Wed. Dec 1st, 2021

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As Thanksgiving pops up in the US, climate change activists have at least one reason to be grateful. US President Joe Biden on Monday reappointed Jay Powell as chairman of the Federal Reserve and appointed Lael Brainard as his deputy, with special responsibility for financial stability. This disappointed some progressive people, who wanted Brainard Powell to move. But her role could enable her to introduce a stronger climate focus on Fed policies – something she’s apparently keen to do, given her recent speeches.

It matters. As we report below, Brussels is already pushing ahead with its planned green taxonomy (albeit at such a rapid pace that it is triggering increasing business protests). And, as we also describe, rating agencies are facing new regulatory scrutiny. However, the Federal Reserve – unlike some of its European counterparts – has not yet embedded climate change analysis in its stress tests, or introduced mandatory reporting requirements. Neither does the Securities Exchange Commission.

However, Brainard will probably now insist that climate issues appear in bank stress tests. Meanwhile, the SEC is already considering new climate-linked reporting guidelines. How draconian it will be is unclear, as Washington officials are (understandably) concerned about Republican legal challenges. But one Republican who is unlikely to oppose this potential policy shift is Powell: a little-known detail about the Fed chairman is that he once sat on the board of the Environmental Defense Fund, and while he remained silent about it during the Trump era, he is personally sympathetic to green issues.

Keep an eye on this space – in Brussels and Washington. And if you want instructions on what these changes mean for lawyers, corporate executives, consumers and accountants, check out our Expert series of videos with Paul Polman, Mary Schapiro, Leo Strine and Lily Cole. – Gillian Tett

EU taxonomy drives under fire


The EU’s effort to meet its hot expectations “taxonomy”- a far-reaching classification system for green investment, aimed at setting clear standards and eliminating green laundry – has been plagued by heated debate.

The most high-profile controversy was over how far nuclear and natural gas power should be treated as climate-friendly sectors. But more prosaic – and probably more significant – concerns about Brussels’ attempt to create a “gold standard” for green investment are beginning to emerge.

The most important among them is concern about the disclosure requirements for large companies. Several industry groups have warned that companies could struggle to provide Brussels with key information required from the beginning of next year.

One of the mainstays of taxonomy regulation is the creation of something that looks like a public green database, where large listed companies will have to provide information on how much of their income, capital and operating expenses are linked to activities that comply with “taxonomy”.

This database, which will provide standardized information and key metrics for investors to compare businesses, is the newest – and for some, the most important – business of the entire taxonomy exercise. But industry groups have complained that companies do not have enough time, resources or clarity on the rules to comply with EU demands.

The latest intervention comes from Accountancy Europe, a group representing nearly a million accountants and auditors, who want Brussels to provide additional information on how the disclosures work.

“There is a significant risk that we will end up with a patchwork of interpretations, depending on the Member State, the sector or the expert,” said a letter sent to EU officials by Accountancy Europe last week.

The auditors’ grievances contribute to a steady chorus of warnings from lobby groups who say the wide range of disclosures creates a risk of leaking trade secrets to competitors. The European Commission did not respond to requests for comment.

The rules are expected to be formally signed by EU member states within a few weeks. To address operational concerns, the commission will require only limited “qualitative” disclosures from next year, with the full scope enforced for companies in 2023 and for financial companies in 2024.

The staggering entry is still not enough for people like Accountancy Europe. It believes there is an “urgent need to explain the definitions and the specific requirements to ensure consistent application of the rules”. BusinessEurope, another lobby group, also expressed concern that the current corporate IT systems are not equipped to provide the necessary level of detail.

But green campaigners and many policymakers are refusing the idea that the rules should be changed so that big companies can avoid investing in new software or hiring more auditors.

Regulators in Brussels appear determined to continue with the new corporate disclosure rules to provide transparency for investors and the public. This information, they hope, will help bring about change and accelerate financial flows to sustainable activities. Additional bureaucratic burdens, for all the setbacks of business lobby groups, seem inevitable. (Mehreen Khan)

ESG data gold rush clashes with new regulatory inquiry

© Reuters

S&P Global expects to generate $ 100 million in ESG-linked revenue this year – a small amount for a giant credit rating company, but a striking acquisition in the world of ESG data. S&P, which recently launched a service to validate the environmental impact of corporate sustainability debt, said estimated ESG revenue could rise to $ 300 million in 2024, the company’s chief financial officer, Ewout Steenbergen, said earlier this month.

The S&P figures underline the significant cash flowing to this sector. UBS estimated the market for ESG data could reach $ 5 billion by 2025, from $ 2.2 billion by 2020.

But the growth of ESG data revenue has been under scrutiny. Now the regulators are striking.

The International Organization of Security Commissions (Iosco) Tuesday published recommendations on how countries should think about rules for ESG reviewers and data providers. Among these, Iosco focused on potential conflicts of interest.

Regulators with authority over credit rating agencies (such as the U.S. Securities and Exchange Commission) should consider “whether there is a potential for conflict of interest” between ESG offerings and existing products, Iosco said. There is ample room, he added, for new regulations to enforce the disclosure of potential conflicts, and to enforce action where it exists.

Iosco also expressed concern about ESG consulting services. Red flags go up when the consulting department provides information to a client company to help him get a better ESG rating, Iosco said.

Even before Iosco’s report was released, the organization’s effort prompted the ESG market to take action.

RepRisk, a Swiss ESG data provider, published last week its rating methodology online – up to the Python source code used in its algorithms. RepRisk claimed it was the first and only ESG data provider to be so transparent about its score.

Institutional Shareholder Services, which offers boardroom voting recommendations to investors as well as ESG ratings, said it takes “extremely seriously the potential for actual or perceived conflict of interest that could affect the integrity of ISS’s ESG corporate ratings” or other client offerings.

Money has been flowing into ESG data for years. Now, with the new regulatory pressure, ESG data is coming out of the shadows. (Patrick Temple-West)

Tamami Tips

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the Eastern Hemisphere.

As Moral Money has been warning for some time now, climate-related legal risks is increasing. And government institutions find that they are not immune.

A group of five global climate NGOs worked together to lodge a complaint with the US Securities and Exchange Commission yesterday, requesting an investigation into the Japan International Cooperation Agency, Japan’s overseas development agency. They allege that JICA is misleading investors about its coal-free bond, arguing that JICA’s actions are “illegal” and may have “materially harmed US investors and threatened to exacerbate climate change by financing coal-fired power generation”.

“We hope global bondholders take this as a warning that they may still support new coal power if they buy JICA bonds, despite what JICA has told them,” said Julien Vincent, executive director of Market Forces.

JICA issued a US dollar bond in April with the aim of raising $ 580 million. Its prospectus stated that JICA “will not knowingly allocate any proceeds from the sale of its securities to activities related to coal power generation”. However, the agency has continues to fund coal plant projects in Bangladesh, and its financial statements suggest that the bonds will be used at least in part to fund new coal-fired power projects, the group of NGOs said.

However, JICA denied the claim and told Nikkei that the agency did not use the proceeds of the April bonds to fund coal-fired power projects.

Japan, along with South Korea and China, is responsible for 95 percent of total foreign financing of overseas coal-fired power plants. Historically, Japan has been one of the world’s major exporters of coal power. But earlier this year, at the G7 agreement to end public funding for overseas coal power projects before 2022.

“As far as we are aware, this complaint is the first time that a government organization has been the target of a whistleblower complaint filed with the SEC, but given the SEC’s suppression of the disclosure of climate-related risk, we do not expect it to be the be last, ”said Kevin Galbraith, an American securities lawyer representing the group of NGOs.

The group also hopes for the newly created Climate and ESG Task Force at the SEC will agree with their view on JICA’s actions and treat the case as “the first enforcement action of its kind”, Galbraith said.

Smart reading

  • For a sense of what COP26 was like for the highest level negotiators, read this excellent report of the Boston Globe’s Jess Bidgood, who overshadowed John Kerry throughout the conference. Her report provides insight into the U.S. climate envoy’s mindset and his penal charge in Glasgow: his step-counter counted seven miles during one day that slipped through the negotiating halls; on another he was in a hotel conference room with Chinese counterparts until 3 p.m.

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