ESG Weekly Update – February 23, 2022

23 February 2022

EU: ESMA Adds New “Environmental Risks” Category to Its Dashboard

In its first trends, risks and vulnerabilities (“TRV”) report of 2022, the European Securities and Markets Authority (“ESMA”) has introduced “Environmental Risks” as a new category in its risk- assessment and -monitoring framework, to sit alongside existing categories such as credit, liquidity and operational risk. Established in 2011 to foster stability in financial markets and to award investors with greater protection, ESMA has identified this new category—which will initially focus on climate risks—as a key component of its market-risk assessments. Its latest TRV report highlighted the continued growth of ESG markets: ESG fund assets increased by 9% in the second half of 2021, while ESG bond markets grew by 19%. ESMA reaffirmed concerns related to the potential over-valuation of green assets; to address this, the report’s statistical annex outlines new risk indicators on climate-related disclosures, firms’ reputational risk and EU carbon markets.

Core risks anticipated to fall within the new “Environmental Risks” category include greenwashing and the impact of climate change on physical assets and financial holdings. ESMA referred to the need for enhanced disclosure and transparency for green financial products, primarily through better climate risk-monitoring indicators. Over time, ESMA hopes this will allow for more accurate impact assessments of identified climate risks. In addition, ESMA assessed the implementation of its ESG disclosures guidelines by reviewing 64,000 press releases of credit rating agencies between January 1, 2020 and December 30, 2020. Though the level of disclosure increased throughout the period, disparities between agencies were still evident; ESMA has committed to working with the European Commission to address the inconsistent application of the guidelines.

Separately, ESMA recently detailed its new priorities in its Sustainable Finance Roadmap for 2022–24. These underpin the actions to be taken to tackle greenwashing and promote transparency; they also seek to support understanding of new green legislation and ensure better monitoring mechanisms for ESG trends and risks. ESMA plans to work with regulators to improve data mapping in ESG markets, with further assistance offered to the European Commission to facilitate the wider rollout of the EU Green Bond standard.

Additions to statistical annex and text mining analysis of ESG disclosures
TRV feature on environmental risks
Sustainable finance results for second half of 2021
ESMA’s Sustainable Finance Roadmap 2022-24

EU: Environmental NGOs Challenge EU Green Taxonomy on Bioenergy and Plastics

ClientEarth, along with a coalition led by Partnership for Policy Integrity (“PFPI”), has filed two independent requests for internal review in relation to the European Commission’s latest Taxonomy proposal. The NGOs challenge the Taxonomy’s labelling of bioenergy, bio-based plastics and other plastic chemicals as “sustainable” as both unlawful and unscientific.

Specifically, the PFPI coalition in its request argues that the technical screening criteria for bioenergy activities breach provisions of the Taxonomy Regulation, including through a misuse of powers by substituting the “do no significant harm” criteria in the regulation for technical screening criteria in delegated acts. ClientEarth in its request argues that the new Taxonomy determinations were not the result of scientific assessment, a requirement under the Taxonomy Regulation.

The challenges are being brought under the Aarhus Convention, a United Nations Economic Commission for Europe instrument that allows access to information, public participation in decision-making and access to justice in environmental matters. The internal review requests are the first step toward bringing legal challenges in these matters. The European Commission has 16 weeks to reply and rectify any errors, failing which the NGOs can challenge the Taxonomy proposal before the European Court of Justice.

On February 2, 2022, the European Commission reached political agreement in another controversial area involving the labelling of nuclear and natural gas activities as “transitional” within the Taxonomy. This determination also may face legal challenge from civil society groups and EU Member States.

PFPI Press Release
Client Earth Press Release
PFPI Internal Review Request

Russia: Russian State Duma Adopts Law Related to De-carbonization Pilot Project in Sakhalin

The Russian State Duma adopted legislation implementing an ambitious de-carbonization pilot project on the island of Sakhalin for the period running September 1, 2022 through December 31, 2028. A central objective of the project is to test a new greenhouse gas emissions quota system, which includes a mechanism for trading of the quotas by firms. If the pilot project in Sakhalin is successful, the system will be considered for implementation across Russia. Under the pilot project, government authorities for the Sakhalin region will set annual greenhouse gas emissions quotas for entities that fall within the scope of the law. These regulated entities will be required to submit reports on their greenhouse gas emissions for the previous year, subject to verification. If the regulated entity’s emissions for a given year are below the quota allowed, it will be able to utilize the excess under the quota during the following year or sell the excess to third parties. If the regulated entity exceeds its quota in a given year, it will be required to pay for the emissions that exceed the quota amount.

Big Asia

Holland: PFZW Pressures Fossil Fuel Companies to Align with Paris Agreement

PFZW, one of Europe’s largest pension funds, has indicated that it will divest fossil fuel companies from its portfolio if the companies do not implement greenhouse gas emissions targets that align with the Paris Climate Agreement’s goal of limiting global warming to no greater than 1.5 degrees Celsius. Firms that fail to make such a commitment by the end of 2022 will be divested in 2023. Companies making such a commitment will then be required to submit to PFZW a “convincing and verifiable” climate change strategy by the end of 2023 or risk divestment in 2024.

Separately, PFZW has committed to increasing its voting activity as a large shareholder, including by voting to cease new development of fossil fuels and voting against directors that it believes fail to contribute to a company’s transition out of fossil fuels. PFZW is also intending to refine its coal and tar sands exclusion policy, reducing the funds’ revenue thresholds for both to 5% or less. Since 2016, PFZW has divested approximately 225 carbon-intensive companies, reducing the carbon footprint of its listed equity portfolio by 53%. However, at the end of the third quarter of 2021, PFZW continued to maintain fossil fuel investments of up to 4.5 billion Euros.

PFZW’s announcement follows those of several other Dutch pension fund’s planning to divest their fossil fuel holdings, including ABP.

PFZW to divest fossil fuel companies unless they align with Paris Agreement
PFZW to divest up to 4.5 billion Euros of fossil fuel companies