ESG
BANKS - CLIMATE-RELATED FINANCIAL RISK
The Basel Committee on Banking Supervision (BCBS) plans to publish a consultation paper this month on the Pillar 3 disclosure framework for bank exposures to climate-related financial risks.
EU GREEN BOND STANDARD REGULATION (EU GBS)
The EU Green Bond Standard Regulation will be published in Official Journal in the coming weeks. This follows its adoption by the European Parliament (here) and by the EU Council (here).
The Regulation will apply 12 months + 20 days after it is published in the Official Journal, and it will be directly effective in Ireland. Domestic Irish regulations will be needed regarding administrative penalties and other appropriate administrative measures for breaches of the Regulation. There will be a transitional period to facilitate the provision of services by external reviewers (ERs) while ESMA is putting its registration and supervision framework in place (that period will run for 18 months from the date that that Regulation applies).
The Regulation sets out several deliverables for ESMA. These, together with its final report on greenwashing, are key elements of its 2024 Work Programme. The bulk of the ESMA deliverables relate to its new responsibility for the registration and ongoing supervision of ERs.
The key provisions of the Regulation are summarised in our June 2023 briefing here and the key deliverables under the Regulation, which will be worked on at EU-level over the coming months, are summarised in our October 2023 briefing here.
FIT-FOR-55 CLIMATE RISK SCENARIO ANALYSIS FOR BANKS
The EBA’s public consultation on draft templates for collecting climate related data from EU banks closed on 11 October 2023. This is part of the one-off Fit-for-55 climate risk scenario analysis, which the EBA will carry out together with ESMA, EIOPA, the ECB and the ESRB.
The draft templates are designed to collect climate-related and financial information on credit risk, market and real estate risks. Following the consultation, the EBA plans to launch a data collection exercise at the end of November 2023 with the support of the Single Supervisory Mechanism and other competent authorities. 70 banks will take part in this exercise (the same banks as those included in the 2023 EU-wide stress test) and competent authorities will be able to request that other banks in their respective jurisdictions participate.
Banks will be asked to report aggregated and counterparty level data as of December 2022. Collecting counterparty level data will allow to assess concentration risk of large climate exposures, as well as to capture amplification mechanisms and assess second round effects. Aggregated data will inform on the climate-related risks of the banking sector more broadly. The EBA expects to publish the results by Q1 2025.
RATIONALISATION OF EU REPORTING REQUIREMENTS (AND IMPACT ON CSRD)
The European Commission’s call for evidence in relation to the rationalisation of reporting requirements closes on 28 November 2023.
As signposted in the European Commission 2024 Work Programme, the Commission is targeting a 25% reduction in reporting requirements which it sees as having a disproportionate impact on businesses, in particular SMEs and microenterprises.
The call for evidence is particularly focused on:
- Indications of areas where inefficient requirements are particularly problematic, with quantitative data on the burden induced by them.
- Concrete ideas for rationalisation, modernisation or optimisation, such as eliminating redundant requirements, adjusting reporting frequency, proposing options for digitalisation, applying the ‘once only’ principle, making better use of other data sources, or other possible efficiency gains (without undermining policy objectives or standards of conduct and protection).
Based on the results, other consultation activities and data collected through preparatory work, the Commission will prepare concrete rationalisation plans for 2024 and will then work towards a full repository of reporting requirements with a view to monitoring their relevance and performance, and with the aim to reduce their burden by 25%.
As part of its initiative to reduce the reporting burden on certain EU corporates by up to 25%, the Commission also plans to postpone deadlines for the adoption of the European Sustainability Reporting Standards (ESRS) for certain sector and for certain third country undertakings. It has launched a consultation, which closes on 19 December 2023. The Accounting Directive as amended by the Corporate Sustainability Reporting Directive (CSRD) requires certain entities to include, in a dedicated section of their management report, information necessary to understand the company’s impacts on sustainability matters, and the information necessary to understand how sustainability matters affect the company’s development, performance and position. This information must be reported in accordance with ESRS to be adopted by the Commission by means of delegated acts. The Commission adopted sector-agnostic ESRS in 31 July 2023 which are now in the scrutiny period. Sector-specific ESRS were to be adopted by 30 June 2024. The Commission’s proposal is to delay, by 2 years, the 2024 adoption date for the sector-specific ESRS. According to the Commission, this will allow in-scope companies to focus on the implementation of the sector-agnostic ESRS adopted in July 2023. This proposal will also postpone, by 2 years, the deadline for certain non-EU companies with business in the EU to adopt the ESRS to be used by them.
Note that this exercise follows on from a related European Commission consultation, covered in the October 2023 edition of our Horizon Scanner: Finance, which also impacts CSRD. The European Commission consulted on a draft delegated directive which would adjust the size criteria for micro, small, medium-sized and large companies to account for the effects of inflation. The change would be specific to the definition used in respect of the Accounting Directive. It would not impact the SME definition in Recommendation 2003/361, which may be reviewed separately. The Commission’s view is that it is necessary to amend the monetary size criteria in the Accounting Directive i.e. the balance sheet total and the net turnover, for determining the size category of a company by 25% to adjust for the effects of inflation. According to the Commission, the 25% adjustments would reduce the scope of application of the sustainability reporting requirements under the Accounting Directive, as amended by CSRD, and consequently under Article 8 of the Taxonomy Regulation for large undertakings, small and medium-sized undertakings that are listed, and large groups. The consultation closed on 6 October 2023. For more information, read the latest insights from our Corporate and M&A Group here.
TRANSITION FINANCE
The Glasgow Financial Alliance for Net Zero’s consultation on defining transition finance and considerations for decarbonisation contribution methodologies closes for comments on 2 November 2023. This follows the GFANZ November 2022 Recommendations and Guidance for Financial Institutions Net-Zero Transition Plans (Executive Summary here).
GFANZ defines transition finance as investment, financing, insurance, and related products and services that are necessary to support an orderly real-economy transition to net zero. It is of the view that financial institutions need greater clarity on what constitutes transition finance in relation to their own activities, but also in relation to the activities of the entities they finance.