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February 10, 2022

Regulatory round-up

By Victor Smart and

Welcome 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

In this first round-up, we bring you some extra views on the EU taxonomy and bring you up to speed on recent initiatives around the world. We also have some insights on regulators’ move into ESG ratings. You can expect more frequent updates in the next few weeks.


The debate over the inclusion of natural gas and nuclear power in the EU taxonomy is unlikely to die down any time soon. As anticipated, last week, the European Commission approved plans to include natural gas and nuclear power in its taxonomy, pending final approval by the European Parliament, where lawmakers can veto the rules with a majority of votes. Meanwhile, investors continue to express concern about the treatment of natural gas in particular as a transition fuel, with many warning about the risks of including energy sources in line with political preference, rather than science.

This is what they have said: In a research note this week, UBS’s analysts wrote that they expect to see “contrarian long-term investors looking for potential downside risk in ideas aligned with taxonomy specifications, but not necessarily [aligned] with all stakeholder perceptions of sustainable real-world outcomes”.

Last week, after the news broke, Swedish pension fund Alecta’s CEO, Magnus Billing, said: “Clearly the risks of greenwashing and lack of trust from the end beneficiary seeking sustainable investment products significantly increases if political considerations are introduced into the taxonomy. Given the importance of a ‘just transition’ I can understand the inclusion of natural gas, but it must be for a very limited transition period if we are to be able to fulfil the Paris Agreement.”

And NN Investment Partners’ Isobel Edwards added: “Natural gas and nuclear will likely help meet the gap in supply as renewable capacity increases. But they have access to all the non-sustainable finance flows – they do not need to be included in a set of definitions for green investment too.” 

Will investors influence lawmakers? Probably not, but what the taxonomy says may end up being less influential in investment decisions than some parties initially hoped.


Regulators from around the world have begun to raise concerns about credit rating agencies’ ESG rankings. The US Securities and Exchange Commission has warned of potential conflicts of interest between credit rating firms’ ESG ratings work and their other services, such as consultancy. In a report, the SEC said: “Rating agencies may not adhere to their methodologies or policies and procedures, consistently apply ESG factors or maintain effective internal controls involving the use in ratings of ESG-related data from affiliates or unaffiliated third parties.” 

Similarly, the Securities and Exchange Board of India warned of the unregulated nature of ESG ratings, noting that rating firms also offer services, such as index solutions and advisory services related to ESG, which may cause potential conflicts of interest. 

And Japan’s Financial Services Agency has shown it shares concerns about the robustness of ESG ratings by establishing a special subcommittee on ESG ratings and data providers. The move follows the release of a report last June that highlighted the increasing importance of ESG ratings and data providers as ESG investment expands.

For its part, the European Securities and Markets Authority has issued a call for evidence on “the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU”. These concerns follow warnings first sounded by the International Organization of Securities Commissions in a recent report on raters and data providers.

What does this mean? Regulators’ new focus on ESG ratings should be a significant worry for rating agencies. ESG ratings and data have opened up a whole new line of lucrative business for them, yet methodologies are opaque and rankings show little consistency from one rater to another. Though couched in dry, cautious terms, regulators’ comments globally pose some big questions about the value of ESG ratings. And for the wider community, they raise troubling issues about how far ESG data can be truly made objective and precise. 

What IOSCO says: “There is little clarity and alignment on definitions, including what ESG ratings or data products intend to measure. There is also a lack of transparency about the methodologies underpinning these ratings or data products.”


Indonesia has formally launched the country’s new green taxonomy. Framed by the country’s financial services regulator, the OJK, the new taxonomy labels business activities on a ‘traffic light’ system of green, yellow or red. The first draft was unveiled in late January.

To qualify as green an activity must do no significant harm, provide positive impact to the environment and align with the environmental objective of the taxonomy; yellow requires no significant harm is done; and red denotes harmful activities. 

Advocates believe the creation of the yellow label is vital to promote transition activities, such as replacing coal electricity generation with less harmful natural gas. The taxonomy will also serve as a guideline for the formulation of policy incentives, such as lower risk weights for the financing of electric vehicles.

In compiling the taxonomy, 2,733 economic sector and sub-sector classifications were reviewed but only 14 qualified for direct inclusion in the green category. 

Why the three-colour system? A year ago, the Singapore Monetary Authority pioneered the traffic light approach that has now been broadly adopted across many members of ASEAN. Many ASEAN countries would see the lights go off if they stopped burning coal, and they believe a shift to gas is all that is feasible in the next few decades. 

Some critics argue that allowing the burning of any fossil fuel to be labelled as ‘green’ fatally compromises an ESG taxonomy. But the EU’s more purist green taxonomy – which lacks a middle yellow category – has itself been compromised by plans to admit gas and nuclear into the top green category.

What do financiers think? They seem to like it – or at least HSBC does, according to one of its recent research notes. This said the taxonomy not only provides some clarity to investors and issuers, but also paves the way for Indonesia’s reporting system for green instruments. The bank added that, following the release of Korea’s green taxonomy and Taiwan’s disclosure rules for overseas ESG funds earlier in January, “we expect to see more regulators to be focused on ESG integrity this year”.


The Institutional Investors Group on Climate Change (IIGCC) has developed guidance that should help to put private equity on the path to net zero. This is now open for consultation until February 27. The step is part of an ambitious strategy to incorporate more asset classes into the Net Zero Investment Framework published in March 2021; the framework is supported by Ceres, the Asia Investor Group on Climate Change, and Investor Group on Climate Change. According to the IIGCC, its new guidance offers for the first time a blueprint for general partners to make and implement net-zero commitments, and allows limited partners to incorporate private equity in net-zero strategies for multi-asset class portfolios. Public companies, which already face net-zero responsibilities, will doubtless consider the nudge to get private equity on board with decarbonisation as long overdue.

Comment: Stephanie Pfeifer, IIGCC’s CEO, said: “This is an important step in bringing private markets – an ever-expanding and influential part of financial markets – in line with public markets. When it comes to net zero, private equity is currently a blind spot for institutional investors. We look forward to now seeing how many general partners adopt, and are able to use, the private equity components as a blueprint to make and implement net zero commitments.”


In other policy news

The European Commission has launched a public consultation open until May 2 into carbon removals regulation. Stakeholders are invited to submit proposals to monitor, report and verify the authenticity of removals. The aim is to encourage the use of innovative solutions to capture, recycle and store CO2 by farmers, foresters and industries. 

ESMA, the regulator asked to oversee external reviewers of green bond frameworks for the EU Green Bond Standard, says there are “possible challenges” with the draft rules, including the timeline for introducing the measures and allowing non-EU reviewers to become accredited. 

Data gaps currently make it impossible to measure the climate impact of asset-backed securities used as collateral in the ECB asset purchase scheme for auto loans and other schemes, according to Banque de France research.

US SEC commissioners Allison Herren Lee and Caroline Crenshaw have called for comments on how ESG factors might be factored into executive pay packages, as the regulator reopens the rulemaking process on the issue.


A service from the Financial Times