ESG Policy Digest: August 2024

The August 2024 edition of the ESG Policy Digest covers a wide range of policy tools and solutions emerging worldwide to power sustainability-driven capital markets. At the international level, the Global Reporting Initiative and the Taskforce on Nature-related Financial Disclosures (TNFD) are refining reporting standards with an interoperability mapping resource to support alignment across both frameworks. The International Accounting Standards Board (IASB) proposed adding eight illustrative examples to the International Financial Reporting Standards (IFRS) as guidance to support consistency in reporting of climate-related uncertainties in financial statements.

The SBTi announced plans to review the Corporate Net Zero Standard by year’s end, following a recent analysis highlighting the limited effectiveness of carbon offsets. Furthermore, voluntary carbon markets are undergoing further scrutiny as the Integrity Council for the Voluntary Carbon Market (ICVCM) recently restricted the use of its Core Carbon Principles (CCP) label, citing failure to meet the ‘additionality’ criteria required by the label under existing renewable energy methodologies.

In the EU, regulators are prioritising the development of resources to enhance and streamline sustainability reporting. The European Commission has published FAQs on the implementation of the Corporate Sustainability Reporting Directive (CSRD), including guidance on the scope and applicability of the European Sustainability Reporting Standards (ESRS) and clarification on how the CSRD interacts with the Sustainable Finance Disclosure Regulation (SFDR). Meanwhile, The European Securities and Markets Authority (ESMA) has published recommendations for the evolution and effective functioning of various legislation under the Sustainable Finance Regulatory Framework.

In the U.K., the HM Treasury confirmed that legislation to regulate ESG ratings providers is on the horizon.

The U.S., in contrast, has reached an impasse as the Securities and Exchange Commission’s (SEC) faces legal challenges to its climate disclosure rule, resulting in delayed implementation. Moving south to Latin America, Costa Rica launched its Sustainable Finance Taxonomy on 14 August to provide a framework for mobilising financial flows toward achieving the country’s climate change goals.

In the Asia Pacific region, the Reserve Bank of India’s (RBI) Deputy Governor announced plans to release guidance on climate scenario analysis and stress testing based on the Basel Committe on Banking Supervision principles for climate-related risks. And lastly, New Zealand’s financial regulator – the Financial Markets Authority (FMA) – issued a consultation on proposed guidance for climate reporting entities (CREs) regarding the inclusion of climate statements in disclosure documents under the new climate-related disclosures (CRD) regime.

These recent global regulatory updates reflect significant advancements at both international and domestic levels in sustainability reporting standards and frameworks, addressing emerging challenges around practical implementation. Although standards and regulations may vary on the basis of ambition, there remains continued emphasis on achieving a common reference point to promote interoperability across the sustainability reporting landscape.

INTERNATIONAL

GRI and TNFD unveil joint interoperability mapping outlining alignment in Disclosure Recommendations

The Global Reporting Initiative (GRI) and the Taskforce on Nature-related Financial Disclosures (TNFD) have jointly released an interoperability mapping resource which illustrates cross-cutting requirements and metrics across the TNFD Disclosure recommendations and the GRI Standards. Reporters can use a correspondence table to identify equivalent datapoints and achieve high alignment with the TNFD recommendations, as well as the GRI Standards. The mapping provides a detailed overview of the overlaps in concepts, definitions, and disclosure metrics. Additionally, the TNFD has integrated the GRI Standards’ impact materiality focus into its flexible LEAP approach, designed to assess nature-related risks and opportunities through both an impact and financial materiality lens. Conversely, GRI 101 references the TNFD’s LEAP approach for evaluating nature and biodiversity-related risks.

ISSB outlines plans for enhanced framework interoperability, maintenance and implementation

The International Sustainability Standards Board (ISSB) convened on 24–25 July, detailing key developments in Agenda papers 2, 6 and 9. Agenda Paper 2 outlines plans to enhance interoperability between ISSB standards and other major frameworks such as ESRS and GRI, along with initiating research on biodiversity, ecosystems and human capital related risks and opportunities. Agenda paper 6 introduces a phased approach for developing exposure drafts to amend the SASB Standards. Meanwhile, Agenda paper 9 highlights upcoming updates on the implementation of IFRS S1 and S2 following the Transition Implementation Group (TIG) meeting in September 2024.

IASB launches consultation on illustrative examples to enhance reporting of climate-related uncertainties in financial statements

In developing these examples, the IASB worked closely with the ISSB to strengthen connections between the information an entity provides in financial statements and the information it provides in sustainability-related financial disclosures. The Exposure Draft outlines eight illustrative examples to help companies effectively disclose financial positions and performance by guiding materiality assessment, assumptions and disaggregation of information in the context of climate-related risks and other uncertainties. The IASB has proposed the illustrative examples be incorporated as guidance in accompanying IFRS Accounting Standards. Stakeholders are invited to submit feedback until the consultation period closes on 28 November 2024.

SBTi releases new findings on carbon offsets amid review of the Corporate Net-Zero Standard

The SBTi has published four technical outputs which will inform the revision of the Corporate Net-Zero Standard including findings from a third-party review which found carbon credits to be ‘mostly’ ineffective. This marks a reversal from the SBTi’s earlier opinion in April on allowing companies greater use of carbon offsets in target-setting. Currently, companies are only allowed to use offsets after achieving their targets by directly reducing emissions. In addition to the findings, the SBTi released a Scope 3 discussion paper which explores the practical challenges associated with Scope 3 target setting and value chain decarbonization. The SBTi invites feedback from stakeholders on the discussion paper and announced that a consultation on a draft Corporate Net-Zero Standard will be launched by Q4 2024.

ICVCM restricts use of CCP label for renewable energy carbon credits

The Integrity Council for the Voluntary Carbon Market (ICVCM) has announced that carbon credits issued under existing renewable energy methodologies, which represent nearly a third of the voluntary carbon market, will not be eligible to receive the Core Carbon Principles (CCP) label. According to the ICVCM, the credits fail to meet the “additionality” criteria in the CCP label’s core principles, which mandates that emissions reduction and removals must occur without relying on financial incentives arising from carbon credits revenues. Established in 2021 to set global standards for carbon credits, the ICVCM created the CCP label to set benchmarks for credibility, integrity and transparency in carbon markets.

EU publishes FAQs to clarify sustainability reporting under the CSRD

On 7 August 2024, the European Commission released a set of frequently asked questions (FAQs) to help streamline sustainability reporting, minimising administrative and compliance burden for companies. As the CSRD adds sustainability reporting provisions to the Accounting Directive and Transparency Directive, the guidance document clarifies relevant legal provisions and disclosures, including Article 8 Taxonomy disclosures, for reporting entities. The FAQs provide a detailed explanation to determine ESRS applicability and a timeline for the application of reporting requirements. It also illustrates examples where certain undertakings may be exempt from an obligation to publish sustainability statements when a consolidated report is available. In the final section, the Commission has clarified the interaction between the CSRD and Sustainable Finance Disclosure Framework (SFDR). Financial market participants can assume that any indicator reported as non-material by an investee company subject to the CSRD does not contribute to the corresponding principal adverse impacts in SFDR disclosures, meaning that such investments do not need to be included in the numerator of the relevant SFDR impact indicator.

EFRAG Releases Study on Early Implementation of ESRS

The analysis of ESRS early adoption in the STOXX Europe 600 reveals that only 8% of firms have shared a detailed materiality assessment, with Climate Change and Workforce being universally material topics. While many companies are still grappling with the preparation of ESRS-compliant reports, the study indicates progress in areas such as data reporting in the value chain, enhancing clarity on the use of matrices and tables for reporting and standardizing topic granularity. The study is based on interviews with 28 large EU-based companies across eight sectors and is a “state of play report” not meant to set implementation guidance for the European Sustainability Reporting Standards (ESRS).

ESMA proposes long-term enhancements to the EU Sustainable Finance Framework

The European Securities and Markets Authority (ESMA) has published an Opinion on the Sustainable Finance Regulatory Framework, recommending long-term improvements to enhance the framework’s effectiveness and prevent greenwashing. ESMA suggests that the EU Taxonomy should become the sole reference point for assessing sustainability across all major sustainable finance legislation. Recommendations for improvements include extending the EU Taxonomy to cover all activities that could substantially contribute to environmental sustainability. ESMA has suggested that the Sustainable Finance Framework could evolve further by providing clarity on concepts such as transition investments, mandating sustainability disclosures for all financial products, creating a product categorization system, regulating ESG data products, and conducting consumer and industry testing before implementing new policies. It is also recommended that legislative progress on the social taxonomy resume.

UK to regulate ESG ratings providers in 2025

This new regulation will focus on enhancing transparency and establishing governance systems for providers. Earlier this year, the UK’s Financial Conduct Authority (FCA) launched a voluntary code of conduct for ESG ratings providers and data products, and the former government had announced that it would explore regulation in this area to bolster the UK’s Green Finance Strategy. The HM Treasury has been tasked with a review of a proposed regime for ratings providers and will introduce formal legislation to regulate ESG ratings providers by 2025.

US SEC begins legal battle defending the corporate climate disclosure rule

In March 2024, the U.S. SEC adopted the climate disclosure rule, which mandates that listed registrants disclose Scope 1 and 2 emissions starting in 2025. Although the final rule was watered down by dropping the Scope 3 disclosure requirement, it still faced multiple legal challenges, with critics arguing that it imposes an excessive compliance burden on companies and signifies an overreach of the SEC’s regulatory authority. This pushback has led to nine consolidated lawsuits filed in the U.S. Eighth Circuit of Appeals. In response, the SEC temporarily stayed the rule in April and will delay implementation while reviewing all legal petitions. The Commission is now defending the climate risk disclosure rule in court, citing “substantial investor demand” for consistent and comparable climate-related information. The SEC has stated that it is well within its congressionally granted authority to mandate material information for informed investing and voting decisions. Additionally, the SEC has addressed in court concerns about estimated compliance costs by presenting findings on the rule’s economic effects, demonstrating that it supports cost-effective and decision-useful disclosures for investors.

Costa Rica launches Sustainable Finance Taxonomy

Costa Rica has launched a Sustainable Finance Taxonomy to classify economic activities and assets that make a significant contribution to the country’s climate change objectives. The Taxonomy focuses on climate change mitigation and adaptation activities across eight priority sectors including electricity, gas, steam and air conditioning supply, construction, transportation, manufacturing, solid waste and emissions capture, water supply and treatment, Information and communication technology (ICT) and land use (agriculture, livestock and forestry). The Taxonomy will be used and tested in the financial sector to mobilise flows towards green projects and assess portfolio exposure to climate-related risks.

RBI to issue additional guidance on climate-related risks

Deputy Governor of RBI, Rajeshwar Rao, has confirmed plans to release guidance on how to conduct scenario analysis, stress testing and management of climate change risks. The guidance will be based on the Basel Committe on Banking Supervision principles. The new guidance reinforces the RBI’s goals to establish a ‘robust regulatory and supervisory framework’ to ensure the preparedness and resilience of the financial sector in the context of climate change. In February 2024, the RBI published a draft Disclosure Framework for climate-related risks (‘guidelines’) to mandate disclosures by regulated entities (REs) on the TCFD pillars of governance, strategy, risk management and metrics and targets. And, recently, the country’s Finance Minister announced an upcoming ‘climate finance’ Taxonomy – a classification framework for investments that significantly contribute towards climate change mitigation and adaptation.

New Zealand FMA releases guidance for climate-reporting entities

The Financial Markets Authority (FMA) has issued a consultation on proposed guidance for climate reporting entities (CREs) regarding references to climate statements in disclosure documents under a new climate-related disclosures (CRD) regime. The guidance covers the content and presentation of climate-related information under Product Disclosure Statements (PDS), Other Material Information (OMI) on the offer register on disclose for their financial products, any Statements of Investment Policies and Objectives (SIPO), and annual reports. The FMA has opened feedback on the guidance until 30 August 2024.

Financial Stability Board (FSB) releases stocktake on nature-related risks Read More.
Stock Exchange of Thailand partners with FTSE Russell to update ESG ratings methodology. Read more
ASIFMA issues recommendations for ISSB adoption across Asia. Read more
NGFS Report on Nature-related Financial Risks: a Conceptual Framework to guide Action by Central Banks and Supervisors available now. Read more
Science Based Targets Networks shares manual for corporates. Read more

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