By Margarita Pirovska (@MargaritaIP), Director of Policy, PRI
As the world adapted to the continuing COVID crisis during 2021, policymakers’ focus on sustainable finance and business gained further momentum
A shared awareness of the climate crisis, enduring and visible social risks, and increasingly prominent global governance issues such as tax evasion, maintained the spotlight on the role of finance in promoting sustainable economic development. The creation of the International Sustainability Standards Board (ISSB) kickstarted global efforts to address the issue of standardised ESG data, a long-time barrier for responsible investment. In addition, the International Platform for Sustainable Finance has produced a first draft of the Common Ground Taxonomy, analysing the EU sustainable taxonomy and the China Green Bonds Project Catalogue, aiming to improve the comparability and future interoperability of taxonomies. Overall, our regulation database shows an even higher spike in new or revised policy instruments around the world compared to previous years.
The EU has maintained its leadership on sustainable finance, although in the final months of 2021, delays and political pressure have put heavy pressure on the European Commission
The first half of 2021 saw great achievements, with the publication of the Renewed Sustainable Finance Strategy which set a clear policy agenda to 2024. The Corporate Sustainability Reporting Directive (CSRD) proposal was also tabled, receiving strong investor support while EFRAG started drafting EU sustainability reporting standards (ESRS) on climate. The European Commission also made significant announcements related to the clarification of fiduciary duty rules. Another important milestone was achieved with the adoption of the first EU Taxonomy climate Delegated Act (DA) which means investors and companies can now start reporting against the EU Taxonomy.
This progress has stalled with increasing political pressure and announcement of implementation delays at the end of 2021. PRI engaged with policy makers in the Commission and at Member State level to preserve the scientific integrity of the EU Taxonomy and proposed alternative solutions to a potential inclusion of gas-fired power and nuclear energy as sustainable activities. The Sustainable Corporate Governance (SCG) initiative has been postponed for the third time and expected in March 2022. Finally, the European Commission confirmed further delays to SFDR disclosure dates, meaning Level 2 disclosure would only start applying on 1 January 2023.
In 2022, investors could expect a deal on CSRD as well as a proposal by EFRAG to the European Commission on a first set of sustainability reporting standards. The Commission should also strengthen its ambition on stewardship and provide concrete guidelines for investors to connect this critical missing link. The Platform on Sustainable Finance (PSF) will also have a key role to play, with the expected publication of three final reports in Q1 related to the EU Taxonomy (four remaining environmental objectives, Taxonomy extension and Social Taxonomy).
In 2021, the United Kingdom, host of COP26 and the G7, pursued reforms to enable sustainable finance and alignment with net zero by 2050
Greening Finance: a roadmap to sustainable investing launched in 2021 and set out the long-term ambition for a green financial system. Phase one of the Roadmap places emphasis on improving the information available to financial decision makers with further consultations due in 2022 on its implementation.
Pension funds of over £5bn are now required to report in line with climate change regulation, and new legislation was announced for mandatory corporate climate disclosures. Ongoing work to develop a green taxonomy complements real economy policy changes, such as a 2030 sales ban for petrol and diesel vehicles and a “10-point plan for a green industrial revolution” as the UK seeks to make good on its net zero by 2050 commitment made last year.
In 2022, investors should expect the UK Government to consult on the draft UK Technical Screening Criteria for the Green Taxonomy’s environmental objectives “climate change mitigation” and “climate change adaptation”. This will be followed by consultation from the FCA on Sustainability Disclosures Regime (SDR) in Q2 2022. From 1 October 2022 – subject to consultation – Occupational Pension schemes will be required to go a step further on TCFD reporting, with the introduction of requirements to report on Paris alignment. Towards the end of the year, we can expect the FRC to announce their proposal on tiering signatories against the Stewardship Code and a report best practice from the Transition Plan Taskforce.
After a series of regulatory setbacks in 2020, the US has made strong progress enabling responsible investment and building towards sustainable economies
The US rejoined the Paris Agreement in early 2021 and set a non-binding, aspirational net zero 2050 target. Through executive action, President Biden called on the federal government to fully account for climate financial risk in budgeting, procurement and contracting. The Financial Stability Oversight Council (FSOC), composed of leaders of the major US financial regulators, released a report calling climate change an emerging and increasing threat to financial stability.
At the Securities and Exchange Commission (SEC), Chair Gary Gensler is advancing a progressive agenda promoting shareholder rights and active ownership, and is poised to release two rules early next year to improve issuer disclosure of climate and human capital information.
The Department of Labor recently closed a public consultation on a rule to undo action by the Trump administration and clearly establish that climate and ESG factors can be considered throughout the investment process and in exercising shareholder rights.
2022 will be a pivotal year for responsible investment in the United States. While action in Congress may be limited on responsible investment and climate change, regulators are poised to improve issuer disclosure, allow further integration of ESG factors in investment decision making, and begin to set rules around the use of ESG-related terms in financial markets.
In China, while carbon neutrality remains the central topic, financial regulators showed increasing interest in the broader field of responsible investment, including issues such as biodiversity, circular economy and common prosperity
As presented in a high-level guiding opinion and detailed action plan, the central government has taken a systemic approach to delivering carbon neutrality goals by 2060, also launching the national carbon ETS in July.
The PBOC, CSRC, and MEE respectively issued investor and corporate environmental disclosure guidelines and regulations, and the PBOC co-chaired the G20 Sustainable Finance Working Group, developing the G20 Sustainable Finance Roadmap.
Despite its ambitious climate commitments, China needs stronger and internationally aligned policy actions to establish a healthy responsible investment ecosystem. ESG information disclosure continues to be the most urgent issue for investors in China, but requirements will likely remain voluntary before further research. There are also strong needs from investors for clear policy guidance on ESG integration and stewardship to enhance investees’ sustainability performance and shape investment impacts aligned with SDG goals.
In 2022, we expect the CBIRC will step up efforts on promoting ESG investment for insurance companies and insurance asset managers. We also look forward to joint actions from financial regulators to establish clear ESG integration and stewardship requirements for institutional investors. MEE will lead climate investment and finance work with local pilots to explore future supporting policies and evaluation mechanisms.
Following its 2050 carbon neutrality announcement, Japan has seen developments in both climate-related and sustainable finance policies
METI launched its Green Growth Strategy, including five policy measures and fourteen sectoral action plans to enable industry alignment with 2050 carbon-neutrality. With the FSA and the Ministry of the Environment, METI also formed a Taskforce on transition finance, and jointly published the Basic Guidelines on Climate Transition Finance for bonds and loans.
On the corporate end, the FSA and the Tokyo Stock Exchange revised Japan’s Corporate Governance Code and Guidelines for Investor and Company Engagement. The Ministry of Foreign Affairs also published the National Action Plan on Business and Human Rights.
The FSA furthermore established the Sustainable Finance Expert Panel to discuss the future direction of sustainable finance policy, including on ESG products and corporate disclosure. The Panel’s final report, which covers recommendations for corporate disclosure, enhancing market function, and financial institutions’ climate risk management, shows actionable changes for the next stage. METI also established two working groups to develop guidelines for better corporate disclosure and investor dialogues, focusing on sustainability transformation.
In 2022, the new Kishida administration is expected to publish a Clean Energy Strategy, including a roadmap to double the percentage of renewable energy in Japan’s energy mix by 2030. Further, in April, the Tokyo Stock Exchange will be restructured into three new market segments (Prime Market, Standard Market, and Growth Market). Under the revised Corporate Governance Code, companies listed in the Prime Market will be required to disclose climate related information according to the TCFD recommendations on a comply or explain basis.
While these are all important steps forward, given the rapid acceleration of sustainable investment practice and regulation across the region, the Japanese government and financial regulators will need to quickly move from discussion groups to implementation to keep pace with global developments.
Although still behind global leaders, Australia has increased momentum towards building a sustainable financial system
Throughout 2021, APRA and the RBA have consistently spoken on the macroeconomic impacts of climate change and impacts to financial stability. Additionally, the first comprehensive guidance for banks, insurers, and superfunds to manage climate-related risks was released by APRA in November.
On the other hand, political divisions have slightly hindered the incorporation of ESG factors in financial decision making. Released in late December 2021, a joint committee report provided 13 recommendations that could potentially limit financial institutions’ ability to divest from high-emitting industries or engage in collective stewardship. It remains unclear whether the Australian government will accept any of the recommendations. Additionally, proxy advice regulations were introduced that may prevent advisors from providing superfunds with independent advice on listed companies’ ESG issues.
In 2022, we expect Australian regulators and Treasury to take further steps towards mandating TCFD-aligned climate disclosures. ASIC, Treasury and the RBA intend to engage with the IFRS Foundation on the global sustainability reporting baseline. Meanwhile, the Council for Financial Regulators plan to examine the global developments of sustainable finance taxonomies and their implications for Australia. We expect that these regulators will consider developing an Australian specific taxonomy that remains consistent with international developments.
Financial policymakers and regulators now widely acknowledge the need to connect financial policy frameworks to sustainability issues
Investors are increasingly looking to understand and manage the outcomes of their investment decisions on the real economy, jobs, livelihoods, the environment. Our flagship Legal Framework for Impact project provides the basis for policy reforms to support and mainstream this thinking. As the world’s top economies work towards national sustainability targets such as net zero by 2050, investors can expect increased regulatory scrutiny on whether investment decisions contribute or not to such shared goals.
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