Thanks for reading Climate Risk Review — powered by Manifest Climate, and welcome to the 44 new subscribers who joined this week! Not signed up yet? Why not join over *2,900 subscribers* interested in climate-related financial risk and regulation by signing up here:

Manifest Climate is hosting a *free* webinar on December 10: ‘TCFD 101: Back to Basics’. Sign up here to join:

Webinar sign-up

1) Increase legal certainty to boost voluntary carbon market — ISDA

The uncertain legal status of tradable emissions offsets is hobbling the development of “a robust, well-governed and transparent voluntary carbon market”, financial industry trade body the International Swaps and Derivatives Association (ISDA) has said.

In a paper published Wednesday, the group wrote that lawmakers and financial regulators should clear up the legal treatment of voluntary carbon credits (VCCs) so that financial and non-financial organizations can buy and sell them with confidence, and to support the growth of VCC derivatives markets. VCCs cover reduction or avoidance credits that mitigate carbon emissions through projects that prevent emissions being released, and removal or sequestration credits that support the direct extraction of carbon from the atmosphere.

ISDA recommends that VCCs should be codified as a form of property by countries to cement their legal status. The group said this could be achieved through the issuance of authoritative legal statements, legislative amendments, and/or regulatory guidance at the jurisdictional level. At the international level, the intervention of global standard-setters such as the United Nations Commission on International Trade Law and the International Institute for the Unification of Private Law could go a long way to clarifying the legal status of VCCs across borders.

With enhanced legal certainty, ISDA said the process of drafting standardized documentation and legal opinions — the foundations on which strong derivatives markets are built — would get easier. It would also lower the market and credit risks associated with trading VCCs and VCC derivatives.

VCCs would also benefit from the establishment of minimum standards to enhance their fungibility — an important quality for stoking deep, liquid markets, ISDA added. Such standards could cover the type and location of VCC projects, similar to how most commodity contracts are graded today.

2) EU anti-greenwashing rules delayed

Rules governing the disclosure of sustainability information by investment funds and financial products in the European Union have been pushed back six months to January 1, 2023 — the second delay this year.

The EU Sustainable Finance Disclosure Regulation (SFDR) came into effect on March 10 with the aim of stamping out greenwashing by investment firms and financial advisors. However, the package of regulatory technical standards (RTS) that detail the content and presentation of SFDR disclosures have yet to be endorsed by the European Commission. In a letter published Monday from the European Commission to the European Parliament and European Council, John Berrigan — Deputy Director-General for Financial Stability, Financial Services and Capital Markets Union — wrote that the RTS would be pushed back from the July 1 2022 target announced earlier this year. This itself represented a delay from a January 1 2022 deadline widely expected when the SFDR first came into force.

The letter explained that the RTS — 13 in total — have been delayed because of their “length and technical detail”. Though the European Supervisory Authorities published the final draft RTS in October, these need to be endorsed by the European Commission before being enacted. In the absence of the RTS, firms will have to continue to apply the SFDR’s ‘Level 1’ principles-based requirements.

Disclosures governed by the RTS include those showing how a product does not significantly harm sustainable investing goals and those containing principal adverse impact (PAI) indicators, which show the bad effects on sustainability factors that a financial product or investment could entail. 

3) Fed Chair: “We’ll get there” on climate risk guidance

Chair of the Federal Reserve Jerome Powell told lawmakers that the central bank would not join the climate risk management guidance for banks that the Office of the Comptroller of the Currency (OCC) plans to release before the end of the year, but that it plans to provide its own guidance in time.

Speaking at a hearing of the House Financial Services Committee on Wednesday, Powell said in response to a question from Representative Rashida Tlaib (D-MI): “I don’t think we will join this specific guidance. We are very much tracking and in discussions with the OCC. I think we will move to … provide guidance, and I think we all want — all the agencies want — to have consistent or identical, ideally, guidance. I don’t think we will be in a position to join this specific guidance at this time but we’ll get there”.

In response to another of Tlaib’s questions on the Fed’s actions to tackle climate change, Powell reiterated that the central bank’s focus is on supervising and regulating financial institutions “to make sure they understand the risks they are running and manage them” and on researching potential climate impacts on the financial system and economy. 

However, he also shot down the idea that the Fed would incorporate climate change in its monetary policy, as the European Central Bank, Bank of England, and People’s Bank of China have done — at least for now. “I’m focused on the United States and our existing mandates … we are not doing that now [factoring climate change into monetary policy], and I think that is something we will do in the longer run”.

Treasury Secretary Janet Yellen, facing the same Committee on Wednesday, told Representative Alexandria Ocasio-Cortez (D-NY) that the agency “will be monitoring very closely” the performance of the large financial institutions that committed to net zero goals at the UN Climate Change Conference (COP26) in Glasgow, and that it was “heartened” to see those pledges made. However, in response to a question from Ocasio-Cortez on regulating the financing of fossil fuels by private institutions, Yellen reiterated that “we don’t have authority to tell institutions that they must pursue lending policies that support the Paris commitment”, referring to the 2015 Paris Agreement.

4) Auditors’ approaches to climate risk not considered in shareholder votes

Investors in UK public companies overwhelmingly waive through the appointment of auditors who verify their financial statements without regard to their policies on climate risk disclosures, a report by the activist group Greenpeace shows.

Of the 16 asset managers assessed by Greenpeace, 14 voted for all auditor appointments at the annual general meetings of their in-scope portfolio companies this year. Only one of these asset managers, Sarasin & Partners, referenced climate change specifically as a reason for voting against auditor appointments in this cycle. Across the 85 FTSE 100 companies assessed, auditors received over 90% support in 2021.

This is despite the fact that, as data from Carbon Tracker and the Climate Accounting Project showed earlier this year, most high carbon-emitting public companies did not factor climate issues into their 2020 financial disclosures.

BlackRock, the world’s largest asset manager, was found to have voted against only one auditor of a high carbon-emitting company. BlackRock has a voting policy in place for the Europe, Middle East and Africa that says if company financial reports do not reflect assumptions made on climate risk impacts to their profits, liabilities and assets, it may vote against the re-appointment of the auditor.

Greenpeace said its findings show that the UK government should “create specific duties for companies, and their directors and auditors, to ensure climate risk is reflected in financial statements”, since asset managers do not appear to be taking companies to task on their own.

5) New ESG data platform backed by major financial firms

Financial institutions including Allianz, Bridgewater, Deutsche Bank, and HSBC have banded together to create a new ESG data platform that promises easy access to reliable, comparable, and transparent sustainability information.

ESG Book, launched on Wednesday, offers sustainability data services as a public good. Users will be able to access ESG Book data and upload their own to the platform free-of-charge. Companies are able to maintain control of their own data through the platform in real-time, instead of being limited by the rhythm of the annual reporting cycle.

The gathered data can be mapped to various reporting frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) and Global Reporting Initiative.

“Institutions and investors need access to reliable and comparable sustainability data, in order to mobilise finance for the biggest enablers of the transition to net zero,” said Celine Herweijer, Group Chief Sustainability Officer at HSBC. “Digitalising, streamlining and aligning that information, as ESG Book aims to do, will help banks to navigate the sustainability data landscape and optimise our customers’ transition journeys”.

ESG Book is not the only collaborative project aiming to disrupt the sustainability data space. OS Climate, which counts big banks BNP Paribas and Goldman Sachs among its backers, is also building a ‘data commons’ to sharpen investors’ understanding of ESG risks and opportunities. 

This column does not necessarily reflect the opinion of Manifest Climate, Inc. and its owners

Please send questions, feedback and more to louie.woodall@climateriskreview.com

You can catch additional climate risk management updates on LinkedIn

First image: metamorworks / Shutterstock.com, Third image: Flickr / Federal Reserve, Fifth image: Dee Angelo / Shutterstock.com

All other images under free media license through Canva.com