The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Green finance regulatory developments
The financial sector continues to face new rules and government expectations as part of the broader effort to aid the green transition. From Indonesia to China, the following developments from the past month in green finance stand out:
- EU: Lawmakers reach provisional agreement on ESG ratings
- Indonesia: OJK publishes sustainable finance taxonomy
- China: Stock exchanges release sustainability reporting requirements
- Malaysia: ACSR consults on mandatory adoption of ISSB standards for sustainability disclosures
- Switzerland: FINMA launches new circular on nature-related financial risks
- Korea: Korean Financial Services Commission set to release draft ESG disclosure standards
EU lawmakers reach provisional agreement on ESG ratings
EU Member States and the European Parliament have reached a provisional agreement on a proposal for a regulation on environmental, social and governance (ESG) rating activities.
In short: The new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations of ESG ratings providers and preventing potential conflicts of interests. ESG rating providers will need to be authorized and supervised by the European Securities and Markets Authority (ESMA) and comply with transparency requirements, in particular with regard to their methodology and sources of information.
Third-country providers: The regulation establishes two different regimes for providers established in the EU and those established outside the EU. Namely:
- ESG rating providers established in the EU will need to obtain an authorization from ESMA
- Providers established outside the EU will need to meet more onerous requirements. They will need to obtain an endorsement of their ESG ratings by an EU authorized ESG rating provider, a recognition based on a quantitative criterion or be included in the EU registry of ESG rating providers on the basis of an equivalence decision
Avoiding conflicts of interest: The agreement introduces a separation of business and activities, with a possibility for ESG ratings providers not to set up separate legal entities provided they put in place measures to avoid potential conflicts of interests.
Next steps: The provisional political agreement will need to through a formal adoption procedure before it is published in the Official Journal of the EU. The regulation will start applying 18 months after its entry into force.
Indonesian OJK publishes Taxonomy for Sustainable Finance
The Indonesian Financial Services Authority (OJK) published the Taxonomy for Indonesian Sustainable Finance (TKBI), representing a revised version of the Indonesian Green Taxonomy Edition 1.0.
In summary: TKBI is a classification of economic activities that support efforts and Sustainable Development Goals (SDGs) covering economic, environmental and social aspects, and is used as a guide to improve capital allocation and sustainable financing to support the achievement of Indonesia’s Net Zero Emission (NZE) targets by 2060 or earlier.
Key features: The TKBI framework was developed with reference to the ASEAN Taxonomy for Sustainable Finance and Indonesian national policies.
- The four main environmental objectives of the TKBI are (1) climate change mitigation; (2) climate change adaptation; (3) protection of healthy ecosystems and biodiversity; and (4) resource resilience and the transition to a circular economy
- There are two approaches in activity assessment; technical screening criteria for the corporate/non-MSME segment and sector-agnostic decision tree for the MSEME segment
- The result of the TKBI assessment process would classify an activity as “Green”, “Transition” or “does not meet classification”
Scope of the Taxonomy: There are five sector focuses in Indonesia namely Energy, Waste, Industry Processes and Product Use (IPPU), Agriculture and Forestry and Other Land Use (FOLU).
Looking ahead: The TKBI will be reviewed periodically in line with developments in science, technology and sustainable finance policies on national and global levels.
China stock exchanges release sustainability reporting requirements
China’s three major stock markets, the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE) and Beijing Stock Exchange (BSE), have announced mandatory disclosure requirements targeting large companies.
In detail: The rules introduce a mandatory obligation for larger cap and dual-listed issuers to disclose a wide range of ESG topics (including climate change, biodiversity and energy) starting in 2026. The requirements follow a double materiality approach, requiring companies to disclose both the impact of environmental risks on the company’s financial standing, as well as the company’s impact on the environment and society. The rules also include reporting on Scope 3 emissions occurring throughout the company’s value chain.
Next steps: Companies will need to publish their first sustainability reports by 2026 for the 2025 reporting period.
Malaysia consults on mandatory requirement for companies to adopt ISSB standards for sustainability disclosures
Malaysia’s Advisory Committee on Sustainability Reporting (ACSR), chaired by the Securities Commission Malaysia (SC), has published a consultation proposing a mandatory requirement for companies to adopt the ISSB standards for their sustainability disclosures.
In summary: The Consultation paper provides background information and outlines the potential implementation approach and considerations in relation to the ISSB Standards as well as assurance of sustainability information.
Background of the ACSR: The ACSR was formed in May 2023 with the endorsement of the Ministry of Finance, comprising of representatives from the Audit Oversight Board, Bank Negara Malaysia, the Companies Commission of Malaysia, Bursa Malaysia Berhad and the Financial Reporting Foundation.
- The role of the ACSR are to identify the enablers that will facilitate the use of the standards issued by the International Sustainability Standards Board (ISSB), specifically the International Financial Reporting Standards (IFRS) S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1), and IFRS S2 Climate-related Disclosures (IFRS S2) in Malaysia
- The ACSR’s responsibilities also include identifying other supporting elements that need to be in place including a framework for assurance and capacity building, collectively constituting the National Sustainability Reporting Framework for Malaysia (NSRF)
Key features of the consultation: The consultation seeks feedback on the following:
- The use and and application of IFRS S1 and IFRS S2, including the required transition reliefs
- The approach in relation to a sustainability assurance framework
- Enablers and/or support required for (1) and (2)
Given the difference in readiness and maturity of listed issuers and non-listed companies, a different adoption timeline and approach has been outlined in the Consultation. The paper also proposes “transitions reliefs” that would allow companies to focus on principal business segments when making climate-related financial disclosures, making it optional to disclose the impact of climate on strategy and decision-making and relax requirements for Scope 3 emissions disclosures.
Feedback required: The consultation aims to seek feedback on the use and application of IFRS S1 and IFRS S2, including the required transition reliefs, the approach in relation to a sustainability assurance framework, and the enablers or support required. Feedback must be submitted via an online portal by 21 March 2024.
Swiss regulator launches new circular on nature-related financial risks
In a new circular, the Swiss Financial Market Supervisory Authority (FINMA) has set out its supervisory practice on the management of nature-related financial risks. The circular is open for consultation until 31 March 2024.
For context: FINMA’s circular is based on the current recommendations of the international standard-setters, in particular the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS), as well as some of the recommendations of the Network for Greening the Financial System (NGFS).
In detail: The circular is aimed at banks and insurance companies and is due to enter into force on 1 January 2025 with transitional provisions. The document specifies the extent to which nature-related financial risks must be taken into account in corporate governance and institution-wide risk management by banks and insurance companies.
- In particular, it specifies criteria for assessing the materiality of risks and how scenario analyses are to be incorporated
- It also sets out how the main nature-related financial risks are to be embedded as risk drivers in the existing management of credit, market, liquidity and operational risks as well as in insurance activities
Korean Financial Services Commission set to release draft ESG disclosure standards
The Korean Financial Services Commission (FSC) plans to release its environmental, social and governance (ESG) disclosure standards between March and April this year. These will apply to companies listed on the Korean Stock Exchange.
A closer look: The ESG disclosure standards are aimed at making sure that information about corporate sustainability practices can be disseminated to investors in a more systematic way, helping to solve the problem of information asymmetry between companies and investors.
Limiting the reporting burden: The FSC aims to minimize the reporting burden in two ways:
- By drawing up draft ESG disclosure standards that are closely aligned and interoperable with global standards. This will ensure that domestic businesses do not face duplicate disclosure requirements in multiple jurisdictions
- By taking into account domestic market structures, particularly Korea’s reliance on the manufacturing industry
Next steps: Companies are expected to start reporting their sustainability information in 2026.
EIOPA consults on the prudential treatment of sustainability risks
The European Insurance and Occupational Pensions Authority (EIOPA) has launched a consultation on the prudential treatment of sustainability risks. The deadline for responding to the consultation is March 22, 2024.
For context: Under the Solvency II Directive, EIOPA is required to assess whether a dedicated prudential treatment of assets or activities associated substantially with environmental or social objectives, or harm to such objectives, is justified. In December 2022, EIOPA published a discussion paper on the methodologies and data sources that form the basis for the analysis in this consultation paper.
The consultation in detail: EIOPA follows a risk- and evidence-based approach in relation to the expected mandate. The consultation paper assesses the potential for a dedicated prudential treatment of risks associated with environmental and social factors in accordance with this approach.
As part of its consultation, EIOPA considers three conceptual areas to provide appropriate economic rationale and data for a prudential risk analysis in context of the expected mandate:
- Market risks of assets and transition-risk exposures. The first conceptual area centers on the environmental objective of climate change mitigation and assesses the link between climate change-related transition risks and prudential market risks for insurers’ investment activities
- Non-life underwriting risks and climate change adaptation. The second area of the consultation paper focuses on the non-life underwriting activities of insurers with regard to climate change adaptation as a risk-based environmental objective
- Social objectives and social risks from a prudential perspective. The third area of the consultation paper addresses the prudential treatment of social risks and objectives under Solvency II.
Next steps: Based on the feedback received to the consultation, EIOPA will be required to submit a report to the Commission.
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