Climate risk regulation rundown: November
What happened in climate-related financial regulation last month, and what's coming up
Welcome to the eleventh edition of the ‘Climate risk regulation rundown’. Did I miss anything? Could this newsletter be better? Let me know by emailing email@example.com
**This rundown replaces the news analysis article for this Thursday. Normal service will resume next week**
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Jerome Powell was tapped by President Biden to serve a second four-year term as Chair of the Federal Reserve, a decision that irked some climate activists.
The November 22 announcement has implications for how the world’s most influential central bank will factor climate change into its monetary policy and oversight of major financial institutions. The Fed placed near the bottom of the Green Central Banking Scorecard published this October, as it has yet to incorporate climate risk into its stress testing, capital framework, and supervision of banks and designated important nonbank financial institutions. It also disproportionately supported fossil fuel companies and assets in the secondary markets through its COVID-19 relief programs.
David Arkush, Managing Director of the climate program at Public Citizen, a progressive nonprofit, said Powell’s renomination “doubles down on reckless Wall Street deregulation and dangerous dawdling on climate-related threats to the financial system, flouting Biden’s own whole-of-government approach to stemming climate threats”.
Biden also appointed Fed Governor Lael Brainard to serve as Vice Chair, a move climate activists broadly supported. Brainard has made a number of supportive speeches in recent months on the importance of tackling climate risks to the financial system. In October, she supported Fed-backed guidance for large banks on measuring, monitoring, and managing climate threats to their businesses.
The Wall Street Journal reported on November 30 that Richard Cordray is being considered by Biden to take on the role of the Fed’s Vice Chair for Supervision, the central bank’s top banking regulatory position. The role has been vacant since the expiry of Randal Quarles’ term in October. The Journal understands that Cordray’s nomination is supported by progressive lawmakers including Senator Elizabeth Warren, a strong supporter of Fed action to tackle climate-related financial risks.
The Securities and Exchange Commission (SEC) issued new guidance on November 3 to make it easier for investors to get climate-related issues voted on at public companies’ annual shareholder meetings.
The guidance, published by the SEC’s Division of Corporation Finance, told companies they should not exclude shareholder proposals that “raise issues of broad social or ethical concern related to the company’s business” just because the relevant business isn’t material to the firm.
This could open the door to more shareholder proposals on addressing climate change, including plans that would require companies to set emissions reduction targets.
President Biden’s first choice to head the Office of the Comptroller of the Currency (OCC), a major US bank regulator, is unlikely to be confirmed after certain lawmakers made their opposition clear to the White House.
Axios reported on November 24 that Biden’s pick, Saule Omarova, does not have the support of five Democratic Senators: Jon Tester (D-MT), Mark Warner (D-VA), Kyrsten Sinema (D-AZ), John Hickenlooper (D-CO) and Mark Kelly (D-AZ).
Omarova, a Cornell University law professor, is supported by climate activists who believe she would push the agency to address climate-related financial risks.
Manager of the Sierra Club Fossil-Free Finance Campaign Ben Cushing said in response to her nomination in September: “Saule Omarova will bring a critical understanding to OCC of the government’s role in ensuring the stability of our financial system in the face of growing climate risk and investing in a more sustainable and equitable economy”.
In 2020, Omarova authored a report for the left-leaning group Data for Progress on an infrastructure-focused ‘green’ rebuilding of the US economy in the wake of the coronavirus crisis.
The current Acting Comptroller of the Currency, Michael Hsu, has continued to emphasize the importance of climate risk management for the banking sector. In a November 8 speech, he said bank boards should ask five questions of their senior management on climate risk:
“What is our overall exposure to climate change?”
“Which counterparties, sectors, or locales warrant our heightened attention
“How exposed are we to a carbon tax?”
“How vulnerable are our data centers and other critical services to extreme
“What can we do to position ourselves to seize opportunities from climate
As part of the first question, Hsu said board members should press managers to develop in-house climate scenario analyses.
“Boards should push senior management hard to develop scenario analyses, both top down and bottom up, as doing scenario analysis well takes time. But time is running out,” said Hsu.
He further explained that although bank managers may not have answers to the five questions today, they should by this time next year. He also reiterated that the OCC is working on “high level supervisory expectations” on climate risk management for large banks, which he said should be published by the end of this year.
The New York State Department of Financial Services (NYDFS) set up a dedicated Climate Risk Division on November 3 to protect the safety and soundness of banks and insurers from climate-related threats.
Dr. Yue (Nina) Chen, the agency’s Director of Sustainability and Climate Initiatives, will head up the new unit as Executive Deputy Superintendent. Under her leadership, the Division will work to factor climate change into the supervision of New York-based banks and insurers, help the industry to manage climate-related risks, and work with peer regulators to build capacity on climate-related supervision.
On November 15, the NYDFS finalized climate risk management expectations for state insurers, which asks firms to: integrate climate risks into their governance structures; consider the present and future impacts of climate change in their businesses, activities, and decision-making processes; incorporate climate risks into their existing risk management frameworks; use scenarios analysis to aid in climate risk identification and evaluation, and disclose climate risks and opportunities using the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and similar reporting initiatives.
NYDFS oversees around 1,800 insurance companies and 1,400 banking and other financial institutions, including the consumer arm of Goldman Sachs and the branches of foreign banks Banco Santander, Barclays, BNP Paribas, and Deutsche Bank, among others.
The Bank of Canada (BOC) made a series of commitments on addressing climate change on November 3.
It said understanding and monitoring climate risks was core to fulfilling both its monetary policy mandate and its duty to “foster a stable and efficient financial system”. The commitments are:
To assess the effects of climate change on the macroeconomy and price stability
Evaluate the Canadian financial system’s exposures to climate-related risks and improve associated risk management capacities
Measure, mitigate and report on the Bank’s operational risks related to climate change, and
Engage and collaborate with Canadian and international partners
The European Central Bank (ECB) published a report showing that no major lender in the euro area has met all 13 of the climate-related supervisory expectations it set out last year.
Among the findings in the report, released on November 22, the ECB highlighted that banks are lagging when it comes to factoring climate change into their internal reporting, market and liquidity risk management, and stress testing.
Furthermore, half of the banks assessed for the report are yet to plan “concrete action” to incorporate climate and environmental risks into their business strategies, and less than 20% have constructed key risk indicators to monitor climate-related threats. The ECB evaluated 112 ‘significant institutions’ that it directly supervises.
While most firms have put in place implementation plans for meeting the ECB’s expectations, the report found that these vary in quality and content, with many lacking operational details on how climate objectives will be realized and neglecting interim milestones. About two-thirds of banks also failed to “tailor their plans sufficiently to their specific situation” the report said. Furthermore, roughly 40% of banks were found to not run climate risk materiality assessments or to have performed assessments with significant shortcomings.
On the flipside, the report said that two-thirds of banks have made “meaningful progress” when it comes to integrating climate into their credit risk management, for example by reinforcing due diligence measures and setting limits on financing activities with high climate risks.
Next year, the ECB plans to conduct “a full review” of how ready banks are to manage climate and environmental risks, with a special focus on their inclusion in bank strategy, governance, and risk management.
In the latest edition of its biannual financial stability review, published November 17, the ECB said that while investor appetite for ‘green finance’ has surged this year, “greenwashing concerns persist”. To combat these, the central bank said better information “especially in relation to forward-looking commitments and plans” is needed, as well as “enhanced standards”. Current European Union initiatives and global standard-setting work streams could help with this, the central bank added.
On November 5, the ECB submitted an opinion to the European Parliament on the EU’s green bond standard, which aims to combat greenwashing and ensure this kind of debt meets high-quality sustainability requirements.
In the opinion, the ECB said it supported making the standard mandatory “within a reasonable time period”. However, it also warned that in its current state, the proposed regulation for implementing the standard could lead to the double counting of green investments by the EU banking sector, as it appears to allow issuers to use the proceeds of a sold green bond to buy a third-party-issued green bond. The ECB said this could lead to “an artificial bolstering of the issuing credit institution’s green asset ratio via double counting if that institution purchases an EuGB [EU green bond] which is directly or indirectly backed by its own EuGB”.
EU banks have to disclose a green asset ratio — showing the proportion of their lending and investment portfolios allocated to climate-friendly assets — starting from January 1, 2022.
In its latest ‘Risk Dashboard for 2021’, released on November 26, the European Securities and Markets Authority (ESMA) said in a section on retail investing that “Investor appetite for sustainable investment products increases greenwashing risk in the absence of disclosure requirements and labelling”.
On November 18, ESMA published a preliminary report on the EU carbon market and the associated financial regulatory environment. This found that open positions in European Union Allowances (EUA) futures are mainly held by investment firms and non-financial counterparties, and only a small minority are in the hands of investment funds and financial counterparties (about 8%). ESMA plans to deliver an in-depth report on the EU carbon market in early 2022.
The Bank of England (BoE) will stop buying debt issued by climate laggards as part of a strategy to ‘green’ its Corporate Bond Purchase Scheme (CBPS).
Announced November 5, the plan aims to cut the weighted average carbon intensity of the BoE’s corporate bond portfolio by 25% by 2025, and align it with net zero goals by 2050. To achieve this, the BoE will stop buying bonds sold by companies that fail to publish climate-related disclosures in line with UK government requirements from 2022, and those sold by high-emitting companies that do not have public emissions reduction targets.
The BoE will also ‘“tilt” its purchases to favor companies that perform well on an in-house ‘scorecard’. Metrics including emissions intensity, past cuts in absolute emissions, and third-party verification of an emissions reduction target will count towards a corporate’s ‘score’. The BoE held around £20 billion of corporate debt under the CBPS as of end-September.
The UK government will require banks and other firms to publish decarbonization and transition plans as part of an effort to make the country a ‘Net Zero Aligned Financial Centre’.
Speaking on ‘Finance Day’ at the UN Climate Change Conference (COP26) on November 3, UK finance minister Rishi Sunak outlined the government’s intention to mandate the disclosure of “clear, deliverable” plans by financial institutions and listed companies to align with the UK’s net zero goals. A new Transition Plan Taskforce, made up of industry leaders and other experts, will develop a science-based “gold standard” for these plans to assist in-scope firms and head off greenwashing. The Taskforce is due to produce this standard by the end of 2022, and companies to start publishing transition plans in 2023.
Swiss financial regulator FINMA published guidance for investment funds on how to head off greenwashing risks on November 3.
The document said greenwashing poses legal and reputational risks to market participants and Switzerland’s status as a financial center, and expects these to be “adequately taken into account” by fund managers. Funds that purport to be “sustainable”, “green”, or “ESG”, would be scrutinized by the regulator to ensure their sustainability characteristics are “appropriately disclosed”.
The guidance laid out six examples of greenwashing that funds should avoid:
Making reference to sustainability, although no sustainable investment strategy/policy is pursued
Making reference to sustainability but the stated strategy/approach is not implemented
Making reference to sustainability but allowing a significant proportion of non-sustainable investments in the strategy
Making reference to sustainability when the sustainable investment strategy used only factors in exclusionary criteria that are already widespread, and no other sustainability component
Making reference to “impact” or “zero carbon” without the stated impacts or emissions savings being capable of being measure or verified, and
Making reference to sustainability but the fund documents do not provide, or provide only very general, information about the corresponding sustainable investment strategy/policy
The Bank of Russia intends to loosen capital requirements for lenders that extend credit to environmentally friendly projects and tighten them for those handing out loans to firms that fail to disclose their ecological impact.
In an interview with Reuters on November 30, First Deputy Ksenia Yudaeva said this would be first of several regulatory changes, though she did not elaborate on what these would entail, nor when the capital changes would come into effect.
On November 9, the People’s Bank of China (PBoC) initiated a “carbon-reduction supporting tool” that will loan cheap money to Chinese commercial banks if they extend credit to climate-friendly projects.
To qualify for the funds, banks have to lend to businesses in industries that are “key to carbon emission reduction” at rates close to PBoC’s own loan prime rate. Lenders can then access central bank funds worth 60% of the loan principal at the rate of 1.75%. To ensure the funds support climate goals, PBoC requires banks to “disclose information concerning such carbon emission reduction lending, and the amount of emission reduction supported by such lending”.
The Australian Prudential Regulation Authority (APRA) released on November 26 final guidance for banks on how to tackle climate-related financial risks.
This includes recommendations for bank boards, including how they should consider putting in place “risk exposure limits and thresholds” at their institutions to help manage climate-related threats.
The guidance also has advice for bank managers on climate risk management, climate scenario analysis, and the disclosure of “ decision-useful, forward-looking climate risk information” in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Though APRA has not introduced any new regulatory requirements or obligations, next year the regulator plans to survey the banks under its watch to help understand their alignment with its guidance and to the TCFD recommendations.
The Monetary Authority of Singapore (MAS) said it would pilot four digital platforms built to bridge climate data gaps for the financial sector.
Announced November 9 as part of ‘Project Greenprint’ — the regulator’s effort to “harness innovation and technology to promote a green finance ecosystem” — the pilot program would trial: the use of an online portal that aims to simplify the ESG reporting process for institutions; a sustainability data aggregator; a registry of ESG certifications, and a virtual marketplace for connecting green technology vendors with investors, venture capital firms, financial institutions, and corporates.
The pilot is scheduled to conclude in the second half of 2022.
Financial officials from the Association of Southeast Asian Nations (ASEAN) introduced a taxonomy for sustainable finance on November 10.
This lays down “a common language” for the financing of sustainable economic activities across the 10 member states of the Association, and is intended to funnel capital towards those projects that will spur the region’s transition to a low-carbon economy.
The taxonomy is made up of two elements: a principles-based “Foundation Framework” which enables a qualitative assessment of sustainable activities, and a “Plus Standard” featuring metrics and thresholds to “further qualify and benchmark eligible green activities and investments”.
Accounting standard-setter the IFRS Foundation announced the creation of the International Sustainability Standards Board (ISSB), which will oversee the development of a new reporting framework covering environmental, social, and governance issues.
The new body, which officially launched on November 3 at the UN Climate Change Conference (COP26) in Glasgow, plans to start work on climate disclosure standards first of all. These standards will aim to meet investor demands for “transparent and comparable information” on firms’ climate risks and opportunities and act as a shield against ‘greenwashing’.
A prototype climate disclosure standard was published alongside the launch setting out draft rules for how companies could report their climate governance, strategy, risk management, and metrics and targets. On metrics, the prototype said companies shall disclose absolute gross Scope 1, Scope 2, and Scope 3 emissions, and the amount and percentage of assets or business activities vulnerable to climate-related transition and physical risks.
The ISSB’s draft climate standards are scheduled to be put out for public consultation in 2022.
The Basel Committee on Banking Supervision (BCBS) published a set of climate risk principles for banks and supervisors on November 16.
Among the bank-specific principles, the BCBS says firms should identify and quantify climate risks and factor those that are material into their internal capital and liquidity adequacy assessment processes. Banks should further develop processes to weigh the “solvency impact” of climate risks that may manifest “within their capital planning horizons”. The typical capital planning horizon is 3-5 years.
As for supervisors, the principles say they should run checks to make sure banks incorporate material climate risks into their business strategies, corporate governance, and internal control frameworks. Part of this includes assessing how well banks’ boards and senior executives oversee climate risks.
The principles also emphasize the role of climate scenario analysis in the climate risk management toolkit. Banks are told to consider, where appropriate, scenario analysis — including stress testing — to evaluate how their business models and strategies would react “to a range of plausible climate-related pathways” and weigh the effect of climate risk drivers on their overall risk profile. For their part, supervisors are told to think about running climate scenario analysis to spot relevant climate risks to firms, measure portfolio exposures, root out data gaps, and learn about the adequacy of banks’ risk management approaches.
Public comments on the principles are welcomed until February 2022.
The Network for Greening the Financial System (NGFS), a coalition of climate-focused central banks and supervisors, issued a ‘Glasgow Declaration’ on November 3 in the midst of the UN Climate Change Conference (COP26), reiterating the group’s intention to “expand and strengthen” its efforts to harden the financial system to climate-related and environmental risks.
The Declaration laid out elements of the NGFS’ workplan for the coming years, which includes enhancing and enriching its suite of climate scenarios and intensifying efforts to bridge climate data gaps.
On November 5, the NGFS published a report on climate-related litigation and how central banks and supervisors could monitor and manage this risk.
The document outlines the different kinds of legal action taken against public and private entities to date, and the exposure of financial institutions to these actions. It further explained that supervisory authorities “may not have, so far, fully recognised the impacts of such cases when assessing climate-related financial risks even though they constitute an important channel through which physical risks and transition risks may affect assets or counterparties of financial institutions”.
The International Organization of Securities Commissions (IOSCO) called on financial markets regulators to scrutinize ESG ratings and data product providers.
The call to action by IOSCO — which represents securities watchdogs from over 130 jurisdictions — accompanied a set of 10 recommendations on how regulators could put together their own frameworks for overseeing ESG ratings and data products. These include ideas on enhancing the transparency of the methodologies that underpin these products and improving the written policies and processes intended to ensure providers’ decisions are independent.
The recommendations follow a consultation launched in July which garnered 61 responses from interested parties.
The Bank for International Settlements (BIS) unveiled on November 4 prototype apps that would allow retail investors to invest any amount into green government bonds and track the climate impact of the use of proceeds over time.
The prototypes, developed as part of Project Genesis — a collaboration between BIS Innovation Hub and the Hong Kong Monetary Authority launched in August — effectively “tokenize” green bonds using blockchain technology. The reports say this enhances the monitoring and control of risks by issuers and investors alike, and enables real-time tracking of a given investment’s contribution to a safer climate, thereby reducing ‘greenwashing’.
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