Key news in this edition:
- EU lawmakers reach an agreement to regulate ESG ratings providers.
- China releases carbon emissions trading regulations.
- Kazakh ratings assignments demonstrate growing focus on ESG at major SOEs.
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Europe
EU lawmakers reach an agreement to regulate ESG ratings providers
On 5 February, the European Parliament and the Council of the European Union reached a provisional agreement on a proposal for the regulation of ESG rating activities. The primary objective of the proposed regulation is to boost investor confidence in sustainable products. Under the new regulation, ESG rating providers will be authorised and supervised by the European Securities and Markets Authority (ESMA), and have to comply with transparency requirements, in particular with regard to their methodology and sources of information. ESG rating providers established outside the EU that wish to operate in the common market will need to obtain an endorsement of their rating methodology by an EU-authorised ESG rating provider. The proposal also introduces a principle of separation of ESG rating activities from other services, including consulting, audit, investment, or credit rating activities, in order to prevent any conflicts of interests.
The provisional agreement is subject to initial approval by the Council of the European Union and the European Parliament, followed by the full legislative procedure. Its provisions are expected to start applying 18 months from adoption. This regulation will help to address mounting criticism of ESG ratings for a lack of standardisation and transparency that can result in the same company receiving very different ratings from different providers. However, the information used to generate the ratings will still not be based off double materiality and will continue to rely upon self-reported data.
The European Council delays the vote on Corporate Sustainability Due Diligence Directive
The European Council delayed the vote on the Corporate Sustainability Due Diligence Directive (CSDDD) scheduled for 9 February 2024, following the indications that Germany and Italy would abstain from the vote. German political leaders have claimed that the EU regulations on sustainability put an excessive administrative burden on businesses. According to EU voting rules, a qualified majority of 55 percent of member states, representing at least 65 percent of the EU population is needed for the bill to proceed to a final vote in the European Parliament. Germany is reportedly not able to block the directive alone, but may find support from other members known to be sceptics of the regulation, such as Finland, Austria, and Sweden. The voting is expected to take place at the next meeting on 14 February.
Sub-saharan africa
Climate Investment Funds endorse Kenya’s USD 70 million Clean Energy Transition Plan
On 31 January, the Trust Fund Committee of the Climate Investment Funds, a multilateral fund which sponsors climate initiatives in low and middle income countries, endorsed Kenya’s USD 70 million clean energy transition plan with an initial allocation of USD 46.39 million.
The endorsement forms part of the Renewable Energy Integration investment program and will finance Kenyan efforts to provide clean, affordable, and reliable electricity throughout the country. Although Kenya currently has a 90 percent share of renewable energy, it faces challenges with dispatching surplus energy and grid stability. The Renewable Energy Integration is expected to focus on these issues. The deployment of the program will also support Kenya’s target to reduce greenhouse gas emissions by 32 percent by 2030, and eventually achieve net zero emissions by 2050.
An additional USD 243 million is expected to be mobilised through the African Development Bank, the World Bank Group, and the public and private sectors.
Russia and the CIS
Kazakh ratings assignments demonstrate growing focus on ESG at major SOEs
In December 2023, the ratings agency Fitch announced ESG ratings for several of Kazakhstan’s leading state-owned enterprises. Fitch assigned the Development Bank of Kazakhstan and the Baiterek Holding Company a rating of 3 with scores of 60 and 57, respectively. The rating and scores place the institutions in the middle of Fitch’s ratings scale. According to the announcements, these ratings reflect a growing focus on ESG matters – including green financing – from two of the Kazakh government’s leading investment vehicles. These are not the only ESG ratings received by leading Kazakh state-owned enterprises in recent months. In September 2023, S&P Global assigned a 51 out of 100 rating to the state-owned electricity provider Kazakhstan Electricity Grid Operating Company, and in December 2022, awarded the same score to the state-controlled uranium miner KazAtomProm.
Asia Pacific
China releases carbon emissions trading regulations
On 5 January, China’s State Council adopted new regulations to govern carbon emission trading. Known officially as the interim regulation on the management of carbon emissions trading, the new act implements a supervisory system that mandates market participants to put in place data quality control plans. The set of rules also gives the Ministry of Ecology and Environment and its local environment departments power to investigate and punish companies which fabricate or falsify data – with extended oversight to third-party firms involved in monitoring and verifying emissions. The new rules will take effect on 1 May 2024.
The act is part of a legal framework for the emission trading scheme (‘ETS’) that began operating in 2021. Currently, the ETS only covers around 2,000 electricity-generation companies that jointly emit over 5 billion metric tons of carbon dioxide annually. Chinese authorities plan to expand the scheme to other heavily emitting sectors.
China relaunches voluntary carbon-credit market for the first time since 2017
On 22 January, the Chinese government reopened its voluntary carbon trading platform, also known as China Certified Emission Reduction (‘CCER’) scheme, after it was suspended in 2017 due to low trading volume and a lack of standardisation in carbon audits. According to reports, the scheme is mainly open to entities in four major fields, including afforestation, solar power generation, offshore wind power generation, and mangrove planting. The revamped scheme also now allows any enterprise to purchase carbon credits to offset its emissions, as opposed to limiting it to businesses covered under China’s compulsory national carbon trading market.
Hong Kong unveils green finance action plan
On 8 January 2024, the Hong Kong Monetary Authority announced an action plan to capture financing and investment opportunities related to the low carbon transition within the Asia Pacific region. The action plan has three key initiatives, which include adjusting International Financial Reporting Standards (‘IFRS’) Sustainability Disclosure Standards to local circumstances in Hong Kong; leveraging technology to support sustainability reporting and data analysis; and, supporting the development of transition finance to consolidate Hong Kong’s role as a leading sustainable finance hub. The Hong Kong Monetary Authority states that it identifies transition finance as a priority for 2024.
Americas
Brazilian government announces further efforts to protect native Yanomami tribe from illegal mining
On 9 January 2024, the Brazilian government announced that it will establish a permanent presence in the territories inhabited by the indigenous Yanomami people in the state of Roraima, northern Brazil. The government is seeking to stop illegal mining and to guarantee the protection of the native population in the region. In total, the authorities pledged the investment of BRL 1.2 billion (USD 240.9 million) to strengthen public health, inspection, and territorial control. According to the Ministry of Environment and Climate Change, members of the Brazilian armed forces and the federal police will be permanently stationed in the region. The plan also includes creation of an “integrated governance space” for federal agencies in the area.
Since early 2023, the Brazilian authorities have actively attempted to mitigate the humanitarian crisis endured by the Yanomami. In total, since February 2023, federal bodies under the Brazilian Ministry of Environment and Climate Change have carried out over 300 inspections and issued around 180 notices for environmental violations in the region. Fines imposed for the same period total approximately BRL 61.2 million (USD 12.3 million) and over BRL 96.3 million (USD 19.3 million) in assets were seized.
