Fragmentation concerns raised over EU’s climate disclosure approach

Japanese and US banking industry bodies have warned that ambitious EU moves towards sustainability disclosures – including a newly-finalised taxonomy and new standards for Pillar 3 disclosures – risk creating a fragmented global framework and “exporting” its model to non-EU institutions.

The EU formally adopted the new taxonomy on 4 June, after the European Commission approved it in principle on 21 April.

The Commission’s action follows the EU Taxonomy Regulation, which came into force on 12 July last year aiming to provide definitions for environmentally sustainable investments. The regulation required the Commission to follow up the legislation with a delegated act specifying EU banks’ disclosure obligations, including by defining technical screening criteria and providing a list of sustainable activities.

Although the rules are intended to cover EU banks, Japanese banking industry association Zenginkyo has protested the taxonomy, saying non-European banks operating in Europe would be obliged to adopt its definitions.

In a letter of 2 June, Zenginkyo warned the EU against attempting to adopt a “first mover advantage” on green taxonomy, saying corporate attempts to tackle climate change would be disrupted if different jurisdictions adopted different approaches.

It said that the European Commission’s proposed disclosure framework was too localised. “Climate change, which is definitely the global challenge, needs a global solution.”

It  that non-EU financial institutions with EU-based operations would be forced to follow EU regulations on top of their different home regulations. It said the EU should cooperate with other jurisdictions, “rather than try to ‘export’ the EU framework outside the EU”.

Zenginkyo complained that the act had a too-precise definition of “sustainable”, and that an “unsustainable” catch-all category would exclude “transitional” activities. Such a black-and-white system would “discourage momentum in each jurisdiction to achieve the Paris Agreement”, it warned.

It said that, although the regulation was developed to facilitate transparency on how assets would perform environmentally, activities the taxonomy categorised as “green” would not be treated as such in another jurisdiction.

Given that such definitions differ country to country, Zenginkyo argued that nationally determined contributions (NDC) would reflect that reality better.

The push against fragmentation in reporting standards has also come from the G7, whose finance ministers and central bank governors called for a “baseline global reporting standard” that account for domestic regulatory frameworks.

In a 5 June communiqué, the group called for consistency between jurisdictions and recognised “the growing demand” for climate-risk disclosure.

The theme was echoed by Bank of Japan governor Haruhiko Kuroda who, speaking at the Bank for International Settlements’ “Green Swan” conference on 4 June, urged regulators  to take regional differences into account when setting climate risk standards.

Asia, he said, faced particular physical risks such as flood and drought that other regions were less at risk of, he said while also accounting for “almost half” of global emissions  because of its position as the centre of industrial production. “Standardisation would do more harm than good”, he said.

Kuroda criticised a “one-size-fits-all” approach to climate change and called close international-coordination “essential”.

EBA urged to avoid fragmentation in Pillar 3 disclosure standards

Elsewhere, the European Banking Authority (EBA) has also faced charges of potential fragmentation  for its proposed Implementing Technical standards (ITS) on Pillar 3 disclosures for ESG risks.

The Washington, DC-based Institute of International Finance (IIF) criticised the proposals for disclosures on climate-related risks as contributing to a “fragmented landscape”.

The IIF said that disclosures made by financial institutions should be able to withstand analysis by international stakeholders, and be comparable across borders in order to reduce “information asymmetries”.

In a comment letter, IIF managing directors Sonja Gibbs and Andres Portilla recommended a global standard for ESG disclosure, and endorsed such initiatives as the International Financial Reporting Standards (IFRS) Foundation’s global sustainability reporting standard.

Even EU banks, the letter said, would be put under pressure by an uncoordinated framework, and grow less able to operate in jurisdictions outside the EU.

The IIF instead recommended a phased implementation, one which it said would allow the EBA to remain flexible and accommodate global ESG standards as they emerged, pointing to the upcoming 2021 United Nations Climate Change Conference, to be held in Glasgow this November.

The European Banking Federation (EBF) made a similar point in its submission to the EBA consultation, saying that the EBA should employ a “building blocks” approach instead of the current rushed implementation.

It said that the EBA should use a small number of “core templates” based on available data, and adapt as the level of reliable data matured.

Non-EU counterparties would not be able to provide the disclosures that EU counterparties would, the EBF said, and banks would be forced to rely on proxies in the absence of similar recognised standards in the counterparty’s home jurisdiction, it argued.

Speaking to GBRR, Brussels-based Bird & Bird partner Paul Hermant describes “mixed feelings” in principle about the EU’s moves towards sustainability disclosures.

“On the one hand, it is going to increase an already impressive reporting burden, which has not always delivered on its objectives,” he says. “But on the other hand this has become a widely spread expectation and, while a globalised approach would probably have been ideal, it would have resulted in additional delays and not necessary in a better result, as compromises would have been necessary.”

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