What happened in climate-related financial regulation last month, and what’s coming up.
On July 28, US Treasury Secretary Janet Yellen chaired a meeting of the Financial Stability Oversight Council, where the Climate-related Financial Risk Committee (CFRC) provided updates on interagency efforts to identify and monitor vulnerabilities in the financial system due to climate-related risks.
Acting Comptroller of the Currency Michael Hsu, a member of the council, expressed support for the publication of an updated report on CFRC activities to help financial institutions manage climate risks and promote financial stability. Hsu particularly praised the CFRC Risk Assessment Working Group’s efforts to develop a framework for identifying and assessing climate-related financial risks, including preliminary risk indicators for banking, financial, and insurance markets.
On July 18, a US House of Representatives subcommittee held a hearing called “Climate-Risk: Are Financial Regulators Politically Independent?”
At the hearing, Republican lawmakers grilled several federal regulators on the intersection of climate risk and financial supervision.
Greg Coleman, the senior deputy comptroller for large bank supervision at the office of the Comptroller of the Currency, told the subcommittee that his agency is “committed to staying focused on banks’ risk management of climate-related financial risks.”
Similarly, Rendell Jones — the deputy executive director of the National Credit Union Administration — told lawmakers his office’s plans “to identify and assess climate-related risks … develop tools to assist credit unions in managing those risks, and produce guidance and support programmes.”
On July 19, the Commodity Futures Trading Commission (CFTC) convened a second meeting focusing on voluntary carbon markets. The discussions covered current trends and developments in carbon credit cash and derivatives markets, public and private sector initiatives, and market participants’ views on how the CFTC can promote integrity for high-quality carbon credit derivatives.
On July 31, the European Commission adopted the European Sustainability Reporting Standards (ESRS), which will ultimately apply to around 50,000 companies starting in 2024.
The ESRS underpin the European Union’s (EU) Corporate Sustainability Reporting Directive, which is designed to provide investors with clearer information on companies’ sustainability impacts.
Most ESRS climate and sustainability indicators will now be disclosed based on a materiality assessment, meaning companies only need to report indicators relevant to their business model and activities. The materiality assessment process will be subject to external assurance in order to ensure credibility and robustness. Companies claiming climate change is not material to their businesses must provide a detailed explanation.
The European Parliament and Council will scrutinize the ESRS for two months, potentially extending the period by another two months. Although they can reject the standards, they cannot make changes. Large companies will need to produce sustainability disclosures in line with the ESRS from 2025, based on the 2024 financial year. Smaller companies will report in subsequent years.
The European Parliament’s Committee on Economic and Monetary Affairs approved draft amendments to the bloc’s Solvency II rules, which would require insurers to publish net zero by 2050 transition plans.
These plans would have to include quantifiable targets and insurers’ processes for monitoring and addressing climate transition-related risks. The plans would have to be incorporated into firms’ annual solvency and financial condition reports.
The amendments also mandate that insurers consider ESG risks in the short, medium, and long term, as well as conduct climate scenario analyses at least every three years. The European Commission and Council are now scrutinizing the amendments.
The European Banking Authority (EBA) initiated a public consultation on how it should gather data from EU banks for its upcoming ‘Fit-for-55’ climate risk scenario analysis.
The EBA produced draft templates that aim to collect climate-related and financial information on credit risk, market, and real estate risks. Banks will be required to use the finalized templates to report aggregated and counterparty-level data as of December 2022. This will help assess concentration issues, amplification mechanisms, and second-round effects related to climate risks. The consultation closes on October 11.
Following the consultation, the EBA — along with other European authorities — will begin data collection in late November. Seventy banks are slated to participate in the ‘Fit-for-55’ climate risk scenario analysis, which is scheduled to begin before the end of this year.
The exercise is intended to understand how the financial sector could be affected by the EU’s efforts to achieve carbon neutrality by 2050 and reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
The French National Assembly approved a ‘Say on Climate’ rule requiring large listed French companies to present their climate strategies for a non-binding shareholder vote at least once every three years and to publish annual reports on these plans.
The rule will now be debated in the ‘Commission Mixte Paritaire,’ a gathering of representatives from both houses of the French parliament.
The UK Financial Conduct Authority said it would delay the release of its Sustainability Disclosure Requirements (SDR) in a regulatory initiatives update.
The delay will allow for further review of the extensive feedback received during a consultation with market stakeholders. The SDR aims to establish a new labeling system for environmental, social, and governance (ESG) funds, which will help retail investors distinguish between various sustainable investment strategies.
The UK Financial Reporting Council (FRC) initiated a call for evidence on July 19 to evaluate the potential endorsement of the International Sustainability Standards Board’s (ISSB) inaugural disclosure rules, called IFRS S1 and S2.
The FRC, responsible for setting corporate governance and reporting standards in the UK, aims to gather views on the understandability, relevance, reliability, and comparability of the reports that would be produced using ISSB standards.
Additionally, the call for evidence seeks to determine the technical feasibility of preparing these reports in a timely manner and on the same schedule as general purpose financial reports.
The FCR’s call for evidence closes on October 11.
The UK Transition Plan Taskforce (TPT) announced that its net-zero transition plan disclosure framework will be published in October 2023.
An initial version of its implementation guidance will be released ahead of the final version in February 2024. The TPT also plans to provide sector-specific guidance for industries, such as asset management, banking, electric utilities, food and agriculture, metals and mining, and oil and gas.
Draft sectoral guidance will be published in November 2023, with final guidance set for the first quarter of 2024.
On July 5, the Monetary Authority of Singapore (MAS) published its latest sustainability report, which included an update on its efforts to better align its portfolio with climate goals.
In a speech heralding the report, MAS managing director Ravi Menon said the central bank has invested 2% of its portfolio, around SGD$8bn (USD$6bn), in a climate transition program that favors less carbon-intensive companies.
MAS aims to bring its entire portfolio under the program as it gains confidence in the climate indices used for its equity portfolio tilting. The central bank will also focus on aligning its corporate bonds with the program, though it recognizes that few climate indices exist for corporate bonds, and lower liquidity compared to equities may present challenges when it comes to rebalancing the portfolio.
On July 6, Singapore’s Accounting and Corporate Regulatory Authority and the Singapore Exchange Regulation announced a consultation on proposed rules that would mandate climate disclosures aligned with the International Sustainability Standards Board for both public and private companies.
Listed companies would be required to comply starting in 2025, while large, non-listed entities would need to do so beginning in 2027.
On July 25, the Australian Securities and Investment Commission (ASIC) launched legal proceedings against Vanguard Investments Australia, accusing the company of misleading investors regarding its AUD$1bn (USD$676mn) Ethically Conscious Global Aggregate Bond Index Fund.
Vanguard allegedly claimed the fund followed an index that applied ESG criteria and excluded fossil fuels. However, ASIC asserts that the index provider did not conduct ESG research on a significant proportion of issuers, resulting in 42 issuers violating the ESG criteria. Additionally, the regulator said at least 14 issuers were linked to oil and gas exploration.
ASIC is seeking pecuniary penalties and a court declaration on whether Vanguard has violated the law. Additionally, Vanguard may be required to publish whether it misled investors.
The International Organization of Securities Commissions (IOSCO), endorsed the International Sustainability Standards Board’s (ISSB) new disclosure requirements on July 25.
IOSCO, whose members oversee 95% of the world’s financial markets, praised the ISSB standards, known as IFRS S1 and S2, for providing a “global framework” that enables investors to accurately assess sustainability risks and opportunities. IOSCO has urged its 130 member jurisdictions to consider adopting or applying the ISSB’s standards.
On July 17, IOSCO published a final report on Compliance Carbon Markets, with recommendations to improve their efficiency and integrity. These are categorized into guidelines for primary and secondary market participants. The primary market involves authorities issuing carbon credits to regulated companies, while the secondary market is where firms trade credits among themselves.
The recommendations for the primary market cover transparency, predictability, allowance allocation mechanisms, market stability measures, and accessibility. For the secondary market, the focus is on enhancing market integrity, improving transparency, and refining market structure.
On July 10, the IFRS Foundation announced it would take over the monitoring of companies’ progress on climate-related reporting practices from the Task Force on Climate-related Financial Disclosures (TCFD).
This came at the request of the Financial Stability Board, a global panel of regulators and follows the June release of the inaugural climate and sustainability reporting rules from the International Sustainability Standards Board (ISSB). The ISSB’s standards fully incorporate the TCFD’s recommendations.
The Financial Stability Board (FSB) is forming a Transition Plans Working Group to better understand the role of corporate and financial institution transition plans in addressing climate-related financial risks and promoting decarbonization.
The announcement accompanied the board’s July 13 publication of a progress report on addressing climate-related financial risks.
The report highlights the need for improved climate data availability and quality, as well as regulatory and supervisory practices. It also emphasizes the importance of developing forward-looking metrics for measuring climate-related risks and integrating climate scenario analysis into financial vulnerability assessments.
On July 27, the Integrity Council for the Voluntary Carbon Market (ICVCM) published the Core Carbon Principles (CCPs) framework to assess the integrity of carbon offset projects.
The framework aims to identify high-quality projects and improve the voluntary carbon market’s ability to support climate goals.
Carbon credit projects can now undergo a CCP assessment to determine if they meet the ICVCM’s standards for quality and integrity. Successfully assessed projects can use the CCP label on carbon credits that they sell.
CCPs require projects to be compatible with a net-zero transition, permanently sequester emissions, have additionality, and ensure robust quantification of emissions reductions or removals.