The European Central Bank (ECB) published new climate-related statistical indicators to narrow the climate data gap. In addition, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) issued their opinions on the first draft of European Sustainability Reporting Standards (ESRS Set 1), which the European Commission will consider and adopt into Delegated Acts by June 30, 2023. Furthermore, the Securities and Markets Stakeholder Group (SMSG) advised the ESAs to formulate green-washing-related matters.
ECB published the report on the first set of climate-related statistical indicators to assess the impact of climate-related risks on the financial sector and to monitor the development of sustainable and green finance. The indicators intend to support the analysis of climate-related issues in the financial sector. To ensure the indicators are accessible and replicable, existing data from the European System of Central Banks (ESCB) or other publicly available data have been used. This report briefly describes the released indicators, presents the methodology, and highlights existing caveats, limitations, and areas for further development. The report includes three sets of indicators:
- Sustainable finance indicators provide an overview of the issuance and holding of debt instruments with sustainability characteristics by residents in the euro area. These indicators provide information on the proceeds raised to finance sustainable projects and hence the transition to a net-zero economy.
- Carbon emission indicators provide information on the carbon intensity of financial institutions' securities and loan portfolios and thus help assess the sector’s role in financing the transition to a net-zero economy and related risks. This indicator provides information on banks’ exposure to counterparties with a high dependence on carbon emission-intensive business models. This information is relevant to assessing transition risks in monetary policy, financial stability, and banking supervision.
- Indicators on climate-related physical risks analyze the impact of natural hazards, such as floods, wildfires, or storms, on the performance of loans, bonds, and equities portfolios. These indicators can be used to compare physical risks across countries, sectors, and hazards.
Another update announces that ESMA issued its opinion on the first set of draft European Sustainability Reporting Standards (ESRS Set 1), developed by the European Financial Reporting Advisory Group (EFRAG). The draft ESRS set out the rules and requirements for companies to report on sustainability-related aspects under the Corporate Sustainable Reporting Directive (CSRD). On November 25, 2022, ESMA received a request from the European Commission to provide an opinion on the technical advice on the first set of ESRS, in particular about its consistency with the Sustainable Finance Disclosure Regulation (SFDR) and its delegated acts. The overall objective of the assessment of ESMA has been to ensure that ESRS Set 1 is conducive to investor protection. ESMA has used below four criteria for its assessment:
- The purpose of applying criterion 1 was to assess whether ESRS has ensured that undertakings are reporting in line with the sustainability matters and reporting areas; whether ESRS is promoting disclosure on how undertakings identify, assess, and manage material impacts, risks, and opportunities, both actual and potential, related to their business, strategy and financial performance arising from sustainability matter; and whether ESRS is supporting coherence in reporting by undertakings, including between their sustainability reporting and their financial reporting.
- The purpose of applying criterion 2 was to assess whether the ESRS is facilitating undertakings’ understanding of how their disclosure should be prepared and promote reporting which can be subjected to assurance by the statutory auditor/audit firm and other competent authorities.
- The purpose of applying criterion 3 was to assess whether the ESRS is aligned and can be applied in combination with other EU legislation.
- The purpose of applying criterion 4 was to assess whether the ESRS permits users to easily compare information prepared under the ESRS with information prepared under the two main global standard-setting initiatives for sustainability reporting—that is, the IFRS Sustainability Disclosure Standards and the Global Reporting Initiative (GRI) Standards.
The European Commission will consider the opinion from ESMA, alongside opinions submitted by the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and other public bodies, and adopt ESRS Set 1 into Delegated Acts by June 30, 2023.
EBA also published its Opinion on this first draft of the European Sustainability Reporting Standards (ESRS). The EBA acknowledged that the draft ESRS is consistent with international standards and any other relevant EU Regulation. EBA welcomed the level of alignment with the disclosure requirements under the EBA Pillar 3 framework. Regarding proportionality, EBA believes that the draft standards offer a well-balanced approach, with the relevant phasing-in provisions. EBA also highlighted a few aspects for further consideration by the European Commission:
- The draft requires interoperability with international standards.
- There should be additional guidance and clarification on the materiality assessment and implementation of the value chain concept for institutions operating in the financial sector.
- Further alignment with the EBA Pillar 3 requirements should be considered when developing the sector-specific standards.
- Additional clarification and consistency between the draft ESRS, the Accounting Directive, and the Directive against fraud in the European Union would be needed.
- A mechanism should be established to address the interpretation questions that are expected to arise from the practical implementation of ESRS.
In yet another development in the area of ESG, SMSG advised the European Supervisory Authorities (ESAs) to formulate a clear definition of greenwashing. SMSG advised that ESAs should clarify related concepts and closely related terminology, such as “green”, “ESG”, “sustainable”, “impact investing” and “sustainable investment." SMSG also opines that potential gaps in the current regulatory framework should be identified before introducing new legislative requirements. The SMSG advises ESAs to provide an indicative list of practices and activities that would violate the existing regulations and amount to greenwashing. Additionally, ESG characteristics and objectives and/or ESG metrics in legal documents or commercial information should align with the true product characteristics. Finally, SMSG advises that, to promote the development of ESG finance, regulators should avoid adopting an excessively rigid framework that would curb the development of the ESG market; they are also advised to ensure that products match investor expectations and ultimately reduce the potential for greenwashing.
Keywords: Europe, Banking, Sustainable Finance, ESG, Climate Metrics, Greenwashing, Climate Change Risk, SMSG, ESMA, EBA, ECB
Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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