administrators to highlight the risk of poor disclosures for ESG benchmarks (financial indices that consider ESG factors ) [16]. Following on from this, the FCA have now completed a preliminary review of ESG benchmarks and sent a further letter to administrators to outline the issues identified [17]. The review found that the overall quality of ESG-related disclosures made by benchmark administrators was poor. Issues identified include:

• Not enough detail on the ESG factors considered in benchmark methodologies.
  
• Not ensuring that underlying methodologies for ESG data and rating products used in benchmarks are accessible, clearly presented and explained to users.
• Not fully implementing ESG disclosure requirements.
• Benchmark administrators failing to implement ESG benchmark’s methodologies correctly (e.g., using outdated data and ratings).

The FCA will continue to focus on this issue to address potential failings and expect firms to be able to explain these strategies on request. The FCA are also working closely with the Government on the regulation of ESG ratings and support and encourage the development of a voluntary Code of Conduct for ESG data and ratings providers [18]. 

FCA provides an update on its Sustainability Disclosure Requirements and investment labels consultation

Following the closure of the consultation period in January 2023, to set out measures aimed at clamping down on greenwashing the FCA have received 240 written responses [19] as feedback on its consultation on Sustainability Disclosure Requirements and investment labels. To take into account this significant feedback, the FCA intend to publish the Policy Statement in Q3 this year (as opposed to Q2 planned initially), with proposed effective dates to be adjusted accordingly. 

The FCA have outlined that they will carefully consider the feedback to ensure the regime protects consumers, including considering their approach to marketing restrictions, refining specific criteria for labels and clarifying how different products, asset classes and strategies can qualify for a label. The FCA will also clarify matters such as that primary and secondary channels for achieving sustainability outcomes are not prescribed, and that independent verification of product categorisation is not required to qualify for a label. They also committed to continue considering how to further support compatibility and coherence with international regimes. This work is part of the broader commitment made by the FCA in its ESG Strategy and Business Plan, with the aim to build trust and integrity in ESG-labelled instruments, products and supporting ecosystem.

CMA publishes draft guidance on competition laws applicable to environmental sustainability agreements

The CMA published draft guidance on the application of the competition rules to agreements between competitors or potential competitors in relation to environmental sustainability. It also sets out guidance that is specific to agreements which combat or mitigate climate change where a more permissive approach is proposed. Given the scale of the challenge to address environmental sustainability and particularly climate change, and the degree of public concern about such issues, the CMA is keen to ensure that businesses are not deterred from collaborating in this space due to fears about competition law compliance – where it is permitted.

The Guidance explains the circumstances in which collaboration to protect or enhance environmental sustainability may, or may not, be permitted under competition law and covers three broad situations within the legal framework for the prohibition on anti-competitive agreements, known as the ‘Chapter I prohibition: 

• Environmental sustainability agreements which are unlikely to infringe the Chapter I prohibition.
• Environmental sustainability agreements which could infringe the Chapter I prohibition.
• Environmental sustainability agreements which can benefit from exemption.

EU 

The EC publishes Net Zero Industry Act

The European Commission has proposed the Net-Zero Industry Act (NZIA) which intends to scale up manufacturing of clean technologies in the EU and ensure the EU is well-equipped for the clean-energy transition [20]. The goal is for the EU to reach the overall strategic net zero technologies manufacturing capacity of at least 40% of the Union's deployment needs by 2030. This initiative forms part of the ‘Green Deal Industrial Plan’ announced earlier this year. Together with the proposal for a European Critical Raw Materials Act and the reform of the electricity market design, the NZIA aims to set out a clear European framework to reduce the EU's reliance on highly concentrated imports. The Act seeks to strengthen the resilience and competitiveness of net zero technologies manufacturing in the EU by creating better conditions to originating net zero projects in Europe and attracting investments. 

NZIA is built on the following pillars:

• Setting enabling conditions: Improving conditions for investment in net-zero technologies by enhancing information, reducing administrative burden and simplifying permit-granting processes.
• Accelerating carbon capture: Reaching annual 50Mt injection capacity in strategic carbon storage sites in the EU by 2030, with proportional contributions from EU oil and gas producers. This would help remove a major barrier to developing carbon capture and storage as an economically viable climate solution.
• Facilitating access to markets: To boost diversification of supply for net zero technologies, public authorities would be required to consider sustainability and resilience criteria for net zero technologies in public procurement or auctions.
• Enhancing skills: Introducing new measures to ensure there is a skilled workforce supporting the production of net zero technologies in the EU, including setting up the Net Zero Industry Academies which will contribute to quality jobs in these essential sectors.
• Fostering innovation: Enabling Member States to set up regulatory sandboxes to test innovative net-zero technologies and stimulate innovation, under flexible regulatory conditions. 
• Net-Zero Europe Platform: The Platform will assist the Commission and Member States to coordinate action and exchange information, including around Net Zero Industrial partnerships. The Net Zero Europe Platform will support investment by identifying financial needs, bottlenecks, and best practices for projects across the EU. It will also foster contacts across Europe's net zero sectors, making particular use of existing industrial alliances.

The proposed regulation now needs to be discussed and agreed by the European Parliament and Council of the European Union before its adoption and entry into force.

ECB and ESAs call for enhanced climate-related disclosures for structured finance products 

The European Central Bank (ECB) and the European Supervisory Authorities (ESAs) have called [21] for enhanced climate-related disclosure requirements for structured finance products. The ECB and ESAs argue that the lack of transparency in the underlying assets of these products and their exposure to climate risks makes it difficult for investors to understand the potential climate-related risks associated with their investments. This lack of transparency can lead to mispricing of risk, which can have negative consequences for the financial system as a whole.

To address this issue, the ECB and ESAs are proposing that issuers of structured finance products provide investors with better information on the climate risks associated with the underlying assets of these products. This would include information on the exposure of the underlying assets to climate risks, as well as any mitigation measures that have been taken to address these risks.

EC adopt a proposal for a directive on green claims

The European Commission has proposed a new law to stop companies from making misleading claims about the environmental merits of their products and services [22]. There are currently 230 sustainability labels and 100 green energy labels in the EU, with vastly different levels of transparency – making it difficult for consumers to make sense of these many labels resulting in low consumer trust. The proposal aims to make green claims reliable, comparable, and verifiable across the EU and subsequently enabling consumers to making informed purchasing decisions.

The proposal includes:

• Clear criteria on how companies should prove their environmental claims and labels.
  
• Requirements for these claims and labels to be checked by an independent and accredited verifier.
• New rules on governance of environmental labelling schemes to ensure they are solid, transparent and reliable.

The proposal targets explicit claims that are made on a voluntary basis by businesses; covers the environmental impacts, aspects or performance of a product or the trader itself; and are not currently covered by other EU rules.

EC asks ESAs to conduct assessment of financial system’s resilience to stress in climate transition

The EU's financial regulators will assess the financial sector's capacity to withstand climate risks and support Europe's green transition, even under stress scenarios. The analysis, specified in a letter [23] from the European Commission's Director General, will evaluate the financial system's ability to meet the EU's target of reducing GHG emissions by 55% by 2030.

The letter instructs regulators to conduct a comprehensive cross-sector assessment, going beyond typical climate stress tests, to uncover system-wide vulnerabilities. It calls for collaboration between the regulators, the ECB, and the European Systemic Risk Board (ESRB) to evaluate the contagion and second-round effects that could impact the financial system's overall resilience. The aim is to identify vulnerabilities that extend beyond individual sectors. In addition to studying climate-related shocks, such as transition and physical risks, which are typically examined in climate stress tests, the analysis is expected to include other stress factors. These may include the combination of climate shocks with adverse macrofinancial scenarios used in ordinary financial sector stress tests. 

According to the Commission, policymakers could use the test results to assess the effects of climate-related shocks and inform future supervisory and monitoring programs for regulators and central banks. The Commission has requested that the test results be submitted by the end of 2024, ideally, or no later than Q1 2025.

EU reach agreement for banning new combustion-engine cars as of 2035

The EU’s three key institutions – the European Commission (executive arm), the Parliament and the Council of Member States - reached an agreement on the legislation banning the sale of new CO2 emitting cars and vans after 2035 [24], with this law playing a key role in the EU’s ‘Fit for 55’ package aiming to address rising road transport emissions. The agreement followed initial opposition to the strict ban by some members states, including Germany and Italy. In addition to the 2035 target, the legislation raises the interim 2030 emissions reduction target which will force automakers to ramp up the sale of electric vehicles. Additional technical legislation will be published later setting out the workaround for e-fuels; however, any such legislation will still need to be approved by the EU institutions. Separate legislation covering trucks, coaches and buses have been proposed and are currently being discussed.

EU adopt regulations on effort sharing and the land use and forestry sector, as part of its “Fit for 55” package

The European Council have adopted two new regulations [25] as part of their ‘Fit for 55’ package of green legislation which aims to enable the EU to reduce its net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels, and to achieve climate neutrality in 2050. The two new regulations are:

1. Effort sharing regulation (ESR): sets an EU-level GHG emission reduction target of 40% by 2030, compared to 2005, for the sectors that it covers (road and domestic maritime transport, buildings, agriculture, waste and small industries), with the revised regulation assigning each member state an increased national target as well as adjusting the way member states can use existing flexibilities to meet their targets.
   
2. Land use, land-use change and forestry (LULUCF): sets an overall EU-level objective of 310 Mt CO2 equivalent of net removals in the LULUCF sector in 2030. This target will be collectively delivered by each member state who will have a binding national target for 2030 for the increase of net GHG removals as well as a commitment to achieve a sum of net GHG emissions and removals for the period of 2026-2030. 

This was the last step of the decision-making procedure. The regulations will be signed and published in the Official Journal of the EU before entering into force.

EU Parliament adopt position on the Energy Performance of Buildings Directive 

The European Parliament adopted its position on the revision of the Energy Performance of Buildings Directive (EPBD). The EPBD is the main piece of legislation addressing decarbonisation of buildings, which are responsible for approximately 36% of EU emissions and 40% of energy consumption [26]. The European Parliament’s new, more ambitious position as it enters political negotiations with the Council is as follows:

• All new buildings should be zero-emission from 2028.
• Existing buildings will have to comply with minimum energy performance standards to reach climate neutrality by 2050.
• Residential buildings will have to achieve a minimum energy performance rating of Class E by 2030, and Class D by 2033.
• Non-residential and public buildings would have to achieve Class E by 2027 and Class D by 2030.
• Member States will have to set higher standards for those buildings after that date and for the rest of the stock.

As part of the revision of EPBD, the European Parliament agreed to phase out fossil fuel heating systems from households, preferably by 2035 and by 2040 at the latest – allowing however for hybrid boilers in new buildings which run on biofuels, hydrogen or a blend of fossil and renewable gas. The latter has been criticised for risking locking in fossil infrastructure, absorbing scarcely available hydrogen which could be better used to decarbonise the hard to abate industries and will slow down the transition to fully electrified systems. 

EFRAG announce delay in the release of sector specific sustainability reporting standards

Following the release of the EFRAG’s first draft [27] set of sector-agnostic European Sustainability Reporting Standards (ESRS) in November 2022, the EFRAG will be delaying [28] the release of sector specific ESRSs. This has been in response to a call from the European Commission to prioritise work on helping companies to implement the first set of released ESRSs, with EFRAG set to put in place an ESRS implementation support function. This can be organised under three pillars, focusing on:

1. The swift and timely provision of much-needed guidance;
   
2. The creation of a user-friendly and comprehensive documentation hub and;
3. The facilitation of educational initiatives

A sector-specific standards publication date has not been announced however, draft ESRSs dedicated to SMEs and sector-specific standards remain a key task on the EFRAG’s agenda. 

ESRSs set out the detailed rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU’s Corporate Sustainable Reporting Directive (CSRD). 

US 

21 Republican state Attorney Generals publish an open letter to over 50 US asset managers expressing legal concerns over their ESG goals and practices

The letter [29] focuses on potential legal violations stemming from their ESG investment activities and participation in climate-focused alliances for the upcoming proxy voting season. The letter covers adherence to fiduciary requirements, representations to consumers about asset managers’ services, and the role of proxy advisors, specific types of shareholder resolutions (e.g., race, emissions, political spending) across different industries (e.g., banking and insurance) and compliance with antitrust laws. It does not ask for a response from the asset managers, but states undersigned AGs will continue to evaluate activity in this area in line with our ongoing investigations into potential unlawful coordination and other violations that may stem from the commitments they have made as part of Climate Action 100+, NZAMI and other similar engagement platforms.

For those looking to discuss any of the above further, please reach out to our authors:

• Tonia Plakhotniuk, Vice President, Climate & ESG Capital Markets 
• Daniel Bressler, Vice President, Climate & ESG Capital Markets, Corporates
• Roze Warren, Associate, ESG Advisory
• Tyler Mayzes, Analyst, Climate & ESG Capital Markets, Corporates
• Siobhan Wartnaby, Analyst, Climate & ESG Capital Markets
• Amanda Chua, Analyst, ESG Advisory

References

1. Powering Up Britain – The Net Zero Growth Plan (publishing.service.gov.uk)
   
2. Powering Up Britain – Energy Security Plan (publishing.service.gov.uk)
3. Green finance strategy - GOV.UK   (www.gov.uk)
4. Powering up Britain - GOV.UK (www.gov.uk)
5. Nature markets - GOV.UK (www.gov.uk)
6. UK International Climate Finance Strategy - GOV.UK (www.gov.uk)
7. 2030 Strategic framework for international climate and nature action - GOV.UK (www.gov.uk)
8. ESG Ratings Consultation (publishing.service.gov.uk)
9. Addressing carbon leakage risk to support decarbonisation - GOV.UK (www.gov.uk)
10. UK “Green Day” — Key Policy Measures Announced to Fuel Investment in Green Energy and Achieve Net Zero | Latham.London | Latham & Watkins
11. Publications Archive » TNFD
12. PBAF seeks to nip biodiversity materiality struggles in the bud :: Environmental Finance (environmental-finance.com)
13. UN delegates reach historic agreement on protecting marine biodiversity in international waters | UN News 
14. High seas treaty: historic deal to protect international waters finally reached at UN (theguardian.com). 
15. AR6 Synthesis Report - Climate Change 2023 (ipcc.ch)
16. Portfolio letter: Our supervision strategy for benchmark administrators, September 2022 (fca.org.uk)
17. Dear CEO letter: ESG Benchmarks Review (fca.org.uk)
18. FCA outlines where improvements are needed in ESG benchmarks | FCA
19. FCA updates on its Sustainability Disclosure Requirements (SDR) and investment labels consultation | FCA
20. Net-Zero Industry Act (europa.eu)
21. ESAs_ECB Joint Statement on disclosures for securitisations.pdf (europa.eu) 
22. Green claims (europa.eu)   Bank of England report on climate-related risks and the regulatory capital frameworks (bankofengland.co.uk)
23. Letter from John Berrigan One off exercise (europa.eu) 
24. EU ministers pass 2035 car engine ban law (politico.eu)
25. Fit for 55 package: Council adopts regulations on effort sharing and land use and forestry sector - Consilium (europa.eu)
26. European Parliament adopts position on the Energy Performance of Buildings Directive | Climate Bonds Initiative
27. First Set of draft ESRS - EFRAG
28. EU Delays Sector-Specific Sustainability Reporting Standards (esgtoday.com)
29. Attorney General Utah - Asset Manager letter (attorneygeneral.utah.gov)