May 2024- Top news and regulatory developments
What are the key stories we are following in sustainable finance?
News
G7 agree to end use of unabated coal power plants by 2035 The Guardian
Ministers from the G7 countries agreed to end the use of unabated coal power plants by 2035 – but left the door open for those heavily reliant on coal to breach the deadline. After two days of talks in Turin, Italy, they published a pledge to “phase out existing unabated coal power generation in our energy systems during the first half of 2030s” to curb the rise in global greenhouse gas emissions. The communique marks a key climate milestone for the G7 nations – the UK, US, Canada, France, Italy, Germany and Japan – who had been unable to reach an agreement on phasing out coal after several years of talks. The document refers to unabated coal, which leaves room for countries to keep burning coal to generate electricity if power plants are fitted with carbon-capture technology to stop emissions from entering the atmosphere.
Worsening weather is igniting a $25 billion market Bloomberg
Against a backdrop of rising climate volatility, demand for weather derivatives is surging. Average trading volumes for listed products jumped more than 260% in 2023, according to the CME Group, with the number of outstanding contracts currently 48% higher than a year ago. And that publicly traded corner could make up as little as 10% of all activity, according to industry estimates; outstanding derivatives may be worth as much as $25 billion based on notional value. Part of the jump in demand is driven by corporations newly confronting their exposure to the elements. In some cases, it’s because their operations have already been impacted, in others because they’re responding to investor and consumer pressures. In many jurisdictions, regulators are beginning to compel companies to quantify just how much of a threat the weather is to their business.
Assessing the Materiality of Nature-Related Financial Risks for the UK Green Finance Institute
A new analysis led by the Green Finance Institute (GFI) conducted in collaboration with top UK researchers and supported by various government bodies and financial institutions, reveals that the degradation of the UK's natural environment could result in a staggering 12% loss to GDP, surpassing the impact of both the 2008 financial crisis and the Covid-19 pandemic. It also shows that Nature-related risks are as detrimental to the economy as those from climate risks. Three-quarters of the UK has a high level of ecosystem degradation, with risks to financial services and the wider economy as a result. The analysis shows, however, that half of the UK’s nature-related financial risks originate overseas. Within the analysis, a new inventory charts these domestic and international nature-related risks to the economy, many of which are not currently captured in national risk assessments. The inventory captures financial risks arising from the deterioration of nature and biodiversity, including soil health decline, water shortages, and zoonotic diseases, with agriculture, manufacturing, and utility sectors particularly vulnerable. These impacts on the real economy will also have a material financial impact on banks and other financial institutions. The analysis estimates that some banks could see reductions in the value of their domestic portfolios of up to around 4 – 5% in some cases.
Countries consider pact to reduce plastic production by 40% in 15 years The Guardian
Countries have proposed to limit global plastic production for the first time, aiming to reduce it by 40% over 15 years to safeguard human health and the environment. Rwanda and Peru submitted a motion at UN talks in Ottawa, Canada, outlining a plan to cut primary plastic polymers production by 40% by 2040, starting from a 2025 baseline. Their plan would involve mandatory reporting of statistical data on plastic production, imports, and exports. The initiative is linked to the Paris Agreement's goals and aims to align with objectives for a safe circular economy and limiting global warming to 1.5°C. Plastic production, largely derived from fossil fuels, contributes significantly to climate change, with projections showing it could consume a significant portion of the world's carbon emission budget by 2050. Despite concerns about the target's ambition, environmentalists see it as a crucial step towards addressing the plastic pollution crisis.
Global Regulatory Updates
IFRS Foundation and EFRAG Publish Interoperability Guidance IFRS (more in the visual of the month!)
The IFRS Foundation and EFRAG have released guidance highlighting the high-level alignment between the International Sustainability Standards Board’s IFRS Sustainability Disclosure Standards (ISSB Standards) and the European Sustainability Reporting Standards (ESRS). The guidance provides practical steps for companies to efficiently comply with both standards, particularly focusing on climate-related disclosures. This effort aims to reduce complexity, fragmentation, and duplication for companies adopting both sets of standards, advancing transparency and comparability. The guidance describes the alignment of general requirements including on key concepts such as materiality, presentation and disclosures for sustainability topics other than climate; and provides information about the alignment of climate disclosures and what a company starting with either set of standards needs to know to enable compliance. This initiative, supported by both entities, reflects a commitment to international convergence in sustainability reporting and aims to alleviate the reporting burden for EU companies.
Hong Kong Taxonomy for Sustainable Finance Hong Kong Monetary Authority
The Hong Kong Monetary Authority (HKMA) unveiled the Hong Kong Taxonomy for Sustainable Finance to enable informed decision-making and facilitate finance flows towards green and sustainable initiatives. Developed through stakeholder consultation and guided by principles of interoperability, comparability and inclusiveness, the taxonomy covers 12 economic activities across four sectors namely power generation, transportation, construction, and water and waste management with plans for expansion. It also facilitates easy navigation among the Common Ground Taxonomy, China’s Green Bond Endorsed Projects Catalogue and the European Union’s Taxonomy for Sustainable Activities. The aim is to enhance transparency, combat greenwashing, and promote common understanding in green finance. The HKMA encourages its use in labelling, product development, and disclosures within the financial sector. Additionally, a consultation report and supplemental guidance have been released, with plans for ongoing collaboration to further develop and apply the taxonomy. Separately, the HKMA will launch a cloud-based platform to assess climate-related physical risks on buildings in Hong Kong.
Council adopts directive to delay reporting obligations for certain sectors and third-country companies European Council
The European Council finalized its approval of a directive to extend reporting deadlines for certain sectors and non-EU companies under the Corporate Sustainability Reporting Directive (CSRD), allowing more time for the adoption of European Sustainability Reporting Standards (ESRS). This directive, completing the decision-making process, delays sector-specific standards for EU firms and general reporting standards for non-EU entities until June 30, 2026, easing the transition and reducing reporting burdens. It also allows more time to develop these sector-specific sustainability standards and standards for non-EU companies. Originating from the Commission's aim to alleviate reporting burdens, this directive aligns with efforts to reduce obligations while preserving policy objectives.
Updating the Magna Carta of Supervision: Review of the Core Principles for Effective Banking Supervision European Central Bank (ECB)
The Basel Committee on Banking Supervision (BCBS) unveiled the updated Core Principles for Effective Banking Supervision, a pivotal global standard shaping supervisory practices since 1997 and last updated in 2012. These principles serve as a cornerstone for global banking oversight, guiding both regulators and banks. In response to evolving risks and lessons learned, the revised Core Principles now explicitly address operational resilience, business model sustainability, and climate-related financial risks. These additions reflect global consensus on pressing issues and align with ongoing supervisory priorities. Strengthened requirements in operational resilience fortify banks against pandemics, cyber threats, technology failures and natural disasters, while the emphasis on business model sustainability aims to fortify banks in today's economic landscape. Additionally, recognition of climate-related financial risks underscores the imperative for banks and supervisors to integrate climate considerations into risk assessments.