Whilst there is progress, companies have a lot to contend with...

There is much progress seen within sustainable finance regulation and policy, particularly in the areas of disclosures, taxonomy, ESG data and climate as a financial risk. This huge amount to contend with continues to be confusing and complex for companies to stay on top of.

In this article we have added some key upcoming dates and also listed the key sustainable finance regulatory developments over the last few weeks.

Upcoming key dates*

• Q2 2023 - DG FISMA to launch four – week consultation on the first set of ESRS
• Q2 2023 – EFRAG to launch consultation on second set of ESRS
• Q2 2023 – Commission to adopt the first set of ESRS by June
• Q2 2023 - The US SEC proposed climate-related disclosure rules are expected to be finalised in April 2023.
• Q2 2023 - The EU proposal on ESG ratings is expected to be published between May and June
• Q2 2023 - ISSB S1 and S2 standards expected to be published
• Q2 2023 - The Commission expected to publish a Q&A on SFDR application
• Q2-Q3 2023 - ESAs to provide additional Q&A guidance further to the Commission Q&A doc on SFDR application
• Q2 2023 - Taxonomy Delegated Act (DA) on TSC for the four remaining environmental objectives to be adopted by June
• Q2 2023 – Updated Taxonomy DA on TSC and activities for climate mitigation and adaption to be adopted by June

*Dates are based on recent insights and will be updated in each article

EU developments:

30 March – The European Parliament, adopted the provisional agreement on the Pay Transparency Directive. Next steps: The Council will have to formally approve the agreement before the text is signed into law and published in the EU Official Journal.

Meanwhile, the European Parliament’s Committee on Legal Affairs (JURI) continue to deliberate on the proposal of the Corporate Sustainability Diligence Directive (CS3D). Changes have been made to specific provisions related to financial undertakings. Contact me directly for more information.

29 March - Further to Commissioner McGuiness publicly calling for EFRAG to focus its efforts on capacity building for the implementation of the first set of ESRS. EFRAG announced that they are adjusting to this new priority whilst carrying on work under a modified timetable on the SMEs and sector-specific standards.

Next steps: EFRAG will be discussing how to put in place (with high priority) an ESRS implementation support function. It is unclear to what extent this will impact the timeline on the development of the SME and sector-specific standards.

29 March - The European Securities and Markets Authority (ESMA) published its 2022 Corporate reporting enforcement and regulatory activities Report . The report provides an overview of the activities of ESMA and national authorities when examining compliance of financial and non-financial information provided by issuers in 2022. On that basis, ESMA offers overarching messages to issuers and auditors to improve future financial and non-financial reports and adhere to ESMA’s recommendations, including the European Common Enforcement Priorities (ECEP). The report is structured around how the different financial reporting initiatives are enforced including the IFRS reporting, the Alternative Performance Measures (APMs) reporting, non-financial reporting and European Single Electronic Format (ESEF).

Highlights of key findings from a sustainability perspective:

• IFRS reporting - there is significant room for improvement in disclosures of climate related matters by issuers of financial statements.
• Enforcement of non-financial reporting: significant improvement is needed in climate-related disclosures.
• Additionally, undertakings still need to take steps to ensure a good level of preparedness for alignment reporting related to Article 8 of the Taxonomy Regulation. Aspects of the consequences of COVID-19 on non-financial matters were discussed, but disclosures are incomplete regarding the impact of the pandemic on sustainability related goals.

29 March – The European Banking Authority (EBA) published a speech by Jose Manuel Campa, EBA Chair titled Our path to the future of EU-wide stress testing. In his speech Mr Campa summarises progress made on the EBA’s 2023 EU-wide stress testing and how stress testing could be improved – particularly in relation to climate risk. Mr Campa notes that the EBA is considering more broadly its strategy for climate risk stress testing. This includes a review of its guidelines on institutions stress testing to include guidance on how to test institutions' resilience to climate change, and also to long-term negative impacts of environmental, social and governance (ESG) factors.

Next steps: This work is expected to take place in 2023, although the timing will depend on the outcome of the Commission's legislative process to amend the CRD IV Directive (CRD IV). Additionally, under the proposed changes to the CRD IV, the EBA and other European supervisory authorities (ESAs) are due to develop joint guidelines for supervisory ESG stress testing, starting with climate risk.

29 March – The European Insurance and Occupational Pensions Authority (EIOPA) published a staff paper on Nature-related risks and the impact for insurance. The report includes an assessment of risks, approaches to managing nature-related risks and the role for supervisors and regulators.

27 March – ESMA published its final report on Guidelines on MIFIDII product governance guidelines. One of the key amendments included the specification of any sustainability-related objectives a product is compatible with.

27 March - The European Central Bank (ECB) published its results of its climate risk stress test. For background, in 2022, the ECB conducted the first climate risk stress test of the euro area central banks’ balance sheets to analyse how sensitive the financial risk profile can be to climate-related risk scenarios and improve our risk assessment capabilities. The results show that both transition risk and physical risk have a material impact on the risk profile of the Eurosystem balance sheet.  

22 March – The Commission published its Consumers Package, consisting of two proposals: Green Claims Directive and common rules promoting the repair of goods. The Green Claims Directive in particular is part of the broader set of initiatives to fight greenwashing. The proposal introduces minimum requirements on substantiation and communication of environmental voluntary claims which are subject to third party verification prior to it being used in commercial communications. The Commission’s proposal currently states that the Directive does not apply to financial services. 

21 March - Commissioner McGuiness delivered a speech . During her speech, the Commissioner publicly called on the European Financial Reporting Advisory Group (EFRAG) to focus on guidance for the first set of standards over preparatory work for the sector standards and highlighted that "prioritising EFRAG's efforts on the first set of standards over preparatory work for the sector standards will avoid overlapping consultations, and ease the burden on all stakeholders wanting to contribute to this busy agenda”. Her sentiments are consistent with EFRAG thinking in terms of where to focus their efforts. 

16 March – The Commission published its highly anticipated Net-Zero Industry Act (NZIA). The NZIA is a proposal for a regulation to scale up manufacturing of clean technologies in the EU and prepare the EU for the clean-energy transition. This initiative is part of the Green Deal Industrial Plan – the EU’s response to the US Inflation Reduction Act. The goal is to accelerate the progress towards the EU's 2030 climate and energy targets and the transition to climate neutrality.

16 March - The Commission proposed a Critical Raw Materials Act , a comprehensive set of actions to ensure the EU's access to a secure, diversified, affordable and sustainable supply of critical raw materials. The Commission also released a proposal for a European Hydrogen Bank, which aims to boost renewable hydrogen production and imports.

13 March - The European Supervisory Authorities (ESAs), together with the European Central Bank (ECB), published a Joint Statement on climate-related disclosure for structured finance products. The Statement encourages the development of disclosure standards for securitised assets through harmonised climate-related data requirements.

Next steps: the Statement sets the ECB and the ESAs’ joint efforts to facilitate access to climate-related data with a view to improving sustainability-related transparency in securitisations and to promote consistent and harmonised requirements for similar instruments.

UK

30 March – UK HM Treasury published a consultation paper on a proposed future regulatory regime for ESG ratings providers. The consultation paper sets out HM Treasury's initial policy proposals for the scope of a regulatory regime. It is considering regulating a wide range of ESG ratings used in financial markets (excluding ESG data). Next steps: Consultation closes on 30 June 2023.

30 March – The UK’s Department for Energy Security and Net Zero (DESNZ) published an update to the Government's 2019 Green Finance Strategy. The 2023 update focuses on the need for green investment and on opportunities for the UK's financial and professional services, in light of the UK's target for net zero by 2050 and the environmental objectives in the Environmental Improvement Plan. The updated Strategy sets out the measures the Government is planning to take to achieve its objectives in relation to green finance (most of these are not new announcements)

Next steps:

• A consultation in autumn or winter 2023 on requiring the largest companies to disclose net zero transition plans.
• The TPT is expected to publish its Disclosure Framework and Implementation Guidance for transition plans in summer 2023
• A consultation in autumn 2023 on proposals for a UK green taxonomy
• Assessment of the suitability for the UK of the global sustainability disclosure standards being prepared by the International Sustainability Standards Board (ISSB). The final standards are expected to be published in summer 2023
• Call for evidence on reporting scope 3 greenhouse gas (GHG) emissions
• Consult on the interventions needed to support the growth of high integrity voluntary carbon markets

29 March - The UK Financial Conduct Authority published a press release providing an update on its consultation paper on sustainability disclosure requirements (SDR) and investment labels (CP22/20). The FCA are carefully considering the feedback to ensure that the regime protects consumers. It also recognises and takes account of any practical challenges that firms may have.

Next steps: The FCA intended to publish final rules by the end of the first half of 2023. However to take account of the significant response, it intends to publish the policy statement in Q3 2023. The proposed effective dates will be adjusted accordingly.

28 March - The UK Financial Conduct Authority (FCA) published a letter addressed to UK benchmark administrators outlining the issues identified its preliminary review on ESG benchmarks.

Key takeaways:

• In general, the work confirmed that disclosures were poor. There were often instances where benchmark administrators did not provide sufficient detail and description of the ESG factors considered in their benchmark methodologies or the access was not easy for users.
• Some firms failed to fully implement the disclosure requirements introduced in the Low Carbon Benchmarks Regulation.
• Among the broader considerations on ESG integration in UK capital markets, the FCA used this opportunity to stress its support for the development of a voluntary Code of Conduct for ESG data and ratings providers as well as future regulation.

The UK Government will shortly consult on whether and how to extend the FCA's perimeter to include ESG ratings providers. Regarding the EU, the evidence gathered is particularly relevant as some of the considerations regarding not fully implemented ESG disclosure requirements or non-transparency of methodologies could feed into the Commission’s thinking around the rules for ESG benchmarks in the context of the BMR Review, or the upcoming proposal on ESG Ratings.

Next steps: The FCA expects the administrators to carefully consider the assessment of the risks and the issues identified in the Annex to the letter. As a result of the findings, the FCA announced they will be doing more work in the area, to holistically consider the risks of harm related to ESG benchmarks across the value chain. Where firms fail to consider the feedback, the FCA will deploy its formal supervisory tools and, where appropriate, consider enforcement action.

13 March – The Prudential Regulation Authority (PRA) published a report on climate-related risks and the regulatory capital frameworks for banks and insurers. The report sets out the PRA's latest thinking in this area and its future work. Topics covered include: capability gaps, regime gaps, capitalisation timelines and areas for future research.

Next steps: The PRA recognises that further work is needed particularly on potential regime gaps to capture systemic risks from climate change and unintended consequences. It will continue to address these gaps as part of its supervision and policymaking. It also intends to build its capabilities and forward-looking tools to judge the resilience of the financial system to climate risks.

Global 

28 March: the Taskforce on Nature-related Financial Disclosures (TNFD) published the fourth and final beta version of its disclosure framework. The TNFD framework will provide guidance for organisations to report on nature-related risks, to support a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes. Next steps: TNFD is consulting on the fourth beta version from 30 March 2023 to 1 June 2023.The final framework is expected to be published in September 2023.

28 March - The International Organization of Securities Commissions (IOSCO) published a report setting out key considerations for developing a Global Assurance Framework for sustainability-related corporate reporting. The report elaborates on IOSCO's support for the ongoing work of the international standard setters – the IAASB and the IESBA – to develop profession-agnostic assurance and ethics (including independence) standards over sustainability-related information.  

24 March – The International Accounting Standards Board (IASB) added a project to its work plan to explore whether and how companies can provide better information about climate-related risks in their financial statements. The project aims to:

• Research the causes of stakeholders’ concerns about inconsistent application and insufficient information;
• Research whether the IFRS Foundation’s educational material on the effects of climate-related matters on financial statements and the application of the ISSB's future standard on climate-related disclosures help to address these concerns; and consider whether and what actions might be needed

Next steps: The ISSB is scheduled to publish a consultation in Q2 2023, asking stakeholders for feedback on its work plan priorities including whether the ISSB should undertake a project to move beyond simply connecting information in the financial statements and sustainability-related financial disclosures to closer integration in reporting.

Thanks to colleagues for their contribution to this article: Nina Emordi.

Disclaimer: The views reflected in this article are the author’s and do not necessarily reflect the views of the global EY organization or its member firms.