EU proposes new regulations to strengthen taxonomy and provide oversight for the ESG ratings industry
The EU announced new regulatory changes to improve its climate taxonomy regulations, adding additional climate positive activities that can form part of a company’s environmental classification. Among these new criteria were the sustainable use of water, the transition to a circular economy and the protection of biodiversity.
These regulations will add additional oversight for the ESG industry, requiring all ESG ratings companies to be registered with a central EU agency.
The changes are intended to provide additional transparency in the sustainable finance industry and more usability to the EU’s complex network of financial laws. As quoted in FinTech Global, Commissioner for Financial Services, Financial Stability and Capital Markets Mairead McGuinness said that enhancing the coherence of the sustainable finance framework in Europe was a “key priority”.
Hopes of substantive progress at the recent climate talks in Bonn, organised by the UN and upcoming COP28 hosts the UAE, have been dashed as attendees failed to reach agreement on any specific agenda item. The event, which many saw as a prelude to larger talks at COP28, has worried many – especially given pessimistic signals from the UN climate chief, who said he was ‘dissatisfied’ with the proceedings.
Long before COP28 has even started, the event has been mired in scandal. The source of much of this tension comes from this year’s host, the UAE and its representative, Sultan Al-Jaber, who is also head of the Abu Dhabi National Oil Company (ADNOC). Many have argued that his leadership of a large oil company represents an unavoidable conflict of interest, and that his presidency has signalled a larger role for oil and gas in a conference that some hoped would phase out fossil fuels altogether.
Last week, The Guardian revealed that the COP28 organisation and ADNOC shared an email server and the oil company had access to internal emails and press requests. These revelations seem to indicate an uphill battle for those hoping for climate positive regulations.
Think-tank Planet Tracker released a new report that analysed almost 3,900 companies to assess the global distribution of environmental harms across the textile value chain.
Following the Thread found a significant discrepancy between the location of negative environmental impacts and the location of capital within the supply chain. Finding that fabric manufacturers and fibre producers were responsible for the lion’s share of environmental impact and yet very little of its market capitalisation.
Regulators are adopting an increasingly aggressive approach towards the supply chain impacts of many of these companies, most recently seen in the European Commission Directive on corporate sustainability due diligence,
Planet Tracker called on retailers to do more to meaningfully invest in their supply chains to reduce these harms, which will reduce significant reputational risk and net positive savings in the near term.
Worldwide carbon markets continue to grow across the world, with almost 25% of all CO2 released covered by some kind of pricing mechanism. These initiatives attempt to add a market incentive for companies to drive down emissions, with the eventual aim of making it so punitive for a company to be a large emitter (and so profitable for its competitors) that it will reduce emissions across the board.
The EU’s Emissions Trading System (ETS) is by far the most extensive of these initiatives, which regulators are continually trying to expand. As a result of impending regulations, the price of carbon in the EU briefly reached €100 per tonne earlier this year.
While debate still exists whether these markets are contributing positively to the economy, or simply driving speculation, it is undeniable they have become very appealing to worldwide policymakers and businesses seeking to boost their green profile.