EU: ECB and Other EU Regulators Call for Climate Disclosures for Structured Finance Products
On April 13, 2023, the European Central Bank (ECB) and the European Supervisory Authorities (ESAs) (i.e., the European Insurance and Occupational Pensions Authority and the European Banking Authority) announced that they are developing enhanced climate-related disclosures for structured finance products in relation to securitized assets. They argue that additional metrics are needed to inform investors of climate risks and reduce dependence on external estimates.
The regulators note that the assets underlying structured finance products, such as bonds backed by real estate mortgages or auto loans, are often exposed to heightened risks of climate change. The value of such assets and associated returns is ultimately impacted by the climate risks. The lack of climate data for such assets also means that the products and services cannot be classified as sustainable under the EU Taxonomy and SFDR. For instance, if the underlying asset is seen as having a negative environmental impact (say the car in an auto loan), the financial product would not be classified as sustainable (i.e. the auto loan). Further, the enhanced climate data may be relevant for other funding instruments backed by similar assets, such as covered bonds.
Pending introduction of mandatory disclosure standards, the ECB and ESAs have advised issuers, sponsors and loan originators to collect climate data relevant to investors at the time of initial lending.
Link:
Joint Statement
South Korea: Financial Regulator Launches Taskforce to Develop ESG Fund Disclosure Standards
South Korea’s Financial Supervisory Service (FSS) announced its plan to establish an ESG taskforce to provide ESG-related oversight and guidance to the capital market sector. The taskforce will develop a framework addressing ESG investment targets, fund manager capabilities and management performance based on global standards.
The taskforce will include seven unnamed asset managers, selected based on the size of their existing ESG funds, as well as the Korea Financial Investment Association, an industry trade group, and the Korea Capital Market Institute, a government-funded research organization.
The framework is expected to be released later in 2023.
Link:
Press release (in Korean)
U.S.: Proxy Season Debates Underscore ESG Political Tensions
Since the beginning of the proxy season, annual shareholder meetings held at various major companies have seen an uptick in discussions regarding ESG topics, including diversity, abortion rights and climate change.
While these issues are not new, the renewed focus by politicians and government representatives on ESG topics may be causing the surge, according to corporate governance experts. Conservative shareholders, historically less active in shareholder campaigns, may become more involved—proposals opposing ESG policies rose 60% since 2022, according to the Proxy Preview 2023 report (more on this here). The Center for Political Accountability also reports that shareholder support for corporate political alignment has been gradually increasing over the years, which makes it challenging for companies to navigate the political alignment between shareholders, on the one hand, and employees and customers, on the other.
Several companies are expecting confrontation on specific ESG-related topics, such as Eli Lilly (abortion rights), Coca-Cola Co. (political spending), major North American banks (climate change impacts from lending and investment activities and related human rights issues), Home Depot (diversity issues), Walt Disney Co. (LGBTQ+ and abortion rights) and Walmart (gun violence). These controversial issues have reportedly already led to heated confrontations at proxy meetings. Discussions will likely continue over the next several weeks.
Links:
CPA-Zicklin Index
Proxy Preview
U.S.: Environmental Protection Agency Proposes New Vehicle Emissions and Power Plant Air Pollution Standards
On April 12, 2023, the United States Environmental Protection Agency (EPA) announced new proposed emissions standards for light-, medium- and heavy-duty vehicles for model years 2027 and onwards.
The EPA projected that the standards for emissions from light-duty vehicles, such as passenger cars and light trucks, would result in a 56% reduction compared to the vehicles produced in model year 2026. The medium-duty vehicle standards would result in a 44% reduction. The standards for heavy-duty vehicles, such as delivery trucks or tractors, aim to reduce emissions progressively for each model year through to 2032. In sum, the EPA projects that the proposed standards would avoid close to 10 billion tons of CO2 emissions by 2055. In addition to emission reductions, the standards would lower fuel and maintenance costs and reduce oil imports, delivering substantially improved air quality and other health benefits. They also accompany the Administration’s investment in electric car manufacturing and electric vehicle charging infrastructure.
On April 5, 2023, the EPA published a proposed rule seeking to strengthen and update the Mercury and Air Toxics Standards (MATS) for coal-fired power plants in line with advancements in pollution control technologies. The MATS require reduction of harmful pollutants such as mercury, acid gases and non-mercury metals from fossil fuel-based power plants. The proposed rule would further reduce the emissions limit for filterable particulate matter by 67% and for mercury pollution from existing lignite-fired sources by 70% through leveraging the latest technologies and techniques. The EPA expects this would reduce adverse health impacts of such emissions, including heart attacks, cancer and developmental delays in children.
The comment period is open for 60 days after the rule’s publication in the Federal Register.
Links:
Vehicle Emissions Press Release
Power Plants Press Release