Featured Product

    BIS Paper Sets Out Policy Actions for Design of Green Taxonomies

    October 08, 2021

    The Bank for International Settlements (BIS) published a paper that develops a framework to classify and compare existing taxonomies. The paper also identifies weaknesses that emerge from this classification and comparison and proposes five key principles for the design of effective taxonomies. The analysis in the paper concludes by setting out key policy recommendations, one of which is that authorities should aim to harmonize practices for calculating and reporting impact metrics. Furthermore, standardization of units and disclosure of computation methodologies should be encouraged and external auditing required.

    The weaknesses identified by the analyses include the lack of use of relevant and measurable sustainability performance indicators, lack of granularity, and lack of verification of achieved sustainability benefits. The key principles for the design of effective taxonomies can be employed to develop a simple framework for transition taxonomies. While certain principles, both in traditional taxonomies and in the case of climate transition finance, are intended for application over medium to longer term horizons, the paper recommends some concrete near-term policy actions:

    • Endeavor that specific taxonomies (or certification processes) correspond to specific sustainability objectives. A single taxonomy that categorizes activities or entities based on the achievement of multiple objectives, such as greenhouse gas emission reduction and social inclusion, runs the risk of increased greenwashing due to reduced market transparency resulting from complex weighting schemes to aggregate the objectives. Narrowly focused taxonomies benefit from less costly certification and verification processes. 
    • Encourage development of transition taxonomies to facilitate the channeling of funds to transition activities and increase the focus on Paris alignment. Practices and standards with respect to the reporting of climate transition plans, interim targets, and their level of alignment with Paris goals need to be harmonized further. Many institutional investors seeking to align portfolios with low-carbon transitions use environmental, social, and governance (ESG) ratings. Yet the metrics for the environmental pillar (the “E” of ESG) do not yet capture a forward-looking assessment on climate transition. In the absence of a globally accepted taxonomy, a wide range of transition terminologies and metrics exists, thus resulting in a low level of standardization across markets and jurisdictions. 
    • Monitor and supervise the evolution of certification and verification processes. To mitigate the risk of greenwashing, a high-quality and consistent verification process is critical. Supervisors and regulatory authorities should provide uniform standards of conduct for the providers of certification and verification services. Viable models for the supervision and regulation of providers of those services include those already in place for credit rating agencies in the United States and Euro area.
    • Shift from current voluntary guidelines of post-issuance reporting to mandatory annual impact and use-of-proceeds reports. The success of outcome-based taxonomies will depend heavily on the availability of more data and analysis on the impact of the classified assets or activities. To the extent that taxonomies move toward incorporating outcome-based key performance indicators (Principle 3), impact reports are likely to be a key supplementary requirement of these taxonomy, with provisions of the report best made available on at least an annual or even a higher frequency basis. Estimation of the promised impact of the projects financed by green bonds as well as ex post tracking of their achievement is greatly facilitated by mandatory uniform annual impact and use-of-proceeds reports. Use of proceeds and impact should be reported project by project, specifying the environmental impact categories while the information should be aggregable at individual bond level and by category or sector. 


    Related Links

    Keywords: International, Banking, Sustainable Finance, ESG, Taxonomy, Paris Agreement, Green Bonds, Climate Change Risk, Transition Risk, Disclosures, Reporting, Impact Reports, BIS

    Featured Experts
    Related Articles

    EBA Launches Stress Tests for Banks, Issues Other Updates

    The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.

    January 31, 2023 WebPage Regulatory News

    EBA Proposes Standards for IRRBB Reporting Under Basel Framework

    The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.

    January 31, 2023 WebPage Regulatory News

    FED Issues Further Details on Pilot Climate Scenario Analysis Exercise

    The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.

    January 17, 2023 WebPage Regulatory News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8700