Climate risk regulation rundown: March 2022

April 5, 2022

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

The US Securities and Exchange Commission (SEC) issued a proposed rule on climate-related disclosures for publicly listed companies on March 21.

If enacted, the rule would require companies to describe their governance, strategy, and risk management in relation to climate change in ways similar to those recommended by the Task Force on Climate-related Financial Disclosures (TCFD).  The information would have to be included in companies’ registration statements, annual reports, and other filings.

The rule would also make firms report climate-related financial statement metrics and accompanying disclosures in a note to their audited financial statements. For example, a company would have to report the financial impacts of extreme weather events and other physical risks, as well as “transition activities” on their revenue, cost of revenue, sale of property, plant, and equipment, and more.

All companies would have to report their direct Scope 1 and 2 greenhouse gas emissions. Large companies would also have to obtain attestation reports from third-party service providers to provide assurance that their Scope 1 and 2 numbers are sound.

Scope 3 emissions would have to be publicly reported by companies where they are deemed to be material, or by companies that have set emissions reduction goals that include Scope 3. 

The comment period on the proposal lasts until at least May 20, 2022.

(Learn more about the SEC proposed rule by reading Manifest Climate’s latest blog: ‘What’s in the SEC’s New Climate Disclosure Rule Proposal’)

US President Biden’s nominee to serve as the Vice Chair for Supervision at the Federal Reserve withdrew from consideration on March 15 in response to lawmakers’ objections to her views on climate risks.

Sarah Bloom Raskin, who has previously served as the Deputy Secretary of the US Department of the Treasury and as a Governor of the Federal Reserve Board, has been upfront about how US regulators should act to curb climate risks to the financial system and use their power to incentivize the transition to a low-carbon economy.

In a letter to Biden seen by Politico, Raskin said that Republicans senators’ opposition to her nomination stemmed from her “frank public discussion of climate change and the economic costs associated with it.” She added: “It was — and is — my considered view that the perils of climate change must be added to the list of serious risks that the Federal Reserve considers as it works to ensure the stability and resiliency of our economy and financial system.”

Democratic Senator Joe Manchin also opposed Raskin’s nomination. Without the vote of every Democratic senator, Raskin would have been unable to be confirmed by the Senate given Republican’s unanimous opposition.

The Federal Reserve Bank of New York will host a symposium on “Climate Change: Implications for Macroeconomics” on May 13. The gathering of academics and policymakers will discuss how climate change may impact monetary policy, the allocation of labor and capital, trade and global production, and financial markets.

The US Federal Deposit Insurance Corporation (FDIC) published draft climate-related risk management principles for large banks on March 30.

The principles would apply to firms over $100 billion in size, and cover banks’ climate governance, policies and procedures, strategy, risk management, disclosure, and scenario analysis. They also describe how bank boards should consider the intersection of climate change with established financial risk categories, including credit, market, liquidity, and operational risks. The principles are substantively similar to those issued by the Office of the Comptroller of the Currency (OCC) in December last year, which are in the process of being finalized.

The public comment period on the FDIC’s draft principles closes on June 3.

The acting head of the US Office of the Comptroller of the Currency (OCC), Michael Hsu, said on March 7 “it will be a number of years” before its bank examiners run climate risk management evaluations of midsize and community banks. He added that these entities should use the time the regulator is focused on larger banks to “develop thoughtful, tailored assessments of their climate risk profiles.”

A bill introduced in the Senate of Canada would force banks to hold more capital against their fossil fuel loans. The Climate-Aligned Finance Act, introduced by Senator Rosa Galvez on March 24, would ramp up the risk-weights banks apply to “financing exposed to acute transition risks.” Risk-weights are used to determine bank capital requirements for loans, investments, and other exposures.

Specifically, the bill would apply a 1,250% risk-weight to any loan, bond, or derivative exposure to new fossil fuel resources or infrastructure. This would mean for each dollar of exposure to these activities, a bank would have to hold one dollar of capital in reserve.

It would also set a 150% risk-weight on exposures to all other kinds of fossil fuel activity, and apply a banking system-wide capital surcharge that “recognizes the extent to which the activities of financial institutions financially facilitate emissions.” 

The legislation would also change the Bank of Canada’s mandate so that it has to act in alignment with Canada’s climate commitments.

The European Central Bank (ECB) published the results of a stocktaking exercise on the quality of banks’ climate-related disclosures on March 14.

This showed that while most banks now produce meaningful information on their climate and environmental (C&E) risks, many disclosures lack transparency and have significant gaps.

As of 2021, seven in ten banks reported information on C&E risk management and governance, and four in ten relevant data on how C&E risks are incorporated into their strategies. However, none of the banks surveyed meet all the ECB’s supervisory expectations for disclosures, and just 12% have described how they plan to align their portfolios with the objectives of the Paris Agreement. 

The ECB stocktake covered 109 banks’ public disclosures. In the wake of the exercise, the ECB sent individual feedback letters to firms highlighting their shortcomings and disclosure expectations for the future.

Bloomberg reported on March 22 that members of the ECB’s supervisory board plan to get to work incorporating climate risks into the Europe-wide rulebook on setting bank capital requirements. Discussions are slated to begin in the second half of 2022 following the results of the ECB’s supervisory climate stress test.

In a speech on March 28, the ECB’s Chair of the Supervisory Board said that the central bank “will not hesitate” to make sure lenders “sufficiently disclose the climate-related and environmental risks they are exposed to.” He also explained that a bank that falls short of its climate risk disclosure obligations would be in breach of the EU’s Capital Requirements Regulation “with all the consequences this can entail.”

The European Securities and Markets Authority (ESMA) published a report on the European Union’s carbon market on March 28.

This included proposals for policymakers on improving the transparency and monitoring of EU Allowances (EUA), the carbon credits used in the bloc’s emissions trading scheme. Specifically, it called for an extension of position management controls to EUA derivatives and changes to EUA position reporting, 

ESMA also recommended that the European Commission put limits on the positions in carbon credits held by institutions and centralize monitoring of the carbon market.

The European Financial Reporting Advisory Group (EFRAG), a private association charged with providing technical advice to the European Commission on EU Sustainability Reporting Standards, appointed members to its Sustainability Reporting Board on March 10.

This board will oversee all the sustainability reporting positions of EFRAG.

On March 30, EFRAG also said it would complete a draft set of sustainability reporting standards by the end of April. These standards would cover environmental, social, and governance reporting, including the disclosure of climate-related issues.

On March 22, the Governor of the Banque de France said lenders should be required to publish transition plans that are then scrutinized by supervisors. Banks with transition plans that are “misaligned” with climate policy targets could cause them to receive capital add-ons, he added.

The latest systemic risk survey conducted by the Bank of England (BoE) revealed that 24% of respondents cited climate risk as a threat to the UK financial system.

Published on March 24, the biannual survey quantifies and tracks market participants views of systemic risks. This edition also revealed that 15% of respondents consider climate risk as one of the most challenging to manage. 

An official at the UK’s Prudential Regulation Authority (PRA) said the authority would assess whether the current capital framework for insurance companies is “fit for purpose” when it comes to incorporating climate change.

In a speech on March 2, Charlotte Gerken — an Executive Director co-leading the Insurance Directorate at the PRA — said if shortcomings were found, it would explore changes to the framework “in order to capture climate risks adequately.”

The Bank of Japan (BoJ) published an analysis of physical climate risks to financial institutions on March 14.

This found that to date the indirect impacts of flood risks, a subset of physical climate risks, “has not been sizable.”

However, a forward-looking assessment included in the analysis found that without a low-carbon transition, increased flood risks could cut the net worth of banks and other financial firms by 6% by 2100, and depress Japan’s GDP by 0.6%.

The Australian Prudential Regulation Authority (APRA) issued a “climate risk self-assessment” survey to banks and other regulated entities on March 2.

APRA Chairman Wayne Byres said that the regulator would “incorporate insights from the survey into its ongoing supervisory approaches” to addressing climate risks. It would also provide participating entities with “de-identified peer comparison results so as to enable them to understand how their approaches and practices compare to peers.”

The survey questions are intended to surface data on how financial institutions are currently managing climate risks, using APRA’s 2021 guidance document on climate change risks as a benchmark.

A cross-agency group chaired by the Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission plans to work with authorities in mainland China to establish a ‘Unified Carbon Market.’

In a report on carbon market opportunities for Hong Kong published on March 30, the Green and Sustainable Finance Cross-Agency Steering Group said it should assist and integrate with China’s national and regional carbon markets. Specifically, Hong Kong should help facilitate the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) Unified Carbon Market, which would link into mainland China’s national emissions trading system.

The Steering Group also said it would take steps to develop Hong Kong into a “global, high-quality voluntary carbon market.”

Bank Negara Malaysia (BNM)the central bank of Malaysia, published a report on nature-based risks to the country’s financial system, including those caused or exacerbated by climate change.

Released on March 15 in partnership with the World Bank, the report said that 54% of banks are “exposed to sectors that depend to a high extent on ecosystem services” through their commercial loan portfolios, making them vulnerable to physical climate risks and water scarcity. Around one-quarter of banks’ portfolios are also vulnerable to climate regulation.

In addition, the report showed that individual banks’ exposure to transition risks — both climate- and nature-related — ranged from 28% to 100% of their commercial loan holdings.

The International Sustainability Standards Board (ISSB) published draft sustainability-related and climate-related disclosure requirements for public comment on March 31.

The draft climate-related requirements would make companies disclose their climate governance, strategy, and risk management processes. It would also mandate the publication of general and industry-specific metrics and targets, including absolute Scope 1, 2, and 3 emissions.

The purpose of the standard is to provide investors with the information needed to understand how climate-related risks and opportunities could impact a company’s enterprise value and gauge its ability to adapt accordingly.

Emmanuel Faber, Chair of the ISSB, said the requirements are built on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and integrate industry-specific elements adopted from the Sustainability Accounting Standards Board (SASB).

The public comment period for the draft standards closes on July 29. The ISSB then plans to review feedback and publish a finalized set by the end of the year. 

(Learn more about the ISSB draft standards by reading Manifest Climate’s latest blog: ‘Unpacking the ISSB’s Climate-Related Disclosure Standards’)

On March 24, the ISSB announced a memorandum of understanding with the Global Sustainability Standards Board (GSSB) that will ensure their respective work programs and standard-setting activities are aligned. The purpose of the tie-up is to ensure basic sustainability information produced for investors by the ISSB continues to serve the needs of other stakeholders that want to understand companies’ impacts on the climate and environment.

The Financial Stability Board (FSB) published its 2022 work programme on March 31, which has among its priorities “building and strengthening the analytical basis for monitoring climate related risks to financial stability.” 

In an indicative timeline of planned publications, the FSB said it would release a consultative document concerning the identification of regulatory and supervisory approaches to addressing climate-related financial risks in April. In July, it plans to release two reports, one on climate-related vulnerabilities and their monitoring and another on scenario analysis for climate-related risks. A progress update on the FSB’s efforts in achieving consistent climate-related financial disclosures is slated for October.

The International Organization of Securities Commissions (IOSCO) adopted a sustainable finance work plan on March 14. As part of this, the group pledged to conduct “a timely and thorough review” of the ISSB draft standards.

It also said it would continue developing standards for the independent assurance of corporate sustainability reports and ramp up its engagement with stakeholders on its recommendations concerning ESG ratings and data providers.

Furthermore, the plan commits IOSCO to an “in-depth review of carbon markets” to understand the vulnerabilities they face.

The Network for Greening the Financial System (NGFS), the club of climate-focused central banks and supervisors, released its 2021 annual report on March 3.

In it, the NGFS disclosed that it gained 22 new members last year, as well as three additional observer members. It also covered major actions taken by the group in relation to its six core workstreams.

For central banks, these are: integrating climate‑related risks into financial stability monitoring and micro‑supervision; integrating sustainability factors into own‑portfolio management; bridging climate data gaps; and building awareness and intellectual capacity and encouraging technical assistance and knowledge‑sharing.

For policymakers, they are: achieving robust and internationally consistent climate and environment‑related disclosure, and supporting the development of a taxonomy of economic activities.