Climate Risk Regulation Rundown: August/September 2023

October 16, 2023

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


On September 25, the US Securities and Exchange Commission (SEC) fined DWS Investment Management Americas, a Deutsche Bank majority-owned asset manager, USD$19 million for “materially misleading statements” concerning ESG investments. This marks the largest ESG-related enforcement action against an asset manager by the SEC. 

The SEC’s order states that while DWS marketed itself as an ESG leader, it neglected to implement certain elements of its ESG integration policy between August 2018 and late 2021. DWS also failed to ensure the accuracy of public statements about its ESG-integrated products. 

“Whether advertising how they incorporate ESG factors into investment recommendations or making any other representation that is material to investors, investment advisers must ensure that their actions conform to their words,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force.

A DWS spokesperson said that the SEC order did not find misstatements in financial disclosures or fund prospectuses and that the firm has already started addressing the identified weaknesses in processes and procedures.

On September 20, the SEC approved an update to its “Names Rule” in an effort to combat greenwashing and misleading marketing practices in investment funds. The revised rule mandates that 80% of a fund’s portfolio must match the characteristics advertised in its name. This means that funds with ESG factors in their names, like “climate” or “green”, must ensure that four-fifths of their assets align with these factors. Additionally, the rule requires funds to review the assets covered by the 80% requirement at least quarterly and sets specific time frames for compliance if a fund’s assets fall below the threshold. 

On August 7, Democratic lawmakers sent a letter to SEC Chair Gary Gensler urging him to “finalize a strong and durable rule” mandating climate-related financial disclosure for US public companies.

The SEC published a proposed rule on climate risk disclosure in March 2022 and is slated to release a final version this October. The 77 Democrats who signed the letter, including pro-climate legislators Sean Casten, Juan Vargas, and Kathy Castor, wrote that more frequent climate-related natural disasters “have affirmed that climate change poses a significant financial risk”, strengthening the case for a strong climate risk disclosure rule.

The Commodity Futures Trading Commission (CFTC) should measure financial institutions’ ability to withstand climate-related shocks using stress tests, Commissioner Christy Goldsmith Romero said in an August 25 speech

The Commissioner recommended the CFTC work with its largest regulated entities, including exchanges and clearing houses, to “increase our understanding of the impact of simultaneous or close in time shocks, and the impact on financial stability.” She also proposed combining scenario analysis with a supervisory review of climate risk management at exchanges, clearinghouses, and market intermediaries in conjunction with the National Futures Association.

Romero further suggested that the CFTC roll out a series of principles for managing climate risks to help the largest banks, brokers, exchanges, and clearinghouses understand the CFTC’s expectations. This would help companies “develop strategies, deploy resources, and manage risks … while leaving flexibility to address these risks in a way that fits with their individual business models and risk profiles,” she said.

The US Treasury released nine voluntary “Principles for Net-Zero Financing & Investment” to guide banks, asset managers, insurers, and other financial institutions in implementing consistent and credible net-zero commitments. The principles emphasize the use of robust transition plans, credible metrics, and targets that align with limiting global warming to 1.5°C. Additionally, they call for reductions in Scope 3 financed and facilitated greenhouse gas emissions, alongside goals, actions, and accountability mechanisms.

US Treasury Secretary Janet Yellen emphasized the importance of credible net-zero commitments and consistent implementation approaches. The principles also encourage financial institutions to assess their clients’ and portfolio companies’ alignment with their net-zero targets and the 1.5°C warming limit.

Top philanthropic organizations, including the Bezos Earth Fund, Bloomberg Philanthropies, and ClimateWorks Foundation, have committed $340mn over three years to support research, data availability, and technical resources for financial institutions to establish and operationalize robust net-zero commitments. The funding will also aid transition planning efforts in non-financial sectors. Furthermore, the Rocky Mountain Institute Center for Climate-Aligned Finance will introduce frameworks for the aluminum and aviation sectors, while the Partnership for Carbon Accounting Financials will provide training on greenhouse gas accounting methodologies and reporting.

The California Legislature passed two first-in-the-nation climate disclosure laws, which were signed by Governor Gavin Newsom on October 7. 

SB 253 mandates companies with at least USD$1bn in revenue to publicize their direct (Scope 1 and 2) and indirect (Scope 3) greenhouse gas emissions, while SB 261 requires organizations with over USD$500mn in earnings to report their climate-related financial risks in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

Sustainability non-profit Ceres estimates that SB 253 would cover over 5,300 organizations, while SB 261 would apply to more than 10,000.


The European Commission is considering significant changes to the Sustainable Finance Disclosure Regulation (SFDR).

In a public consultation document published September 14, the Commission requested answers to a number of questions reflecting stakeholder concerns with the current regulation. SFDR sets out how financial market participants communicate sustainability information to investors. However, it has increasingly been used by companies as a de facto labeling and marketing tool, particularly in relation to Articles 8 and 9 of the regulations. These articles are supposed to outline requirements for two types of sustainable funds but have been used by companies to brand products as either “light green” or “dark green”. The consultation document hints that the current distinction between Articles 8 and 9 may disappear altogether in a revised version of the framework.

A second, parallel consultation is targeted toward companies and stakeholders that have close familiarity with the SFDR — including investors, regulators, financial market participants, and non-governmental organizations. This consultation asks specific questions on SFDR’s legal certainty, useability, and effectiveness ability in tackling greenwashing

Both the SFDR consultations close on December 15.

The European Supervisory Authorities (ESAs) criticized financial institutions for their “short and vague” explanations for why they do not consider principal adverse impacts (PAIs) in their second annual review of voluntary disclosures under the SFDR.

PAIs refer to the most significant negative effects of investments on the environment and people. The ESAs said that when financial institutions do not consider PAIs, they should better explain the reasons for not doing and at least indicate a target date for when they will be considered. The report also found that firms generally do not disclose their investments’ alignment with the Paris Agreement. However, the ESAs observed improvements in compliance and disclosure quality compared to the previous year, as well as better understanding of the regulation among firms.

The European Central Bank (ECB) published the results of its second economy-wide climate stress test on September 6. 

This showed that an accelerated green transition is the most effective way to achieve a net-zero economy for EU firms, households, and banks.

The stress test assessed the continent’s resilience to three transition scenarios: an accelerated transition, a late-push transition, and a delayed transition. The results indicate that a faster transition benefits firms and households, as early investments in renewable energy pay off and ultimately lower energy expenses. In the accelerated transition, EU companies’ green investments rise to €2trn (USD$21.trn) by 2025, compared to only €0.5trn (USD$0.53trn) in the other two scenarios.

In the late-push transition, credit risk increases by over 100% by 2030 compared to 2022, with a projected absolute annual loss of about €21bn (USD$23bn). In contrast, under the accelerated transition scenario, the increase is only 60%. Delaying the transition or not acting at all leads to higher long-term costs and risks, as missing emission reduction targets ratchets up the impact of physical risk on the economy and the financial sector.

On September 4, Frank Elderson — ECB supervisory board vice-chair — highlighted climate-related litigation as a “major source of risk” for banks in a speech to a legal conference. While climate-related litigation has previously focused on governments, increasing attention is being directed toward corporates, with banks like BNP Paribas already facing legal action for financing fossil fuel-related activities.

Elderson believes that banks can address and mitigate climate-related litigation risk through guidance from prudential supervisors. The ECB has published guides on climate-related and environmental risks and conducted thematic reviews to help banks evaluate litigation risks, define tasks and responsibilities, and conduct climate-related due diligence. Banks have been advised to closely follow developments in climate and environment-related litigation, analyze potential repercussions, and mitigate risks.

The European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) released a joint statement of interoperability on September 4, describing the “high level of interoperability” between their respective sustainability disclosure standards.

The statement is significant in that it makes clear that organizations do not have to create separate reports to comply with both EFRAG and GRI standards. EFRAG’s European Sustainability Reporting Standards (ESRS) underpin the European Union’s Corporate Sustainability Reporting Directive (CSRD), which applies to some 50,000 European companies.

To further simplify reporting, EFRAG and GRI said they will develop a digital taxonomy and multi-tagging system that enables cross-referencing of disclosures under both the ESRS and GRI standards.

The UK government announced on August 2 that its forthcoming Sustainability Disclosure Standards (SDS) will be based on IFRS S1 and S2, the sustainability and climate reporting requirements established by the International Sustainability Standards Board (ISSB).

The government plans for the SDS to be completed by July 2024. The companies and organizations required to disclose according to the SDS will be decided by the government for UK registered companies and limited liability partnerships, and by the Financial Conduct Authority for UK listed companies.

An official at The Pensions Regulator (TPR), a UK watchdog, said that “a degree of revolution, not evolution” is needed to address shortcomings with current climate models and scenario analysis, which may be underestimating the financial risks from climate change.

In a blog published August 29, Mark Hill, TPR’s Climate and Sustainability Lead, suggests this presents an opportunity for improvement and change. New reports on climate scenarios from third parties, including “The Emperor’s New Climate Scenarios” and “Loading the DICE Against Pensions”, highlight the limitations of current approaches and have created an opportunity for practitioners to take stock and suggest new ways forward, he said.

Hill emphasized that trustees should focus on informed decision-making and risk management using decision-useful climate scenarios. He suggested that trustees develop an understanding of climate issues and seek additional training if needed, and also review the climate-related capabilities of service providers. Furthermore, he recommended that pension trustees adopt a more interdisciplinary approach, with greater collaboration between finance and climate science, to help influence the debate on pensions and climate change.

On September 28, TPR announced it had fined the ExxonMobil Pension Plan £5,000 (US$6,127) for failing to publish a report on its management of climate-related risks and opportunities, marking the first fine under TPR’s climate reporting regulations. 

The Exxon Pension Plan trustees attributed the issue to an administrative error and published the report six days after being contacted by TPR. The regulator investigated 80 pension schemes subject to its 2021 regulations, which require climate change reports aligned with the Task Force on Climate-related Financial Disclosures (TCFD) to be published on a publicly accessible website by a specific deadline.


The Australian Prudential Regulation Authority (APRA) will conduct a climate scenario analysis exercise for general insurers in 2023, according to its Corporate Plan 2023-24. The exercise aims to model the financial impact of climate change on insurers and their response to physical and transition risks. The specific coverage and start date of this “Climate Vulnerability Assessment” were not provided.

This follows a similar exercise conducted last year by APRA with five of Australia’s largest banks, which revealed increased losses on bank lending in the medium-to-long term but no severe stress. The insurance analysis seeks to address the rising frequency and severity of climate-linked natural disasters, which reduce access to affordable insurance, particularly for those in at-risk areas.

A survey of banks conducted by the Reserve Bank of New Zealand (RBNZ) found that around half of firms have yet to conduct any climate scenario analysis.

Published on August 23, the results of the voluntary survey are intended to measure participating banks’ progress identifying, measuring, and managing climate-related risks, as well as their readiness to meet mandatory climate disclosure requirements that come into effect in 2024. No bank participant said it was “at risk for not meeting” the new disclosure regime. However, 25 out of 29 surveyed said they need to complete “significant further work” as they prepare their first set of climate statements.

The Hong Kong Monetary Authority (HKMA) co-hosted the inaugural Blended Finance Roundtable with the Infrastructure Financing Facilitation Office on August 22. The event brought together representatives from banks, international organizations, family offices, and philanthropies to discuss the potential of blended finance in driving innovation and collaboration to address global climate challenges. Blended finance is the use of capital provided by development financial institutions and philanthropies to stimulate additional private investment in climate solutions.

On September 8, the Singapore Exchange Regulation (SGX RegCo) announced plans to align its listing rules with the ISSB’s climate and sustainability disclosure requirements. The rules are set to be finalized by next year following a public consultation period on climate disclosures for Singaporean companies.

The Financial Sector Forum (FSF) of the Philippines issued a proposed sustainable finance taxonomy to help investors determine what activities are environmentally sustainable. The taxonomy is principles-based rather than prescriptive, meaning companies can decide themselves whether their activities align with the taxonomy or not.

Climate mitigation and adaptation activities are defined and classified in the taxonomy. Activities that reduce carbon emissions are in scope of the climate mitigation classification, and those that reduce the impact of physical risks come under the adaptation heading.

An industry-wide consultation on the proposal closed on October 6.


The International Sustainability Standards Board (ISSB) received over 300 responses to its consultation on future agenda priorities. Many financial regulators, accounting bodies, and asset owners urged the organization to expand its sustainability-related disclosure requirements beyond climate. 

The consultation, which closed on September 1, received responses from the UK’s Financial Conduct Authority and the European Securities and Markets Authority, which both called for a broader scope of sustainability reporting standards. EFRAG, an advisory body to the European Commission on corporate disclosure rules, recommended the ISSB define the universe of sustainability-related information and expand its set of topical standards promptly.

The Canadian Sustainability Standards Board suggested the ISSB focus on providing interpretive guidance and examples for reporting entities, addressing implementation challenges, and ensuring the interoperability of its standards across jurisdictions. However, a group of Canadian respondents also expressed interest in a “beyond-climate” roadmap for disclosure standards development.

On September 1, the Network for Greening the Financial System (NGFS) published two reports emphasizing the growing climate-related litigation trend and its impact on financial institutions. The first report highlights the rapid growth of climate-related cases and their diverse legal arguments and litigants. It emphasizes the need for central banks and supervisors to increase their monitoring and supervisory efforts as the financial sector witnesses more cases brought against it.

The second report focuses on the micro-prudential supervision of climate-related litigation risks. Supervisors must identify risk drivers, transmission channels, and exposures to assess the financial risks to institutions, the report says. However, it adds that the supervision of climate-related litigation risks is still in its early stages, with formal methodologies yet to be fully developed.

On September 6, the NGFS published a “conceptual framework” for central banks and supervisors for addressing nature-related risks.

This framework is intended to “create a shared science-based understanding” of nature-related financial risks and provide “greater clarity” on key concepts and how they interact.

On August 2, the International Auditing and Assurance Standards Board (IAASB) issued new global sustainability assurance standards that aim to enhance the integrity and reliability of environmental and social information provided by companies. 

Once finalized, the International Standard on Sustainability Assurance (ISSA) 5000 will be the most comprehensive sustainability assurance standard available. The standard has been designed to accommodate various disclosure frameworks, including the ISSB’s climate and sustainability reporting requirements. ISSA 5000 is open for public consultation until December 1.

The Taskforce on Nature-related Financial Disclosures (TNFD) released its final recommendations for managing and disclosing nature-related financial risks on September 18.

Developed over two years, the guidance aims to highlight financial risks associated with biodiversity loss and ecosystem destruction, while directing investments towards nature-positive outcomes in line with the UN-backed Global Biodiversity Framework. 

The 14 TNFD recommendations are built on the TCFD framework, and are organized across the same four pillars: governance, strategy, risk management, and metrics and targets. The TNFD is also consistent with the ISSB and GRI standards.