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UK HMT announces plans to regulate ESG ratings
The UK government has confirmed that it will regulate the provision of ESG Ratings, where these assessments of ESG factors are used for investment decisions and influence capital allocation.
Background: As part of the Edinburgh reforms in December 2022, Chancellor Jeremy Hunt announced that the government wants to ensure improved transparency and good conduct in the ESG ratings market. Following this, the UK government ran a consultation in 2023 on whether it should expand the regulatory perimeter to regulate ESG ratings providers.
What’s next: A full consultation feedback statement and legislative steps will follow later this year.
SEC adopts rules on climate-related disclosures
On Mar. 6, the SEC adopted final rules on climate-related financial disclosures that were weaker than it had originally proposed. The final rules require a registrant to disclose, among other things:
Material climate-related risks
Activities to mitigate or adapt to such risks
Information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks
Information on any climate-related targets or goals that are material to the registrant’s business, results of operations or financial condition
They also require disclosure of a firm’s material Scope 1 and Scope 2 emissions but exclude previously proposed requirements to report Scope 3 emissions resulting from a firm’s supply-chain or customers.
The final rules become effective 60 days following publication of the adopting release in the Federal Register, and compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status.
Reactions: The rules have drawn legal and political pushback from both sides of the political aisle. Environmental groups the Sierra Club and the Natural Defenses Council sued the SEC over the rules in the U.S. Court of Appeals for the District of Columbia Circuit and U.S. Court of Appeals for the Second Circuit alleging that the rules do not go far enough. Republican attorneys general filed petitions in the Fifth, Sixth, Eighth and Eleventh circuits claiming that the SEC had overstepped its authority in adopting the rules.
Litigation developments: On March 21, a lottery held by the U.S Judicial Panel on Multidistrict Litigation to centralize the multi-circuit petitions for review selected the conservative-leaning Eighth Circuit as the venue to consolidate the petitions. On March 15, the Fifth Circuit had granted an administrative stay to temporarily halt the SEC’s rules throughout the litigation.
Reserve Bank of India consults on disclosure framework on climate-related financial risk
The Reserve Bank of India (RBI) has released a draft framework on the disclosure of climate-related financial risks for regulated entities.
In more detail: According to the draft framework, regulated entities disclose information about their climate-related financial risks and opportunities for the users of financial statements. The intention is to foster an early assessment of climate-related financial risks and opportunities and also facilitate market discipline.
Background: The draft framework follows from the RBI’s ongoing work on the sources of climate risk and potential impact on regulated entities, in particular:
The central bank noted the need for all regulated entities to have appropriate governance, strategy and risk management structure to manage climate change risk
Climate-related disclosures by regulated entities is an important source of information for different stakeholders (e.g. customers, depositors, investors and regulators) to understand relevant risks faced and approach adopted to address such issues
Given the growing importance of climate-related financial risks, there is a need for regulated entities to disclose more structured information about their climate-related financial risks
Thematic pillars: Disclosures by regulated entities should cover four thematic areas:
Governance: Entities should, inter alia, disclose their Board’s oversight of climate-related risks and opportunities and senior management’s role in assessing and managing climate-related risks and opportunities
Strategy: Entities should detail their strategy for managing climate-related financial risks and opportunities
Risk management: Entities should detail, inter alia, the processes and policies to identify, assess, prioritize and monitor climate-related financial risks
Metrics and targets: Disclosures on metrics and and targets should detail entities’ performance in relation to its climate-related financial risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by statute or regulation
Next steps: The draft framework is open for comments until April 30, 2024.
New Zealand discusses use of credit risk weights for climate risk management
The Reserve Bank of New Zealand (RBNZ) has published a Bulletin article discussing the use of credit risk weights for climate-related purposes.
The background: RBNZ is increasing minimum capital requirements, with risk weights playing a key role in adjusting for financial risks associated with climate change. These measures aim to ensure that banks with higher-risk exposures factoring in climate-related risks maintain higher capital reserves, thus improving the resilience of the wider financial system against stress events.
In detail: The Bulletin sheds light on the following:
An overview of the Reserve Bank’s general approach to credit risk weights
What climate-related risks are and their links to credit risks to individual banks and financial stability at a system-wide level
How the Reserve Bank’s credit risk weights framework currently incorporates climate-related risks within its general approach to credit risk
Other tools that the Reserve Bank uses to help entities manage climate-related risks to financial stability
There’s more: The RBNZ is also focusing on improving climate-related risk capabilities and data quality and availability. When considering any future changes to the approach to setting risk weights, the RBNZ will ensure any changes are data-driven and explicitly linked to financial risks.
Singapore consults on adopting ISSB standards and mandates disclosure from FY2025
SGX RegCo has mandated climate reporting from FY2025. In addition, the Group is consulting on how the International Sustainability Standards Board (ISSB) standards should be incorporated into its sustainability reporting rules for climate-related disclosures.
Climate reporting in Singapore: According to recent announcements, all listed issuers must report from FY2025, while large non-listed issuers will need to report from FY2027. Reporting will be phased in as follows:
From FY2025, all listed issuers will be required to report and file annual climate-related disclosures (CRD), using requirements aligned with the ISSB standards
From FY2027, large NLCos (defined as those with annual revenue of at least $1 billion and total assets of at least $500 million) will be required to do the same
More time will be given for companies to report CRD on Scope 3 GHG emissions and conduct external limited assurance on Scope 1 and 2 GHG emissions
CRD for Scope 3 GHG emissions is expected to kick in no earlier than FY2029
External limited assurance on Scope 1 and 2 GHG emissions will apply to listed issuers from FY2027 and to large NLCos from FY2029
The consultation in detail: SGX RegCo proposes the following requirements:
From FY 2025, issuers should refer to both ISSB’s IFRS S1 and IFRS S2 in preparing climate-related disclosures, including any (permanent) structural and (temporary) transition reliefs
Issuers should disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions and the measurement approach from FY 2025
Issuers should disclose applicable categories of Scope 3 GHG emissions from FY 2026
Issuers should disclose industry-based metrics and cross-industry metric categories relevant for climate-related disclosures
Sustainability reports should be issued according to the current timelines as of FY2025 and together with the annual report from FY2026
Feedback welcome: The consultation is open until April 5, 2024.
Indonesia publishes Climate Risk Management and Scenario Analysis
The Indonesia Financial Services Authority (OJK) has published the Climate Risk Management & Scenario Analysis (CRMS) Guide to support financial institutions’ management of climate risk.
Objective and background: The CRMS includes aspects of governance, strategy, risk management and disclosure to assess the resilience of bank business models and strategies in facing climate change in the short, medium and long term.
The CRMS standardizes the climate management framework by establishing scenarios and a uniform methodological framework supported by data sources and references.
In detail: This CRMS guide consists of 6 pillars, namely:
Climate risk management
Technical guidance for measuring climate risk
Carbon emission calculation methodology
Data supporting potential physical risks in Indonesia
Supporting data for Indonesia’s macroeconomic projections
Working paper on reporting the impact of climate risks and carbon emissions from the banking sector to the OJK
Next steps: The CRMS guide is expected to help banks measure the impact of climate on their business performance and sustainability. It will be updated regularly in line with global developments, best practices and stakeholder needs.
Malaysia sets expectations on climate risk stress testing
Bank Negara Malaysia (BNM) has issued a new methodology paper, setting out its expectations for financial institutions (FIs) carrying out the 2024 Climate Risk Stress Test (CRST) exercise.
Objectives: The 2024 CRST exercise aims to make the following enhancements:
Improve understanding and appreciation among board, senior management and staff of FIs on how the business and operations of the FIs could be impacted by climate-related risks
Explore novel approaches that could lead to better identification and measurement of FIs’ exposures at risk to climate change
Identify current gaps, specifically those related to data, measurement, methodology, technology and capabilities, as well as potential solutions to these challenges
Climate scenarios: FIs are to conduct the 2024 CRST exercise by employing the following three long-term adverse climate scenarios to capture the impact from a range of different combinations of physical and transition risks:
Net Zero 2050 (“orderly”)
Divergent Net Zero 2050 (“disorderly”)
Nationally Determined Contributions (“hot house world”)
Further action: Where progress by a financial institution towards strengthening its resilience to climate-related risks remains inadequate, the Bank may consider broader use of its supervisory toolkit as appropriate, including the use of capital add-ons.
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