ESG round-up: Swiss finance ministry to draft proposal on greenwashing

The latest developments in sustainable finance: European Council adopts Green Bond Standard regulation; Fed agencies issue climate-related financial risk principles.

The Swiss Federal Department of Finance (FDF) will draft a proposal for implementing the Federal Council’s position on the prevention of greenwashing. In December, the council published its position on preventing greenwashing in the financial sector to assess how the requirements could be implemented most efficiently. The FDF will submit a consultation draft to the council by end-August 2024. If, however, the financial industry presents a self-regulation solution that implements the council’s position effectively, the FDF will halt further regulatory efforts.

The European Council has adopted the Green Bond Standard. The regulation lays down uniform requirements for issuers of bonds that wish to use the designation “European green bond” for their environmentally sustainable bond. European green bonds – a standard that aims to “foster consistency and comparability” in the green bond market – will be aligned with activities in the EU Taxonomy. To prevent greenwashing, the regulation also provides for some voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU.

US federal bank regulatory agencies have issued principles for climate-related financial risk management for large financial institutions. The principles – intended for companies with more than $100 billion in total assets – address physical and transition climate change risks, and are consistent with the risk management framework described in the agencies’ existing guidance. The principles describe how climate-related financial risks can be addressed in the management of traditional risk areas, including credit, market, liquidity, operational and legal risks.

The number of Article 8 funds revising their minimum sustainable investment commitment grew significantly in Q3, according to Morningstar’s latest SFDR overview report. In Q3, 294 Article 8 funds changed their minimum level, including 213 increases, versus 190 last quarter. Reclassification activity also picked up, with 279 changes. This was mainly driven by upgrades, which accounted for 250 of the reclassified funds, but 15 downgraded from Article 9 to 8 and 18 dropped from Article 8 to 6.

The International Auditing and Assurance Standards Board (IAASB) has published additional guidance on the application of materiality by a reporting entity and by an assurance practitioner as part of its proposed global sustainability assurance standard ISSA 5000. The extra information has been provided in response to requests from a range of stakeholders to provide additional information on materiality matters to help them navigate the new standard.

The outstanding volume of ESG sukuk rose by 66 percent year-on-year, reaching $33.3 billion globally at the end of Q3 this year, according to Fitch Ratings. The growth has been driven primarily by government sustainability initiatives and diversification efforts by issuers targeted at both sharia and ESG-sensitive investors. However, ESG instruments accounted for just 4.1 percent of outstanding global sukuk at end-Q3. Fitch Ratings said the market had not reached its full potential due to hurdles including lack of green assets or projects, extra costs and complexities linked to both sharia compliance and meeting ESG goals, and longer time-to-market.

Asset owners should design mandates to include “Just Transition-linked outcomes” in addition to target returns, according to the Investor Group on Climate Change (IGCC). The Australian and New Zealand climate-focused investor body made the recommendation in its latest report on driving the energy transition in Australia. The report also noted that existing policy signals in the country are confusing the market, “skewing demand in favour of carbon-intensive goods compared to their green counterparts which are not subsidised”.

The World Benchmarking Alliance (WBA) has issued a request for proposal for research providers for social transformation and Just Transition work. The proposal is split into two parts. The first will involve drafting core social indicator assessments for 731 keystone companies in the financial system, urban, and climate and energy benchmarks from December to July 2024. The second part will be Just Transition assessments for 131 keystone companies in the climate and energy benchmarks, which will take place between May and July 2024. The research provider is not expected to create or revise a methodology, but to assess companies using the core social indicators from the social transformation framework and the Just Transition indicators from the Climate and Energy Benchmark’s methodology. The deadline for the RFP is 10 November.

The central banks of the Philippines and Malaysia have partnered with research network Inspire to support work on nature-related risks in Southeast Asia. The trio have issued a call for proposals to further understand the links between environmental degradation and climate change, as well as the implications for the macroeconomy and financial policy. They have invited submissions that strengthen the evidence base around the conceptual framework and assessment methodologies of the macroeconomic implications of nature loss, land-use change and deforestation that aim to be policy-relevant and establish applied technical and implementation-ready policy guidance for monetary, prudential and financial market authorities. The deadline is 2 January.

Indigenous rights and reconciliation are expected to see the biggest increase in engagement activity in Canada in the coming years, according to the Responsible Investment Association (RIA). The finding comes from the association’s responsible investment trends report, which draws on a survey in which 95 Canadian institutional asset managers and asset owners were asked to identify which strategies they expect to use in the coming two to five years. Although there was a broad intention to increase engagement on all topics – with climate change/risk remaining the top issue – 42 percent of respondents cited indigenous rights and reconciliation. Other issues set to see a relatively large increase include labour practices, GHG emissions/net zero, diversity and inclusion, data security/privacy, and supply chain management.

The Future Investment Initiative Institute has released an “Inclusive ESG Tool” and accompanying “Inclusive ESG Score” to support emerging market companies and investors to unlock investment. The tools have been developed in partnership with ESG Book to reduce an ESG investment gap in emerging markets, which receive less than 10 percent of ESG capital flows.

ESG factors are increasingly driving investment decisions, according to Russell Investments’ annual survey. Only 7 percent of respondents (169 asset managers) said ESG factors do not drive investment decisions, down from 22 percent in 2022. Seventy-five percent of managers also said they had hired additional dedicated ESG personnel across data integration and analytics, stewardship, equity investment and compliance roles.