Taxonomy troubles in Brussels | Financial Times

As Thanksgiving looms in the US, climate change activists have at least one reason to be thankful. US president Joe Biden reappointed Jay Powell as Federal Reserve chair on Monday, and named Lael Brainard as his deputy, with special responsibility for financial stability. This disappointed some progressives, who wanted Brainard to displace Powell. But her role could enable her to introduce a stronger climate focus into Fed policies — something she appears keen to do, given her recent speeches.

This matters. As we report below, Brussels is already racing ahead with its planned green taxonomy (albeit at such a rapid speed that it is sparking growing business protest). 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 into its stress tests, or introduced mandatory reporting requirements. Nor has the Securities Exchange Commission.

However, Brainard will probably now push for climate issues to feature in bank stress tests. Meanwhile, the SEC is already considering new climate-linked reporting guidelines. How draconian these will be is unclear, since Washington officials are (understandably) worried about legal challenges from Republicans. But one Republican who is unlikely to oppose this potential policy shift is Powell: a little-known detail about the Fed chair is that he once sat on the board of the Environmental Defense Fund, and while he kept quiet about this during the Trump era, he is personally sympathetic to green issues.

Watch this space — in Brussels and Washington alike. And if you want some instruction on what these changes mean for lawyers, corporate executives, consumers and accountants, check out our Expert Series videos with Paul Polman, Mary Schapiro, Leo Strine and Lily Cole. — Gillian Tett

EU taxonomy drive comes under fire

The EU’s effort to create its hotly anticipated “taxonomy” — a far-reaching classification system for green investment, aimed at imposing clear standards and eliminating greenwashing — has been dogged by fierce debate.

The most high-profile controversy has been over how far nuclear and natural gas power should be treated as climate-friendly sectors. But more prosaic — and arguably more significant — concerns about Brussels’ attempt to create a “gold standard” for green investment are beginning to rear their head.

Chief among them are worries about the disclosure requirements for large companies. Several industry groups have warned that companies may struggle to provide Brussels with key information required from the start of next year.

One of the main planks of the taxonomy regulation is the creation of something resembling a public green database, where large listed companies will have to provide information on how much of their revenue, capital, and operating expenditure are linked to “taxonomy compliant” activities.

This database, which will provide standardised information and key metrics for investors to compare corporates, is the most novel — and, to some, the most important — undertaking of the entire taxonomy exercise. But industry groups have complained that companies do not have sufficient time, resources or clarity on the rules to meet the EU’s demands.

The latest intervention comes from Accountancy Europe, a group representing nearly a million accountants and auditors, who want Brussels to provide additional information about 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,” says a letter sent by Accountancy Europe to EU officials last week

The auditors’ gripes add to a steady chorus of warnings from lobby groups saying the wide scope of the disclosures creates a risk of spilling trade secrets to rivals. The European Commission did not respond to requests for comment.

The rules are expected to get formal sign-off from EU member states in a few weeks. To assuage industry 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 staggered entry is still not enough for the likes of Accountancy Europe. It thinks there is an “urgent need to clarify the definitions and the specific requirements to ensure consistent application of the rules”. BusinessEurope, another lobby group, has also raised concerns that current corporate IT systems are not equipped to provide the level of detail required.

But green campaigners and many policymakers balk at the idea that the rules should be amended so that large companies can avoid having to invest in new software or hire more auditors.

Regulators in Brussels seem determined to push ahead with the new corporate disclosure rules to provide transparency for investors and the public. That information, they hope, will help bring about change and accelerate financial flows towards sustainable activities. Attendant bureaucratic burdens, for all the pushback from business lobby groups, look inevitable. (Mehreen Khan)

The ESG data gold rush collides with new regulatory scrutiny

S&P Global is expecting to generate $100m of ESG-linked revenues this year — a small sum for a giant credit ratings company, but an eye-catching haul in the world of ESG data. S&P, which recently launched a service to validate the environmental impact of corporate sustainability debt, estimated ESG revenues could jump to $300m in 2024, the company’s chief financial officer, Ewout Steenbergen, said earlier this month.

The S&P figures underscore the sizeable cash flowing into this sector. UBS has estimated the market for ESG data could hit $5bn by 2025, up from $2.2bn in 2020.

But the growth of ESG data revenue has invited scrutiny. Now the regulators are pouncing.

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

Regulators with authority over credit rating agencies (such as the US Securities and Exchange Commission) should consider “whether there exists the potential for conflicts of interest” between ESG offerings and existing products, Iosco said. There is ample scope, it added, for new regulations to force disclosure of potential conflicts, and to compel action where they exist.

Iosco also raised concerns over ESG consulting services. Red flags go up when the consulting division provides information to a client company to help it get a better ESG rating, Iosco said.

Even before Iosco’s report went public, the organisation’s effort had sparked the ESG market into action.

RepRisk, a Swiss ESG data provider, last week published its ratings methodology online — all the way down 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 scoring.

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

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

Tips from Tamami

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

As Moral Money has warned for some time now, climate-related legal risks are on the rise. And government institutions are finding they are not immune.

A group of five global climate NGOs has collaborated to file a complaint to the US Securities and Exchange Commission yesterday, calling for an investigation into the Japan International Cooperation Agency, Japan’s overseas development institution. They claim JICA is misleading investors over its coal-free bond, arguing that JICA’s conduct is “unlawful” and may have “materially harmed US investors and threatens to exacerbate climate change by financing coal-fired power generation”.

“We hope global bondholders take this as a warning they may still be backing new coal power if they buy JICA bonds, despite what JICA’s been telling them,” said Julien Vincent, Market Forces executive director.

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

JICA, however, denied the claim and told Nikkei the agency did not use the proceeds from the April bonds to fund coal power projects.

Japan, along with South Korea and China, accounts for 95 per cent of total foreign financing of overseas coal-fired power plants. Historically, Japan has been one of the world’s big coal power exporters. But earlier this year it joined the G7’s agreement to end public financing for overseas coal power projects by before 2022.

“As far as we are aware, this complaint is the first time a governmental organisation has been the target of a whistleblower complaint filed with the SEC, but given the SEC’s crackdown on disclosures of climate-related risk, we don’t anticipate that this will be the last,” said Kevin Galbraith, a US securities lawyer who represents the group of NGOs.

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

Smart read

• For a sense of what COP26 was like for the highest level negotiators, read this excellent report from the Boston Globe’s Jess Bidgood, who shadowed John Kerry throughout the conference. Her report gives insights into the US climate envoy’s mindset and his punishing workload in Glasgow: his step-counter logged seven miles during one day prowling the negotiating halls; on another, he was in a hotel conference room with Chinese counterparts until 3am.