OUTLOOK 2022-Will this be the year ESG bites?

At a minimum, 2022 looks set to be the year financial services firms get their ducks in row on climate risk. A whole raft of regulatory initiatives are underway at international, national and regional level which could have serious consequences for firms that fail to assess and address their climate exposure.

Widening the regulatory lens out to environmental, social and governance (ESG) as a whole, societal pressure appears to be prompting some asset managers to exercise their shareholder voice. Firms which fail to live up to their green and ESG claims do not only have regulators to fear — litigation is now an ever-present and growing danger.

The United Nations Conference of the Parties (COP26) set the direction of travel for 2022. The landmark agreement on international sustainability standards has for the first time set a baseline for reporting on sustainability.

The first two standards — one on climate the other a general (holding) standard — will not come into force until November 2022, but prototypes for both were published during COP26 and give compliance departments a clear steer about the kind of information that will be required in due course.

The other significant development at COP26 was the agreement on art 6 of the Paris Accord. This gave the green light to an expansion in voluntary carbon markets worldwide, and Regulatory Intelligence has been told that investment banks are already staffing-up their trading desks in anticipation of a boom. Voluntary carbon markets should not be confused with government emissions schemes such as that operated by the European Union.

Voluntary carbon markets have existed for many years, but they have a chequered history, and the market is a ripe one for fraudsters. Detractors also point out that three decades of carbon market have failed to reduce climate change. Carbon markets amount to nothing more than a “get out of jail free card” for carbon producers, Jennifer Morgan, executive director at Greenpeace International, said in November.

Financial firms are acutely aware of these past flaws, and efforts are underway to bring credibility to, and strong checks on, carbon credits. The Integrity Council for Voluntary Carbon Markets (IC-VCM), an initiative born out of the Taskforce on Scaling Voluntary Carbon Markets, will this year agree core principles and governance arrangements for “high-integrity” carbon credits.

The use of carbon credits and markets must be supplemental to the direct cuts firms make to emissions, said Hugh Sealy, a former chair of the executive board of the U.N. Clean Development Mechanism and co-chair of the IC-VCM.

“Companies cannot buy their way out of reductions,” Sealy said.

The idea is that the council, which includes representatives from indigenous communities, sets out what a project should look like, including what monitoring and accreditation should be put in place to ensure projects are legitimate. What should happen to all the carbon credits issued to date, and if they will be subject to the IC-VCM high integrity principles, remains to be decided.

Shareholder voice, crypto and litigation

2022 is likely to see an uptick in ESG interventions from institutional investors and lenders. There is an argument to make that institutional shareholders could always have exercised their power in terms of ESG, but for the most part chose not to. What the march of ESG has done is give them “cover” to speak out.

A recent example of this is the letter written by 65 institutional investors, with a collective $3.5 trillion of assets under management, to the boards of pharmaceutical groups Pfizer, Moderna, AstraZeneca and Johnson & Johnson.

The letter called for remuneration policies of managers and directors to be linked to the worldwide availability of COVID-19 vaccines. Add to this the statements from banks including HSBC and Standard Chartered on how their own net zero plans will affect future lending decisions and it is clear that corporates which rely on these institutions for funding will have to, at a minimum, produce transition plans.

The energy consumption of “proof-of-work” cryptocurrencies, including Bitcoin and Ethereum, has attracted the attention of regulators and lawmakers in the United States and the EU. This could pose problems for several banks and asset managers which have begun offering crypto services. It is hard to see how such highly energy-intensive crypto coins sit alongside pledges to reduce emissions, especially in Europe.

This month, Erik Thedéen, director general of the Swedish Financial Supervisory Authority and vice-chair of the European Securities and Markets Authority (ESMA), called for proof-of-work crypto coins to be banned. Thedéen also chairs the Task Force on Sustainable Finance of the International Organisation of Securities Commissions (IOSCO), so his thinking could also have international implications.

Litigation on misleading or false statements in annual reports, issue documents and marketing literature is not new. The closer attention being paid to ESG statements in such reports, however, is leading to an increase in litigation. Corporate claims about recycling, animal cruelty and emissions are just a few examples of areas that have so far seen firms face legal action. As corporates are increasingly forced, by legislation, to hand over data to back up ESG claims, more litigation is bound to follow.


Transition plans, disclosure and stress testing will be top priorities for European and UK regulators in 2022. Statements from the UK Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), ESMA and the European Central Bank (ECB) should leave firms in no doubt that firms’ actions on climate, in particular, are in their crosshairs.

The PRA said this month that climate risk would be a particular focus for its supervisors in 2022. Banks and insurers have given far more thought to opportunities arising from climate change than they have to the risk it presents to their businesses, the PRA said. The message was clear: identify your risks and come up with a mitigation plan, or else.

In theory, the UK’s Senior Managers and Certification Regime would also put individuals in regulators’ sights if firms are found not to have identified, and begun to offset, their climate risk exposure. UK regulators asked firms to designate a senior manager as responsible for climate risk in 2019.

In December, ECB officials, made it clear that the results of an initial round of self-assessed climate stress testing at banks were inadequate. Not one of the 1,600 euro zone banks that participated had fully quantified their climate risk. That led to Andrea Enria, chair of the Supervisory Board of the ECB, stating that the regulator could not rule out supervisory action for firms with similarly poor results in its 2022 stress test.

Frank Elderson, vice-chair of the ECB supervisory board, separately called for the EU to legislate to mandate transitions plans. A transition plan sets out how a firm will reduce its climate exposure to be net zero by 2050 (or sooner). The UK has already said that UK-listed firms and financial groups will have to produce transition plans.

In October, ESMA instructed financial regulators across the EU27 member states to prioritize greenwashing in their annual review of corporate financial statements. The move — which was made before two pieces of ESG disclosure legislation (the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD)) have come into force — signals a step up in ESG monitoring on the part of EU regulators.

Lawyers have warned that firms mis-allocating investment products under SFDR could face civil as well as regulatory action for greenwashing. SFDR requires firms to place their investment funds into one of three categories: art 6 (fund does not consider ESG); art 8 (among other things, the fund promotes ESG characteristics); or art 9 (fund has a sustainable invest objective).

The UK FCA has also promised to come down hard on investment firms caught greenwashing.

United States

After lagging behind its European peers on climate change regulation, regulators in the United States plan to narrow the gap in 2022, issuing new proposals on environmental and social disclosure rules as well as on the supervision of banks as they manage the transition toward a greener economy. Climate change is a critical part of the policy agenda of President Joe Biden’s administration, and U.S. regulators have been given a mandate to speed up their efforts to address climate risk.

The precise timing is uncertain, but the Securities and Exchange Commission (SEC) is expected to announce proposed disclosure rules in the early part of the year. Under chair Gary Gensler, the securities regulator has previewed the type of information it will be seeking from companies through numerous statements and speeches.

SEC proposals look to dig deeper

The SEC’s ESG disclosure proposals will also include human capital management and board diversity. The most detailed preview seen so far came in September, when the SEC published a sample letter to companies on the types of questions they might ask. The SEC included some of the following information requests:


We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.

Risk factors:

Disclose the material effects of transition risks related to climate change that may affect your business, financial condition and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes.
Disclose any material litigation risks related to climate change and explain the potential impact to the company.

Management’s discussion and analysis of financial condition and results of operations

There have been significant developments in federal and state legislation and regulation and international accords regarding climate change that you have not discussed in your filing. Please revise your disclosure to identify material pending or existing climate change-related legislation, regulations and international accords, and describe any material effect on your business, financial condition and results of operations.
The SEC’s proposals will encounter resistance from those who believe the agency is overstepping its statutory bounds. Critics argue that new rules on climate change need to pass the “materiality” test: disclosures are material when they are reasonably likely to affect a company’s financial condition or operating performance.

Those against new disclosure rules also say that many companies are already providing a massive amount of information on how they are dealing with climate change. Still, there is growing demand by investors for standardized metrics that allow comparison across companies.

Investors are the “arbiters of materiality” and “have been overwhelmingly clear in their views that climate risk and other ESG matters are material to their investment and voting decisions”, said Allison Herren Lee, SEC commissioner.

The SEC proposals will go through a lengthy public comment period until final rules are agreed upon.

Banking regulators to provide supervisory guidance

Banking regulators are also hard at work on climate risk. The two primary agencies, the Federal Reserve and the Office of the Comptroller of the Currency (OCC), last year created new units dedicated to climate risk. At the Fed, the Supervision Climate Committee has been working with large U.S. banks, foreign regulators and climate experts to better understand how to use climate “scenario analysis” in its supervision of banks. Fed officials have acknowledged they are behind the curve and are incorporating the efforts of EU and UK regulators in this area.

“Several foreign regulators have already undertaken climate scenario analysis, affording us the opportunity to learn from their experiences,” Lael Brainard, Fed governor, said in October. Brainard has been nominated as Fed vice chair, putting her into an influential role in steering the central bank’s climate policies.

“It will be helpful to move ahead with the first generation of climate scenario analysis to identify risks and potential issues and to inform subsequent refinements to our models and data,” Brainard said.

Quite when the Fed will unveil how scenario analysis guides its supervisory process is unclear. What is clear is that the Fed is a long way from incorporating climate risk into its bank stress-testing exercises — something already underway at the ECB and the Bank of England.

The other top bank regulator, the OCC, announced high-level supervisory guidance on climate risk in December, paving the way for more detailed rules latter in 2022. Large U.S. banks — those with more than $100 billion in assets — will have to integrate climate financial risk assessments into every aspect of their work under the new draft supervisory guidance proposed by the agency.

The principles touch on everything from how climate change affects boardroom governance, liquidity, credit and operational risk, to the way banks project hypothetical future losses on their books and their ability to serve poorer communities.

The principles were notable in their emphasis on corporate governance and management accountability.

“Sound governance includes reviewing information necessary to oversee the bank, allocating appropriate resources, assigning climate-related financial risk responsibilities throughout the organisation … and clearly communicating to staff regarding climate-related impacts to the bank’s risk profile,” the guidance said.

“Responsibility and accountability may be integrated within existing organizational structures or by establishing new structures for climate-related financial risks. Where dedicated units are established, the board and management should clearly define these units’ responsibilities and interaction with existing governance structures,” the regulator said.

The Fed said separately that it would also review the feedback the OCC receives and will work on a consistent set of standards for bank supervisors regarding climate risk management.



The Monetary Authority of Singapore (MAS) is to set out a road map for mandatory climate-related financial disclosures for finance companies in the city-state, with the aim of embedding climate risk considerations into its supervisory framework. The authorities also plan to conduct stress tests for the finance sector in 2022 under a range of climate scenarios, a senior official at MAS said.

The city-state is supporting capacity-building among central banks and supervisors “in addressing environmental risks, such as through the COP26 Climate Training Alliance initiative,” said Ravi Menon, managing director of MAS.

Menon will also chair the Network for Greening the Financial System (NGFS) for a two-year term starting from this year, and will focus the organisation’s efforts on helping to enhance climate and environmental risk management in the finance industry, MAS said. The Singaporean central bank was one of the eight founding members of the NGFS and has been an active participant across its workstreams.

These efforts will be backed by the Singapore Green Plan 2030, which aims to build a sustainable and financially resilient Singapore. The plan strengthens the city-state’s commitments under the U.N. 2030 Sustainable Development Agenda and the Paris Accord. Specifically, this will help to halve carbon emissions from 2010 levels by 2030, and reach net zero around 2050.

The city-state has just launched the Climate Impact X initiative, an international carbon exchange and marketplace that was forged by local stakeholders — the Singapore Exchange, DBS, Standard Chartered and Temasek Holdings. The nascent carbon market is expected to demonstrate the potential of trading within a voluntary carbon market to achieve carbon emission reductions, attracting market participants to trade carbon credits around the Southeast Asian region.

The Singaporean authorities have augmented their green efforts by issuing a proposed taxonomy and an environmental risk management handbook which offers guidance to banks, insurers and asset managers on upholding the green finance blueprint in the city-state.

Hong Kong and China

Elsewhere in Asia, Hong Kong is also expected to play a significant role in the expansion of China’s carbon emissions trading market, as part of the nation’s efforts to combat climate change, according to a policy expert at the Asia Securities Industry and Financial Markets Association (ASIFMA).

China launched its emissions trading scheme in July for the power generation sector, and is expected to expand this to other sectors with support from Hong Kong in the coming years.

“It has definitely been discussed at the regulatory and governmental level [between the mainland and Hong Kong governments], though this is still under discussion,” said Matthew Chan, head of public policy and regulatory affairs at ASIFMA in Hong Kong. There is a strong opportunity for Hong Kong to play an essential role in facilitating investment and providing liquidity in the carbon emissions trading market in the Guangdong-Hong Kong-Macao Greater Bay Area, China.

The Chinese securities regulator has published a portfolio of projects that is expected to be supported by green bond financing, as part of the country’s pledge to achieve carbon neutrality by 2060. The list was released following China’s launch of a green innovation reform package that focuses on developing environmental-friendly sectors, including renewable energy technology.

In Hong Kong, green finance has been high on the regulatory agenda set out by the Securities and Futures Commission (SFC), with the aim of launching ESG-focused investment fund portfolios and managing and disclosing climate-related risks in the years ahead.

The city’s Green and Sustainable Finance Centre, jointly established by the SFC and the Hong Kong Monetary Authority in July, will in the longer term serve as a repository for resources, data and analytics which support the carbon-neutral economic transition to a more sustainable development pathway.

Hong Kong’s climate action blueprint 2050 launched at the end of 2021 will also help boost the city’s carbon neutrality goals and support a swathe of initiatives to develop it as a green finance hub in the Greater Bay Area.

About the authors

Henry Engler is senior editor at Thomson Reuters Regulatory Intelligence.

Lindsey Rogerson is senior editor at Thomson Reuters Regulatory Intelligence.

Yixiang Zeng is senior correspondent at Thomson Reuters Regulatory Intelligence.

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