Climate Risk Regulation Rundown: April 2023

May 9, 2023

What happened in climate-related financial regulation last month, and what’s coming up.


A paper out of the Federal Reserve Bank of New York examines the potential loan losses that US banks may face due to climate transition risks. 

Under the scenario with the most climate transition impacts, the analysis found that the average bank’s loan losses could reach 9%. Meanwhile, losses related to loans to the top 20% of industries most vulnerable to transition risks could be as high as 12% to 14%. 

Since the 2015 Paris Climate Agreement, US banks overall have shifted their portfolios away from high-risk industries and are charging them higher interest rates, the paper adds. It also says there is no evidence that banks belonging to the Net-Zero Banking Alliance are decarbonizing their portfolios at a faster rate than other institutions.

On April 14, Commissioner Christy Goldsmith Romero of the Commodity Futures Trading Commission (CFTC) announced that Yevgeny Shrago would serve as her senior counsel and policy advisor. 

Shrago previously worked as a policy director at Public Citizen, a nonprofit consumer advocacy group, where he drafted recommendations for addressing climate-related financial risk. 

“Yevgeny’s advice will be instrumental in finding thoughtful ways to promote market resilience to climate-related financial risks, which is an urgent priority for my office,” Goldsmith Romero said.


The European Commission (EC) published additional guidance on its Sustainable Finance Disclosure Regulation (SFDR) to address industry confusion over what constitutes a sustainable investment fund. 

The SFDR classifies funds as either “Article 8” (light green) or “Article 9” (dark green), with the latter explicitly pursuing measurable environment, social, and governance targets. The EC’s new guidance is intended to help financial institutions properly implement the SFDR.

On April 5, the EC expanded the criteria for the EU’s Sustainable Taxonomy to cover four additional environmental objectives and to enhance its coverage of climate mitigation and adaptation activities. The taxonomy is intended to channel investment toward activities that further the EU’s climate and environmental goals. 

With regards to climate mitigation, the EC recommends altering 18 of the initial criteria and introducing seven new ones. For climate adaptation, it recommends modifying 15 criteria and introducing six additional ones. These changes would expand the climate part of the taxonomy to encompass more manufacturing, transport, civil engineering, IT, and consulting activities.

Members of the European Parliament voted to advance the Corporate Sustainability Due Diligence Directive (CSDDD), which would require companies to consider environmental and social factors in their business models, operations, and value chains.

The law would also compel firms to identify and mitigate the negative impacts of their activities on human rights and the environment, as well as create climate transition plans that align with a 1.5°C global warming pathway.

If enacted, the CSDDD would apply to EU companies with over 250 employees and revenues of more than €40mn (USD$44mn) a year. Moreover, directors of companies with over 1,000 employees would be held legally responsible for the implementation of their climate transition plans. 

The European Central Bank (ECB) has found EU lenders are not producing adequate climate risk disclosures to meet incoming supervisory standards.

Only 6% of major firms covered in the ECB’s most recent assessment provided “broadly adequate” data across five key areas, while half of banks disclosed some information that was either incomplete or unspecific on their financed emissions. 

However, 86% of banks now report on their material exposures to climate and environmental risk, up from 36% last year. Additionally, over 90% provide basic information on how they identify, assess, and manage these risks. 

Banks must produce new reports on environmental, social, and governance issues by June 2023, but the ECB identified a group of persistent laggards that have not adequately reflected supervisory feedback. The ECB said it will take appropriate actions to ensure firms meet its disclosure expectations.

On April 24, the ECB and the European Insurance and Occupational Pensions Authority (EIOPA) published a discussion paper on the accessibility and adoption of climate catastrophe insurance.

Currently, only 25% of all EU climate-related catastrophe losses are insured, according to the regulators. In some member states, they say the share is below 5%. 

Without insurance, it is more difficult for households and businesses to bounce back from climate disasters, impeding economic growth. Government finances may also become strained if they are needed to make up for uninsured losses.

To improve insurance coverage, the ECB and EIOPA recommend insurers create policies that incentivize households and businesses to lower their climate-related risks. For example, the regulators suggest offering premium discounts if customers adopt climate mitigation and adaptation measures. They also recommend insurers make greater use of catastrophe bonds — financial instruments that pay out if and when a qualifying disaster occurs.

The paper also sketches out how the burden of catastrophe losses could be better shared between the private sector and governments. For example, it says governments could establish public-private partnerships and backstops to assume some of the costs that insurers take on in the wake of major disasters.

The three European Supervisory Authorities (ESAs) cite greenwashing as a main risk to the financial sector in their Joint Committee Report on risks and vulnerabilities in the EU financial system

“Public skepticism about well-founded intentions of climate pledges is becoming apparent with the increased focus on greenwashing,” the paper, released April 25, reads. “The issue of greenwashing has become central, including for investors and issuers facing growing reputational risk.”

The authorities add that new environmental, social, and governance (ESG) disclosure rules, namely the Sustainable Finance Disclosure Regulation (SFDR), would help alleviate greenwashing risks.

The report also describes how EU reinsurance capacity is under pressure “from increasing losses to properties and businesses due to climate change.” This could lead to the withdrawal of reinsurance from certain lines of business, leaving a large part of the EU economy vulnerable to climate disasters.

In the report, the ESAs explain that financial institutions are expected to “put further efforts in climate-related risk management, and more broadly ESG risks management.” This is because these risks are increasingly material to these firms’ financial positions.

On April 12, the ESAs proposed amendments to the reporting framework that underpins the Sustainable Finance Disclosure Regulation (SFDR). This was in response to issues brought forward since the regulation first came into effect in 2021.

Among the recommended changes, the ESAs favor adding product-level disclosures on decarbonization targets, including their level of ambition and how they will be achieved.

The consultation closes July 4. The ESAs will then make a final report on amending the SFDR to the European Commission in October.

Sarah Breeden, the Bank of England’s executive director for financial stability, said climate risks are continuing to build up in the UK economy, despite improvements in banks’ and insurers’ climate management governance, strategy, and risk management.

She identified four key challenges that must be addressed to make meaningful progress on the climate transition. These include equipping financial institutions with forward-looking information, prioritizing climate issues amid geopolitical headwinds, making transition-driven business decisions in the absence of a clear roadmap, and engaging with counterparties and suppliers to scrub emissions from supply chains. 
Breeden addressed these concerns when she spoke before Chapter Zero, a group of non-executive directors working to ensure their businesses respond to climate change.

Most Swedish equity mutual funds are not aligned with the Paris Agreement’s target to limit global temperature rise to well below 2°C, research published by Sveriges Riksbank, Sweden’s central bank, shows. 

The findings reveal that the average fund is aligned with a temperature increase of 2.77°C, with only five funds on a below 2°C trajectory. This means most mutual funds in the sample of 122 have substantial transition risk exposures.

Furthermore, the research shows no significant difference in temperature alignment between funds involved in top climate initiatives — like the Net Zero Asset Managers Initiative — and those that aren’t. It also doesn’t indicate a substantive difference between funds with or without a “Low Carbon Designation” from Morningstar, a financial data provider. 

However, index funds are associated with lower temperature increases than non-index funds. The research also found fund size plays a significant role in temperature alignment, with small funds lagging behind larger funds.


The Hong Kong Exchanges and Clearing Market (HKEX) plans to make climate-related disclosures mandatory in companies’ environmental, social, and governance (ESG) reports, beginning January 1, 2024.

In a consultation paper published April 14, the exchange — which regulates more than 2,600 listed firms — said these disclosures would have to align with the climate reporting rules under development by the International Sustainability Standards Board (ISSB).

HKEX said it would provide interim provisions for certain disclosures, such as Scope 3 emissions, as well as financially relevant metrics. Full compliance would be expected for financial years starting on or after January 1, 2026.

In addition, HKEX said companies planning to become publicly listed must disclose material ESG risks in their prospectuses and have mechanisms in place to meet ESG requirements. 

The consultation closes July 14.

The Hong Kong Monetary Authority (HKMA) published its inaugural Sustainability Report on April 28. 

The document describes how the regulator is striving to improve the Hong Kong financial sector’s climate resilience and boost the domestic green finance market.

It also provides insight into the carbon intensity of the regulator’s own Exchange Fund Investment Portfolio, which it uses to conduct monetary policy. 

As of 2021, the weighted average carbon intensity of the public equities part of the portfolio was 43% lower than in 2017, at 126 tonnes of carbon dioxide equivalent per USD$1million in revenue. HKMA said this figure is lower than the market investment benchmark.

The Monetary Authority of Singapore (MAS) and the People’s Bank of China (PBoC) established a China-Singapore Green Finance Taskforce (GFTF) on April 21.

The taskforce is intended to “deepen bilateral cooperation in green and transition finance” and to foster public-private collaboration on funding for the net-zero transition.

The GFTF will begin to focus on three workstreams: green and transition investment taxonomies, technology to scale sustainable finance, and the issuance and distribution of sustainability, green, and transition bonds.

Regarding the first workstream, MAS and PBoC have pledged to work together to ensure their respective sustainable finance taxonomies are interoperable through the International Platform on Sustainable Finance — a forum for policymakers to discuss sustainable finance regulation.

On April 21, the Australian Government announced it would co-fund a national sustainable finance taxonomy with the Australian Sustainable Finance Institute (ASFI).

The taxonomy aims to establish a common standard for sustainable finance, which will help direct more capital toward Australia’s climate transition and emissions reduction targets.

The move follows the March 23 release of ASFI’s final recommendations on designing an Australia-specific taxonomy.

The government also announced a Sovereign Green Bonds program, which is expected to facilitate the issuance of Australia’s first green bond in mid-2024.


The International Sustainability Standards Board (ISSB) voted to delay the implementation of its non-climate sustainability disclosure rule for one year. 

Companies will only need to report information aligning with the ISSB’s climate disclosure standards in 2024, although entities that already disclose non-climate are encouraged to continue to do so. 

The ISSB has also introduced a one-year transitional relief period for the disclosure of Scope 3 emissions and for reporting emissions in line with the GHG Protocol.

The International Auditing and Assurance Standards Board (IAASB) announced plans to introduce a new International Standard on Sustainability Assurance (ISSA) 5000 in July.

The proposed standard will cover multiple sustainability issues, including climate, and will be suitable for both limited and reasonable assurance of sustainability information.

The IAASB is working with the International Ethics Standards Board for Accountants to produce an integrated package of sustainability ethics and assurance standards by the end of 2024. 

The new standard is intended to support the consistency, comparability, and reliability of sustainability-related information provided to the market. The International Organization of Securities Commissions (IOSCO) has urged companies, assurance providers, and capital markets participants to take part in the consultation.