Welcome back to our regulation tracker, where we aim to monitor policymakers’ latest views and actions on all things sustainable finance – as well as the industry’s response to them
The European Banking Federation and the United Nations Environment Programme Finance Initiative have published guidelines on “Practical approaches to applying the EU Taxonomy to bank lending”. This is based on discussions with a score of top banks, including Santander, BNP Paribas, ING and Deutsche Bank. The authors hope it will help banks to understand the EU taxonomy, its requirements and its application for disclosure requirements, which cover both mandatory and voluntary aspects.
The report explores disclosure requirements under the EU delegated act, gathering information for banks’ clients who do not yet have an obligation to disclose (such as SMEs and non-EU companies), and addresses compliance with minimum safeguards of the taxonomy regulation.
Something’s missing: The document, however, makes no mention of the EU Commission’s highly contentious decision last month to permit natural gas and nuclear power to qualify for the taxonomy’s green category. Some may look askance at the report’s claim that the taxonomy provides a clear, “science-based” classification of economic activities.
Comment: Launching the report this month, Santander executive chair and EBF president Ana Botín noted the financial sector’s role in decarbonising the economy, saying: “Europe is leading the way [in this effort], and the EU taxonomy sets the criteria for meeting the climate targets for 2030 and 2050.”
Also this month (unrelated to the EBF/UNEPFI report but related to the wider issue at hand), the chair of the new International Sustainability Standards Board, Emmanuel Faber, said: “The problem in today’s market is that companies can make claims that nobody can verify.” However, he added that greenwashing does show that “companies recognise that acting on issues like climate or social matters is important for their stakeholders and shareholders”.
The European Securities and Markets Authority has warned that widescale greenwashing could trigger financial instability. In its new Sustainable Finance Roadmap 2022-24, the independent EU body says it is prioritising the fight against greenwashing, encouraged by the combination of growing demand for ESG investments and the fast-changing market. It also warns that regulatory arbitrage linked to the evolving legislative framework could aggravate greenwashing risks for investors in the EU. It wants an agreed definition of greenwashing, to help drive the supervisory work in a coordinated manner across the EU in a new rulebook.
Separately, ESMA has released a text-mining analysis of ESG disclosures in rating agency press releases. It is unclear why some rating agencies deem ESG factors to be relevant and report them in their press releases, while others do not yet do so. The divergences that ESMA found across agencies in this respect are, therefore, “quite striking”.
Put simply: Regulators worried about the risks of a wave of mis-selling are upping the ante significantly; look beneath their understated words and they are calling out the weaknesses of much ESG data and rankings, and sounding the alarm about potential consequences.
Comment: In one long breath, ESMA said: “Growing demand for ESG investments not matched by adequate transparency and comparability on the real sustainability impact of the financial products available in the market leads to a risk of misrepresentation and wrongful disclosure and mis-selling of ESG-labelled products to final investors, which can create reputational and financial risks for the actors involved and a loss of trust in sustainable finance products, which in turn may also trigger financial stability concerns.”
The Say on Climate initiative has hit back at criticism from the UN-supported Principles for Responsible Investment. The PRI suggested that when it comes to driving meaningful change, the “benefits of transition plan votes” at companies – often referred to as ‘Say on Climate’ – could be outweighed by associated risks and potential unintended consequences.
Say on Climate told Sustainable Views that its campaign has two elements, neither of which PRI captures correctly. The first is to use AGM resolutions to mandate disclosure of five-year climate action plans aligned with Climate Action 100+ benchmark. The second is to hold approval or disapproval votes where appropriate.
In their words: “We are concerned that some investors and companies do not support annual votes because it serves to highlight the lack of progress by companies… and the failure of previous engagement efforts to drive change. Many companies – especially in the US and Japan – continue to greenwash with basic Scope 3 emissions commitments or vague net zero 2050 promises, which investors are allowing them to get away with,” said Say on Climate.
In other policy news
The Bank of England has launched a “second round” of its climate stress test exercise, to assess participants’ proposed management actions in response to physical and transition climate risks. The results of both rounds will be published in May. Among the 18 participants are Axa, Barclays, HSBC, M&G, Scottish Widows and Standard Chartered.
Australia’s climate authority is to review the use of international offsets, at the request of the government. The independent Climate Change Authority is to examine the use of international carbon offsets by Australian companies, ahead of the launch of the regional Indo-Pacific Carbon Offsets Scheme.
Thailand’s securities regulator and the UN Development Programme have signed an agreement to promote understanding of sustainable finance in the Thai capital market, and integration of sustainability principles in business strategies and operations.
The Philippines Security and Exchange Commission is seeking views from investment firms and fund managers on the ASEAN Sustainable and Responsible Fund Standards and expectations for sustainable funds, including issuance trends, investment drivers and regulatory requirements.