Regulatory round-up: India’s SEBI and UK FCA move on ESG disclosures and greenwash

The Securities and Exchange Board of India (SEBI) has updated disclosure and management requirements for green bonds in order to align its existing framework with the updated ICMA Green Bond Principles.

The changes announced by India’s financial markets regulator on Monday include pre-issuance requirements to appoint a third-party reviewer on a comply-or-explain basis. Previously, this had only been a suggestion.

Issuers will now also have to report an indicative estimate of distribution between financing and refinancing of projects or assets, as well as details of perceived environmental and social risks posed by proposed projects, and a mitigation plan for these risks.

Issuers of transition bonds are required to disclose alignment between the objectives of an issuance and India’s national climate targets.

After issuance, the requirements have been updated to include reporting on the deployment of the mitigation plan for perceived risks, as well as mandatory impact reporting.

An additional section on issuer responsibilities has also been added, requiring borrowers to ensure that all projects and assets funded by proceeds of green bonds meet the bonds’ documented objectives. They must also comply with a circular issued last week setting out a list of “dos and don’ts” to avoid greenwashing.

The new guidelines come in to force on 1 April.

FCA to target laggards

Meanwhile, the UK’s Financial Conduct Authority (FCA) has warned that it will focus on asset managers with poor reputations on greenwashing for enforcement action in 2023.

In a letter dated 3 February, the regulator said it will examine firm-level governance structures to ensure that they deliver on ESG claims made to investors. “We will particularly focus our supervisory activities on outlier firms that have been identified in previous supervisory activities or other ongoing surveillance,” the FCA added.

No UK fund managers have so far been named by the FCA for greenwashing-related offences, although the regulator has quietly pushed a number of managers to alter ESG-related fund disclosures. However, major financial institutions such as Goldman Sachs and BNY Mellon were fined in 2022 for greenwashing in the US, while DWS has faced a high-profile German regulatory probe on the topic. DWS denies all the allegations.

The FCA said it would follow up on a 2021 market study of asset managers, which examined the degree to which managers delivered value to retail and institutional clients, to look at “how firms have built maturity of ESG in value assessment considerations”.

The updates were set out in the FCA’s annual “Dear CEO” letter, which is sent to the senior leadership of regulated asset managers. It follows a similar warning in the FCA’s equivalent letter to hedge fund bosses in Q3 2022.

NBIM backs ESG assurance

Separately, Norges Bank Investment Management (NBIM) has called on the Australian government to require at least limited assurance for climate-related financial disclosures by companies.

In response to a government consultation on introducing standards for companies, NBIM said that in order to ensure the reliability of reported information, limited assurance could be required for the disclosures as a whole, with reasonable assurance for Scope 1 and 2 emissions.

Providers of assurance should themselves be subject to “independence and quality management standards set by the relevant international standard setters”, the response continued.

NBIM said it supported the government basing its standards on the ISSB framework to ensure international comparability. On timing, it said a phased implementation approach could be considered, with Scope 1 and 2 emissions required immediately but Scope 3 and assurance requirements phased in.

The response also supported expanding the requirements to listed and unlisted entities over time in order to create a level playing field and allow for accurate reporting of Scope 3 emissions, as well as “strongly supporting” disclosure of transition planning and offsets.

Finally, NBIM said that a “targeted and proportionate” safe harbour regime might be necessary for Scope 3 or net-zero target disclosure, to avoid disincentivising companies from disclosing due to legal liability concerns.

In contrast, a recent legal opinion commissioned by ESG investors has suggested that introducing legal protections for directors in relation to forward-looking climate-related disclosure requirements would undermine incentives to meet them.