ESG Trends Report
Fitch released the ESG Trends Report for the second quarter, which aims to summarize major events in the field of global sustainable development and provide forward-looking assessments on regulatory, investment and other issues.
Disclosure requirements issued by the International Sustainability Standards Board (ISSB) in the second quarter consolidate existing measures, but more work needs to be done. In addition to changes in disclosure measures, the market also believes that a more consistent version of the ESG taxonomy is needed to reduce compliance costs for companies and investors.
Changes in ESG Disclosures
Fitch believes that the standardization of regulations is a decisive factor for ESG disclosure, especially in terms of environmental disclosure. Regulatory agencies in various countries have begun to impose mandatory disclosure requirements on Scope 3. From industrial perspective, the European bank accounted for one-third of Scope 3 disclosures, with utilities and telecommunications ranking second and third respectively. Across these rating entities, 42% had a disclosure rating of excellent or good.
In terms of ESG disclosure, the two standards of the ISSB will be a watershed for ESG disclosure. If the standards can be adopted quickly on a global scale, GHG-related disclosures will be more consistent. However, there are still large discrepancies in the disclosure progress of various regions, and the decarbonization momentum in the Asia-Pacific region is relatively weaker.
Changes in ESG Taxonomy
The ESG taxonomy determines how the impact of economic activities on the environment and society is defined in the disclosure process. Countries have begun to develop taxonomies according to their own circumstances, taking into account the particularities of their economies. Since the second quarter, some countries have included transition activities into the taxonomy. For example, ASEAN’s Sustainable Finance Taxonomy includes the world’s first framework for energy transitions and uses traffic light systems according to their impact on economic activity. Intermediate activities will also be included in the EU taxonomy to facilitate financing.
Changes in ESG Funds
In order to solve the problem of greenwashing, regulatory agencies in various countries have made new regulations on the naming and disclosure of ESG funds. Terms such as “ESG, green and sustainable” can only be used if the fund holds more than a certain percentage of sustainable assets. Fund standards for specific classifications are also continuing to take effect, such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR). Although some adjustments have been made to the classification of climate funds, the requirements for Article 8 funds and Article 9 funds remain the same, and it is becoming more familiar to investors.
Changes in Carbon Market
In addition to the development of the economy’s own carbon market, countries have also begun to consider the rules for the export of carbon credits in order to establish a mature global carbon credit trading market. This is reflected in the increasing regulation of the Voluntary Carbon Market (VCM) by various countries and the desire to use the trading mechanism to achieve climate goals.
According to the negotiation of the global carbon market mechanism stipulated in the Paris Agreement, countries have begun to pay attention to the natural resources that can obtain carbon credits, and use carbon projects to achieve National Determined Contributions (NDC). Some developing countries have announced the relevant regulations of VCM and will continue to adjust them in the future.
Changes in ESG Sovereign Bonds
In the first half of 2023, the issuance of ESG sovereign bonds increased by 90% year-on-year, and its issuance purposes also showed diversified development (renewable energy and clean transportation are the main purposes). Despite the advantages of green bonds, issuers still face the impact of high interest rates. The average coupon rate of global green bonds in the second quarter was 4.25%, compared with 2.3% in 2021. Green bond issuance in Asia fell by a third quarter-on-quarter, leading to an 8.4% decline in global green bond issuance.