Daily ESG Briefing: Investors call on EU financial regulator for more clarity on what can be labelled ‘ESG’ or ‘sustainable’ 

The latest developments in sustainable finance

Investors have called on European financial regulator ESMA to provide greater clarity on what can be labelled an ‘ESG’ or ‘sustainable’ investment product.  In a letter earlier this week, ESMA’s Securities and Markets Stakeholders Group (SMSG) – the group created to facilitate consultation between the market and the regulator – wrote that: “It is important to clarify if financial instruments or ‘a portfolio’ can be referred as ‘sustainable’ or ‘ESG’ even if they are not article 8 or 9 products under SFDR [Sustainable Finance Disclosure Regulation]”. Article 8 funds promote environmental or social characteristics and Article 9 ones have sustainable investment or emissions reductions as their objective. The SMSG group, which includes the head of the European Fund and Asset Management Association, Tanguy van de Werve, also called for greater clarity from ESMA around the interaction between the new SFDR rules and those governing the sale of financial instruments, known as MiFID II.  

Danish pension fund Sampension  will increase climate-related expectations of and engagement with companies in its investment portfolio in 2022, to ensure they contribute to reaching the fund’s Paris-alignment goal. The fund’s new Head of ESG Jacob Ehlerth Jørgensen said: “We also expect the dialogues to generally move from some more general issues … more to real ‘target-setting’. It is more difficult, but it is necessary.” In 2021, the pension fund concluded engagements with 13 companies where it had established progress, for example where a number of companies committed to more ambitous climate goals. It highlighted Polish utility PKN Orlen setting a carbon neutrality goal for 2050, and Japanese utility Tohoku Electric Power setting quantitative targets for the development of renewable energy.  

Hong Kong banks must step up preparedness for extreme climate events and policy changes relating to emissions, a stress test conducted by the Hong Kong Monetary Authority (HKMA) has found. The authority conducted climate risk-related tests on 27 banks and said that intense climate hazards are projected to cause banks to “suffer an annual operational loss of HK$2.2 billion (US$282.1 million), which is equivalent to 0.8% of their profit before tax in 2019”. Nearly a third of property used as collateral in mortgage loans were in coastal or low-lying areas more vulnerable to risks of flooding or a rise in sea levels, which means bad debt linked to mortgage loans might rise 25 times as a result and lead to a 3 percentage points drop in their capital over a five-year period of extreme climate-related scenarios, the HKMA said.