ESG and Sustainable Finance
The international accounting firm KPMG released a report analyzing the regulations of financial regulators and believed that ESG and sustainable finance are the top priorities.
The Global Regulatory Barometer lists a total of nine regulatory topics and sorts them according to the content, complexity, and implementation time of regulatory policies. KPMG believes that since last year, ESG and sustainable finance have always been at the top of the nine regulatory topics and have continued to maintain a score of above 8.5 (out of 10).
Regulation of Greenwashing
The regulation of ESG and sustainable finance has received sufficient attention, and relevant policies and regulations for greenwashing, ESG information disclosure, climate-related financial risks, ESG financial products and portfolio management are still being formulated.
In terms of greenwashing, regulators are asking financial industry practitioners to reduce its occurrence. The European Union has designed a green taxonomy to provide definitions for green and sustainable behaviors, and to design screening criteria for climate change issues.
European Supervisory Authorities (ESAs) are also discussing modifications to the Sustainable Financial Reporting Disclosure Regulation (SFDR), aiming to be consistent with other regulatory policies. In addition, the European Securities and Markets Association (ESMA) plans to release regulatory policies at the end of the year to reduce the misleading of ESG funds to investors. The EU is also developing green bond standards to reduce the possibility of greenwashing.
Regulation of ESG Information Disclosure
In terms of ESG information disclosure, regulatory agencies are developing a disclosure framework that is consistent with international standards. EU has formulated European Sustainability Reporting Standards (ESRS) to include large companies in the scope of ESG disclosure.
The UK Financial Conduct Authority (FCA) has also begun formulating Sustainability Disclosure Standards (SDS) based on IFRS S1 and IFRS S2 issued by the International Sustainability Standards Board (ISSB). The European Pensions Regulator (TPR) has also begun to review the ESG information disclosure of asset management companies and provide relevant guidelines.
Regulation of Climate-related Financial Risks
When it comes to climate-related financial risks, regulators are beginning to consider the stability of the financial sector from a long-term perspective. The European Banking Authority (EBA) develops guidelines for banks to identify, measure, manage and report ESG risks, and provides climate stress testing to enable banks to meet the requirements.
ESAs plan to carry out climate scenario analysis to assess the stability of the financial system. The Network for Greening the Financial System (NGFS) is also developing guidelines on biodiversity.
Regulation of ESG Financial Products
In terms of ESG financial products, regulators have begun to require ESG product suppliers to comply with the rules. The European Union assigns the regulatory power of ESG rating agencies to the European Securities and Markets Authority (ESMA) and requires institutions that meet formal authorization to carry out rating services.
Related Post: EU Proposes Regulation on ESG Rating Services
HM Treasury is also developing regulations for ESG ratings and data providers. At the same time, the EU has launched the Carbon Border Adjustment Mechanism (CBAM) to reduce carbon emissions generated in international trade by levying carbon taxes.
Regulation of Portfolio Management
In terms of portfolio management, regulators require that sustainable risks be included in asset managers’ portfolios. The EU Markets in Financial Instruments Directive (MiFID) requires investment portfolios to incorporate sustainability-related matters into investment advice and product governance frameworks.
The European Securities and Markets Authority (ESMA) has also developed guidance on sustainability preferences. The Financial Conduct Authority (FCA) is seeking advice on integrating sustainability issues into the work of financial advisers.