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Updated Accountability Regulations for Global Financial Firms

Most countries around the world committed to a goal of net-zero greenhouse gas emissions by 2050. This needs widespread follow-through in policies and regulations. One of the most important drivers of change is a global investment in unified sustainability goals.

From 2020 to 2021, there was a record number of new or updated global sustainable financial policies. This was the observation of the Principles for Responsible Investment Association (PRI). As more countries are tightening regulations and requirements, corporations need sustainability consultants to guide them through compliance.

The Sustainable Finance Disclosure Regulation

On March 10, 2021, the Sustainable Finance Disclosure Regulation (SFDR) came into effect in the European Union. This is a keystone of the Action Plan on Sustainable Finance. It is part of the EU’s commitment to the Paris Treaty, aligned with the Carbon Neutrality Agenda and Sustainable Development Agenda.

The SFDR applies to all financial institutions that operate within the EU. This includes banks, investment companies, insurance companies, and asset managers.

There are two levels of company disclosure that the SFDR requires. The first applies to financial market participants and financial advisers. On their corporate website, they must disclose the integration of sustainability risks in their decision-making process. This must include any adverse effects their investment decision or advice has on sustainability. They must also prove that their payment policies align with sustainability objectives.

Second, companies must inform clients on how sustainability-related products meet their claims. They must include these in pre-contractual information, brochures, periodic product reports, and the website. Companies must categorize their products into those with sustainable investment objectives, those promoting environmental or social characteristics, and mainstream products.

The SFDR aims to change the behavior of the financial sector. It promotes responsible and sustainable investments while preventing greenwashing. The term refers to paying lip service to sustainability goals without the transparency to prove that the company is implementing these.

Other EU Financial Regulations

To be finalized in 2021 is the Regulatory Technical Standards (RTS) for the SFDR. Another 2021 regulation is the EU Green Bond Standard requiring issuers to disclose to investors how the proceeds are used.

The EU’s 2020 Sustainable Corporate Governance Initiative helps companies create long-term sustainability. The Next Generation EU (NGEU) plan requires that all COVID recovery expenditures do not harm the environment. The Regulation on EU Taxonomy requires financial companies to disclose the categorization and alignment of their products toward sustainability objectives. The Timber Regulation prohibits illegally harvested timber and its products in the EU market.

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Other New and Updated Global Financial Regulations

The United States updated the Insurer Climate Risk Disclosure Survey to overlap with Task Force on Climate-Related Financial Disclosures (TCFD) guidelines. In Canada, the Consultation Report of the Ontario Capital Markets Modernization Taskforce requires Toronto Stock Exchange users to disclose environmental information. The Central Bank of Brazil Sustainability Agenda allocates resources for sustainable growth.

Austria issued Guidelines on Dealing with Sustainability Risks. France requires Climate Stress Tests for balance sheets of banks and insurers. It also issued the AMF Guidelines for Sustainable Funds. Hungary passed the Bill on the Declaration of the Climate Emergency, committing to carbon neutrality by 2050. Ireland passed the Climate Action and Low Carbon Development (Amendment) Bill 2020 with the same commitment.

The Netherlands issued tax breaks for sustainable green fund investments. Spain passed the Climate Change and Energy Transition Law and updated its Good Governance Code of Listed Companies that includes consideration of environmental risks. Poland launched the Technical Assistance Project Promoting Better Corporate Practices and Investor Awareness by Enhancing Environmental, Social, and Governance Reporting and Developing Investment Initiatives.

Russia put forth the Recommendations for the Implementation of the Principles of Responsible Investment. Ukraine issued its Green Finance Standards.

Switzerland issued the FINMA Assessment of Climate-Related Financial Risks and the Sustainability in Switzerland’s Financial Sector Report. It also issued the Sustainable Finance Guidelines and the Sustainable Asset Management: Key Messages and Recommendations.

Norway updated the Norwegian Accounting Act to require the inclusion of the company’s environmental policies, principles, procedures, and standards, or the lack of these, in annual reports. New Zealand imposed a hard cap on emissions allowances in trading systems and is proposing mandatory TCFD reporting.

The United Arab Emirates issued Guiding Principles on Sustainable Finance. South Africa updated the Code for Responsible Investing in South Africa.

Initiatives in Asia

China passed its Energy Law and the Target for Climate Neutrality for 2060. The country also issued the Guidance on Promoting Investment and Financing to Address Climate Change. Its Green Bond Endorsed Projects Catalogue (2020) removed coal and fossil fuel projects.

Hong Kong issued the Common Assessment Framework on Green and Sustainable Banking. It also issued the Strategic Plan to Strengthen Hong Kong’s Financial Ecosystem to Support a Greener and More Sustainable Future. It updated its ESG Reporting Guide to require the disclosure of climate-related issues.

Japan updated its Green Bond Guidelines and the Principles for Responsible Institutional Investors. It aligned the TCFD Guidance 2.0 with the TCFD disclosure requirements. Singapore issued the Guidelines on Environmental Risk Management for Asset Managers, Banks, and Insurance Companies.

It is heartening to see governments around the world working on their commitment toward carbon neutrality. The regulatory measures act as audits so financial companies put in place these urgent measures.

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