Global Regulatory Brief: Green Finance, January Edition

Originally published on bloomberg.com

Green finance regulatory developments

The 2023 United Nations Climate Change Conference (COP28) galvanized the energy around the global green finance agenda, setting the stage for a busy 2024 of green-related rulemaking and policy guidance for the financial services sector. The following developments from the past month in green finance stand out:

• Singapore: MAS finalizes transition finance taxonomy
• EU: Lawmakers agrees new corporate sustainability due diligence rules
• UK: FCA confirms sustainability disclosure and labeling regime
• US: CFTC issues proposed guidance regarding the listing of voluntary carbon credit derivative contracts
• International: ICMA and IRSG launch voluntary code of conduct for ESG ratings and data product providers
• Switzerland: FINMA welcomes NGFS recommendations
• Australia: Treasury launches green bond framework
• US: FSOC discusses climate risks in 2023 Annual Report
• Australia: Sustainable Finance Institute makes progress on sustainable finance taxonomy
• Hong Kong: HKMA announces it will soon launch green classification framework
• EU: ESAs draft amendments to SFDR technical rules
• Singapore: MAS finalizes code of conduct for providers of ESG ratings and data products
• International: IOSCO consults on Voluntary Carbon Markets (VCMs) and issues report on supervisory practices to address greenwashing
• EU: Member States and Parliament agree on respective negotiating mandates for ESG ratings
• EU: Platform on Sustainable Finance consults on EU taxonomy-aligned benchmarks
• International: Basel Committee issues consultation on disclosure of climate related financial risks
• International: Proof of Concept for Net-Zero Data Public Utility launched at COP28

MAS launches world’s first multi-sector transition taxonomy

MAS launched the Singapore-Asia Taxonomy for Sustainable Finance (Singapore-Asia Taxonomy) setting out detailed thresholds and criteria for defining green and transition activities that contribute to climate change mitigation across eight focus sectors.

Focus on transition: The Singapore-Asia Taxonomy is the first taxonomy globally to pioneer the concept of a “transition” category in recognition of the need to properly contextualize “transition” for the Asian region. Transition activities are comprehensively defined through two new approaches:

• A traffic light system that defines green, transition and ineligible activities across the eight focus sectors. “Transition” refers to activities that do not meet the green thresholds now but are on a pathway to net zero or contributing to net zero outcomes. To signal the importance of progression towards a 1.5 degree celsius (1.5°C) aligned outcome, transition thresholds do not last indefinitely and have a sunset date
• A “measures-based approach” that seeks to encourage capital investments into decarbonisation measures or processes that will help reduce the emissions intensity of activities and enable the activities to meet the green criteria over time

Enhancing interoperability: To align with global taxonomies, MAS has commenced an exercise to map the Singapore-Asia Taxonomy to the International Platform for Sustainable Finance (IPSF)’s Common Ground Taxonomy (CGT). Financial institutions and market participants will be able to refer to a common set of definitions under the CGT to facilitate sustainable development in markets covered by the CGT.

EU agrees new corporate sustainability due diligence rules

EU negotiators reached a political agreement on the corporate sustainability due diligence directive (CSDDD). 

Who will this apply to? The CSDDD will apply to EU companies with more than 500 employees and a net worldwide turnover of € 150 million. Non-EU companies will be included in the scope if they generate a €150 million net turnover in the EU, three years from the entry into force of the directive.

The new rules in detail: The CSDDD imposes mandatory obligations for EU and non-EU companies operating in the union to conduct due diligence within their own operations and across their global value chains with a view to identifying, preventing, mitigating and, where necessary, terminating adverse impacts on human rights and the environment. Financial services will only need to conduct due diligence within their own operations. Companies will need to meet a number of obligations to comply with the directive, namely:

• Adopt and put into effect a transition plan for climate change mitigation
• Integrate due diligence into their policies and risk management systems
• Maintain a complaints mechanism and seek contractual assurances from business partners and employees

Non-compliant behavior will be punishable with fines based on companies’ turnover, with a minimum penalty of 5% of net turnover.

Next steps: The new rules will have to be formally endorsed by the EU Parliament and Member States in the coming months before publication in the EU Official Journal. EU Member States will have two years to transpose the directive into national law.

FCA confirms sustainability disclosure and labeling regime

The Financial Conduct Authority (FCA) has issued a policy statement setting out its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels.

The measures in sum: The package of measures is intended to improve trust and transparency in the market for sustainable investment products and minimize greenwashing. The FCA will introduce:

• An anti-greenwashing rule for all authorized firms to make sure sustainability-related claims are fair, clear and not misleading
• Product labels to help investors understand what their money is being used for, based on objective sustainability goals and criteria
• Naming and marketing requirements so that products cannot be described as having a positive impact on sustainability when they do not

Accompanying consultation: In parallel, the FCA has published its consultation on expectations for FCA-authorized firms making claims about the sustainability of a product or a service. The proposed guidance is designed to help firms better understand the FCA’s expectations under the anti-greenwashing rule and other associated requirements. Comments are due by January 26, 2024.

Next steps: The anti-greenwashing rule will come into effect from May 31, 2024. Firms can use the investment labels from July 31, 2024. The naming and marketing rules for asset managers come into effect from December 2, 2024.

CFTC issues proposed guidance regarding the listing of voluntary carbon credit derivative contracts

The US CFTC has approved a proposed guidance and request for public comment regarding the listing for trading of voluntary carbon credit derivative contracts.

The details: The proposed guidance outlines certain factors a CFTC-regulated exchange, or designated contract market (DCM), should consider when addressing requirements of the Commodity Exchange Act (CEA) and CFTC regulations that are relevant to the contract design and listing process.

Important context: This follows two voluntary carbon market convenings where the CFTC brought together industry participants and heard about problems in the voluntary carbon markets and the lack of standardization to address the integrity of voluntary carbon credits.

Deadline for comments: The comment period will end on February 16, 2024.

FCA welcomes the launch of industry code of conduct for ESG ratings and data products providers

The International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) have launched a voluntary code of conduct for Environmental, Social and Governance (ESG) ratings and data products providers.

For background: In 2022, the FCA appointed the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) to convene an industry group to develop a globally consistent voluntary code for those providing the third-party data and ratings increasingly relied upon by the market. The FCA, the Treasury and other national and international financial regulators acted as observers as the code was agreed.

The code in summary: In line with IOSCO’s recommendations, the code focuses on:

• Promoting transparency, good governance, management of conflicts of interest, and strengthening systems and controls in the sector
• Playing a key role in increasing transparency and trust in the ESG data and ratings market
• Providing a benchmark for any providers that fall outside the scope of potential future regulation

Looking ahead: The implementation period for ESG ratings providers is six months and the implementation period for ESG data products providers is twelve months. Providers are encouraged to sign up to the Code by publishing their Annual Statement of Application and informing ICMA.

FINMA implements NGFS recommendations

The Swiss Financial Market Supervisory Authority (FINMA) is taking various measures to implement the relevant recommendations of the Network for Greening the Financial System.

On FINMA’s agenda: FISMA’s agenda includes the following key initiatives:

• Drafting a new FINMA circular on nature-related financial risks, which will apply to banks and insurance companies
• In 2024, FINMA will also review whether a revision of the current FINMA disclosure requirements is necessary due to the many developments in the area of climate and sustainability reporting
• FINMA will also conduct a data collection exercise for climate risk covering various features and transmission channels of climate risks. The data collection will be carried out for the first time in 2024 and only at larger institutions (supervisory categories 1 to 3)

Australian Treasury launches green bond framework

The Australian Office of Financial Management and federal Treasury issued Australia’s Green Bond Framework.

In detail: The Green Bond Framework sets out the Australian Government’s key climate change and environmental priorities and outlines how green bonds will be used to finance eligible green expenditures. This includes the basis for identifying, selecting, managing, and reporting on expenditures financed with green bonds. The program will enable investors to back public projects that drive Australia’s net zero transformation and support environmental objectives.

Next steps: The first issue of green bonds is expected to occur in mid-2024.

FSOC discusses climate risks in 2023 Annual Report

On climate-related financial risk, the Financial Stability Oversight Committee (FSOC) noted more severe and frequent climate-related events are imposing significant costs on the public and the economy, with economic costs from climate change expected to grow.

The details: FSOC and its member agencies have significantly increased their capacity to evaluate and address climate-related financial risks. FSOC’s Climate-related Financial Risk Committee (CFRC) is developing a framework to identify and assess these risks, and the FSOC recommends enhanced coordination of data and risk assessment through the CFRC. FSOC also recommends state and federal agencies continue to coordinate to identify, prioritize, and procure data necessary for monitoring climate-related financial risks. At the same time, financial regulators should continue to promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to consider climate-related financial risks in their investment and lending decisions.

Australia makes progress on sustainable finance taxonomy

The Australian Sustainable Finance Institute (ASFI) published two methodology papers as a further step towards the development of Australia’s sustainable finance taxonomy.

The papers in sum: The reports outline the key methodological design features of the Australian sustainable finance taxonomy. These features, which have been endorsed by the Taxonomy Technical Expert Group, form the basis on which the Australian taxonomy’s technical screening and further qualifying criteria will be developed over the next twelve months.

• The first paper sets out the definitions of “green” and “transition”, in addition to how sectors and activities will be assessed as eligible or not for inclusion in the taxonomy under one of those two labels
• The second paper clarifies the process for determining the other environmental objectives and social considerations in the taxonomy

Consultation ahead: The public consultation for defining the draft criteria under Australia’s taxonomy will begin in late March 2024 and run for six months.

HKMA due to launch Hong Kong’s green classification framework

HKMA announced that it would very soon release the first version of Hong Kong’s green classification framework.

The background: In May 2023, the HKMA released a discussion paper and prototype of a green classification framework setting out its thinking.

What to expect: Hong Kong’s green classification framework will help banks and other financial institutions identify environmentally sustainable activities, and then align their business decisions with global climate goals to support the transition to a low-carbon future. Furthermore, HKMA expects that it will continue to expand the sectors and activities covered under the framework such as to include transition activities.

ESAs draft amendments to SFDR technical rules

The ESAs published their draft amendments to the technical rules under the Sustainable Finance Disclosure Regulation (SFDR).

In detail: The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) have published their Final Report amending the draft Regulatory Technical Standards (RTS) to the Delegated Regulation supplementing the Sustainable Finance Disclosure Regulation (SFDR). The ESAs propose adding new social indicators and streamlining the framework for the disclosure of principal adverse impacts of investment decisions on the environment and society.

Additionally, the ESAs propose the following technical revisions to the SFDR Delegated Regulation:

• Improvements to the disclosures on how sustainable investments “Do No Significant Harm” (DNSH) to the environment and society
• Simplification of the pre-contractual and periodic disclosure templates for financial products
• Other technical adjustments concerning, among others, the treatment of derivatives, the calculation of sustainable investments, and provisions for financial products with underlying investment options

Next steps: The EU Commission will study the draft RTS and decide whether to endorse them within three months.

MAS finalizes Code of Conduct for providers of ESG rating and data products

The Monetary Authority of Singapore (MAS) published its finalized Code of Conduct for ESG Rating and Data Product Providers (“CoC”).

In detail: The CoC aims to establish baseline industry standards for transparency in methodologies and data sources, governance, and management of conflicts of interest that may compromise the reliability and independence of the products. It builds upon the IOSCO recommendations for good practices for such providers.

The following actions are encouraged:

• Providers’ self-attestation on the checklist should, where feasible, undergo third party assurance or audit
• Providers should disclose their adoption of the CoC and publish their completed checklist within 12 months of publication of the CoC

Going forward: MAS will continue to monitor developments in the industry and the global regulatory landscape when considering any further enhancements to the regulatory regime for such providers.

IOSCO publishes Consultation on Voluntary Carbon Markets (VCMs) and report on supervisory practices to address greenwashing

IOSCO has launched a public consultation outlining a set of Good Practices to promote the integrity and orderly functioning of the Voluntary Carbon Markets (VCMs), as well as a final report on supervisory practices to address greenwashing.

The consultation in detail: IOSCO put forward 21 non-binding good practices that relevant regulators and other authorities or market participants could consider in addressing vulnerabilities in VCMs and enhancing financial integrity. The good practices related to regulatory frameworks, primary market issuance, secondary market trading, and use and disclosure of use of carbon credits. The deadline for comments on the consultation report is March 3, 2024.

The report in detail: The report provides an overview of initiatives undertaken in various jurisdictions to address greenwashing, in line with IOSCO recommendations published in November 2021 and the subsequent call for action in November 2022.

• The report presents potential challenges that could hinder the implementation of these recommendations, including data gaps, transparency, quality, and reliability of ESG ratings, consistency in labeling and classification of sustainability-related products, evolving regulatory approaches, and capacity building needs
• IOSCO finds that while some of these challenges are currently being addressed, greenwashing remains a fundamental market conduct concern that poses risks to both investor protection and market integrity

Member states and parliament agree on respective negotiating mandates for ESG ratings

On December 20, 2023 the council’s member states reached an agreement on its negotiating mandate on a proposal for a regulation on environmental, social and governance (ESG) ratings. Earlier this month, Members of the European Parliament (MEPs) in the Committee on Economic and Monetary Affairs (ECON) voted to adopt their position on ESG ratings.

The council’s position in detail: The council clarified the circumstances under which ESG ratings fall under the scope of the regulation, providing further details on the applicable exemptions. The member states make the following amendments:

• The council clarifies the territorial scope of the regulation, outlining what constitutes operating in the EU, and provides further clarification on the applicable provisions under the endorsement regime
• The council also introduces a lighter, temporary and optional registration regime of three years for existing small ESG rating providers and new small markets entrants
• Finally, the council introduces the possibility for ESG ratings providers to not have a separate legal entity for certain activities, provided that there is a clear distinction between activities and that they put in place measures to avoid conflicts of interests

The parliament’s position in detail: Members of the ECON Committee voted to approve a number of significant changes to the commission’s original proposal.

• Rating providers should refrain from aggregating the E, S and G scores, as this could obscure poor performance on any of these individual metrics
• The adopted report adds provisions to ensure that the rating products should explicitly disclose the rated entity’s materiality
• ESG rating providers should also disclose information to the public on the methodologies, models and key rating assumptions which those providers use in their ESG rating activities and in each of their ESG ratings products

Next steps: The parliament and the council will meet to begin trilogue negotiations in January.

Platform on Sustainable Finance consults on EU taxonomy-aligned benchmarks

The Platform on Sustainable Finance (PSF) published for feedback a draft report including proposals for EU taxonomy-aligning benchmarks (TABs).

In summary: The report puts forward two proposals for voluntary benchmarks (TABex & TAB), with an aim to initiate a discourse on the pivotal role the taxonomy could assume in shaping climate and environmental benchmarks. The suggested benchmarks do not discard alternative approaches to leveraging the taxonomy in the development of benchmarks. The proposals are inspired by the success of the EU Paris-Aligned Benchmarks (PABs), which have played a significant role in financing a low-carbon economy since their adoption in 2019.

Potential legislation: The PSF’s proposed benchmarks do not constitute a legislative proposal – it will be up to the European Commission to take them forward into legislation based on the PSF’s recommendations.

Basel Committee issues consultation on disclosure of climate related financial risks

The Basel Committee has issued a consultation paper on a Pillar 3 disclosure framework for climate-related financial risks. This work forms part of the committee’s approach to address climate-related financial risks to the global banking system.

In detail: The committee is analyzing how a Pillar 3 disclosure framework for climate-related financial risks would further its mandate to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability, and the potential design of such a framework.

• The committee’s preliminary proposal includes qualitative and quantitative Pillar 3 disclosure requirements that would complement the work of other standard setters, including the International Sustainability Standards Board (ISSB), and provide a common disclosure baseline for internationally active banks.
• The Committee also proposes a potential implementation date of 1 January 2026 and welcomes views on whether any transitional arrangements would be required.

Feedback welcome: The consultation will close on 29 February 2024.

Proof of concept for Net-Zero Data Public Utility launched at COP28

French President Emmanuel Macron and UN Special Envoy on Climate Ambition and Solutions Michael R. Bloomberg announced the proof of concept for the Net-Zero Public Utility (NZDPU) at the 2023 United Nations Climate Change Conference (COP28).

The details: Overseen by the Climate Data Steering Committee, the proof of concept will provide an initial set of companies’ greenhouse gas emissions data (Scope 1, Scope 2, and Scope 3 GHG emissions) and emissions reduction targets. CDP will provide core data comprising around 400 high impact companies that disclose publicly through CDP. Over time, the data will expand and the NZDPU ultimately will be integrated into the UN Framework Convention on Climate Change’s Global Climate Action Portal.

View the additional regulatory briefs from this month:

• Trading and markets
• Risk, capital and financial stability
• Digital finance

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