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October 27, 2022

Regulatory Round-up: France’s central bank on biodiversity, World Bank on sustainability-linked bond loopholes

By Victor Smart

Central banks should broaden their action on nature-related risks by incorporating biodiversity shocks into stress tests of financial institutions, the Banque de France has declared. Deputy governor Sylvie Goulard said, in a speech to a conference co-hosted by the Network for Greening the Financial System, that ecological stability is a prerequisite to price and financial stability.

In addition to extending stress tests, central banks should also include biodiversity dimensions into their non-monetary portfolios (the equity components of their own funds and pension liabilities), something that Goulard’s own institution has begun to do. And, she added, they should push for “innovative approaches to integrate nature-related concerns within their monetary operations”, as the European Central Bank has started to do for climate change, looking in particular at its collateral assessment. 

A German consumer group in the state of Baden-Württemberg is suing DWS, Deutsche Bank’s asset management unit, for allegedly misrepresenting the fund’s green credentials in marketing materials, according to Reuters. The case will be heard in a Frankfurt court in March 2023. After allegations from a senior whistleblower, German and US officials are currently investigating reports that DWS engaged in wholesale greenwashing. DWS has repeatedly denied that it misled investors.

The Financial Conduct Authority has published proposals on how it will regulate UK sustainability investment products, suggesting three investment product labels: sustainable focus, sustainable improvers and sustainable impact. The FCA will also require firms to disclose specific information to consumers, including on investments that a consumer may not typically associate with sustainability objectives.

The Bank of England’s Prudential Regulation Authority has warned banks and insurers under its jurisdiction they are likely to face tougher scrutiny if they fail to meet PRA expectations on climate risk management. (More on this and other news in our regulatory round-up later this week).

The European Banking Authority has published a report on how to incorporate ESG risks in the supervision of investment firms, concluding that when those risks are deemed material, they should “progressively and proportionately” be considered, to assess the adequacy of firms’ own funds.

The World Bank has identified structural loopholes in sustainability-linked bonds, which it suggests may be “prone to greenwashing”. In a new report it says this innovative debt product, which incorporates incentives to meet sustainability targets, is becoming increasingly popular. However, current structures allow issuers “to weaken the link between sustainability and financial outcomes”. The report suggests issuers that have high carbon dioxide emissions are most likely to exploit the loopholes. 

The Hong Kong Monetary Authority has announced issuance of the world’s first social bond denominated in Hong Kong dollars and offshore renminbi. The Hong Kong Mortgage Corporation bond comprises HK$8bn 2-year and Rmb3bn 3-year social bonds. A social bond is a conventional bond where the proceeds are used to finance eligible social projects or loans that create positive social impact. 

Australia’s new green taxonomy should have a transition category, according to the Australian Sustainable Finance Institute, a private sector group. In a recent statement, the ASFI said the taxonomy must be science-based and credible, but “there is also strong consensus that a transition category should be included” so that capital is guided towards activities that will decarbonise polluting sectors in economies that are highly carbon intensive.

The International Sustainability Standards Board has voted unanimously to require company disclosures on Scope 1, Scope 2 as well as Scope 3 greenhouse gas emissions. It has also said it will modify some of the terms that are not being clearly understood and focus its future activities on facilitating digital reporting and coordinating work with the International Accounting Standards Board, among others.

A service from the Financial Times