What happened in climate-related financial regulation last month, and what’s coming up

The US Securities and Exchange Commission (SEC) extended the public comment period for its proposed rule on climate risk disclosures to June 17. This followed comments from stakeholders arguing that the original 39-day comment period was too short to consider a rule of this magnitude.

On May 25, the SEC issued a separate proposed rule to enhance and standardize the disclosures made by ESG funds and investment advisors using ESG strategies. The proposal aims to stamp out greenwashing and improve investors’ understanding of how fund providers incorporate climate- and sustainability-related factors into their products.

Climate-focused funds would be forced to disclose their carbon footprints and weighted average carbon intensities under the rule.

The comment period for the proposed rule is open for at least 60 days upon its publication in the Federal Register.


US President Biden’s pick to serve as Vice Chair for Supervision at the Federal Reserve told lawmakers that the central bank’s authorities to drive the low-carbon transition are “limited [and] narrow.”

At a Senate Banking Committee hearing on May 19, nominee Michael Barr said in response to a question on the subject: “I think the Federal Reserve is not able to allocate credit, [and] should not be in the business of telling financial institutions to lend to a particular sector or not to lend to a particular sector.”

When asked about the Fed’s efforts regarding climate-related scenario analysis of the US financial system, Barr said its “only purpose” should be to “understand risks that climate might pose to the financial system and to work with financial institutions on measures to manage those risks.”

Barr is currently the dean of the Gerald R. Ford School of Public Policy and a law professor. He previously served in the Obama administration as the Treasury’s assistant secretary for financial institutions, where he helped develop legislation regulating Wall Street.


The US Commodity Futures Trading Commission (CFTC) announced its first-ever meeting to discuss the trading of carbon offsets and carbon derivatives will take place on June 2.

The agenda will cover the supply and demand for high-quality carbon offsets, product standardization, and the data required to substantiate offsets’ greenhouse gas (GHG) reduction claims. 

Participants will include representatives from carbon offset standard-setters, a carbon registry, private sector carbon offset integrity initiatives, and exchange platforms, among others.


Canada’s Office of the Superintendent of Financial Institutions (OSFI) released draft guidelines on climate risk management for federally regulated firms on May 26.

These include the regulator’s expectations of banks and insurers when it comes to their climate governance, risk management, and disclosures. The guidelines also tell firms to use climate scenario analysis “on a regular basis” to gauge their climate risks and inform their risk management. 

The climate disclosure guidelines are based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the exposure draft recently issued by the International Sustainability Standards Board (ISSB).

The guidelines are open for public comment until August 19.

The Bank of England (BoE) published the results of its inaugural climate stress test on May 24. This revealed that major UK financial institutions could see their annual profits fall by 10-15% on average because of intensifying climate transition and physical risks.

The test, known as the Climate Biennial Exploratory Scenario (CBES), covered UK banks and insurers including HSBC, Barclays, Aviva, and Legal & General. Participants were tested against three climate pathways — an ‘Early Action’ scenario, a ‘Late Action’ scenario, and a ‘No Additional Action’ scenario. Participants were told to estimate the performance of their lending and investing portfolios under these scenarios over a 30-year time horizon.

Overall, losses were projected to be highest under the Late Action scenario for banks, with cumulative loan impairment rates more than doubling over the 30-year period. Life and general insurers were projected to take the biggest hit under the No Additional Action scenario. General insurance participants estimated a spike in average annualized losses of 50-70% by the end of this scenario.

The BoE said the CBES showed that climate risks “could make individual firms, and the financial system overall, more vulnerable to other future shocks.” 

In a speech on May 3, an official on the BoE’s Financial Policy Committee (FPC) said the central bank has a responsibility to “build resilience to climate-related financial risks” and promote the low-carbon transition.

Elisabeth Stheeman, an external member of the FPC, said the group is “well-placed” to tackle climate risks as these have similar characteristics to the other financial stability risks the Committee tackles.

She added that the FPC will be analyzing the results of the CBES in order to understand “the extent of the exposures in the financial system to climate-related risks.”

On May 27, the BoE published the minutes of the third meeting of the Climate Financial Risk Forum (CFRF), an industry group jointly led by the UK Financial Conduct Authority and the BoE’s own Prudential Regulation Authority.

The CFRF heard reports from its three working groups, one focused on the transition to net zero, one on disclosure, data, and metrics, and a third on scenario analysis. The latter group said it would launch an online scenario analysis narrative tool for financial institutions in June, and also produce a paper with lessons learned from the CBES.

The next CFRF meeting will be held in July.


The UK’s Transition Plan Taskforce (TPT) launched a consultation on a “Sector-Neutral Framework” for companies that are producing climate transition plans.

Released on May 11, the framework includes a prospective definition of a transition plan, a set of principles for preparers and users of transition plans to follow, and a list of the key elements that these plans should cover. 

These elements include the overall ambition of a company’s transition plan and how their internal activities and policies support its achievement. The TPT said it wants the framework to cover “all the decision-useful information that external stakeholders require to assess the credibility of transition plans.”

The consultation closes on July 13.


The European Central Bank (ECB) warned that greenwashing could imperil financial stability by duping market participants into undervaluing climate transition risks. This in turn could spark a fire-sale of green bonds, throwing financial markets into disarray.

In its latest Financial Stability Review, published May 25, the ECB provided an overview of climate-related threats to European banks and other financial institutions and markets. To combat greenwashing risk, the ECB supported a “common regulatory standard” to give “assurance that green bonds effectively finance the transition and alleviate risks to financial stability.” The European Union (EU) Green Bond Standard, put forward by the European Commission in 2020, offers the sort of assurance sought, the ECB said. 

The Financial Stability Review also said that EU banks’ loan portfolios have become more carbon intensive since 2018. While a handful of lenders have significantly decarbonized their portfolios, two-thirds of banks were found to have increased their loan-weighted emissions, the ECB reported. This in turn implies that climate transition risks to banks have ratcheted up in recent years.

The ECB further warned that the concentration of climate-sensitive exposures in individual institutions could be vectors of financial instability. Its analysis revealed that banks with concentrated exposures to companies with high emission intensities are projected to suffer higher losses over a 30-year ‘disorderly transition’ scenario. Furthermore, about 35% of system-wide losses are projected to be endured by the 10% of banks with the highest sensitivity to rising carbon prices.

In a separate working paper published by the ECB on May 20, economists and staff at the central bank analyzed how different climate scenarios may influence financing conditions and affect the realization of certain climate outcomes.

The study forecast that a delayed, disorderly climate transition would limit companies’ ability to invest in low-carbon activities and slow efforts to abate GHG emissions. This is because in disorderly scenarios climate policies are assumed to be delayed until after 2030 and to cost more to implement, which slows GDP growth and causes the price of carbon to spike. Under these scenarios, interest rates are also assumed to rise, which could threaten financial stability.

The paper’s authors said these factors could cause banks to cut back on credit and investments in low-carbon energy technologies.


The European Banking Authority (EBA) published a discussion paper on May 2 setting out how the EU’s bank capital framework could be enhanced to harden lenders against climate-related risks.

The paper picked over the EU’s current Pillar 1 rules, which determine the minimum capital requirements all lenders have to abide by, and weighed their suitability when it comes to capturing the credit, market, and operational risks from climate change. 

The EBA concluded that within Pillar 1 rules there are already “mechanisms that allow the inclusion of new types of risk drivers,” including climate-related ones. It added that targeted enhancements to these rules could better protect banks from climate risks than “green supporting” or “brown penalizing” factors applied to select exposures.

The EBA opened the discussion paper for public comment until August 2.


On May 23, the European Securities and Markets Authority (ESMA) released a studyexploring why ESG funds sold in Europe are cheaper to own and perform better relative to other funds.

The study found that ESG funds are focused on large companies and developed economies, factors which are correlated with lower ongoing costs. However, even controlling for these factors ESG funds were statistically cheaper and better performing than non-ESG funds between April 2019 and September 2021.

In 2020, the gross annual performance of ESG retail equity funds hit 3.3%, compared with 0.8% for non-ESG funds. The total costs for the former were 1.5% and for the latter 1.8%. The analysis also found that funds with higher environmental risk had higher performance. ESMA said this can be explained by the outperformance of funds focused on controlling ‘Social’ or ‘Governance’ ESG risks over the studied period.

On May 31, ESMA published a guide to help EU member state authorities effectively supervise sustainable funds. This included a briefing on the supervision of fund documentation, marketing material, and the use of sustainability-related terms in funds’ names. 


The European Insurance and Occupational Pensions Authority (EIOPA) published a first-of-its-kind analysis of European insurers’ exposure to physical climate-related hazards like windstorm, wildfire, river flood, and coastal flood.

This found that many companies have a poor understanding of these risks. More than 50% of the insurers that took part in the exercise have not conducted any climate change analyses to date, and a “substantial share” were unable to produce “a qualitative assessment on global developments and very often struggled to provide data and assessment at a level of granularity required for an in-depth assessment of the [climate] risks.”

EIOPA’s findings were based on quantitative and qualitative data from 44 major European insurance groups and solo entities with relevant exposure to fire and other damages to property businesses.


The three European Supervisory Authorities (ESAs) published draft standards on mandatory climate-related disclosures for certain types of securitizations on May 2.

The standards cover the content, methodologies, and presentation of information on the adverse impacts to the climate (and other sustainability factors) that could arise from the assets that underpin securitizations labeled “simple, transparent, and standardized” (STS) under EU rules. The intent is to standardize the style and type of climate and sustainability disclosures produced by the originators of STS securitizations and help investors compare and contrast the climate impacts of different products.

The consultation closes July 2.

The Bank of Japan (BoJ) issued a climate report in English aligned with the recommendations of the TCFD.

Released May 27, the report laid out the central bank’s climate governance, strategy, risk management, and metrics and targets. Under the latter category, the BoJ reported its Scope 1 and 2 emissions, but not the emissions of its reserve or policy portfolios, unlike some of its peers.

Under risk management, the BoJ said it is having “in-depth discussions” with banks and firms on their efforts addressing climate-related risks and “will encourage financial institutions to develop their climate scenario analyses in line with their size and characteristics.”


The Reserve Bank of New Zealand (RBNZ) said it would conduct a series of climate change sensitivity analyses of lenders under its supervision as part of its 2022 stress test program.

In a Financial Stability Report published on May 4, the central bank said the analyses would focus on the financial impacts of coastal and river flooding on banks’ mortgage exposures, and the effects that drought conditions and emissions pricing may have on their agricultural exposures. The RBNZ said the results would be used to inform a full-bore climate change stress test “at a later date.”

In 2021, the RBNZ incorporated back-to-back droughts in its regular stress test program for banks, and a series of major storms in its program for general insurers.


The Government of Hong Kong placed an inaugural retail green bond on May 18. The HKD$20 billion issuance was oversubscribed, with total applications from interested investors exceeding HKD$32.5 billion. The 3-year bond offers investors a 2.5% return on a minimum investment of HKD$10,000.

The proceeds will be used to finance or refinance projects that produce environmental benefits and support the sustainable development of Hong Kong.


The Green Finance Industry Taskforce (GFIT) set up by the Monetary Authority of Singapore (MAS) released a partial draft taxonomy for classifying climate-friendly economic activities on May 12. The taxonomy covers three of the eight “focus sectors” that are together responsible for 90% of Asia’s GHG emissions. The three sectors are energy, transport, and real estate.

The taxonomy uses a “traffic light” system to categorize activities in these sectors by their contribution to climate change mitigation. A green classification means the activity contributes substantially to climate change mitigation, an amber classification that the activity is either transitioning toward green within a set time period or is supporting significant emissions reductions in the short term, and a red classification that the activity is climate-harming and inconsistent with a net-zero emissions trajectory.  

The GFIT also released an accompanying user guide for financial institutions and companies to apply the taxonomy. This part of the taxonomy is open for public comment until June 23.

The Taskforce intends to publish the taxonomy for the remaining five sectors for public consultation later this year, and finalize the full taxonomy in 2023.

The Bank for International Settlements (BIS) kicked off its second annual Green Swan conference on May 31, featuring discussions on monetary policy setting against the backdrop of climate change and the role of finance in the climate transition. Speakers include Christine Lagarde, President of the ECB, Yi Gang, Governor of the People’s Bank of China, and Sarah Breeden from the BoE.

The second day of the conference can be watched here.


The Basel Committee on Banking Supervision (BCBS) finalized its principles for effective management and supervision of climate-related financial risks on May 31.

The panel of global banking regulators ran a consultation on its draft principles last November. For banks, the draft principles outlined how they should identify and quantify climate risks and integrate these into their internal capital and liquidity adequacy assessment processes. They also explained that banks should develop processes to weigh the “solvency impact” of climate risks that may manifest “within their capital planning horizons.”

The draft principles also instructed supervisors to run checks on banks to ensure they incorporate material climate risks into their business strategies, corporate governance, and internal control frameworks.

The BCBS said it would publish the finalized principles in the coming weeks.


The Network for Greening the Financial System (NGFS) published its work plan for the next two years on May 30.

The plan is split across four workstreams — covering supervisory practices on climate-related risks, climate scenario design and analysis, the implication of climate change on monetary policy, and guidance for central banks on transitioning to net zero — and two task forces, one on nature-related risks and another on capacity building and training.

The NGFS also published a report on May 19 on the financial industry’s attempts to find risk differentials between green and carbon-intensive assets. This concluded that there is “still limited empirical evidence” of such differentials ex-post and that financial institutions are turning to other methodologies to gauge the climate risks associated with different assets. For instance, the report found that almost two-thirds of the 97 financial institutions the NGFS surveyed already have, or plan to introduce, climate stress tests, scenario analyses, or sensitivity analyses to measure risks to green and non-green assets.

In a note also published on May 19, the NGFS published its observations of how credit rating agencies are integrating climate risks into their creditworthiness assessments.


The International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB) said they would “actively encourage” entities that disclose using their rules to embrace the Integrated Reporting Framework.

In an announcement on May 25, the standard-setters described how their takeover of the Value Reporting Foundation, which oversees the Integrated Reporting Framework, would influence their work going forward. The framework helps companies communicate their strategy, governance, performance, and future prospects in the context of their external environment, and inform stakeholders on how these foster value creation over time.

“We are convinced that the Integrated Reporting Framework drives high-quality corporate reporting and connectivity between financial statements and sustainability-related financial disclosures which improves the quality of information provided to investors,” said Emmanuel Faber, Chair of the ISSB, and Andreas Barckow, Chair of the IASB.

The International Financial Reporting Standards Foundation, which oversees the IASB and ISSB, announced that it would absorb the VRF and another voluntary disclosure framework provider, the Climate Disclosure Standards Board (CDSB) last November.


Members of the Financial Stability Board (FSB) discussed efforts to address climate-related financial risks at a series of meetings throughout May.

On May 24, the FSB Europe Group met in Stockholm and debated ways in which they could support the ISSB’s exposure draft on climate-related disclosures. They also reflected on the FSB’s April report on regulatory and supervisory approaches to climate-related financial risks. 

On May 20, the FSB Regional Consultative Group for Asia convened virtually and exchanged views on how the Board could best address emerging market economies’ perspectives on climate-related financial risks.

The FSB’s interim report on climate-related financial risks is open for consultation until June 30.