Regulation is shaping the sustainability agenda and changing the way companies do business in different jurisdictions but keeping pace with constant regulatory updates has become a mammoth task for businesses and investors. In this recurring series, S&P Global Sustainable1 presents key environmental, social and governance regulatory developments and disclosure standards from around the world.

In this month's update, we explore the EU’s reform of its emissions trading scheme, new Swiss guidelines to address greenwashing, Australia’s plans to develop a climate disclosure framework and more.

International    Europe    United States and Canada    Asia-Pacific    Latin America and the Caribbean

International

ISSB publishes guidance on carbon emissions disclosure

The recently formed International Sustainability Standards Board, or ISSB, said on Dec. 15, 2022, that companies reporting Scope 3 emissions under its proposed climate disclosure standard would be allowed a temporary exemption for a minimum of one year after the standard becomes effective to give companies more time to implement the requirements. Scope 3 emissions include emissions from suppliers. Companies will also be able to include information beyond their reporting period if the data comes from suppliers with a different reporting cycle, the ISSB said. When disclosing Scope 2 emissions, which are indirect emissions from purchased energy, companies will be required to use a location-based method, reflecting the average emissions intensity of its local grid.

Europe

EU agrees on new law aimed at preventing deforestation

The European Parliament and the Council of the EU, made up of government ministers of the 27 EU member states, reached a provisional political agreement on Dec. 6, 2022, on a new regulation that would require companies to ensure the products they sell in the EU have not been produced in areas suffering from deforestation. The new regulation would require companies operating in the EU market to carry out due diligence on cocoa, coffee, palm-oil, soya and timber, and products derived from them, such as leather, chocolate and furniture. There will be a review of the regulation in two years to assess whether other products should be included, the Council said. The regulation requires formal agreement between Parliament and ministers. It will come into force 20 days after publication in the EU official journal. Companies and traders will have 18 months to implement the new rules, the European Commission said.

EU Parliament, Council of EU reach deal on emissions trading scheme reform

The European Parliament and the Council of the EU said on Dec. 18, 2022, that they had provisionally agreed on expanding the EU’s Emissions Trading System, or EU ETS, the bloc’s regulated market for trading and auctioning carbon emission allowances. The move is a key component of the EU’s broad Fit for 55 climate package announced in July 2021. Sectors in scope of the EU ETS, such as power and heat generation, commercial aviation and other energy-intensive industries, will have to reduce emissions by 62% by 2030, compared to 2005 levels, compared with a reduction target of43% currently. Annual emissions reductions will also increase from 2.2% per year to 4.3% from 2024 to 2027 and to 4.4% from 2028. Shipping emissions will also be included, making the EU the first jurisdiction to put a carbon price on the maritime sector, the Commission said. For the buildings and road transport sectors, as well as certain industrial sectors, a new separate emissions trading system will start from 2027, the Commission said. The agreement will gradually phase out free emission allowances to certain companies and phase in a carbon border levy between 2026 and 2034, according to the Commission.

EU Parliament, Council of EU reach deal on carbon border levy

The European Parliament and the Council of the EU on Dec. 13, 2022, reached a provisional agreement on one of the bloc’s key climate-related proposals: the carbon border adjustment mechanism, or CBAM, which would impose a carbon price on imports in the form of a levy. The CBAM would apply to imports from countries where carbon prices are lower than those in the EU, or where carbon prices are nonexistent — in other words, where goods can be produced without accounting for the hidden costs of contributing to greenhouse gas emissions. As proposed, it would apply from October 2023, but with a transition period during which importers would be subject only to reporting requirements, the Council said. Parliament and Council will need to formally approve the agreement before the new law can come into force, according to a Parliament press release.

Switzerland sets guidelines to prevent financial sector greenwashingxx

Switzerland’s Federal Council on Dec.16, 2022, set out a series of guidelines to prevent greenwashing, or making investments sound more sustainable than they actually are. Financial products or services should only be advertised as sustainable if they meet at least one specific sustainability goal, the Council said. Providers of sustainable products or services should disclose how they intend to achieve the sustainable investment goal they pursue, it added. They should also report regularly on the specific sustainable investment goal or goals relevant to the product, and have these reports reviewed by third parties, it said. Clients should also “have recourse to legal remedies,” the Council wrote. Market regulators around the world have been working to address concerns about greenwashing and have sought information from stakeholders to inform policy decisions. The Federal Council said it has asked a working group to advise on implementing the guidelines.

EU regulator finds occupational pension sector has material exposure to climate risks

The European Insurance and Occupational Pensions Authority, or EIOPA, said on Dec. 13, 2022, that its first climate stress test of the European occupational pension sector indicates that firms have material exposure to transition risks. The exercise tested how the sector would react to a sudden transition to a sustainable economy because of the delayed implementation of climate policies. It looked at 187 occupational pension providers in 18 countries with €1.98 trillion in assets, or 65.3% of total assets in defined benefit and defined contribution schemes. According to the test, assets fell 12.5%, corresponding to losses of €255 billion, mostly in equities and bonds. The test also showed that occupational pension firms had about 6% of their equity investments and 10% of their corporate bond investments in carbon-intensive industries such as mining, electricity and gas as well as transport, resulting in steep write-downs of between 20% and 38% in those holdings.

EU banking regulator publishes sustainable finance roadmap

The European Banking Authority on Dec. 13, 2022, published a new three-year sustainable finance roadmap, detailing what steps it plans to take to integrate ESG risks into the regulatory framework of the banking sector. The regulator said it had started assessing whether changes to prudential regulation may be necessary to incorporate environmental and social risks. It also said it would help develop green standards and labels, tackle greenwashing and continue its work on developing and implementing sustainability disclosures. It also said it would continue working on ensuring that ESG factors and risks are integrated into lenders’ risk management and in their supervision, including through climate stress tests. In early 2022, the regulator said it would ask banks to disclose information on climate risks and their plans to address those risks starting in December 2023.

United States and Canada

US Federal Reserve proposes climate risk guidance for large banks

The U.S. Federal Reserve Board opened a consultation on Dec. 2, 2022, on draft principles for large financial institutions to help them manage climate-related financial risks. The proposed principles would apply to banks with more than $100 billion in total assets and address both physical risks, such as extreme weather events, and transition risks, such as changes in regulation and policy. The principles would cover six areas: governance; policies, procedures and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis. The proposals are designed to help lenders' boards of directors and executives incorporate climate-related financial risks as part of their risk management, the Federal Reserve Board said. The proposals are similar to ones issued by the U.S. Office of the Comptroller of the Currency and the U.S. Federal Deposit Insurance Corporation, the Board said, adding that it would work with the two agencies to ensure consistency in supervisory frameworks for large financial institutions.

Asia-Pacific

Japan’s financial regulator publishes draft guidelines for ESG funds

Japan’s Financial Services Agency, or FSA, on Dec. 19, 2022, published draft guidance for fund managers to address greenwashing in funds offered to the public. Under the guidelines, the FSA defines an ESG fund as one that considers ESG criteria in its investment allocations and includes its objectives in its prospectus. Supervisors will verify what ESG criteria are included in a fund and how ESG factors are accounted for during the investment process, the FSA said. They will also check that ESG funds include any targets in their prospectus, the regulator said. Fund managers must also disclose how much a fund has achieved its ESG or impact goals, it said. Non-ESG fund names must not include sustainability-related terms such as “green” or “impact” to avoid misleading investors, the FSA said.

Australia launches consultation on climate disclosure framework for business, investors

The Australian government on Dec. 12, 2022, launched a consultation on establishing a climate risk disclosure framework to guide businesses and investors in managing their climate exposure. The framework will initially be aligned to the influential Taskforce on Climate-Related Financial Disclosures, or TCFD, which is a voluntary disclosure framework, the government said. It will then reflect the International Sustainability Standard Board’s proposed disclosure requirements once they are finalized for adoption. The reporting requirements will be mandatory for large companies and will be phased in over time. The government also said it had asked the Treasury Department to develop a sustainable finance strategy, which would include measures to expand Australia’s sustainable finance markets, improve transparency and create opportunities for the country in the rapidly growing global green finance market. The consultation will close on Feb. 17, 2023.

Latin America and The Caribbean

Uruguay central bank publishes sustainable finance roadmap

The Central Bank of Uruguay on Dec. 7, 2022, published its sustainable finance roadmap designed to make the Uruguayan financial sector more sustainable. Under the plan, the regulator said it intends to incorporate climate risks in its supervision and monitoring of financial stability. It will also help develop a taxonomy — or classification of sustainable activities — consistent with international standards, it said. The central bank also aims to improve climate-related disclosures and assess the impact of climate change on monetary policy and integrate sustainability into its foreign currency reserves.