The Latest in ESG and Stewardship Regulation – May 2024

The latest regulatory developments related to ESG and stewardship worldwide.

This monthly bulletin produced by ISS STOXX’s Regulatory Affairs & Public Policy group provides a review of regulatory developments that may be relevant to investors and companies.

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UNDRR

United Nations Office of Disaster Risk Reduction Releases Guide for Adaption and Resilience Finance

On April 11, the United Nations Office of Disaster Risk Reduction (UNDRR) released its Guide for Adaption and Resilience Finance. Chartered, KPMG, UNDRR, and over 20 of the leading financial institutions, multilateral development banks, and NGOs worked together to create the guide. The guide serves as a roadmap for step-change in financing adaption and resilience through setting guidance on eligible financeable activities and a list of relevant investment activities and areas; the guide covers over 100 investable activities including vertical farming, water conservation, climate-resilient crops, and renewable energy storage. The UNDRR built the roadmap to serve as “a practical tool” for investors and financial institutions to “simplify the decision-making process for financing adaption” and identify priority investments and their related benefits.

IOSCO

International Organization of Securities Commissions (IOSCO) Releases Updated Work Programme

On April 12, IOSCO released its updated 2023-2024 work programme, focusing on five key themes: strengthening financial resilience, supporting market effectiveness, protecting investors, addressing new risks in sustainability and fintech, and promoting regulatory cooperation and effectiveness. In addressing new risks in sustainability and fintech, IOSCO aims to finalize its work on voluntary carbon markets, to continue engagements on capacity building as different countries consider adopting International Sustainability Standards Board (ISSB) disclosure standards, to complete its review of proposed assurance and ethics standards from the International Auditing and Assurance Standards Board (“IAASB”) and the International Ethics Standards Boards for Accountants (“IESBA”), and to continue, and expand upon, existing work focused on transition plans and risk management for new green financial products.

ISSB

More Jurisdictions Open Consultations on Disclosure Linked to International Sustainability Standards Board Standards

Canada, Japan, and Singapore have opened consultations on introducing sustainability-related disclosures linked to ISSB standards. The Canadian Sustainability Standards Board (CSSB) and the Sustainability Standards Board of Japan (SSBJ) have launched consultations on draft regulation proposals linked to ISSB standards, while the Singapore Exchange Regulation (SGX RegCo) has sought market opinion on how ISSB standards should be integrated into future sustainability reporting rules that it intends to introduce. Emmanuel Faber, ISSB Chair, welcomed the consultations as they “demonstrate the momentum towards a global baseline of sustainability-related disclosures so that investors have access to high-quality, comparable information.”

Australia and Malaysia have recently concluded consultations related to adopting ISSB-based climate disclosures in their jurisdiction; meanwhile, Brazil, Costa Rica, Sri Lanka, Nigeria, and Turkey have all announced that they will adopt standards either based off, or directly in line with, ISSB standards.

ISSB Announces Two New Disclosure Research Projects

On April 23, ISSB announced that it will begin two new research projects related to disclosure on the risks and opportunities associated with biodiversity, ecosystems, and ecosystem services, as well as human capital. The new projects will attempt to assess what information is useful for investors to assess risk and opportunity in these areas. The project will also aim to see what information is already required under existing frameworks, such as the work of the Task Force on Nature-related Financial Disclosures (TNFD). ISSB will make the new research projects a key area of focus as it works to build “a global baseline for sustainability-related financial disclosures”; however, ISSB has decided against embarking on a similar project regarding risk and opportunity related to human rights.

GRI

Global Reporting Initiative and Taskforce on Nature-related Financial Disclosures Announce Future Collaboration Plans

On April 12, the Global Reporting Initiative (GRI) and Taskforce on Nature-related Financial Disclosures (TNFD) announced plans for “strengthened collaboration.” The two organizations have previously aided each other with projects: most notably, GRI provided input on TNFD’s September 2023 recommendations. Following stakeholder feedback, GRI announced that the two organizations will release a TNFD-GRI interoperability mapping document in Q2 2024 – providing a descriptive guide on alignment between TNFD recommendations and GRI standards – as well as joint case studies on nature-related risks, opportunities, and dependencies that will help support the use of TNFD’s LEAP assessment.

SBTi

Science Based Targets Initiative Extends the Use of Environmental Attribute Certificates for Abatement Purposes on Scope 3 Emissions

On April 9, the Science Based Targets initiative (SBTi) announced that, following studies on a 2024 revision of its Corporate Net-Zero Standard, it will extend the use of environmental attribute certificates for abatement purposes on Scope 3 emissions. The decision will be accompanied by draft rules and guardrails on the proper use of certificates for Scope 3 disclosure that will be issued by July 2024 and will be subject to consultation. The decision does not alter SBTi’s current standards, and SBTi will not begin the practice of validating carbon credits quality.

Japan

Japanese Financial Services Agency Finalizes Its Guidelines on Impact Investing

On March 29, the Japanese Financial Services Agency (JFSA) finalized its “Basic Guidelines on Impact Investment.” The JFSA released the guidelines to “foster common understanding… and further elaborate markets and practices on” impact investments that can be referred to by financial market participants “when structuring financing, and promoting collaboration for investment projects.” The draft guidelines, which originated from the discussions of the Working Group on Impact Investment, were released for public consultation from June 30, 2023, to October 10, 2023; the finalized Guidelines include responses to comments received throughout the consultation period.

Sustainability Standards Board of Japan Releases Exposure Drafts on ISSB-Linked Sustainability Disclosure Standards

The Sustainability Standards Board of Japan (SSBJ) released three Exposure Drafts for Sustainability Disclosure Standards that would be applied in Japan. The Drafts incorporate all elements of the IFRS S1 and S2 Disclosure requirements released by ISSB and add in certain optional Japan-specific conditions. The Exposure Drafts include the “Application of the Sustainability Disclosure Standards” and “General Disclosures” Drafts – which cover the requirements of IFRS S1 – and the “Climate-related Disclosure” draft – which covers IFRS S2. The SSBJ expect that the Standards will eventually be required “under the Japanese securities laws and regulations, to be applied by companies listed on the Prime Market of the Tokyo Stock Exchange.” The comment deadline on the drafts is July 31, 2024.

Japanese Ministry of Environment Publishes Transition Strategies for a Nature Positive Economy

On March 29, the Japanese Ministry of Environment published its “Transition Strategies toward Nature Positive Economy,” which they created jointly with three other governmental ministries. The strategies aim to achieve a nature positive economy captured under the Basic Strategy 3 from the Kunming-Montreal Global Biodiversity Framework established in COP15. The strategies argue for a “transition to nature positive management,” list factors that companies should consider as they transition, outline potential new business opportunities, and create a guide for governmental action to support a nature positive management transition.

Singapore

Institute of Banking and Finance Singapore and Monetary Authority of Singapore Launch Sustainable Finance Jobs Transformation Map

On April 17, the Institute of Banking and Finance Singapore (IBF) and the Monetary Authority of Singapore (MAS) launched the Sustainable Finance Jobs Transformation Map (JTM). The map is based on a KPMG study which concluded that more than 50,000 financial services professionals in Singapore would find sustainability-related components integrated into their jobs or transition into new, sustainable-finance-specific roles; moreover, the study found that Singapore would be better equipped to benefit from sustainable finance trends if it had a workforce skilled in sustainability-related matters. The JTM lays out emerging skills in sustainable finance that will benefit financial services professionals during this transition. MAS and IBF have also set out several initiatives to support the JBM, including setting aside S$35 million to support upskilling and re-skilling and expanding courses and badges available for education in sustainable finance.

Hong Kong

Stock Exchange of Hong Kong Limited Publishes Conclusions on Climate-Related Disclosures

On April 19, the Stock Exchange of Hong Kong Limited (SEHK) published its conclusions on climate-related disclosures under its ESG framework. The SEHK’s ESG-related disclosure requirements will come into effect on 1 January 2025 and will include a phased-in approach and proportional requirements. Following a public consultation, the SEHK have adjusted their proposed sustainable disclosures, so the final requirements more closely reflect IFRS S2 requirements. The Hong Kong Securities & Futures Commission (SFC) have endorsed the conclusion and announced they will “continue to work closely with the Government, SEHK, and other relevant stakeholders” to introduce more ISSB-aligned sustainability reporting in Hong Kong.

Hong Kong Steering Group Meets with ISSB to Discuss Sustainability-Related Disclosures

On March 27, Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group met with ISSB to discuss sustainable disclosures for companies in Hong Kong. The two parties discussed the “local sustainability disclosure ecosystem” and agreed to strengthen collaboration as Hong Kong aims to promote ISSB-aligned sustainable disclosure regulation.

India

Reserve Bank of India Publishes Draft Disclosure Framework on Climate-Related Financial Risks

On February 28, the Reserve Bank of India (RBI) published its Draft Disclosure framework on Climate-related Financial Risks, 2024. RBI published the framework to improve the consistency and comparability of climate-related disclosures in India. The draft framework focuses on four “Thematic Pillars of Disclosure”: Governance, Strategy, Risk Management, and Metrics & Targets. The disclosure framework would apply to all scheduled commercial banks, all tier-IV primary (urban) co-operative banks, all all-India financial institutions, and all top and upper layer non-banking financial companies. The first disclosure requirements for the draft framework would be required for FY 2025-2026, with proportional timelines based on the size of the reporter and the nature of the disclosure. RBI is receiving comments on its draft disclosure framework until April 30, 2024.

Korea

Korean Financial Services Commission Outlines Framework of Draft ESG Disclosure

On April 22, the Korean Financial Services Commission (FSC) hosted its fourth meeting with relevant ministers, industry groups, and investors to discuss draft Korean ESG disclosure standards. Following the meeting, FSC Vice Chairman Kim Soyoung outlined the framework of the draft disclosure. The draft disclosure – which is largely aligned with global standards for interoperability purposes – will mandate climate-related disclosures, while initially keeping non-climate-related ESG disclosures voluntary. The draft disclosure takes a focused approach, attempting to promote a sustainable transition through requiring disclosure on companies’ governance structure, strategy, risk management process, and current and target indicators. FSC expects to make the draft disclosure public on April 30.

Australia

Australian Treasury Proposes Sustainability-Related Financial Reporting Requirements to Australian Parliament

In Schedule 4 of its Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, the Australian Treasury proposes to mandate sustainability-related financial reporting for corporates. The bill, which was first read to the Australian House of Representatives on March 27, introduces measures that are proportional to the size of the reporter; the measures in Schedule 4 include a mandatory climate statement where corporates will have to disclose on a material financial risk or opportunity related to climate; any climate metrics and targets, including on Scope 1, 2, & 3 emissions; and any information about climate-related governance, strategy, and risk management. The bill proposes to cover asset owners and asset managers. The Australian Sustainable Finance Institute (ASFI), as well as 14 of Australia’s most influential business and finance organizations, have come out in support of Schedule 4 of the Treasury’s proposal. The organisations have emphasized the importance of having mandatory ISSB-aligned sustainability-related disclosures in Australia.

Australian Prudential Regulation Authority Releases Letter to Provide Context for Climate Risk Self-Assessment Survey

On April 3, the Australian Prudential Regulation Authority (APRA) released a cross-industry letter to provide context for corporates on the “scope, purpose, and timing” of its upcoming voluntary climate risk self-assessment survey. The survey is an informational tool for APRA and corporates to understand the extent of climate-related risks and how they are being managed.

New Zealand

New Zealand Treasury Issues Paper on How to Assess Economic and Fiscal Impacts of Climate Change

New Zealand’s Treasury issued a paper titled “Assessing the Economic and Fiscal Impacts of Climate Change in New Zealand.” The paper aims to expand on a 2023 report from the New Zealand Treasury and Ministry of Environment that studied data relating to economic and fiscal impacts of climate change. The Treasury’s new paper provides a framework for assessing threats and opportunities linked to climate change, while identifying areas for increased domestic and international focus to better understand climate-related impacts.

New Zealand Financial Markets Authority Opens Consultation on Potential Class Exemption for Bringing Certain Green, Social, Sustainable, and Sustainability Linked Bonds to Market

On April 2, the New Zealand Financial Markets Authority (FMA) opened a consultation to seek feedback on whether to provide a class exemption of certain regulatory requirements for listed companies bringing certain green, social, sustainable, and sustainability linked (GSSS) bonds to market. If enacted, this exemption would allow companies who offer GSSS bonds similar to ones already available in the market the ability to bypass having to prepare a “Product Disclosure Statement.” Companies would have to make available to investors information on the GSSS features of the bond to qualify for the exemption. The FMA is proposing the exemption to promote innovation and flexibility in financial markets by reducing unnecessary compliance costs.

ASEAN

ASEAN Taxonomy Board Publishes Updated ASEAN Taxonomy for Two New Sectors

On April 2, the ASEAN Taxonomy Board (ATB) published the ASEAN Taxonomy for Sustainable Finance Version 3. The new version focuses on two sectors: transportation & storage and construction & real estate. The new Taxonomy offers “green classification[s]” that are designed to be interoperable with other international strategies; the ASEAN Taxonomy is largely aligned with the EU Taxonomy, with certain provisions adapted for ASEAN-specific conditions. Alongside the Version 3 Taxonomy, ATB also published annexes providing additional examples and explanations for the Life Cycle Assessment (LCA) checklist and the Climate Risk and Vulnerability Assessment (CRVA) checklist.

European Union

Platform on Sustainable Finance Releases Intermediate Report on Capital Flows to Sustainable Investments

On April 4, the Platform on Sustainable Finance (PSF) – a group charged with advising the European Commission on a methodology to monitor financial flows into sustainable investments – released an intermediate report on capital flows to sustainable investments. The report is segmented into three parts: Chapter 1 aims to lay out a methodology for tracking the financial flows; Chapter 2 analyzes how “capital expenditure by real economy entities” is filling sustainable investment gaps and is accompanied by an analysis of the green deal investment gap in the annexes of the report; and Chapter 3 aims to assess “capital flows into and from financial markets.” PSF will release their final report at the end of their mandate.

European Commission Releases Study on Methodological Framework to Assess Financial Risk of Biodiversity Loss and Ecosystem Degradation

In February, the European Commission released a Study for a Methodological Framework and Assessment of Potential Financial Risks Associated with Biodiversity Loss and Ecosystem Degradation. The study aims to improve the preparedness of public and private sector participants to integrate natural capital protection into their risk and strategy planning. The study outlines definitions and procedures that will help financial institutions assess and manage risk drivers and exposure to biodiversity loss and ecosystem degradation.

European Securities and Markets Authority Launches Public Consultation on EU Green Bond Standard

On March 26, following the passage of the EU Green Bond Standard (EU GBS) in December 2023, the European Securities and Markets Authority (ESMA) launched a public consultation. The consultation covers ESMA’s draft Regulatory Technical Standards (RTS) “related to the registration and supervision of external reviewers” under the EU GBS. The consultation includes an accompanying report outlining ESMA’s initial analysis of the legislative text and a draft RTS relating to the knowledge and experience of analysts and senior management, conflict-of-interest management, and outsourcing practices of external reviewers of green bonds and sustainable debt and sustainability assurance providers.

European Insurance and Occupational Pensions Authority Launches Public Consultation on Proposed Reassessment of Natural Disaster Risk

On April 3, the European Insurance and Occupational Pensions Authority (EIOPA) launched a public consultation on their proposed reassessment of natural disaster risk within the standard formula. Based on new data, models, and insights of the scope of natural perils, EIOPA proposes expanding risk factors across types of perils and the number of countries included for specific perils. The proposed changes aim to stabilize the EU’s insurance market by requiring “insurers’ capital requirement for natural catastrophe underwriting risk [to] continue to reflect the excepted impact of climate change.” The consultation will be open until June 20, 2024.

Parliament Votes to Approve Several Key Pieces of Legislation

On April 24, the European Parliament voted in their plenary session to approve several noteworthy legislative vehicles, including the Corporate Sustainability Due Diligence Directive (CSDDD), the ESG Rating Regulation, and the Parliament’s position on the EU Benchmark Regulation (BMR) review.

United Kingdom

HM Treasury Publishes TCFD-Aligned Disclosure Application Guidance for Phase 1 and 2

On April 15, HM Treasury, with the approval of the UK Financial Reporting Advisory Board’s Sustainability Subcommittee (FRAB-SSC), published its TCFD-aligned disclosure application guidance for Phase 1 and 2. The guidance incorporates insights from HM Treasury’s recently concluded consultation on their Phase 2 Exposure Draft for TCFD-aligned disclosure in annual reports. HM Treasury has provided additional guidance on size thresholds for “Arm’s Length Bodies,” sector-specific and industrial groupings, reporting requirements if climate is identified as a principal risk, boundaries of required qualitative and quantitative reporting, assurance procedures and arrangements, and reporting on climate opportunities.

Financial Conduct Authority Publishes Final Guidance for Upcoming Anti-Greenwashing

On April 23, the UK Financial Conduct Authority (FCA) published final guidance regarding regulatory expectations and compliance by all FCA-regulated firms with the upcoming anti-greenwashing rule, which comes into effect on May 31, 2024. The FCA also announced that it is consulting on extending to portfolio managers the Sustainability Disclosure Requirements (SDR) and labeling regime, introduced in November 2023, that currently apply to UK fund managers of UK funds.

Transition Plan Taskforce Releases Final Version of the TPT Sector Summary

In April, the UK Transition Plan Taskforce (TPT) released the final version of the TPT Sector Summary to provide guidance on transition plans for 30 financial and real economy sectors. TPT also released the TPT Sector Deep Dive Guidance, which gives sector-specific guidance for seven sectors selected based on their GHG emission levels and the “need for (or [their] provision of) transition finance in the UK context.”

United States

US Congressmembers Introduce Legislative Vehicles to Challenge SEC Climate Rule

On April 17, U.S. Senator Tim Scott (R-SC) introduced a Congressional Review Act (CRA) resolution to stop the recently adopted Securities and Exchange Commission (SEC) “Enhancement and Standardization of Climate-Related Disclosures for Investors” rule (SEC Climate Rule) from coming into effect. Senator Scott’s resolution has been sponsored by 34 other senators, including Democratic Senator Joe Manchin. The House of Representatives has also introduced a CRA resolution, led by Rep. Bill Huizenga (R-MI), which passed out of the House Financial Services Committee with a 28-22 vote.

On April 4, the SEC voluntarily stayed its Climate Rule pending legal challenges.

The Supreme Court of the United States Issues Opinion Affecting Omitted Information in Financial Statements

On April 12, in Macquarie Infrastructure Corp vs. Moab Partners, L. P. the Supreme Court ruled that “pure omissions” do not create legal liability under SEC Rule 10b-5(b) – which makes a material misrepresentation or omission by the defendant unlawful. In the majority opinion, authored by Justice Sonia Sotomayor, the Supreme Court ruled that “pure omissions” of information required for disclosure in companies’ financial reporting under Item 303 of SEC Regulation S-K do not support private action under SEC rule 10b-5(b). Consequently, if an omission is a “pure omission” rather than a “half-truth” – omissions that render other statements made in a company’s financial reporting misleading – then a company is not liable under federal securities law.