This blog is part of a regular series of blogs on the wide topic of ESG and items that have caught my attention.
Official announcements
- The Securities and Markets Stakeholder Group (SMSG) of the European Securities and Markets Authority (ESMA) published its advice on the Joint Committee of the European Supervisory Authorities (ESAs) March 2021 consultation paper on draft regulatory technical standards (RTS) with regard to the content, methodologies and presentation of sustainability disclosures under the EU Sustainable Finance Disclosure Regulation (SFDR).
The advice included a recognition that key performance indicators (KPI) can be extended to include derivatives, provided that it is adequately disclosed how they serve environmental, social and governance (ESG) purposes.
- The EU finalised legislation containing the Technical Screening Criteria (TSC) for climate mitigation and adaptation activities supporting the Sustainable Finance Taxonomy Regulation. While the Commission has broadly retained the approach taken in its November 2020 draft, its approach to the details of the criteria has differed as follows:
- Natural Gas activities (as transitional activities) have been removed due to ongoing controversy over whether, and how, they should be included. A final position on natural gas could be included in a complementary delegated regulation later this year.
- Bioenergy is now considered a 'green', rather than 'transitional', activity but the TSC will be subject to review when TSC for substantial contribution to biodiversity and ecosystems are produced.
- Nuclear activities are still being considered for inclusion in the TSC. However, a recent Commission Joint Research Centre technical report on nuclear energy suggests that concerns over environmental impacts of nuclear energy should not be a major barrier to its inclusion in the Taxonomy / TSC. The report is currently being reviewed for the Commission by two expert groups.
- Buildings activity (whether for acquisition and ownership), an additional method of satisfying the climate mitigation TSC (rather than Energy Performance Certificates) has been added based on a building being within the top 15% of Primary Energy Demand nationally or regionally.
- Manufacturing and the approach of benchmarking performance against the EU Emissions Trading Scheme has been confirmed although the Commission will continue to consider other approaches.
- Agriculture activities have been removed due to ongoing CAP negotiations and will be included in a later delegated regulation.
- The European Commission adopted on 21 April 2021 an ambitious and comprehensive package of measures to help improve the flow of money towards sustainable activities across the European Union. The three main components are:
- The EU Taxonomy Climate Delegated Act aims to support sustainable investment by making it clearer which economic activities most contribute to meeting the EU's environmental objectives
- A proposal for a Corporate Sustainability Reporting Directive (CSRD). This proposal aims to improve the flow of sustainability information in the corporate world. It will make sustainability reporting by companies more consistent, so that financial firms, investors and the broader public can use comparable and reliable sustainability information. It revises and strengthens the existing rules introduced by the Non-Financial Reporting Directive. It will increase the scope of mandatory reporting from 11,000 companies to nearly 50,000.
- Six amending Delegated Acts on fiduciary duties, investment and insurance advice will ensure that financial firms, e.g. advisers, asset managers or insurers, include sustainability in their procedures and their investment advice to clients.
- At the recent summit arranged by President Biden, countries made a number of commitments by 2030:
- China intends to reduce the 2005 emissions intensity of its energy use by 60%, and India by 33% to 35%
- The U.K. and the EU want to cut emissions 68% and 55% below 1990 levels
- The U.S. wants to cut emissions 50%-52% below its 2005 level
- Japan wants to cut emissions 46% below its 2013 level
- South Korea wants to cut emissions 24.4% below its 2017 level.
- The EU Parliament has backed a Carbon Border Adjustment Mechanism which would place a charge on the carbon content of emissions-intensive goods imported into the EU from 2023. The following infographic from S&PGlobal provides details of a number of the potential outcomes:
- Mark Carney (the UK Prime Minister’s Finance Advisor for COP26 and UN Special Envoy for Climate Action and Finance) – in partnership with the UNFCCC Climate Action Champions and the UN Race to Zero campaign, and the COP26 Presidency joined the Honorable John Kerry, US Special Presidential Envoy for Climate and the Honorable Janet Yellen, US Treasury Secretary to launch a global alliance that brings together existing and new net zero finance initiatives into one sector-wide strategic forum: The Glasgow Financial Alliance for Net Zero. (GFANZ).
GFANZ will work to mobilise the trillions of dollars necessary to build a global zero emissions economy and deliver the goals of the Paris Agreement. GFANZ will provide a forum for strategic coordination among the leadership of finance institutions from across the finance sector to accelerate the transition to a net zero economy. All initiatives in GFANZ require signatories to set science-aligned interim and long-term goals to reach net zero no later than 2050 in line with Race to Zero’s criteria. These goals are supplemented by member-determined short-term targets and action plans.
Resources, Reports and Announcements
- The European Banking Authority (EBA) published the findings of its first EU-wide pilot exercise on climate risk. The pilot exercise, run on a sample of 29 volunteer banks from 10 countries, aimed to map banks’ exposures to climate risk and provide an insight into the green estimation efforts banks have carried out so far. Key findings included:
- 58% of total non-medium-sized enterprises (SMEs) corporate exposures to EU obligors are allocated to sectors that might be sensitive to transition risk;
- 35% of banks’ total non-SME corporate exposures are to EU obligors with greenhouse gas (GHG) emissions above the median of the distribution;
- the estimated average ratio for the green asset ratio (GAR) across EU banks is 7.9%
- The International Energy Agency produced a 224 page report that detailed a pathway to net-zero emissions in the global energy system. It included the following expectations
3. The EU carbon price rose above €50 a tonne for the first time, pushing up the cost of polluting in the bloc to more than double its pre-pandemic level. A key driver is the activity of traders who are betting that the availability of carbon allowances will need to tighten in the coming years if the EU is to meet aggressive climate targets, including cutting emissions by 55 per cent by 2030. It is thought that the current level is still “likely to be too low” to reach this target, since some of the solutions which have to be deployed are more in the €100 to €200 per tonne range. The EU’s 2030 climate package, which has been delayed from June until July, would drive further price action could add further pressure.
4. In a report from the Carbon Disclosure Project, it found that portfolio emissions are over 700x larger than direct emissions and that financial institutions must urgently decarbonise their portfolios, by disclosing the impact of their financing activities, setting science-based targets and aligning all financing activity with the Paris Agreement.
65% of financial institutions were found to be not reporting their credit risks such as borrowers’ default on loan repayments, and 74% were not reporting market risks such as stranded assets and financial asset price devaluation.
Allianz, BNP Paribas, BNY Mellon won applause for their disclosures and ABN Amro was praised for disclosing the emissions associated with more than 70 per cent of its portfolio exposure.
