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April 28, 2022

Regulatory Round-up

By Victor Smart

UK-based companies are failing to report on, and eradicate, modern slavery and related human rights abuses within their businesses and supply chains, according to a report by the Financial Reporting Council.

The FRC’s publication, ‘Modern Slavery Reporting Practices in the UK’, analysed the reporting procedures of a sample of 100 companies from a range of indexes. It revealed reporting across both disclosures and annual reports was “lacking the information needed” for stakeholders to make informed decisions. 

One in 10 companies did not provide a modern slavery statement, and for those that did, the majority of statements were fragmented, lacking a clear focus and narrative, or were unduly complicated. Most modern slavery statements were wholly backward-looking, with only a minority clearly identifying emerging issues or a long-term strategy. 

Sara Thornton, the UK’s Independent Anti-Slavery Commissioner, says: “Labour exploitation has been found in all major sectors, including agriculture, fishing, construction, mining, manufacturing, textiles and hospitality. It is perpetrated by organised criminals and cynical opportunists. However, irresponsible commercial practices and poor governance can also create the conditions that allow exploitation to thrive.” 

 

The Finance for Biodiversity (F4B) initiative has confirmed suspicions that trust in carbon offsets is dismally poor, despite the market’s eye-watering growth prospects. In a new report, it presents a three-pronged governance model, which it believes could prevent fundamental worries about a lack of market integrity.

Whole-system governance is the F4B’s first principle: the system must connect with every level within the carbon value chain and other parts of the financial ecosystem, such as the compliance market. Second is transparency: market information must be open and publicly available. Third is inclusive participation: all key market stakeholders must be represented in governing bodies.

The document also outlines how new technologies – such as satellite-based geospatial imaging and blockchain – can make monitoring more rigorous.

No regulation. Unlike the so-called compliance carbon market, the offsets-based voluntary market is scarcely regulated. One of the biggest so-called nature markets, it is forecast to grow a hundredfold by the middle of the century. So F4B’s report is timely, although its governance model is largely conceptual at his stage.

Simon Zadek, chair of F4B, says: “The successful scaling up of carbon markets has thus far been stymied by a crippling lack of trust and integrity in the system. But getting this governance model right goes far beyond just carbon markets. Our proposed design provides a template that could be used across nature markets more broadly, and could pave the way towards using market mechanisms to achieve non-financial goals, such as mitigating climate change and reversing biodiversity loss.”

 

The International Sustainability Standards Board has released details of a new platform to facilitate the alignment of jurisdictions working on climate disclosures.

The new working group will bring together representatives from a number of governments and policy makers that are already engaged in setting standards for sustainability disclosures. The aim is to discuss the compatibility of those initiatives and how the ISSB can contribute to “optimising” reporting efforts.

In March, the influential new body unveiled its proposals for a global baseline of sustainability and climate disclosures. These can either be used on a voluntary basis by market participants or incorporated by individual jurisdictions into mandatory requirements.

Members of the working group are the Chinese Ministry of Finance, the European Commission, the European Financial Reporting Advisory Group, the Japanese Financial Services Authority, the Sustainability Standards Board of Japan Preparation Committee, the UK Financial Conduct Authority and the US Securities and Exchange Commission.

The ISSB will also create a new advisory body, the Sustainability Standards Advisory Forum.

ISSB’s rise. Launched by international accounting standard-setter IFRS at COP26, in November, the ISSB is fast establishing itself globally at the centre of a new ESG regulatory architecture. These latest moves can be seen as a further step to ensure the global framework and national rules meld. But it’s no easy task, as shown by a recent report (below) on how national interpretations of the Task Force on Climate-related Financial Disclosures framework are diverging. And there will be worries that instead of a much-needed streamlining of the system, we will start to see jurisdictional differences proliferate.

ISSB chair Emmanuel Faber says: “There is strong public interest in seeking to align where possible the international and jurisdictional requirements for sustainability disclosures. We have a window of opportunity to do just that, given that the ISSB’s proposals are out for comment at the same time as several major jurisdictions are also seeking public input on their proposals.” 

 

National regulators are taking a variety of approaches in their implementation of climate disclosure rules aligned to the Task Force on Climate-Related Financial Disclosures (TCFD), according to a study by ratings and analytics firm MSCI.

Over the next 12 months, at least 10 major economies will start introducing TCFD-aligned disclosure rules for listed companies, large firms and some other financial institutions. In March, the US joined the list of markets aiming to mandate TCFD-aligned rules. 

Divergence. The TCFD has been hailed as providing consistency in financial disclosures around the globe. Clearly, however, we don’t have anything like full harmonisation.

MSCI says: “Investors now face the challenge of making sense of how various jurisdictions will implement their versions of the TCFD’s standards. One commonality is that companies will be increasingly required to disclose forward-looking metrics so investors can assess their capacity to transition. Overall, however, national disclosure rules may continue to diverge.”

 

In other policy news 

The UK Treasury has launched a UK Transition Plan Taskforce to develop a new regime that will require UK financial institutions to publish rigorous climate change transition plans. Billed as “a gold standard”, this will detail how firms should decarbonise and adapt to a net-zero economy by 2050 as the UK seeks to be the world’s first net zero-aligned financial centre.  

India plans to set up a uniform carbon market framework within a year to help finance its energy transition and emissions reduction goals, according to the Economic Times. The country is the world’s largest exporter of carbon credits and an analysis shows it could gain $11tn over 50 years by limiting rising global temperatures and realising its potential to “export decarbonisation” to the world. 

The China Securities Regulatory Commission is currently asking mainland-based companies traded on stock exchanges in Shanghai and Shenzhen to disclose their ESG information on a voluntary basis, according to Regulation Asia. 

 

 

A service from the Financial Times