Recent developments and implications for those in sustainable finance

• Inclusion of nuclear and gas activities in the EU Green Taxonomy
• Pillar 3 ESG risk disclosure rules for banks
• European Securities and Markets Authority (ESMA) call for evidence on ESG Rating providers
• Bank of England’s (BoE) second round of climate risk stress testing

Next 3 months - what to look out for?

• IPCC
• UK Green Taxonomy
• Extension of EU Taxonomy

Inclusion of nuclear and gas activities in the EU Green Taxonomy

The European Commission published legislation on the inclusion of nuclear energy and natural gas in the EU’s Green Taxonomy. The legislation complements the Climate Delegated Act adopted earlier in June 2021, which sets out criteria for economic activities to be considered as environmentally sustainable – in relation to climate change mitigation and adaptation.

Factsheet: EU taxonomy accelerating sustainable investments

The legislation still needs to be formally adopted by the Commission which will be followed by a 4-month scrutiny period (extendable by 2 months) by the European Parliament and the Council of Member States. Whilst, the European Parliament and the Council have a right to reject the law, it is highly unlikely. The new law will enter into application on 1 January 2023.

The European Banking Authority (EBA) published the final mandatory standard on prudential (Pillar 3) disclosure rules that will require ~150 largest banks in the EU to begin reporting on their ESG risks and sustainable finance strategy, largely starting from 2024. The standard aims to generate disclosures, showing how climate change may exacerbate other risks within banks’ balance sheets (e.g. credit, market, liquidity, operational), how banks are mitigating those risks, and their ratios; including the so-called green asset ratio (GAR), on exposures financing EU Taxonomy-aligned activities.

The European Securities and Markets Authority watchdog published a Call for Evidence on ESG ratings to gather information on the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU. This initiative follows the announcement of the strategy for financing the transition to a sustainable economy by the European Commission in July 2021 where the Commission committed to take action to improve the reliability, comparability and transparency of ESG ratings. ESMA will feed its observations from this data gathering exercise to the Commission and the Commission will follow up with another public consultation to explore a possibility of developing legislation to govern the operation of ESG rating (and potentially other product) providers.

As a reminder, the UK Government is also considering bringing ESG Rating Providers into the scope of Financial Conduct Authority (FCA) authorisation and regulation, as outlined in its roadmap to greening finance and sustainable investing published in October 2021. We expect to see further actions on this from the FCA in 2022.

Overall, we welcome the move from regulatory authorities to ensure transparency and good governance around ESG ratings.

The Bank of England launched the second round of its Biennial Exploratory Scenario (BES) exercise, to test resilience of the UK’s financial system to climate change risks. As a reminder, the first round was launched in June 2021 and involved the largest UK banks and insurance companies. The second round will explore participants’ strategic responses to the three climate scenarios (Early Action, Late Action, No Action), published as part of the first round, and the potential implications for their business models. The results of the entire exercise are expected to be published on an aggregated basis in May 2022. The findings will be instrumental in informing future policy action taken by the banking prudential regulator in the UK in relation to managing financial risk from climate change and the speed of the transition to net-zero. Ramifications may be far-reaching, including for the real economy sector, with the increasing knock-on pressure to decarbonise.

IPCC

The Intergovernmental Panel on Climate Change (IPCC) will release a report with recommendations to policymakers around the world, titled, Climate Change 2022: Impacts, Adaptation and Vulnerability. This will constitute the second part the IPCC’s Sixth Assessment Report with the first part published in August 2021. Findings will be presented at a virtual conference on 28 February 2022. Read more.

UK Green Taxonomy

The UK Government is expected to provide its first indication on what activities would count as "green" in the UK and on the level of alignment with the EU Taxonomy. They will consult on technical criteria for economic activities relating to climate change mitigation and adaptation environmental objectives, as outlined in its roadmap to greening finance and sustainable investing† published in October 2021.

Extension of EU Taxonomy

The EU Platform on Sustainable Finance, an advisory body to the European Commission, is expected to publish recommendations on possible extension of the EU Taxonomy to also cover social objectives and transition activities. The Platform will also publish its recommendations on criteria for the rest of the environmental objectives under the EU Taxonomy (sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems).

• Antonina Plakhotniuk, Vice President, Climate & ESG Capital Markets
• Daniel Bressler, Vice President, Climate & ESG Capital Markets, Corporates

Notes

[1]  https://iea.blob.core.windows.net/assets/deebef5d-0c34-4539-9d0c-10b13d840027/NetZeroby2050-ARoadmapfortheGlobalEnergySector_CORR.pdf