Regulations & Resources
Climate-related regulations for the financial sector
10 minute read Financial regulators across the world are intensifying their focus on climate risk. Regulators are focusing on both the physical risks of climate change such as extreme weather and the risks to companies from the transition to a net-zero economy.
- Where are the world’s climate leaders?
- What the IPCC report on climate change impacts means for investors
- Key provisions of the COP26 climate agreement
- COP26 week one recap
- COP26 national climate commitments tracker
- Keeping warming to 1.5°C will require big countries to quit coal
- What the latest IPCC report means for investors
- About the COP26 climate summit
- What is the role of emissions trading?
- Climate-related regulations for the financial sector
- The significance of nationally determined contributions
- Financial industry climate alliances and initiatives
- Climate reporting by capital-markets participants
- A glossary for getting to net-zero
The regulatory focus on climate risk is intensifying
Countries across the world are redoubling efforts to slow climate change by committing to sharp cuts in greenhouse-gas emissions and moving away from reliance on fossil fuels.
Central banks also are expanding their oversight. Many have begun to direct commercial banks and other regulated financial institutions to consider climate-related risks in their strategies, governance and risk management. Until recently, prudential rules have tended to be less specific on how banks should manage and disclose material risks to which they are exposed. Several central banks also are aligning their lending with global decarbonization goals.
Financial industry standard-setting bodies are proposing sustainability standards
Premium-listed companies required to report climate-related risks in line with the TCFD, starting in 2021. The Financial Conduct Authority has proposed to extend the requirement to standard-listed companies, as well as to asset managers, life insurers and pension providers. Requirement that asset managers and insurers who manage funds for pension schemes disclose climate-related financial risks and opportunities in line with the TCFD. On October 18, 2021, the government published an overview of its plan to create “an integrated framework for decision-useful disclosures on sustainability across the economy” that includes a roadmap for the framework’s rollout. The Bank of England has called on banks and insurers to explore three different climate scenarios, testing different combinations of physical and transition risks over a 30-year period. The bank also will use its portfolio of corporate bonds to incentivize companies to consider climate risk.
Overview of select climate-related regulatory and sustainability initiatives
| Regulation | Sustainability | |
|---|---|---|
| European Union | Market participants required to disclose environmental and social impacts of investment decisions; providers of products marketed as sustainable to include product and website disclosures, both starting March 10, 2021. Sustainability disclosures for climate benchmarks, starting Dec. 23, 2020 In April 2021, the European Commission (EC) published a series of proposals that aim to boost investment to sustainable businesses. The proposals include a new Corporate Sustainability Reporting Directive that would require companies whose securities are publicly listed in EU-regulated markets to disclose information about sustainability in their business. The proposals also would require that financial firms and advisers include sustainability in the investment advice they deliver to clients. The European Central Bank will carry out climate-related stress tests starting in 2022, as part of a series of proposals to infuse monetary policy with sustainability. | In July 2021, the EC published detailed plans to cut greenhouse gas emissions by 55% from 1990 levels by 2030, with the goal of reaching net-zero by 2050. The blueprint calls for, among other things, eliminating emissions from new cars completely by 2035, lowering the cap for the EU’s emissions trading scheme and phasing in a levy on specific products imported from countries with less-restrictive emissions standards. The proposals, which include new voluntary standards for green bonds, aim to enhance the resilience of the economy and financial system to sustainability risks. The EU, U.S. and other nations have committed to a collective goal of reducing global methane emissions by at least 30% from 2020 levels by 2030. |
| France | Financial market participants required to disclose alignment of strategies with Paris Agreement targets, to update greenhouse gas emission targets every five years until 2050, and to disclose fossil fuel-related activities. Financial institutions, including banks, asset managers and insurers, must disclose climate- and biodiversity-related risks. Both requirements start May 27, 2021. | |
| Germany | Has said it would look to develop consumer-friendly labeling for sustainable investments if the EU doesn’t develop so-called traffic-light labels as part of its disclosure regulation; proposes to require, as part of EU-wide rules, that all publicly traded companies and major corporations with limited liability to present audited sustainability reports. | Has published a sustainable finance strategy that aims, among other things, to shift roughly USD 10.6 billion managed by civil-service pension funds to sustainable indexes and to continue issuances of green bonds. |
| Switzerland | Plans to introduce mandatory climate reporting by large companies, banks and insurers based on the recommendations of the TCFD starting in financial year 2023. Has mandated disclosure by banks and insurers of climate-related financial risks, applies from May 31, 2021. The Swiss National Bank said in December 2020 it would begin to examine climate risk in the stability of the country's banking system. The bank also has said it would discontinue investment in companies that mine coal. | |
| United Kingdom | The largest companies and financial institutions will be required to disclose their climate-related risks and opportunities in line with the TCFD starting in April 2022. On October 18, 2021, the government published an overview of its plan to create "an integrated framework for decision-useful disclosures on sustainability across the economy" that includes a roadmap for the framework's rollout. The Bank of England has called on banks and insurers to explore three different climate scenarios, testing different combinations of physical and transition risks over a 30-year period. The bank also will use its portfolio of corporate bonds to incentivize companies to consider climate risk. | The government aims to cut emissions by 78% (from 1990 levels) by 2035, and to reach net-zero emissions by 2050. |
| United States | The Securities and Exchange Commission is reviewing public comment from investors and other market participants on climate change disclosure. The agency chairman has asked the agency’s staff to consider whether publicly listed companies should be required to disclose a variety of quantitative and qualitative climate-related information in their annual financial reports. The Financial Stability Oversight Council, a group of the nation's top financial regulators, reported on Oct. 21, 2021, that climate change is an emerging and increasing threat to financial stability. The council, which includes the leaders of the Federal Reserve, the SEC and banking regulators, recommended that regulators use scenario analysis to evaluate the need for new or revised regulations or supervisory guidance. The Federal Reserve has established committees to identify, assess and address both microprudential and macroprudential risks from climate change. | The Biden Administration has mapped out a strategy to keep 1.5°C within reach through three decades of investment in clean power, reduced carbon emissions, innovation in transportation and building, and strengthening of working lands. The administration has set a target of bringing greenhouse gas emissions for the power sector to net-zero by 2035, by which time it has proposed to produce nearly half the nation's electricity from solar energy. Infrastructure legislation signed by the president on Nov. 15 contains investments that would contribute to emissions reductions, including USD 90 billion for public transit, USD 66 billion in rail funding and USD 7.5 billion for a national network of electric vehicle chargers. Legislation still being negotiated in Congress proposes an additional $555 billion in incentives for reducing greenhouse gas emissions and decarbonizing energy. The U.S., EU and other nations have committed to a collective goal of reducing global methane emissions by at least 30% from 2020 levels by 2030. |
| New York Department of Financial Services | Has directed financial institutions under its supervision to start integrating the financial risks from climate change into their governance frameworks, risk management processes, and business strategies, starting October 2020. | |
| Canada | The Office of the Superintendent of Financial Institutions (OSFI) has sought comment from market participants and the public on climate-related risk in the financial sector; comment deadline was April 12, 2021 The Bank of Canada has teamed with the OSFI to pilot climate-risk scenarios with plans to report on the pilot by the end of 2021. | The government has announced plans to cut greenhouse gas emissions by 40 to 45% below 2005 levels by 2030, as part of a series of actions to reach net-zero emissions by 2050. |
| Mexico | Banco de Mexico has called upon financial institutions to make a collective effort to incorporate environmental issues into their risk assessment and corporate governance strategies, as well as to take advantage of the opportunities that would result from the transition to a low-carbon economy. | |
| Brazil | Licensed financial institutions required to have social and environmental responsibility risk-management systems in place. | The government has pledged to end illegal deforestation by 2028, halve greenhouse gas emissions by 2030 and achieve net-zero by 2050. |
| New Zealand | The government has introduced legislation to make climate-related disclosures mandatory starting in 2023 for publicly listed companies and large insurers, banks, non-bank deposit takers and investment managers. The Reserve Bank of New Zealand has added climate risk to its bank stress-testing program. The bank also has invested USD 100 million in green bonds. | Has pledged to reduce greenhouse gas emissions by 50% below 2005 gross levels by 2030, with a commitment to reach net-zero emissions by 2050, as part of a program for addressing climate change nationwide. |
| Australia | The Australian Securities and Investments Commission recommends that listed companies disclose meaningful and useful climate-risk-related information to investors, and strongly encourages listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework The Australian Prudential Regulatory Authority is increasing its scrutiny of institutions' climate risk management and will factor this into its ongoing supervisory activities; governs banks, credit unions and insurers. | Investing USD 3.5 billion in a package of climate-change mitigation policies as part of achieving its goal of cutting greenhouse gas emissions by 26 to 28% by 2030, with the goal of reaching net-zero emissions by 2050. |
| Japan | Ministry of Economy, Trade and Industry has published guidance for reporting by capital-markets participants pursuant to the TCFD. The Bank of Japan has announced that starting in 2021, supervision of financial institutions will include examination of climate risk. The bank also said it would buy green bonds as part of an initiative to boost investment aimed at countering climate change. | The government has published a Green Growth Strategy, which outlines at a high level how the country aims to reach net-zero emissions by 2050. |
| China | Publicly listed "key polluting companies" required to disclose information about their carbon emissions; other publicly listed companies to voluntarily disclose information in their annual and semiannual reports about their impact on the environment, including efforts to reduce carbon emissions, their efforts to alleviate poverty and revitalize rural areas, and how they fulfill their responsibilities to employees, suppliers, customers and other stakeholders. The People’s Bank of China is considering including climate stress tests in its examination of financial institutions and is running a pilot with some institutions that aims to measure the climate risks and emissions of their projects. | Has announced plans to source 25% of its energy from non-fossil fuel sources by 2030, with the goal of reaching net-zero emissions by 2060. |
| Hong Kong | ESG funds required to disclose their focus, investment strategy, asset allocation, risks and reference benchmarks. Climate-related funds also must disclose the indicators they rely on and explain how any benchmark they rely on relates to the fund's climate-related focus. Both requirements slated to start in January 2022. | Has announced several initiatives for green finance that include support for a sustainability disclosure standard under development by the IFRS Foundation. |
| Singapore | The Monetary Authority of Singapore has issued guidance for climate-related disclosures by banks, asset managers and insurance companies in line with the TCFD. | The Monetary Authority’s Green Finance Taskforce has recommended a roadmap for scaling green finance in the real estate, infrastructure, fund management and transition sectors. |
| India | The 1,000 largest listed companies by market value must report sustainability risks starting in 2023. | The government has set a target of reaching net-zero emissions by 2070. That includes a national action plan on climate change that encompasses eight missions, ranging from enhanced energy efficiency to sustainable agriculture, together with a pledge both to reduce the carbon emissions intensity of its gross domestic product by 45% below 2005 levels and to source half of its energy requirements from renewables by 2030. |
| South Korea | ESG reporting mandatory starting in 2030 for all companies listed in the Korea Composite Stock Price Index; voluntary reporting until 2025; mandatory from 2026 to 2029 for all companies with assets of KRW 2 trillion. The Financial Services Commission has said it would introduce best-practice guidelines on green finance, together with a guideline on climate risk management and oversight plan for financial institutions, in the third quarter of 2021. | The government is developing a taxonomy for green finance that would support investment and lending to projects and businesses rooted in sustainability. |
| Malaysia | Bank Negara Malaysia has published a climate change and principles-based taxonomy that requires licensed banks, insurers and other regulated financial institutions to assess the impact of lending, investment and other capital-markets transactions on the climate starting April 30, 2021. | |
| Russia | Russia put forward plans in March 2020 to reduce greenhouse gas emissions by 33% from 1990 levels by 2030, with the goal of achieving "carbon neutrality in the second half of the 21st century, closer to its end." The government said it would increase its use of renewable energy for large-scale electrification, as well as reduce clear-cutting of forests. The country reportedly is considering unveiling at COP26 a goal of reaching net-zero emissions by 2060. | |
| Saudi Arabia | The Kingdom has pledged to achieve net-zero emissions by 2060, and joined the Global Methane Pledge, the EU- and U.S.-backed initiative to cut global methane emissions 30% by 2030. | |
| Indonesia | The government has pledged to reach net-zero emissions by 2060, with a goal of using renewable sources for 23% of energy use by 2025, and 57% by 2035. |
Additional authorities
| International Organization of Securities Commissions | Collaborating with IFRS to facilitate the prototype climate-related disclosure standard. |
| European Banking Authority | Reviewing public comment on disclosure standards for climate risk. |
| Network for Greening the Financial System | Has published climate scenarios for central banks and supervisors. |
Continue reading
- Climate Risk and the Fed: Preparing for an Uncertain Certainty. The president of the Federal Reserve Bank of San Francisco discusses how a changing climate poses a significant risk to the global economy and financial system.
- Climate and Global Financial Markets. The chair of the Securities and Exchange Commission discusses how his agency is responding to demand from investors for information about climate risk that publicly listed companies face.
- Shades of Green: Investor Approaches to ESG. A discussion of regional differences in sustainability reporting.
- Who Will Regulate ESG? Regulation of environmental, social and governance risks is rising across the world. This interactive map from MSCI shows the growth in such regulations over the decade that ended in 2020.
