ESG round-up: EU should ‘streamline’ sustainability frameworks, says ESMA chair

The latest developments in sustainable finance: Moody's and Fitch to continue including ESG scores in credit rating reports; UKSIF backs sustainability disclosure regime for UK.

European sustainability frameworks will need to be more streamlined in the coming years, the chair of the European Securities and Markets Authority (ESMA) has said. Verena Ross acknowledged that the EU has been a global leader in regulating sustainable finance through the development of the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). However, she added that the European Commission, legislators and the regulatory community need to “improve the practicality of the current EU framework, addressing inconsistencies across regulatory requirements and reducing complexity for investors” in order to “build investor trust” for the financial sector to play its role in the transition to sustainable finance.

Moody’s and Fitch will continue to include ESG scores within their credit rating reports, following S&P’s decision to end the practice. S&P announced on 4 August that it stopped including an alphanumerical scale for ESG in its assessments and returned to using text-only assessments. Fitch chief credit officer Richard Hunter told Responsible Investor that the use of a “numerical ESG score which crisply identifies” cases where credit ratings changes have been driven by ESG factors or cases where ESG factors are relevant but have not caused actual rating changes “has been highly valued by users”. A Moody’s spokesperson said that the provider accounts for ESG factors in its credit ratings and will continue to publish ESG scores on a 1-5 scale.

UKSIF has highlighted the usefulness of disclosure of non-financial information in response to a call for evidence by the Department for Business and Trade. The sustainable investment body said its members want to see a “clearer picture of decision-useful sustainability disclosures from their investee companies” across a range of sustainability factors beyond climate change. It added that the information should be as “consistent and comparable as possible” considering the proliferation of ESG reporting frameworks, and that it should receive auditing and assurance to ensure reliability. UKSIF would also like to see the UK government “engage closely” with the proposed International Standard on Sustainability Assurance (ISSA) 5000 in order to “build further confidence in non-financial reporting”. In addition, it repeated the call for the UK to provide a clear roadmap for the full, mandatory adoption of the the International Sustainability Standards Board’s (ISSB) standards.

The Green Finance Institute (GFI) has called on the UK Treasury to announce plans for a voluntary green bond standard. It recommended that the department should align use of proceeds to the UK green taxonomy, building on the green gilt framework. GFI also urged policymakers to factor in the Green Technical Advisory Group’s (GTAG) advice on grandfathering before any announcements are made.

German human rights and sustainability groups have criticised the “watering down” of the country’s supply chain due diligence act after government guidance confirmed that the end customer was excluded from obligations for lenders and insurers. Guidance published by the Bundesamt für Wirtschaft und Ausfuhrkontrolle on Friday confirmed that the end customer should not be considered part of the supply chain for lenders or insurers, but they themselves may be subject to the law under certain conditions for a company seeking insurance or financing. Ulrike Lohr, sustainable finance expert at the SÜDWIND-Institut, said the new guidance contradicted the government’s aim to make Germany a leading centre for sustainable finance. Campaign groups FIAN Deutschland and Facing Finance were also critical.

JPMorgan Asset Management has launched two Article 9 sustainable indices in partnership with MSCI as part of its $7 billion Research Enhanced Index equity ETF platform. The Global Research Enhanced Index Equity SRI Paris Aligned UCITS ETF and US Research Enhanced Index Equity SRI Paris Aligned UCITS ETF both meet Paris-aligned benchmark requirements, with the overall benchmark universe and the active ETFs having 50 percent less greenhouse gas intensity than the parent universe, as well as decarbonising by 7 percent on average, year on year. Controversial sectors – including fossil fuels, gambling, tobacco, and companies considered to be UN Global Compact violators – have been excluded from both indices to fulfil Paris-alignment criteria.

Robeco has supported calls for a moratorium on deep sea mining. The announcement comes after 36 financial institutions, including Robeco, signed a letter asking the International Seabed Authority (ISA) to postpone granting permits to dredge the seabed for valuable minerals. Robeco holds shares in a several companies that could become directly involved in deep sea mining by providing services or financing, and has proposed engagement with its two largest holdings. The manager is not considering exclusions due to the lack of data and the possibility that the metals and minerals from the seabed could be “needed badly” for the global energy transition.

Dutch pension fund SNS Reaal has converted its corporate bond portfolio into a green bond mandate. The pension fund reportedly asked its manager, Goldman Sachs Asset Management (GSAM), to green its €300 million corporate bond portfolio last year, having already invested partly in green corporate bonds. GSAM may also invest in social corporate bonds used to finance social projects. The proceeds will be used for social impact projects for vulnerable groups, people who are unemployed and people from underprivileged communities.

A group of major companies in the US have called on lawmakers in California to finalise legislation requiring companies to provide standardised and consistent climate-related disclosures. Members of the California State Assembly are set to consider two pieces of legislation in the coming weeks which would provide consumers, investors and other stakeholders with information about how companies are managing the financial risks and opportunities from climate change. The proposed legislation is the first of its kind in the US.