ESMA calls for double materiality in ISSB standards

The European Securities and Markets Authority calls for double materiality in global sustainability standards, a progress report from the Financial Stability Board, sustainability guidance from the Philippines central bank and more from this week in green central banking.

Double materiality should be included in global standards, says ESMA

The European Securities and Markets Authority (ESMA) has called on the global financial standards body to capture climate and environmental impacts in its forthcoming sustainability standards.

In a submission to the consultation process on the International Sustainability Standards Board’s draft guidelines for climate and sustainability-related disclosure, the ESMA said that greenwashing claims “do not necessarily distinguish between ‘enterprise value creation’ and ‘impact materiality'”, and emphasised the importance of including the impact perspective in corporate reporting, otherwise known as double materiality.

The ISSB has stated that its intention is to “develop standards that will require companies to provide all material information related to significant sustainability matters that are relevant to investors’ decision-making”.

The ESMA said that as investors increasingly seek to avoid contributing to environmental impacts, and to protect themselves from environmental risks, it is important that the necessary impact data is captured.

FSB publishes progress report on climate risk

The Financial Stability Board (FSB) has published a progress report on international efforts to address the financial risks stemming from climate change. Based around the FSB’s 2021 climate response roadmap, the document outlines progress made across four core areas: disclosures, data, vulnerability analysis, and regulatory and supervisory practices.

Encouraging progress has been made in all four areas, the FSB said, pointing to the draft reporting standards published by the newly established ISSB and to initiatives in supervisory guidance and climate risk management.

While work has continued on improving the availability and cross-border comparability of climate-related data, the report says there is still an urgent need for agreement on common metrics for financial risks, including “forward-looking metrics anchored in real-world climate targets”.

The report identified “a growing recognition of the importance of global assurance standards to drive reliability of disclosures” and called for data repositories providing open access to data in a consistent form.

It concludes by noting that understanding of biodiversity loss and other sustainability topics is deepening and says the FSB will consider including a broader range of sustainability topics in its financial stability agenda.

New York Fed examines climate economics

The Federal Reserve Bank of New York has published a summary of a recent symposium on the implications of climate change for macroeconomics.

The conference, organised by the New York Fed’s applied macroeconomics and econometrics center, focused on how climate change and climate–related policies will affect macroeconomics in general and monetary policy in particular. Four sessions were held, looking at climate change and monetary policy, macroeconomic and distributional impacts, supply chain effects, and the financial market impact of uncertainty.

Harvard University’s James Stock said climate change and the policy response to it will be an important source of risks for macroeconomic management. MIT’s Iván Werning examined the effects of energy price shocks in economies where real wages do not adjust quickly, arguing that they are similar to inflationary cost-push shocks. And Stanford’s Monika Piazzesi examined the European Central Bank’s (ECB) corporate bond portfolio, pointing out that it is very different from the overall European market portfolio tilted toward dirtier sectors.

BSP finalises sustainability guidance

The Bangko Sentral ng Pilipinas (BSP) has released draft guidelines on the integration of sustainability principles into banks’ investment activities, and expects to finalise the new regulations in August.

This is the third phase in the development of  the BSP’s sustainability-related regulations, following the publication of its sustainable finance framework in 2020 and an environmental and social risk management framework in 2021.

“The BSP recognizes the urgency of promoting the sustainability agenda. We are committed to helping our supervised financial institutions develop their capacity in sustainable finance,” said BSP governor Felipe Medalla in a statement reviewing the central bank’s progress. “This enabling approach will accelerate mobilising funds toward projects and activities to achieve our growth targets and, at the same time, reinforce the country’s resilience to natural disasters and climate change.”

The BSP also says that transition plans submitted by banks over the past six months show that “they are making good use of the three-year transition window provided by the sustainable finance framework”.

Climate central to ECB primary mandate, say board members

Climate change has direct effects on price stability and is therefore at the core of the ECB’s primary mandate, according to a number of executive board members.

Frank Elderson and Isabel Schnabel made the comments in a blog post published alongside the results of the central bank’s inaugural climate stress test of European banks. Working within this mandate, the ECB can act as a catalyst for greening the financial system and support the development of green capital markets, they say, as well as ensuring that banks take climate-related risks into account in their lending decisions.

Reviewing the stress test results and ECB actions to remove carbon bias from its corporate bond portfolio, Elderson and Schnabel say that everyone involved in financial markets will need to prepare for the green transition and address the resulting risks. “Within our mandate we have a duty to play our part, and we will do so,” they conclude.

BoE may add trading to bank stress tests

The Bank of England (BoE) may include trading in future climate stress tests of UK banks, according to the executive director for financial stability.

Speaking to Reuters, Sarah Breeden said the BoE’s first climate test had to exclude trading, focusing instead on loan books. Emphasising that banks will have time to embed lessons from the first stress test before any changes, she said she wanted firms to have an opportunity to be getting better at managing and measuring the risk, and for this to be reflected in the next assessment exercise.

“What we can do is think about whether there are any specific issues that we want to drill down on,” Breeden said. “Do we want to do something really targeted on trading risk, do we want to do something really targeted on a particular sector?”