UK takes steps to endorse ISSB, IOSCO issues carbon markets report, and more.

July 21, 2023

The top five climate risk and disclosure stories this week.

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UK FRC seeks public input on endorsing ISSB standards

The UK Financial Reporting Council (FRC) launched a call for evidence on Wednesday to assess the potential endorsement of the International Sustainability Standards Board’s (ISSB) inaugural disclosure rules. 

The FRC oversees UK auditors, accountants, and actuaries and is responsible for setting standards on corporate governance and reporting in the country. The latest call for evidence is intended to canvas views on whether the disclosure rules, known as IFRS S1 and IFRS S2, will produce reports that are “understandable, relevant, reliable and comparable for investors.” It also seeks to learn whether these reports will be “technically feasible” to prepare on a timely basis and on the same schedule as general purpose financial reports. 

The ISSB standards were published on June 26. IFRS S1 covers the disclosure of general sustainability-related risks and opportunities, while IFRS S2 focuses on specific climate-related disclosures. Both standards incorporate recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and are based on voluntary reporting frameworks, including those out of the Sustainability Accounting Standards Board (SASB) and the Integrated Reporting Framework.

The FRC’s call for evidence closes on October 11.

Global standard setter issues carbon markets report

The International Organization of Securities Commissions (IOSCO) issued a final report on Compliance Carbon Markets (CCMs) on Monday. These are regulated markets set up by governments to advance climate goals that require high-emitting industries to buy and trade carbon credits so they can pollute.

The report highlights how CCMs are unique compared to traditional financial markets and offers recommendations to ensure 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 these firms trade credits among themselves.

Recommendations for the primary market focus on transparency, predictability, allowance allocation mechanisms, market stability mechanisms, and primary market access. Recommendations for the secondary market emphasize market integrity, transparency, and structure. Additionally, the report features a selection of supervisory principles drawn from existing IOSCO reports on securities and commodities markets to guide national regulators’ oversight activities.

“Sound, efficient and compliant carbon markets can be a key tool to help jurisdictions meet their climate goals,” said Verena Ross, the co-chair of the STF Carbon Markets Workstream at the European Securities and Markets Authority (ESMA). “Building on the experience of financial markets regulators at IOSCO, this report will support the continued development of these markets, that can contribute to reducing greenhouse gas emissions globally.”

FCA postpones release of ESG funds labeling regime

The UK’s Financial Conduct Authority (FCA) has delayed the publication of its Sustainability Disclosure Requirements (SDR) for investment products until the last three months of this year.

It’s the second time that the regulation has been pushed back. The FCA previously planned to unveil the rules in the first half of this year, but it chose not to so it could spend more time reviewing the large amount of feedback it received following a consultation with market participants.

The SDR would impose a new labeling regime over environmental, social, and governance (ESG) funds to help retail investors differentiate between various sustainable investment strategies. It would also curb the use of certain ESG terms in product names, such as ‘climate’, ‘impact’, ‘sustainable’ or ‘sustainability’, and ‘green’.

The FCA said the SDR would “help the UK’s asset management sector thrive by setting standards that improve the sustainability information consumers have access to.”

Fund managers value board ESG expertise — survey

A recent survey shows 87% of fund managers consider ESG and sustainability experience valuable when assessing the collective skills and expertise of board members in European financial services firms. 

According to the latest EY European Financial Services Boardroom Monitor report, 18% of UK board members appointed in the first half of 2023 have professional experience in sustainability and ESG, a slight decrease from 26% during the first half of 2022. Overall, 14% of all board members in scope of EY’s Boardroom Monitor have sustainability experience. Among UK insurers, 17% appointed board members with professional experience in sustainability and ESG in the first half of this year, compared to 14% of banks.

The EY poll analyzes the profile, experience, training, and skillsets of board directors across the MSCI European Financials Index and includes a sentiment polling survey of 300 European financial services investors. 

Carbon-regulated firms prioritize short-term GHG reductions — study

As carbon regulation becomes more stringent, companies tend to prioritize short-term emissions reduction strategies over long-term green innovation, new research out of the European Central Bank (ECB) claims. 

As compliance costs rise, companies shift their focus toward immediate and short-lived abatement options, like tree planting or carbon capture and storage, according to the study. This is because abatement strategies can rapidly cut a firm’s net emissions, thereby reducing the need to buy carbon credits under emissions trading systems, or and lowering their tax liabilities under carbon tax regimes.

However, this approach can slow down the transition to greener technologies that can make firms more climate-friendly over the long term. The paper suggests that complementing carbon pricing with subsidies for green innovation could help promote more effective environmentally-friendly investments.

The research also suggests that companies holding large inventories of carbon credits are less committed to reducing their emissions since they can use these in place of abatement strategies or green investments to comply with carbon regulations.

Limiting the distribution of free carbon credits could make firms more devoted to green investments, the researchers suggest.