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 look at draft ESG risk management guidelines for EU banks, a legislative proposal in Australia for mandatory climate-related financial disclosures and Costa Rica’s adoption of global sustainability standards.

EUROPE    ASIA-PACIFIC    LATIN AMERICAN AND THE CARIBBEAN

Europe

UK regulator sets out expectations in 2024 for financial institutions on climate-related risks

The Bank of England's Prudential Regulation Authority’s annual letters to financial institution CEOs indicated that the regulator expects firms to make further progress on climate risk management in 2024. In a letter to the CEOs of insurance companies, the regulator said companies would be required to make more progress on scenario analysis and risk management. Insurers should consider climate risk on both sides of their balance sheets, it said. The PRA also wrote to the CEOs of UK and international banks and said they had “considerable work” to do in developing climate-related financial risk management and incorporating climate risks into decision-making. In 2024, it said it expects firms to develop and integrate processes that would identify, measure, manage and mitigate climate-related financial risks, including the consideration of trading book exposures for international banks. Both UK and international banks should consider tailored climate stress scenarios to assess the impact of climate change on their businesses, the regulator said.

EU banking regulator proposes ESG risk management guidelines

The European Banking Authority (EBA) on Jan. 18 launched a public consultation on draft guidelines for banks to identify, measure, monitor and manage ESG risks over the short, medium and long term. The proposed guidelines set out requirements for banks to identify and measure ESG risks through exposure-based, portfolio-based and scenario-based methodologies. They would also require financial institutions to integrate ESG risks in their regular risk management framework including credit, market, operational, reputational, liquidity, business model, and concentration risks. Institutions would also be required to assess ESG risks related to their counterparties. The EBA will be taking comments on the draft guidelines until April 18 and aims to finalize the guidelines by the end of 2024.

European Central Bank publishes plan to address climate and nature risks in 2024 and 2025

The European Central Bank (ECB) on Jan. 30 published a climate and nature plan for 2024 and 2025 that expands on its previous work on climate change. The central bank said it would concentrate on the impact and risks of the transition to a green economy, especially the associated transition costs and investment needs as well as transition plans and the impact of the green transition on labor, productivity and growth. It aims to examine how the increasing physical impacts of climate change are affecting inflation and the financial system, and how this can be integrated into climate scenarios and macroeconomic projections. The ECB will also assess how climate adaptation, or lack thereof, would impact the economy and financial sector, including related investment needs and the insurance protection gap, it said. The ECB said it would also analyze the risks stemming from nature loss and degradation and how they interact with climate-related risks. It will also further explore the role of ecosystems for the economy and the financial system, it said.

EU legislators approve new rules to limit fluorinated gases and ozone-depleting substances

The Council of the EU, made up of government ministers of the 27 EU member states, adopted on Jan. 29 two regulations to phase out fluorinated gases and other substances that cause global warming and deplete the ozone layer by 2050. The vote completes the legislative process following approval of the regulations by the European Parliament on Jan. 16. The new regulations limit imports and production of hydrofluorocarbons, and by 2030, will phase down the chemicals by 95% below 2015 levels, the European Commission said in a statement. The rules will also restrict the use of all fluorinated gases in equipment where climate-friendly alternatives are available such as heat pumps. New obligations will also reduce fluorinated gas and ozone-depleting substance emissions from insulation foams in old buildings and those under renovation, the Commission said. Fluorinated gases and ozone-depleting substances currently account for more than 3% of the EU’s carbon emissions. The new rules will eliminate an additional 500 million metric tons of carbon emissions by 2050, the Commission said.

EU legislators reach agreement on urban wastewater management rules

The European Parliament and the Council of the EU reached an agreement on Jan. 29 on revised urban wastewater management rules aimed at protecting human health and the environment from harmful discharges of urban wastewater. The new rules will require the removal of more nutrients and micropollutants from urban wastewater, particularly those coming from toxic pharmaceuticals and cosmetics and will introduce systematic monitoring of microplastics in the inlets and outlets of urban wastewater treatment plants, the European Commission said in a statement. The new law will implement a “polluter pays” principle for the first time, requiring the most polluting industries, which are pharmaceuticals and cosmetics, to pay at least 80% of the cost for micropollutant removal. To cope with an increase in heavy rainfall related to the effects of climate change, EU member states will have to systematically develop integrated management plans to deal with storm waters in large cities and will have to do so when storm waters present a risk in smaller cities, the Commission said.

EFRAG proposes corporate sustainability reporting standards for SMEs

The European Financial Reporting Advisory Group (EFRAG), which serves as technical advisor to the European Commission, on Jan. 22 published draft mandatory sustainability reporting standards for listed small- and medium-sized enterprises and voluntary standards for non-listed SMEs, effective under the Corporate Sustainability Reporting Directive. The proposed standards for listed SMEs include general requirements and disclosures, policies, actions and targets, and environmental, social and business conduct disclosures. The voluntary standards for non-listed SMEs set financial thresholds for micro, small and medium companies and are designed to help them respond to requests for sustainability information from banks, investors or larger companies that they may supply. The standards would take effect from Jan. 1, 2026, with a two-year opt out period. The consultation will be open until May 21.

ASIA-PACIFIC

Hong Kong regulators to develop roadmap for adopting ISSB standards

Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group, co-chaired by the Hong Kong Monetary Authority and the Securities and Futures Commission, said on Jan. 8 it would develop a roadmap for adopting the sustainability disclosure standards from the International Sustainability Standards Board (ISSB) for the Hong Kong market. The roadmap will focus on sustainability reporting, assurance, data and technology, and capacity building. A working group will collaborate with stakeholders to identify Hong Kong-specific circumstances to be considered when implementing the reporting standards. The move is part of the steering group’s initiatives for 2024. It also said it would leverage technology to support sustainability reporting and data analysis, including the launch of new GHG emissions calculation and estimation tools jointly developed with the Hong Kong University of Science and Technology. It also aims to broaden the development of its local taxonomy, a classification system of sustainable activities, to cover transition activities.

Australia proposes draft legislation on mandatory climate-related financial disclosures

The Australian government on Jan. 12 published draft legislation that would require companies to disclose information about their climate risks and opportunities. Companies with more than A$500 million in revenues, or A$1 billion in assets, or 500 employees would be subject to the proposed legislation as of July 1, 2024, with additional phase-in periods for smaller companies, the government said. In the first year of reporting, companies would be required to disclose information related to governance, strategy, risk management and metrics and targets including Scope 1 and Scope 2 GHG emissions. They would have to report Scope 3 emissions, or the emissions up and down their value chain, from the second year. Companies would use standards set by the Australian Accounting Standards Board based on the ISSB’s two sustainability disclosure standards published in June 2023.

Taiwan Stock Exchange revises sustainability regulations for listed companies

The Taiwan Stock Exchange said on Jan. 30 it had revised its sustainability reporting regulations for listed companies. The move follows the publication of a roadmap in August 2023 by Taiwan’s Financial Supervisory Commission for listed companies to align with the ISSB’s sustainability disclosure standards. Under the revised regulation, listed companies with a paid-in [L(1] capital of less than NT$2 billion will be required to publish their sustainability report for the year 2024 from 2025 onward. Companies of different sizes will need to disclose their carbon reduction goals, strategies and action plans to strengthen their disclosure of climate information according to a schedule over the next three years. Companies’ sustainability reports must be approved by their boards and be filed at the end of August every year, the stock exchange said.

LATIN AMERICA AND THE CARIBBEAN

Costa Rica adopts global sustainability disclosure standards

The College of Public Accountants of Costa Rica, which sets accounting and auditing standards for the country, said on Jan. 11 it had adopted the ISSB’s two sustainability disclosure standards and that they would be applicable from Jan. 1, 2024. They will be voluntary for the first year of reporting for all companies. They will be mandatory for publicly listed companies regulated by the country’s Consejo Nacional de Supervisión de Sistema Financiero (CONASSIF) as of 2026, for the 2025 fiscal year. CONASSIF oversees Costa Rica’s financial regulators . Companies classified as large taxpayers will be required to report as of 2027, for the 2026 fiscal year. Companies will be required to report their sustainability-related financial disclosures and their sustainability-related risks and opportunities, the College said.