ESG round-up: ESMA and EU national regulators to look at convergence on SFDR supervision

The latest developments in sustainable finance: IFoA says actuaries need to step up to improve climate scenario models; Border to Coast launches Just Transition engagement programme.

EU financial watchdog ESMA announced today (6 July) that it will work with the bloc’s national regulators on fostering “convergence in how they supervise sustainability-related disclosures and sustainability risk integration in asset managers”. The goal of the Common Supervisory Action is to assess the compliance of asset managers with the EU’s anti-greenwashing legislation, Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy and “relevant implementing measures, including the relevant provision in the UCITS and AIFMD implementing acts on the integration of sustainability risks”. Knowledge sharing between national regulators via ESMA will take place from now until Q3 2024.

A paper by the Institute and Faculty of Actuaries (IFoA) and the University of Exeter has criticised widely used climate models for producing “implausible” results that show worst case climate scenarios have “benign, or even positive, economic outcomes”. This has been attributed to a tendency to underestimate climate risk, and a disconnect with climate science, which suggests that carbon budgets may be smaller than expected. Such models also disregard “tipping points”, which could trigger irreversible climate effects, such as the loss of Amazon rainforest cover. Both financial and non-financial companies are increasingly required to carry out climate scenario analysis under TCFD-aligned disclosure rules. The IFoA has called for actuaries to play a bigger role in refining climate models, particularly with regards to their assumptions and limitations.

Border to Coast Pensions Partnership has launched an engagement programme on Just Transition, which it initially announced at RI Europe in June. B2C is the UK’s largest pool of local government pensions schemes (LGPS), with £50 billion ($64 billion; €59 billion) in assets on behalf of its 11 LGPS funds. Just Transition is already an established part of B2C’s responsible investment strategy, engagement and voting policies. Its new engagement programme includes three strands: piloting engagement with an emerging market utility, joining other institutional investors in financing a Just Transition alliance, co-ordinated by the London School of Economics Grantham Institute, and joining Royal London Asset Management to engage UK banks on the topic.

The International Auditing and Assurance Standards Board (IAASB) has approved by unanimous vote the draft International Standard on Sustainability Assurance (ISSA) 5000, which covers the general requirements for sustainability assurance engagements, for public consultation. The consultation will run from the start of August until early December. The IAASB said the proposed standard aims to improve sustainability reporting and that it responds to IOSCO recommendations, and complements the work of other standard setters, including the International Ethics Standards Board for Accountants, the European Financial Reporting Advisory Group, and the International Sustainability Standards Board.

The International Financial Reporting Standards (IFRS) has published an updated version of its educational material developed to help companies determine how to consider climate-related matters when preparing their financial statements. The educational material was initially published in 2020, but has been updated in light of the ISSB’s latest standards it issued last week. The IASB is also working on a project on climate-related risks in financial statements to explore how they can better communicate information about climate-related risks.

The Canadian Securities Administrators (CSA) plans to conduct further consultations to adopt disclosure requirements based on the ISSB’s standards, with modifications appropriate in the Canadian context. The regulator commended the ISSB’s first two disclosure standards, which it published last week. It has also welcomed the Canadian Sustainability Standards Board (CSSB). A further market update from the CSA will follow in the coming months once the consultation ends.

The central bank of the Philippines has published its first sustainability report outlining the progress made in advancing its sustainability agenda and plans for the development of a taxonomy. The bank also announced future plans for regulatory incentives to promote financing to sustainable projects and investments, enhancements to stress testing guidelines, and disclosure requirements.

Experts from the Oxford University’s Environmental Change Institute, Smith School of Enterprise and the Environment, and the Green Finance Institute have called for better policies to boost the UK’s finance response and resilience to climate impacts. The research found significant gaps in UK policies that are leaving the country vulnerable to climate impacts. The experts have made 25 recommendations to the government, including establishing a National Office for Climate Readiness and mandating the UK Infrastructure Bank and British Business Bank to prioritise preparing for physical impacts alongside reaching net zero. The government has been asked to provide clear commitments to adaptation finance by 2025.