EU banking supervisor The European Banking Authority (EBA) announced the launch of a consultation on new proposed guidelines, setting out requirements for banks to identify, measure, manage and monitor ESG risks, including setting plans to address risks arising from the EU’s transition to a climate-neutral economy.

Requirements for banks under the proposed guidelines would include undertaking regular materiality assessments of ESG risks, ensuring the ability to identify risks through data processes and methodologies including exposure-based, portfolio-based and scenario-based approaches, and the integration of ESG risks in their regular risk management frameworks, with considerations of impact across risk categories including credit, market, operational, reputational, liquidity, business model, and concentration risks, across short-, medium-, and long-term time horizons.

The guidelines would also require institutions to develop Capital Requirement Directive-based (CRD) transition plans addressing risks arising from the climate transition and financial risks stemming from ESG factors and regulatory objectives.

According to the EBA, the new guidelines were developed in line with the regulator’s roadmap on sustainable finance. Launched in late 2022, the roadmap sets out the EBA’s priorities and plans in the areas of sustainable finance and in supporting and monitoring the integration of ESG risk considerations in the banking framework, through key objectives that include risk management and supervision, treatment of exposures, and ESG risk and sustainable finance monitoring.

Explaining the rationale behind the new guidelines, the EBA noted that despite actions taken over the past few years to manage the impacts of ESG factors, “several shortcomings have been observed in the inclusion of ESG risks in business strategies and risk management frameworks,” which the regulator said could “pose challenges to the safety and soundness of institutions as the EU transitions towards a more sustainable economy and ESG risks become increasingly substantiated or materialize.”

The guidelines also note a different approach relative to other sustainability-focused regulation such as the Corporate Sustainability Reporting Directive (CSRD) and the proposed Corporate Sustainability Due Diligence Directive (CSDDD), which focus on the compatibility of business models with the EU’s climate and sustainability objectives, while the EBA’s proposals focus instead on ensuring ESG risks are assessed and embedded in strategies and policies, rather than requiring banks to align with specific sustainability goals or transition pathways.

While specifying that the goal of setting up prudential plans “is not to force institutions to exit or divest from carbon intensive sectors,” the guidelines do aim to “stimulate institutions to proactively reflect on technological, business and behavioral changes driven by the sustainable transition,” including focusing on the related risks and opportunities, transition planning and engagement.

Click here to access the draft guidelines. The EBA consultation is scheduled to run until April 18.

EU markets regulator the European Securities and Markets Authority (ESMA) announced the release of an update of its proposed guidance for the use of ESG and sustainability-related terms in investment fund names, including the introduction of a new “transition” category enabling the use of labels to identify funds that include investments not currently classified as green, but are focused on transition strategies.

The update follows the launch of a consultation on the guidelines in November 2022, which the regulator said was aimed at protecting investors from greenwashing risk, by ensuring that fund names that include terms such as “ESG” or “sustainability” fairly reflect funds’ actual investment policies and objectives.

In a recent study released by ESMA, the regulator found that there has been a sharp increase in the use of sustainability-related terms in fund names in Europe over the past several years, with the proportion of funds using ESG terms up more than 4x in 10 years, as fund managers launched new ESG-related products, and changed the names of funds to incorporate sustainability-related terms. The study also found a preference by fund providers for more generic ESG terms, which could make it difficult for investors to verify that investments align with the funds’ names.

One of the proposals included in the initial consultation included introducing a threshold of the minimum proportion of investments required to support an ESG-related fund name, including an 80% threshold for the use of ESG-related words, and a 50% threshold for the use of “sustainable” or any sustainability-related term.

The inclusion of different thresholds for ESG and for sustainability-related terms was met by criticism from investor groups, who suggested that the system may cause confusion for investors who often do not distinguish between the terms. Following the consultation, ESMA removed the 50% sustainability-related threshold, replacing it with new guidelines, including a requirement for an 80% minimum proportion of investments used to meet the sustainability characteristics, the application of Paris-aligned benchmark (PAB) exclusions – such as exclusions of companies involved in controversial weapons or tobacco production, and of companies deriving more than 10% of revenues from exploration, production or refining of oil fuels – and investing “meaningfully” in sustainable investments in alignment with the SFDR definition.

Another significant change in the guidelines is the introduction of a new category for transition-related terms, which would not apply the fossil-fuel related PAB exclusions, while retaining the 80% investment threshold. The regulator also noted that funds with “social” or “governance” terms in their names could be too restricted by the fossil fuel exclusions.

In its statement announcing the updated guidelines, ESMA said:

“Funds’ names are a powerful marketing tool. In order not to mislead investors, ESMA believes that ESG- and sustainability-related terms in funds’ names should be supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy.”

Australia’s competition regulator the Australian Competition and Consumer Commission (ACCC) announced today the release of its final guidance on environmental claims, aimed at helping companies comply with rules to avoid misleading green marketing and advertising green claims, and protecting consumers from greenwashing.

The new guidance follows the publication of a study by ACCC earlier this year that found that 57% of companies examined made concerning claims about their environmental credentials. Following the release of the study, the regulator said that it will be investigating companies for potential greenwashing, and that it will conduct education activities with businesses and update guidance to help improve the integrity of environmental claims. The regulator released draft guidance in July 2023, and said that its final version incorporated feedback from more than 150 stakeholders including consumers, businesses and environmental organizations.

ACCC Acting Chair Catriona Lowe said:

“Our final guidance helps to demonstrate how businesses can make clear, evidence-based environmental claims that consumers can understand and trust.

“Environmental claims are useful for consumers when they can easily understand what the environmental benefit is, and if there are any restrictions that can limit this benefit.”

The final guidance included a set of eight key principles aimed at helping businesses ensure that their green claims are clear, accurate, and not misleading. The principles include making accurate and truthful claims, noting that the overall impression presented by the company should be considered with even factually correct claims being able to mislead consumers; having evidence to back up claims, including making research, evidence, or data on claims easily accessible; not hiding or omitting important information; explaining any conditions or qualifications; avoiding broad and unqualified claims; using clear, easy to understand language, ensuring that visual elements do not give the wrong impression about environmental benefits, and; being direct and open about the company’s sustainability transition.

The guidance also outlines actions that can be taken by the ACCC against companies found to be making false or misleading representations, with penalties reaching as much as $50 million, three times the assessed value of the benefit from the contravention, or up to 30% of the company’s revenue during the relevant period.

ACCC said that it will release further guidance in early 2024 on emissions and offset claims and on the use of trust marks, and that the regulator also plans to develop guidance aimed at helping consumers to assess and rely on environmental claims.

Lowe added:

“Misleading environmental and sustainability claims continue to be an enforcement and compliance priority for the ACCC, and we have several active investigations underway.”

The UK’s Competition and Markets Authority (CMA) announced today that it has formally launched an investigation into Unilever, examining the global consumer brand giant’s green claims, after an initial review revealed “a range of concerning practices” that the company may be overstating the environmental attributes of some its products. 

In a statement today from a Unilever spokesperson, the company said that it was “surprised and disappointed” by the announcement, and added that it refuted that the company’s claims “are in any way misleading.”

The CMA said that its investigation forms part of its broader greenwashing investigation into whether consumers are being misled by the sustainability claims in the marketing of products and services.

Earlier this year, the regulator announced that it would begin examining the green claims made by companies marketing items including food, drink and homecare products, following preliminary work that CMA Chief Executive Sarah Cardell said had indicated that “there could be greenwashing going on” in the sector.

Following its initial review of companies in the fast-moving consumer goods (FMCG) sector, which the CMA said “uncovered a range of concerning practices,” the regulator announced that it would begin an investigation into Unilever, with concerns including the use of “vague and broad” language that could mislead shoppers about the environmental impact of certain products, claims about ingredients that could exaggerate how “natural” the product is, claims about a single aspect of a product that may suggest that the product as a whole is environmentally friendly, and claims about product recyclability that fail to specify if they relate to the whole product, or just part, or the packaging.

The regulator also said that the “colours and imagery” used by Unilever “may create the overall impression that some products are more environmentally friendly than they actually are.”

Cardell said:

“So far, the evidence we’ve seen has raised concerns about how Unilever presents certain products as environmentally friendly. We’ll be drilling down into these claims to see if they measure up. If we find they’re greenwashing, we’ll take action to make sure shoppers are protected.”

In the company’s statement, the Unilever spokesperson said that the company will cooperate with the CMA in its probe. The statement added:

“Unilever is committed to making responsible claims about the benefits of our products on our packs and to these being transparent and clear, and we have robust processes in place to make sure any claims can be substantiated.”

Since announcing its review of the FMCG sector, the CMA said that it has seen signs of improvement in the sector, including suppliers changing and removing some green claims. Noting that it has “identified a range of concerns,” however, the regulator said that “new investigations may follow.”

The Monetary Authority of Singapore (MAS), the central bank and financial regulator of Singapore, announced today the publication of its finalized Code of Conduct for ESG Rating and Data Product Providers (COC), introducing a set of principles aimed at boosting transparency, comparability and reliability of ESG ratings and data.

The code of conduct, and an accompanying checklist for ESG ratings and data providers to attest their COC compliance, are being rolled out on a voluntary basis, using a “comply or explain” approach for providers.

The new code of conduct comes as pressure builds to regulate providers of ESG ratings and data, with demand for the services surging as investors increasingly integrate ESG considerations into the investment process, while the activities and businesses of the providers are generally not covered by markets and securities regulators.

In November 2021, securities regulator standards setter IOSCO urged regulators to focus on improving transparency in the ESG ratings and data space, and to begin to apply regulatory oversight. IOSCO also provided a series of recommendations for regulators, such as requiring providers to identify and disclose potential conflicts of interest, and to consider the data and methodologies used by the providers. MAS said that its new COC builds on the IOSCO recommendations.

Since IOSCO issued its recommendations, several jurisdictions have moved to establish rules for the sector, including regulators in the UK and EU.

Key principles for providers outlined in the COC include the adoption of written policies and procedures ensuring that ratings and data products are based on a thorough analysis of all relevant information, and providing transparency around the methodologies and data sources used for the products, as well as policies to ensure independence and to identify, avoid, manage and disclose potential conflicts of interest.

Alongside the release, the regulator said that it was encouraging ESG ratings and data providers to disclose their adoption of the COC and publish the completed checklist within 12 months.

Lim Tuang Lee, Assistant Managing Director, Capital Markets, at MAS, said:

“The Code of Conduct will help build market confidence in the use of ESG rating and data products. Its baseline transparency standards for rating methodologies and data sources will improve the comparability of ratings and data products. The Code also encourages disclosures on how forward-looking elements are considered in such products, which will improve investors’ assessments of investee entities’ responses to transition risks and opportunities. Overall, the Code will support informed decision making by investors keen on funding the climate transition. We welcome adoption by ESG rating and data product providers as soon as they are ready.”

Click here to access the MAS Code of Conduct for ESG ratings and data providers.

The successful establishment of climate reporting rules in the U.S. could potentially help companies facing more onerous climate-related disclosure requirements in other jurisdictions, according to comments by Securities and Exchange Commission (SEC) Chair Gary Gensler at a Council on Foreign Relations event.

Alternatively, the lack of a U.S. rule would be more likely to result in many companies forced to comply with foreign reporting rules such as those in the EU’s Corporate Sustainable Reporting Directive (CSRD), Gensler warned, with the SEC unable to discuss substituted compliance – a system under which companies are seen as satisfying some requirements under one jurisdiction’s rules by complying with comparable rules elsewhere – with its EU counterparts.

The SEC released its proposed climate disclosure rules in March 2022, which would require U.S. companies to provide information on climate risks facing their businesses, and plans to address those risks, along with metrics detailing the companies’ operational climate footprint, and in some cases emissions emanating across their value chains. The comment period for the proposed rule ended late last year, but the Commission has yet to issue a final rule.

While the SEC continues to review its climate reporting rule, other sustainability disclosure regimes are emerging, often with a different or more comprehensive focus than the U.S. proposal, that will apply to many of the U.S. public companies under the SEC’s jurisdiction.

Most notably, the EU’s CSRD rules’ requirements in areas such as Scope 3 supply chain emissions reporting will likely be more comprehensive than the SEC’s requirements, which as proposed would mandate the disclosure only if the company determines that it is material or has made a public commitment regarding its Scope 3 emissions. The CSRD also utilizes a double materiality approach under which companies are required to report on how they expect climate and environmental changes to affect their businesses, as well as the how they impact people and planet.

The CSRD rules would apply to many U.S. companies, as the regulation extends the reporting requirements to non-European companies that generate over €150 million in the EU.

Similarly, California Governor Gavin Newsom recently signed a bill into law which will effectively require large U.S. companies that do business in the state to disclose their full value chain emissions.

In his comments, Gensler said that while the SEC views its climate reporting rules through “the lens of materiality,” and with a focus on how investors would use the information, he noted that “other jurisdictions may be looking at it for other reasons… to lower climate or greenhouse gas. That’s not our remit.”

Gensler continued:

“If we were not to finalize a rule, or if we finalize a rule and it’s overturned in the courts, either way if we don’t have a rule… some significant number of U.S. companies will have to comply with the European standards – significant number, thousands maybe.

“If we finalize something, even if it’s different than Europe… then we can have some discussions with the Europeans about what’s called ‘substituted compliance,’ possibly.”

While many expected the finalized rule to be released earlier this year, the SEC has yet to set a firm date for its final release, as it deals with the significant volume of feedback it has received on its proposal. Gensler noted that the proposal “got over 16,000 public comments – we never get that. Four or five thousand is a big number, and we often get 200 public comment letters on something were doing.”

Gensler said that he was not announcing when the final rule would be released. A regulatory agenda statement released by the U.S. Office of Information and Regulatory Affairs yesterday listed the current Final Action date for the SEC’s climate rule as April 2024.

De Nederlandsche Bank (DNB), the central bank of the Netherlands, announced today a new commitment to align its reserves, including its investments in equities and corporate bonds with the Paris Agreement.

According to the new commitment, DNB will aim to cut the carbon footprint of the investments in its portfolio in half by 2030, on a 2019 basis, with an emphasis on achieving real-world emissions reductions at its portfolio companies.

In a statement announcing the new commitment, DNB said:

“The European Union (EU) has made various commitments as part of its efforts to limit global warming to 1.5 degrees Celsius compared to pre-industrial levels. For example, European carbon emissions are targeted to be at least 55% lower by 2030 than in 1990, and the EU must be climate-neutral by 2050. DNB is translating these commitments into choices in the management of its own reserves.”

The central bank outlined its approach to reducing portfolio emissions, which will focus on three strategies, including “Invest,” targeting companies with lower carbon emissions or with specific plans to reduce emissions; “Engage,” including entering into dialogue both indirectly with companies and directly with fund managers, engaging with investee companies through a dedicated voting and engagement manager, voting at shareholder meetings, and with fund managers on issues ranging from phasing out coal-linked investments and improving climate-related reporting, and; “Avoid,” including avoiding companies that derive a significant portion of revenues from fossil fuel activities and are not committed to the Paris Climate Agreement, as well as companies that violate standards such as the UNGC principles and those involved with production of or trade in controversial weapons or tobacco.

The DNB added that it will evaluate its approach annually to determine whether changes in its portfolio carbon footprint can actually be attributed to carbon reductions at investee companies, ensuring the achievement of “real-world carbon reductions” rather than just portfolio decarbonization.

The DNB said:

“With the own account portfolios we aim to achieve a solid financial return relative to our funding costs and to contribute to broad value creation on environmental and social issues.”

Image: © De Nederlandsche Bank N.V.

Europe’s three primary financial regulatory agencies, the European Supervisory Authorities (ESAs), announced the publication of their Final Report amending the draft Regulatory Technical Standards (RTS), completing their review of key disclosure rules for financial products under the Sustainable Finance Disclosure Regulation (SFDR), with proposals for new mandatory reporting on social factors such as exposure to tobacco production and inadequate wages, as well as new financial product disclosure of greenhouse gas (GHG) emission reduction targets.

The EU SFDR forms part of the EU’s Action Plan on financing sustainable growth. The regulation aims to establish harmonized rules for financial market participants including investors and advisers on transparency regarding the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to financial products.

The publication follows a request by the European Commission in April 2022 for the ESAs to review the Regulatory Technical Standards (RTS) set out in the SFDR regulation, including its indicators for principal adverse impact (PAI) and financial product disclosures. Originally set with a 12-month deadline, the ESAs informed the Commission of a 6-month delay in its review in November 2022.

Among the key changes proposed in the ESAs’ review is an extension and adjustment of the list of PAIs, detailing the adverse impacts of investment decisions on sustainability factors, to include a series of social indicators. Mandatory PAI indicators now include “exposure to companies active in the cultivation and production of tobacco” (updating a prior tobacco-related indicator), “employees earning less than an adequate wage,” and modified indicators for investments in companies that have been involved in violations of the OECD Guidelines for Multinational Enterprises, and for the gender pay gap between female and male workers.

The regulators also developed draft RTS incorporating new disclosures for financial products regarding GHG emissions reduction targets, applying to products that have emissions reductions as their investment objective. Requirements for these products would include disclosure in pre-contractual documents on the type of outcome the product is committing to achieve and on the alignment of the target with the goal of limiting global warming to 1.5 degrees C, periodic report disclosure to provide progress and explanation on how the investment strategy contributed to the progress, and to have more detailed disclosures available on the website.

Additional proposed revisions to the SFDR regulation brought forward by the regulators include improvements to disclosures on how sustainable investments “Do No Significant Harm” (DNSH) to the environment and society, simplification of templates for pre-contractual and periodic disclosures, among other technical adjustments.

Following the publication of the ESAs’ report, the European Commission will have three months to decide whether to endorse the draft RTS. The potential application of the new RTS would be independent of an ongoing review by the Commission of the SFDR, announced in September 2023.

Click here to access the ESAs’ report.

The Monetary Authority of Singapore (MAS), the central bank and financial regulator of Singapore, announced today the launch of the Singapore-Asia Taxonomy for Sustainable Finance, aimed at defining green and transition economic activities contributing to a series of environmental and climate-related objectives, enabling the identification and allocation of capital to sustainable projects and initiatives.

The new taxonomy also aims to reduce “green or transition washing” risk, according to MAS, by enabling financial institutions to identify and disclose the alignment of their financed activities and labelled investment products.

The taxonomy covers activities across eight focus sectors, with technical screening criteria for each, which combine to represent 90% of the region’s emissions. Sectors covered by the taxonomy include Energy, Real Estate, Transportation, Agriculture and Forestry/Land Use, Industrial, Information and Communication Technology, Waste/Circular Economy, Carbon Capture and Sequestration.

The launch marks the latest in a series of initiatives across jurisdictions to set up a classification system for the definition of sustainable economic activities, including taxonomy systems already established or in development in the EU, UK and Australia.

The Singapore-Asia Taxonomy will be the first to introduce a “transition” category, and includes a “traffic light” system, aimed at enabling users to distinguish between Green, Amber – or transition – and ineligible activities. Green activities under the new system use criteria based on the EU Taxonomy, with some adaptation for regional circumstances, while Amber activities include those that are not yet on a 1.5°C pathway, but are either moving towards a green transition pathway within a defined timeframe, or facilitating significant emissions reductions in the short term with a prescribed sunset date.

The taxonomy also introduces a “measures-based approach” aimed at facilitating a sustainable transition by encouraging investment into decarbonization measures that will support reductions in emissions intensity of activities, to meet green criteria over time.

According to the MAS, the introduction of a definition for transition activities is particularly relevant for Asia, which is balancing a shift towards net zero with economic development, population growth, and rising energy demands.

MAS Managing Director Ravi Menon said:

“This is the first taxonomy in the world to comprehensively define transition activities across eight focus sectors. Most taxonomies define what is green and what is brown, leaving out the bulk of economic activities that are in-between.”

The launch of the Singapore-Asia Taxonomy follows a series of public consultation rounds, and collaboration with the Green Finance Industry Taskforce (GFIT), an industry-led initiative convened by MAS focused on sustainable finance initiatives.

GFIT Chair and HSBC Singapore CEO Wong Kee Joo said:

“The Singapore-Asia Taxonomy takes an Asian perspective and offers a measures-based approach to defining transition activities, categorising them as “amber”. This framework aims to help financial institutions optimise their support for the transition of hard-to-abate sectors, particularly in Asia.”

Click here to access the new Singapore-Asia Taxonomy.

The Financial Conduct Authority (FCA), the conduct regulator for financial services firms and financial markets in the UK, announced today the release of its new Sustainability Disclosure Requirements (SDR) for asset managers and investment labels rules, including a package of measures aimed at helping investors assess the sustainability attributes of investment products and funds, and avoid greenwashing risk.

According to the FCA, the new rules come as investors increasingly seek investments with positive environmental and social impact, with global AUM in ESG-oriented funds anticipated to grow to $36 trillion by 2026, while around 70% of investors report lacking trust in the sustainability claims of investment products.

Sacha Sadan, Director of Environmental, Social and Governance, FCA, said:

“We’re putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs – this is a crucial step for consumer protection as sustainable investment grows in popularity.”

The new measures include an anti-greenwashing rule, applying to all communication by FCA-authorized firms about the environmental or social characteristics of financial products or services, aimed at ensuring that the claims made “are fair, clear, and not misleading, and consistent with the sustainability profile of the product or service.”

The FCA rules introduce four labels intended to help consumers to differentiate between the sustainability objectives and investment approaches of investment products. These include Sustainability Focus, for products that aim to invest in assets that are environmentally and socially sustainable; Sustainability Improvers, investing in assets that have the potential to improve environmental and/or social sustainability over time; Sustainability Impact, investing with an aim to achieve a predefined positive and measurable environmental or social impact, and; Sustainability Mixed Goals, a newly introduced category for funds that invest across different sustainability objectives and strategies aligned with the other categories. The rules include a series of criteria for products to use the labels, including a requirement for at least 70% of the products assets to ordinarily be invested in line with the label’s objective, as well as pre-contractual and ongoing product-level disclosures for products using a label.

The FCA package also includes naming and marketing rules for investment products, aimed at ensuring the accurate use of sustainability-related terms. The rules states that sustainability-related terms can only be used in product names and marketing if a label is used, or, if not using a label, the product’s name accurately reflects the products characteristics, but “the terms ‘sustainable’, ‘sustainability’, ‘impact’ and any variation of those terms must not be used.” Non-labelled products using sustainability-related names would also be required to produce the same types of disclosures as labelled products.

Implementation timelines outlined in the new policy paper begin with the anti-greenwashing rule, which comes into effect at the end of May 2024, with firms allowed to begin using the labels at the end of July 2024, and naming and marketing rules coming into force in December 2024. Ongoing product-level disclosures will be required by large firms from December 2025, and smaller firms a year later.

Welcoming the new policies, James Alexander, Chief Executive of the UK Sustainable Investment and Finance Association (UKSIF), said:

“This is an important moment in our industry’s efforts to build greater confidence and trust among retail investors in the UK’s evolving sustainable investing market. We believe that the new investment labels can address concerns often raised by savers over their funds’ sustainability claims and profile.”

Click here to access the new FCA policy statement.