European Sustainability Standards, GRI Achieve Interoperability, and More.

September 8, 2023

The top five climate risk and disclosure stories this week.

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European sustainability rules, GRI achieve interoperability

The European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) have announced they’ve reached a “high level of interoperability” between each of their respective sustainability disclosure standards.

In a Monday statement, both groups confirmed that the European Sustainability Reporting Standards (ESRS) and the GRI Standards significantly overlap with one another, eliminating the need for organizations to duplicate their sustainability disclosure efforts. This also means that companies already reporting in line with the GRI Standards will be well-positioned to disclose their sustainability information under the ESRS.

For example, the ESRS are now using the same definition of impact materiality as GRI. This means the ESRS’s and GRI’s definitions, concepts, and disclosures on impacts are either fully or closely aligned. The only times that these do not completely overlap is when full alignment wasn’t possible due to the mandates under Europe’s Corporate Sustainability Reporting Directive.

To further simplify the sustainability reporting process, EFRAG and GRI will work on developing a digital taxonomy and multi-tagging system for their respective standards. This is intended to streamline digital reporting by allowing companies to cross-reference their disclosures under both the ESRS and GRI digital taxonomies.

“The efforts made by the GRI and EFRAG Sustainability Reporting teams will prevent the need for double reporting by companies resulting in a user-friendly reporting system without undue complexity,” Hans Buysse, EFRAG’s administrative board president, said in a statement. “Our collaboration with GRI is bearing fruit and we are already preparing ourselves for the next challenges in the field of sustainability reporting.”

New framework released for nature-related risks

The Network for Greening the Financial System (NGFS) released a beta version of its framework on nature-related financial risks on Thursday.

The new framework is intended to guide central banks’ and financial regulators’ future policies and actions, as well as to help create a common language for addressing and discussing nature-related financial risks.

The NGFS’s new framework consists of three phases. The first includes identifying the sources of physical and transition nature risks, while the second focuses on assessing economic threats that derive from nature risks. Finally, the third step looks at identifying the risks from and within the financial system that are a direct consequence of nature-related risks.

In the framework’s technical document, the NGFS references the “climate-nature nexus” and how climate and nature risks connect with one another. The group also says it’s important to consider both climate and nature risks in an integrated manner.

“Along with the climate crisis, the degradation of nature is an existential threat facing our planet,” said Ravi Menon, NGFS chair and managing director of the Monetary Authority of Singapore. “Addressing nature-related risks and its broader implications for the financial sector is no longer just prudent – it is an imperative. Finance can be a powerful force for helping to bend the curve of nature degradation.”

Singapore Exchange to propose ISSB-aligned listing rules 

The Singapore Exchange Regulation (SGX RegCo) plans to table changes to its listing rules so they’re aligned with the sustainability and climate disclosure requirements out of the International Sustainability Standards Board (ISSB).

In a column published Friday, SGX RegCo officials said the rules will be finalized by next year and that there will be a public consultation period on the requirement of climate disclosures for Singaporean companies. They also noted firms with climate transition plans that are already producing robust climate disclosures will “stand a better chance of maintaining access to capital markets, including benefitting from green and transition finance.”

The SGX RegCo column places a focus on climate transition plans, saying companies that get started on these early will experience a smoother transition when it comes to reporting against the ISSB standards. The officials outlined three core characteristics that companies need to develop a credible climate transition plan. The first is that companies should have a thorough understanding of their financially material climate risks, while the second requires strong climate governance to ensure the proper oversight of a transition plan. The third necessitates the active monitoring of how companies are progressing toward their short-, medium-, and long-term climate targets.

SGX RegCo officials said companies are not expected to have fulsome transition plans at the start because the process of developing them is meant to be ongoing and iterative. However, they still noted that companies should start working on their transition plans as soon as possible.

“While many companies have begun to show greater transparency by disclosing emissions data and their material environmental, social, and governance (ESG) factors, many have yet to formulate and communicate a credible climate transition plan,” the column reads. “Disclosure of such transition plans is important to fulfill the growing interest from investors and other stakeholders on how the company intends to meet its climate ambitions.”

No banks disclosed finance toward climate solutions in last year — analysis

None of the world’s largest 26 banks have publicly reported the amount of funding they’ve committed toward climate solutions over the last year, according to a report released on Tuesday.

The analysis out of the Transition Pathway Initiative (TPI), a research organization that focuses on transitioning the financial and corporate world to a low-carbon economy, said only six of the world’s biggest banks disclosed a pledge to immediately end all activities that fund new coal projects. At the same time, only one bank has committed to zero out its emissions for both on and off-balance sheet activities, while just five have publicly reported the quantitative results of their climate scenario analyses.

The TPI used its Net-Zero Banking Assessment Framework to look at 26 of the world’s largest banks’ climate progress. The framework assessed the banks across 10 key areas, including net-zero commitments, target analysis, disclosure of greenhouse gas emissions, performance of emissions, and decarbonization strategy. The banks’ public disclosures were analyzed between March 6 and June 30 of this year.

According to the TPI, European and Japanese banks are farther ahead when it comes to climate action, compared with others around the world. For example, Dutch bank ING scored above average for eight of the 10 framework areas, while US banks JP Morgan and Morgan Stanley only scored above average for two areas that are part of the framework.

Moving forward, the TPI recommends for banks to expand their emissions reduction target coverage to include all material financing activities, to provide plans that outline milestones covering all financed emissions in their sectoral targets, and to include climate-related risks in their annual reports and financial statements.

Faster green transition will yield benefits — Europe stress test

The best way to achieve a net-zero economy is by accelerating the green transition to a rate that is quicker than what is possible under current climate policies, according to the European Central Bank’s (ECB) second climate stress test.

Released Wednesday, the stress test analyzes European companies’, households’, and banks’ resilience to three climate scenarios. The first is an accelerated transition scenario that prioritizes climate-friendly policies and investment, while the second is a later low-carbon transition scenario that continues on its current path and only speeds up in 2026. However, both of these scenarios are still ambitious enough to achieve the 2030 emissions reduction targets outlined in the 2015 Paris Climate Agreement. The third scenario is a delayed low-carbon transition that only begins in 2026 and is not ambitious enough to reach the Paris Agreement’s 2030 goals.

According to the ECB’s test, a faster green transition shows climate-related financial risks significantly decrease in the medium-term. While the quicker transition scenario involves more investment and high energy costs at the beginning, the ECB says these will pay off and reduce energy costs in the long term. At the same time, a delayed low-carbon transition and failing to take action will lead to higher costs and more financial risks down the road.

If the low-carbon transition happens later, the ECB stress test says banks are exposed to the highest credit risk, which is expected to rise by over 100% by 2030 compared with 2022. In a scenario in which there’s an accelerated green transition, banks’ credit risk is only expected to increase by 60%.

“We need more decisive policies to ensure a speedier transition towards a net-zero economy in line with the goals of the Paris Agreement,” ECB vice-president Luis de Guindos said. “Moving at the current pace will push up risks and costs for the economy and financial system. There is a clear need for speed on the road to Paris.”

The ECB’s second climate stress test is part of its broader plan to improve its understanding of climate-related financial risks.