Green Finance: Climate Change, Financial Regulation & Supervision Summit 2022 Summary

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Author: Sephutile Mhlongo

In July, this year, we had our third event of the year which was the Green Finance: Climate Change and Financial Regulation and Supervision Summit 2022 exclusively for Policymakers, Regulators and Supervisors (Financial sector authorities)! We hosted 3-days of live discussions with industry experts from Toronto Centre, the Alliance for Innovative Regulation (AIR), the Alliance for Financial Inclusion (AFI), FSD Kenya and our very own Digital Frontiers Institute. The story of our live discussions was as follows:

As our story has touched on key aspects of Green Finance, Climate Change and Climate risks and environmental risks where financial sector authorities have jurisdiction to play an active role in greening the financial systems in their own contexts. Let’s first take a look at the challenges that central banks face in their operations in credit ratings and climate change.

“Climate change may result in physical and transition risks that could affect the safety and soundness of individual banking institutions and have broader financial stability implications for the banking system.” BIS[1], 2022

This has led to global leaders, policy makers and regulators realizing that to achieve the sustainable development goals of halving carbon dioxide emissions by 2030 and being carbon neutral by 2050 would require an economic transformation. To drive this transformation, the European Union designed a plan in 2018 to help mobilize private capital towards sustainable investments. This plan classified 72 activities that significantly contribute to a net-zero economy, do not significantly harm other environmental priorities, and are carried out with minimal ethical, labour, social standards. The classification system, establishing a list of environmentally sustainable economic activities, is what is known today as the EU taxonomy[2].

In 2020, the Taxonomy Regulation was published to facilitate sustainable investments by empowering European Supervisory Authorities (ESAs) on sustainability-related disclosures in the financial service sector, known as the Sustainable Finance Disclosure Regulation (SFDR). Since then, the ESAs have proposed the Regulatory Technical Standards (RTS) on disclosures pursuant which define the relevant taxonomy-related product disclosure expectations[3] for financial market participants and advisers. The application date of these rules will begin on the 1st of January 2023.

 

Key areas of the SFDR disclosures, include but are not limited to[4]:

 

  • Sustainability indicators, which are defined as indicators used to measure the environmental or social characteristics or the overall sustainable impact of the financial product.
  • Principal Adverse Impact (PAI) disclosures, which measure the environmental or social characteristics or the overall sustainable impact of the financial product, e.g., by showing improvements of the investments against those indicators over time. The use of PAI indicators is mandatory to demonstrate that an investment qualifies as a sustainable investment.
  • Do Not Significantly Harm (DNSH) disclosures which explore how the sustainable investments that the financial product partially intends to make/made, do not cause significant harm to any environmental or social sustainable investment objective
  • Financial Products disclosures, outlines that sustainability-related information be included for each investment option that is offered by the financial market participant or another financial market participant as a financial product that has a sustainable investment as its objective or that promotes environmental or social characteristics.

This is but one way to take an active role in greening the financial systems and the onus remains on all of us to explore ways in which we can use our countries’ regulations and policies to adapt to climate change and build resilience in the financial system.

 

 

[1] BIS (2022), Principles for the effective management and supervision of climate-related financial risks, available here.

[2] European Commission (2020), EU taxonomy for sustainable activities, website available here.

[3] ESMA, EBA, et al (2021), Joint Consultation Paper Taxonomy-related sustainability disclosures, available here.

[4] ESMA (2022), ESAS Provide clarifications on key areas of the RTS under SFDR, available here.