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Last year, regulators sought to bring more clarity, transparency and honesty to the use of terms such as ‘environmental, social and governance (ESG)’ and ‘green’.
This is how it was done. In January 2023, the UK Competition and Markets Authority announced plans to help better understand how consumer protection law can be used to tackle misleading environmental claims that affect consumers. .
In March 2023, the European Commission adopted a draft Green Claims Directive to ensure that “consumers receive reliable, comparable and verifiable environmental information about products”.
Given concerns about the transparency and quality of ESG ratings provided, on 30 March the UK Treasury launched a consultation on the future regulatory regime for ESG rating providers, with ESG rating providers being subject to the Financial Conduct Authority’s (FCA) It will be incorporated within the regulatory authority. .
On October 4, the Dutch Financial Markets Authority joined the fray, publishing a set of guidelines aimed at encouraging greater transparency about sustainability claims by Dutch financial institutions and pension providers.
And just before the end of the year, the FCA announced a new set of regulations based on sustainability disclosure requirements in December. These include: Includes updates to greenwashing regulations, product labeling, naming and marketing requirements. ” or “sustainable.”
Will more structure be added around the transition piece?
So what’s in store for us in 2024?
At COP28, held in Dubai in December, 198 countries[transition] It is committed to “divesting our energy system from fossil fuels in a just, orderly and fair manner” and will spend the next 12 months clarifying more clearly what “weaning” actually means. It should be possible.
Bryony Widdup and Rita Hunter, co-heads of sustainable finance and investments at law firm Hogan Lovell, predict the transition to net zero will be a major regulatory theme in 2024.
There isn’t really a market for transition financing in the UK or the EU… everything has been focused on having a “green” category.
“There is a lack of direction for transition funding,” Ms. Widdup said. “There is not really a market for transition financing in the UK or the EU. There is no sufficiently secure taxonomy for transition or consistent policy direction or policy incentives to increase the expected return on investment in that area. Everything is focused on having a “green” category. ”
She believes that in 2024, the transition part will become more structured in terms of what the transition is, the ideal outcomes for the transition over the next decade, which aspects of the energy transition are most focused on, and other long-term net-zero investments. I expect that it will become a reality. .
Ms Widdup said the idea behind transition financing is to have loans and proceeds that go towards projects, but those projects must have a structure that links them to the net zero transition in a formal way. Ta.
“But if you’re trying to do it for big coal companies or other energy companies, the whole conversation around greenwashing is that it’s very difficult to say, ‘We’re funding Shell with green loans.’ So how does that work from a public perspective or from a risk and liability perspective?”
The UK Transition Planning Taskforce (TPT) sector guidance, which is open for public consultation until 29 December, provides businesses with guidance on how they can use their finances to fund the transformation needed to progress their journey to net zero. It states that it is necessary to prove that the company intends to procure such products. The final guidance document should be published in February after consultation.
What are transition activities?
Widdup says this provides an opportunity to raise money in a more structured way, something that has been lacking previously. “We didn’t have a consistent idea of what a quality transition plan was or a common understanding of transition classification,” she explains.
“TPT provides a framework, content for considering climate and nature risks, and a method for identifying relevant factors using the Task Force on Climate-Related Financial Disclosures and the Task Force on Nature-Related Financial Disclosures as a background framework. “I do,” she explains.
James Hay, sustainable finance advisor at investment advisor Pinsent Masons, said that companies should not view transition plans as just a disclosure document, but that the act of transition planning can help companies seize opportunities and build resilience. They say they should recognize how supporting them can strengthen their business strategies.
“Given that migration planning is currently voluntary, elevating migration planning to a core element of business strategy is an essential element to get started quickly – a call to action rooted in good business. ” he points out.
The EU taxonomy has sought to clarify what constitutes a “transitional” activity. Examples include building renovations and low-carbon buses (emitting less than 50g of CO2) for intercity transportation.2 emissions per kilometer), low carbon cement production (less than 0.498 tonnes of CO)2 per tonne of cement), but Hunter says this has not been a key focus from an industry perspective.
However, how transition activities will be rewarded under the EU’s taxonomy is likely to be debated, with some energy companies pushing coal-dependent economies to reduce carbon emissions and air pollutants. They argue that gas should be included as a “transitional” fuel. But environmentalists say gas should be replaced with cleaner energy, such as renewable energy.
But should coal and oil companies need to take out loans to support the transition?
“There’s a perception that it’s a bad thing for banks to fund oil companies. But if we take that away and ask what are we trying to accomplish? There’s a lot to be said about funding companies so they can develop technology. [transition]” says Hunter.
Integrating social and environmental considerations
One of the benefits of TPT guidance for banks is that it creates an easily comparable set of data points from the underlying companies in the portfolio. “However, this is not a globally mandated standard,” Hunter points out. “Banks will therefore need to map the TPT guidance to European reporting technical standards.”
But what has not yet been fully addressed, Ms Widdup added, is that this is just a transitional part – how to integrate social and environmental considerations. “Integrating Indigenous rights, views and skills remains an under-represented priority in conversations about biodiversity and nature. We don’t hear it enough in conversations,” she says.
She explains that caring for nature and biodiversity can be a huge burden for people who still don’t report their emissions. “But biodiversity and nature are important for climate. These are not independent topics. Nature’s works will help drive the climate front.”
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