What happened in climate-related financial regulation last month, and what’s coming up
The US Securities and Exchange Commission (SEC) is investigating Goldman Sachs Asset Management (GSAM) over mutual funds that incorporate ESG investing criteria, the Wall Street Journal reported on June 10. The probe may not necessarily result in enforcement action.
A spokesperson for Goldman Sachs told trade publication Environmental Finance that the SEC is scrutinizing the company’s ESG Emerging Markets Equity Fund, International Equity ESG Fund, and a US Equity ESG separately-managed account offering.
The US Commodity Futures Trading Commission (CFTC) announced a Request for Information (RFI) on June 2 to gather public feedback on climate-related market risk.
Responses will be used to inform potential actions to address climate risks to US derivatives markets, such as the issuance of new or amended guidance, interpretations, policy statements, or regulations. The CFTC wants the public’s insights on climate data, scenario analysis and stress testing, risk management, product innovation, and voluntary carbon markets, among other things.
The RFI closes on August 8.
The US Office of the Comptroller of the Currency (OCC) said that its bank examiners will include climate-related financial risk in their supervision strategies.
In its semiannual risk perspective, published June 23, the OCC also said that its examination teams would engage with bank managers to better understand the challenges identifying and gathering suitable climate data and developing climate scenario analysis capabilities.
The OCC also told banks to make sure their public pronouncements on their climate risk management efforts match their actions.
The Bank of Canada (BoC) has raised concerns over the quality of the country’s draft climate risk disclosure standards.
In its Financial Stability Review, published June 9, the BoC said that proposed rules drawn up by the Canadian Securities Administrators (CSA) are “less prescriptive” than standards developed by the International Sustainability Standards Board and the US Securities and Exchange Commission. It added that if the finalized CSA rules are not “largely consistent and comparable with emerging global standards” Canadian business could struggle to attract sufficient capital to power the low-carbon transition.
The European Union (EU) took a big step toward mandating new climate and environmental disclosures for large companies.
On June 21, the European Council and Parliament “reached a provisional political agreement” on implementing the Corporate Sustainability Reporting Directive (CSRD), which would force companies to publicly disclose information on their climate risks and opportunities, as well as on other sustainability topics. The directive is intended to curb corporate greenwashing and surface information that helps investors support the low-carbon energy transition.
The CSRD would apply to all large companies, meaning listed or unlisted firms with more than 250 employees, €40 million in revenue, and/or €20 million in assets. Firms that currently report under the EU’s old Non-Financial Reporting Directive would have to comply with the CSRD from 2024, and other large companies from 2025. Small and medium-sized enterprises can opt out of the rules up until 2028.
CSRD-reporting companies will have to produce disclosures that accord with standards in development by the European Financial Reporting Advisory Group (EFRAG), a private association that provides technical advice to the European Commission. The climate standards would oblige firms to explain their low-carbon energy transition plans and report any and all actions taken to “prevent, mitigate or remediate actual or potential adverse impacts” from climate change.
The provisional agreement on the CSRD has still to be approved through official votes of the Council and Parliament.
A senior official at the European Central Bank (ECB) said EU lenders should align with its climate risk management expectations by 2024.
In a June 22 speech, Frank Elderson — Vice-Chair of the Supervisory Board at the ECB — said that the timeline was “reasonable” given banks’ progress implementing climate action plans. He added that 80% of banks planned to complete the actions needed to align with the expectations by 2023. The ECB published climate and environmental risk management and disclosure expectations in November 2020.
Elderson also announced that the ECB is launching “on-site inspections” of banks’ climate risk management and working on a “targeted review” of their commercial real estate exposures to climate risks.
The European Banking Authority (EBA) said it will “systematically monitor climate-related financial stability risks” as part of its 2022 priorities.
In its 2021 annual report, published June 15, the regulator said it would continue “providing tools to measure and manage ESG risks.” Part of this effort involves building an “ESG risk monitoring framework” to help it police emerging climate and sustainability risks.
The EBA also said it plans to release policy recommendations on the incorporation of environmental risks in the Pillar 1 bank capital framework in 2023, after considering feedback to a discussion paper on the topic published earlier this year. In addition, it said it will consider potential requirements for institutions’ internal scenario analyses and climate transition plans as part of its work to establish strong ESG risk management practices.
The European Securities and Markets Authority (ESMA) reported that ESG ratings used by EU entities suffer from gaps in their coverage of certain industries and lack detail.
These shortcomings were covered in a letter to the European Commission from the Chair of ESMA published on June 24, following the agency’s recent call for evidence on the characteristics of ESG rating and data providers. The regulator also cited complexity and “lack of transparency” as issues.
ESMA said it received 154 responses to its call for evidence. Its analysis found that there are 59 ESG rating providers currently active in the EU — consisting of a few very large players domiciled outside the bloc, and a bundle of smaller entities from inside the EU.
German regulator BaFin stepped up its investigation of asset manager DWS Group over allegations of greenwashing.
On May 31, BaFin officials — along with agents from the Frankfurt public prosecutor’s office and German federal police — raided the offices of DWS and Deutsche Bank, the asset manager’s majority investor, as part of a probe into suspected investment fraud.
The Wall Street Journal scooped last year that DWS was being investigated by BaFin and the US Securities and Exchange Commission following allegations made by the firm’s former sustainability chief, Desiree Fixler, who said the firm overstated the amount of assets invested using its ESG screening process.
The Bank of England (BoE) published its third annual climate-related financial disclosure on June 23.
In the report, the central bank revealed that the carbon intensity of its bond portfolios dropped year-on-year, but not by enough to align them with a 2°C warming trajectory.
It also detailed its current and planned future actions on climate risk management. In 2021, the BoE said it explored climate risk data sources and credit rating agency approaches to climate risk, as well as the applicability of its sovereign climate risk framework at the sub-sovereign level. Going forward it intends to review its sovereign climate risk framework and produce methodologies to incorporate climate issues into collateral valuations.
On June 8, BoE official Stefan Claus — Head of the BoE’s General Insurance Division — said that UK insurers have to address data gaps to manage climate risks effectively. In a speech before the Association of British Insurers, Claus summarized the results of the BoE’s recent climate stress test, highlighting how insurance companies apparently struggled to get good data on the Scope 3 emissions of corporates and on the geographical locations of assets.
On June 1, the BoE’s leader on climate change — Sarah Breeden — said that greenwashing could erode trust in the financial system and knock a low-carbon transition off-course.
Speaking at the virtual Green Swan Conference hosted by the Bank for International Settlements (BIS), Breeden argued that if greenwashing leads to misdirected investment, the risk of a disorderly transition would increase, imperiling businesses and households.
Breeden also denounced what she called “paper decarbonization,” meaning the practice of financial institutions investing in activities and products that are considered ‘green’ today rather than investing in those that will drive the future economy.
The UK Financial Reporting Council (FRC) released a consultation on June 15 on changes to professional standards that would require insurance actuaries to factor climate risks into their work.
The FRC regulates auditors, accountants, and actuaries. The consultation ends September 7.
The People’s Bank of China (PBoC) has extended ¥210 billion ($31 billion) worth of green financing to banks in the country through special lending facilities set up last year.
In an interview published on June 28, PBoC Governor Yi Gang also said that as of March 2022, total green loans extended by Chinese banks amounted to ¥18 trillion ($2.7 trillion), and green bond issuance ¥1.3 trillion ($194 billion).
The Hong Kong Monetary Authority (HKMA) disclosed the carbon intensity of its asset portfolio as part of its inaugural sustainability report, published on June 24.
This showed that the weighted average carbon intensity (WACI) of its public equities portfolio at end-2020 was 128 tonnes of carbon dioxide equivalent per US million dollars of revenue, down 42% from 2017. HKMA wrote that the sharp drop reflects its efforts to include more climate-friendly assets in its portfolio since it implemented its responsible investment strategy.
The report also said the authority is looking into how sustainability factors could be incorporated into its collateral framework, which is used by Hong Kong banks to borrow cash. The HKMA said “designated financial assets that meet pre-specified green benchmarks” may count as eligible collateral under this framework going forward.
Banks overseen by the Taiwan Financial Supervisory Commission (FSC) will be subject to climate stress tests in the first half of 2023, Bloomberg reported on June 8.
Roger Lin, deputy head of the FSC’s Banking Bureau, said the tests are being developed by Taiwan’s banking association, and are to be submitted for FSC approval by the end of September.
The Australian Securities and Investments Commission (ASIC) published guidance aimed at stamping our greenwashing in the fund management industry.
In an information sheet published June 14, ASIC laid out the steps investment managers and superannuation funds should take to accurately present the climate-friendliness of their products. Specifically, they should use clear labels in their disclosures and promotions, define the sustainability terms they include, and explain how sustainability considerations are incorporated into their investment strategies.
The Reserve Bank of New Zealand (RBNZ) is canvassing the public for their comments on the relevance of climate change for monetary policy.
As part of its five-year remit review, the RBNZ launched a consultation on June 1 covering how it sets interest rates and manages inflation. On climate change, the RBNZ said that while evidence shows that climate change will affect impact inflation, GDP, and the financial system, “it is not clear that monetary policy can materially influence climate change or its economic impacts.”
The consultation closes July 15.
The Basel Committee on Banking Supervision (BCBS) released finalized principles for the effective management and supervision of climate-related financial risks on June 15.
The 18 principles — 12 for banks and six for supervisors — are intended to enhance climate risk practices and act as a “common baseline” for internationally active lenders and their watchdogs. The BCBS also said the principles allow “sufficient flexibility” to make space for different and evolving practices across jurisdictions.
For banks, the principles cover how climate change should be considered in their corporate governance, internal controls, risks assessments, internal capital and liquidity adequacy assessment processes, and routine stress testing programs. The first principle, on the incorporation of material climate-related financial risks into banks’ business strategies, also asks firms to consider aligning executive compensation practices with climate risk performance.
As regards supervisors, the principles address the inclusion of climate change in scenario analysis and stress testing practices, as well as in their reviews of supervisees’ business strategies, corporate governance, and internal control frameworks.
The BCBS expects its members, which include central banks and supervisors from the US, UK, EU, and China, to implement the principles as soon as possible.