Chapter 2 regulations Flashcards
(88 cards)
1
Q
Explain order of supervision flow of influence
A
- Policy choices first
- Financial regulations
- Financial supervision
2
Q
What are the objectives of financial regulators?
A
- maintain orderly financial markets,
- safeguard investments in financial instruments, savings/pensions, and investment vehicles and
- bring about an orderly expansion of activities of the financial sector.
3
Q
What do financial regulators consider with ESG
A
- How ESG factors might impact the stability of economies and the financial markets
- How these factors might influence the long-term risk-return profile
- Encourage and enable the growth of certain ESG products such as green bonds
- Require disclosure on ESG characteristics or sustainability objectives
4
Q
What are the 4 themes that sustainability-related financial regulations generally involve?
A
- Corporate disclosure
- Stewardship
- Asset Owners
- Investor Protection
5
Q
What are examples of corporate disclosure?
A
- Reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and the GRI
6
Q
Describe more about what the TCFD recommendations underpin:
A
- Regulatory requirement in the UK, voluntary elsewhere
- help firms voluntarily disclose information to support capital allocation
- Underpin the ISSB IFRS sustainability Standards (IFRS S1, IFRS S2)
- Informed the EU’s Non-financial Reporting Directive (NFRD) and its successor, the EU’s Corporate Sustainability Reporting Directive (CSRD), for company reporting
7
Q
What does ISSB stand for
A
International Sustainability Standards Board
8
Q
What does PRI stand for
A
Principles for Responsible Investment
9
Q
What does TCFD
A
Task Force on Climate-Related Financial Disclosures
10
Q
What does IFRS stand for
A
International Financial Reporting Standards
11
Q
What does NFRD and CSRD stand for?
A
1.EU’s Non-financial Reporting Directive (NFRD)
2. the EU’s Corporate Sustainability Reporting Directive
12
Q
What does GRI stand for
A
Global reporting initiative
13
Q
What is the aim of investor protection regulation?
A
Aim to protect investors by improving transparency and efficiency in markets.
14
Q
What are some examples of investor protection regulations that take sustainability into account?
A
- EU’s MiFID (Markets in Financial Instruments Directive) regulation, which includes an obligation to integrate sustainability preferences of investors
- the EU’s SFDR (Sustainable Finance Disclosure Regulation) regulation, which entails a mandatory sustainability classification of investment products;
- the EU’s green bond label regulation, which regulates sustainability claims including those in investment products.
15
Q
What does SFDR stand for?
A
(Sustainable Finance Disclosure Regulation
16
Q
What are some high-level policy options:
A
- Legal restrictions on damaging activities
- Taxes and charges, pricing of externalities
- Public investment and subsidies for activities with positive impact
- Channelling private financial flows to Investments with sustainability benefits
17
Q
Describe the policy instruments for trying to Enable investors to identify assets with sustainability benefits
A
- Taxonomies - classification system
- Sustainability disclosure and accounting standards
18
Q
Describe the policy instruments for trying to Improve the assessment and market price of sustainability risks
A
- Increase awareness of sustainability risks and communicate supervisory expectations through public statements, reports and research
- Financial sector regulation: risk management requirements, stress tests, capital requirements
- Sustainability disclosure and accounting standards
19
Q
What % of new or revised sustainable finance policy were developed after 2000
A
97%
20
Q
What are some of the most important regulatory initiatives Globally?
A
- Task Force on Climate-Related Financial Disclosures
- ISSB IFRS S1, and S2
21
Q
Where is TCFD mandatory?
A
- New Zealand,
- Switzerland,
- Hong Kong SAR,
- Japan,
- Singapore
- United Kingdom.
- SFDR essentially made it mandatory in EU
22
Q
What are the 4 areas that TCFD recommendations centre on?
A
- Governance
- Strategy
- Risk Management
- Metrics and targets
23
Q
What are further updates that TCFD have released?
A
- 2021, TCFD released guidance disclosing metrics, targets, and transition plans.
- It also updated its implementation guidance.
- These updates are shaping evolving disclosure regulations
24
Q
What did the ISSB release
A
- The first standard, IFRS S1,
- The second standard, IFRS S2,
25
Describe IFRS S1
1. General Requirements for Disclosure of Sustainability-Related Financial Information,
2. sets out overall requirements, disclose sustainability-related financial information about sustainability-related risks and opportunities.
26
Describe IFRS S2
1 Climate-Related Disclosures,
2. requires entities to disclose information about their climate-related risks and opportunities
27
What are some of the most important regulatory initiatives in Europe
1. CSRD for corporate sustainability reporting
2. The EU Taxonomy for defining sustainable (corporate) activities
3. SFDR to standardize sustainability reporting for financial products
4. The EU Ecolabel for financial products’ sustainability claims
5. ESRS for sustainability reporting in 2024 and beyond
28
What does ESRS stand for?
European Sustainability Reporting Standards
29
What initiated the regulatory initiatives in the EU
1. adoption of an EU Sustainable Finance Strategy in 2018
2. the sustainability-focused industrial strategy called the EU Green Deal in 2020
30
Describe more about the CSRD
1. Corporate Sustainability Reporting Directive is EU legislation that aims to ensure that consumers and investors know the sustainability impact of businesses.
2. Adopted in 2021 and coming into force in fiscal year 2024
3. CSRD was created as a replacement of the EU’s existing sustainability disclosure legislation (NFRD)
4. the latter was deemed insufficiently fit to support the EU Green Deal and the EU Sustainable Finance Strategy.
31
What do CSRD companies need to meet 2/3 of to fall in scope of mandatory compliance?
1. EUR40 million in net turnover
2. EUR20 million in assets
3. 250 or more employees
4. In addition, also applies to companies based abroad that have a presence in the EU, with non-EU companies that have a turnover of above EUR150 million in the EU having to comply.
32
Describe the membership of CSRD and what they have to do:
1. CSRD more than quadruples the number of companies required to report on sustainability, from the 11,000 covered by its predecessor, NFRD, to nearly 50,000
2. CSRD will require that companies report in accordance with new European Sustainability Reporting Standards (ESRS), which cover environmental, social, and governance standards
33
What did the EU Taxonomy Regulation do?
1. June 2020, established a framework that states conditions for an economic activity to be considered environmentally sustainable.
34
What does the EU taxonomy regulations framework include?
1. contributing substantially to at least one of the six environmental objectives listed
2. “doing no significant harm” to any of the other environmental objectives, and
3. complying with minimum, EU-specified social and governance safeguards.
35
What are the EU taxonomy regulations 6 environmental objectives?
1. Climate change mitigation
2. Climate change adaptation
3. The sustainable use and protection of water and marine resources
4. The transition to a circular economy
5. Pollution prevention and control
6. The protection and restoration of biodiversity and ecosystem
36
What did the EU Sustainable Finance Disclosure Regulation do?
1. 2019, created requirements for disclosures about the extent to which investment products consider or promote environmental and social factors.
2. Aim to enhance transparency of sustainably invested products to prevent green washing.
3. It identifies so-called principal adverse impacts that have a negative impact on the environmental and social issues stemming from investment decisions
37
What are some of the most important regulatory initiatives in UK?
1. Climate Change Act in 2008
2. First country to enshrine its net zero commitment into law in 2019
3. PRA regulations
4. 10 point plan for a green industrial revolution (Green Finance strategy)
5. Disclosure regulations by treasury and FCA
6. Transition Plan Taskforce
38
What did the PRA issue?
1. The Prudential Regulation Authority (PRA) issued climate-related supervisory expectations for regulated firms in 2019
2. with an initial deadline for firms to have embedded them, as far as possible, by year end 2021.
3. In doing so, the Bank of England became the first central bank and supervisor to set supervisory expectations for banks and insurers on the management of climate-related financial risks, identifying current risks and those that can plausibly arise in the future, and appropriate actions to mitigate those risks.
39
UK Green Finance Strategy identified three key areas where policy levers could be used:
1. Greening finance—ensuring that the financial sector systematically considers environmental and climate factors in its lending and investment activities
2. Financing green—directing private sector financial flows to economic activities that support an environmentally sustainable and resilient growth
3. Capturing the opportunity—strengthening the role of the UK financial sector in driving green financ
40
What did the Treasury do as part of the Green Finance Strategy?
1. Disclosure regulation
2. Transition plan Taskforce
41
What is the disclosure regulation introduced by the treasury?
1. HM Treasury and the five financial regulators produced a roadmap to making TCFD-aligned disclosures mandatory across the economy by 2025.
2. Implementation started in January 2021 with the largest listed companies and pension funds and has been rolled out further.
42
What is the Transition Plan Taskforce (TPT)
1. HM Treasury launched the Transition Plan Taskforce (TPT), tasking it with developing a standard for climate transition plans for UK companies.
2. Transition plans, as recommended by the TCFD, are also embedded in the proposed IFRS S1 and IFRS S2 and the proposed SEC disclosure rule
3. The TPT issued its finalized Disclosure Framework in 2023, which was designed to assist companies with developing, delivering, and disclosing “gold standard” transition plans
4. TPT went on to also issue sector-specific guidance for asset owners and asset managers in 2024.
43
What did the DWP do for improving disclosure?
1. announced it will amend occupational pension scheme regulations to require pension trustees “to measure, as far as they are able, and report on their investment portfolios’ Paris alignment”
44
What did the FCA do for disclosure regulations ?
The FCA introduced specific requirements for asset managers, life insurers, and FCA-regulated pension providers applicable from January 2022.
45
What did the Pensions Regulator do?
launched a campaign to ensure trustees meet their ESG and climate change reporting duties
46
What are some of the most important regulatory initiatives in China?
1. Guidelines for Green Financial System
2. Green Asset Taxonomy
3. PBOC 2021–25 Strategy
47
Describe the guidelines for Green Financial System:
1. In 2016, the People’s Bank of China (PBoC), in collaboration with six other government agencies, issued guidelines establishing the green financial system.
2. Previous policy reforms tended to be reactive to financial crises.
3. The new generation of policy recognizes that to be effective, reforms need to tackle multiple aspects of interconnected and complex capital markets.
48
What is PBOC 2021-2025 Strategy
1. In 2021, the PBOC announced a new, five-year strategy with strong support for the origination of green loans, bonds, insurance, and derivatives.
49
What is Common Ground Taxonomy?
1. Published by China’s central bank (PBoC) and the EU Commission.
2. The CGT builds on the EU taxonomy and China’s Green Bond Endorsed Projects Catalogue
3. Establishes a framework that states conditions for an economic activity to be considered environmentally sustainable.
50
What is the objective of China aligning with the CGT?
1. Simplify cross-border green capital flows, which can be achieved by minimizing transaction costs and eliminating redundant verification processes.
2. Aims to enhance market confidence and decrease market fragmentation, thereby facilitating more streamlined and efficient operations.
51
How does the CGT determine the eligibility criteria for each activity?
1. the CGT either adopts criteria present in both sets of taxonomies
2. or adopts whichever taxonomy criteria is more stringent.
52
Which sectors are covered by the Common Ground Taxonomy?
1. Agriculture, forestry, and fishing
2. Manufacturing
3. Electricity, gas, steam, and air conditioning supply
4. Water supply, sewage, waste management, and remediation activities
5. Construction
6. Transportation and storage
53
Describe what the AMAC did in China
1. In 2018, the Asset Management Association of China (AMAC) released the Guidelines for Green Investment.
2. These guidelines state that “ESG is an emerging investment strategy in the asset management industry and an important initiative for the investment fund industry to implement the green development concept and establish a green financial system”
3. It is anticipated that the AMAC will make great efforts to facilitate the implementation of the guidelines
54
Describe what the China Securities Regulatory Commission did
1. In June 2021 issued a set of ESG disclosure guidelines.
2. The guidelines entail mostly voluntary reporting on E risks
55
What are some of the most important regulatory initiatives in Singapore?
1. GFIT Taxonomy
2. Regulatory and Supervisory Measures
56
What did the Monetary Authority of Singapore develop?
1. Green Finance Action Plan in 2019
2. Contains strategies to support a sustainable Singapore and facilitate Asia’s transition to a low-carbon economy
3. Main regulatory parts: development of sustainable finance taxonomies and regulatory and supervisory measures.
57
What are Mas's two strands of work on sustainable finance taxonomies?
1. one in Singapore
2. one on a multilateral collaboration basis with the other member countries of the Association of Southeast Asian Nations (ASEAN).
58
Describe the development of the Singapore sustainable finance taskforce:
1. MAS convened the Green Finance Industry Taskforce in Singapore, which from 2021 to 2023 published three public consultations on what a Singapore sustainable finance taxonomy should look like.
2. This taxonomy is under development with the Association of Banks in Singapore (ABS)
3. It focuses on Singapore-based financial institutions, with particular relevance to those active across ASEAN.
4. The third consultation was closed as of March 2023, and next steps can be expected in the future.
59
What are the 3 areas of sustainable investment that MAS published reuglatory and supervisory guidance for?
1. Environmental risk management
2. Sustainability-related disclosures
3. Sustainability stress tests for regulated insurers in 2018 and entire financial industry in 202
60
What were the guidelines papers called for environmental risk management in Singapore
1. “Guidelines on Environmental Risk Management for Asset Managers”
2. “Information Paper on Environmental Risk Management for Asset Managers
61
What were the Singapore Sustainability-related disclosures in the form of
1. “Comply or explain” based climate reporting applying to all companies that are listed on the Singapore Stock Exchange as of 1 January 2022
2. Disclosure and reporting guidelines for retail ESG funds having come into force as of 1 January 2023
62
What is the ASEAN
1. ASEAN has 10 member states, including Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
2. ASEAN published its ASEAN Taxonomy for Sustainable Finance at the end of 2021.
63
What is the ASEAN Taxonomy for sustainable finance?
1. seeks to create an umbrella framework that will harmonize other frameworks within scope in the region.
2. An important difference between the ASEAN Taxonomy and the EU Taxonomy is that the former takes a multi-tiered approach in classifying whether activities are sustainable and the latter uses a binary approach.
64
What are the two main elements of the ASEAN Taxonomy?
1. A principles-based Foundation Framework, which is applicable to all ASEAN member states and allows a qualitative assessment of the sustainability of activities
2. The Plus Standard, with metrics and thresholds to further qualify and benchmark eligible green activities and investments
65
Who coordinates sustainable finance regulation in Australia?
Council of Financial Regulators CFR
66
What has the CFR's climate change activity consisted of so far?
1. Climate Vulnerability Assessment (CVA) - climate stress testing large banks by the Australian Prudential Regulation Authority (APRA) in 2022
2. Contributing to developing a global standard for climate disclosures, with the Australian Securities and Investments Commission (ASIC) coordinating a joint CFR submission responding to the ISSB draft standards
3. The CFR agencies are supportive of the industry-led initiatives in Australia to develop an Australian Sustainable Finance Taxonomy, a draft of which was published by the Australian Sustainable Finance Institute (ASFI) in December 2022
67
What is the sustainable finance legislation in New Zealand
1. Financial Sector (Climate-Related Disclosures and Other Matters) Amendment Bill
68
What does the Financial Sector (Climate-Related Disclosures and Other Matters) Amendment Bill mean
1. focuses on climate-related disclosures that became mandatory on a comply-or-explain basis for in-scope companies as of January 2023
2. Businesses covered by the requirements have to make annual disclosures covering governance arrangements, risk management, and strategies for mitigating any climate change impacts.
3. If businesses are unable to disclose, they must explain why.
69
What New Zealand’s Financial Markets Authority (FMA), Te Mana Tātai Hokohoko do?
1. made responsible for independent monitoring and enforcement of the regime, providing guidance about compliance expectations, and reporting on monitoring activities and findings.
70
What does NZ's Financial Sector (Climate-Related Disclosures and Other Matters) Amendment Bill apply to?
1. All registered banks, credit unions, and building societies with total assets of more than NZD1 billion (USD621,382)
2. All managers of registered investment schemes with greater than NZD1 billion (USD621,382) in total assets under management
3. All licensed insurers with greater than NZD1 billion (USD621,382) in total assets under management or annual premium income greater than NZD250 million (USD155,346)
4. All equity and debt issuers listed on the NZX
5. Crown financial institutions with greater than NZD1 billion (USD621,382) in total assets under management, such as ACC and the NZ Super Fund
71
What is the US' important sustainable finance regulation?
1. 2022 SEC Proposal
2. 2024 Finalization
72
What did the initial version of the SEC proposal govern?
How a regulated firm is to report on
1. How climate-related risks are governed by a firm’s board and management
2. The firm’s climate-related impacts, goals, targets, and transition plans
3. The firm’s Scope 1 (direct operational emissions)
4. Scope 2 (emissions from energy used by the firm) greenhouse gas emissions
5. The firm’s Scope 3 emissions, if material—that is, the emissions in its upstream and downstream supply chains
73
What was the response to the SEC proposals in the US?
1. drew intense opposition from many US industry groups, centered on the mandatory Scope 3 emission disclosures. 2. Some business groups had balked at the cost and complexity of complying with a Scope 3 mandate
3. others—pushed by groups that include sustainability-focused shareholders and eco-conscious consumers—intended to comply with rule whether it became final or not.
4. The final rule was promulgated on 6 March 2024 and ultimately did not include Scope 3 emission disclosures.
74
Which was one of the most important policies?
1. EU Action Plan on Financing Sustainable Growth.
75
How are governments anticipated to move to stronger requirements?
1. moving away from “comply or explain” regulation and to “comply and explain” regulation,
2. changing from voluntary to mandatory disclosures, and
3. moving from policy to implementation and reporting.
76
What is the Network for Greening the Financial system?
a group of 140 central banks and supervisors established in 2017
77
What has the Network for Greening the Financial system done?
1. explicitly recognizes climate risks as relevant to a supervisory mandate.
2. It also has challenged policymakers, other central banks, and supervisors to act to limit the catastrophic impacts of runaway climate change.
78
When can challenges to ESG investing emerge when considering regulators?
1. if regulators hold a narrow interpretation of fiduciary duty, such as with the US Department of Labor’s (DOL’s) 2020 ruling on fiduciary duty and non-financial objectives
79
What are private sector retirement plants subject to the provisions of?
1. Employee Retirement Income Security Act (ERISA).
2. ERISA sets standards for fiduciaries based on the principle of a prudent-person standard.
3. Public sector often looks to ERISA principles as a benchmark for meeting fiduciary standards
80
What must plan sponsors and other fiduciaries do under ERISA?
1. Act solely in the interest of plan participants and beneficiaries.
2. Invest with the care, skill, and diligence of a prudent person with knowledge of such matters.
3. Diversify plan investments to minimize the risk of large losses.
81
Describe timeline of DOL regulation of private retirement plans in US
1. IN 1990s, Established that investments which generate societal benefits as well as financial are compatible with fiduciary obligations if returns match alternative investments
2. 2008, DOL stated that fiduciary considerations of collateral, non-economic factors in selecting plan investments should be rare
3. 2015, may invest in ETIs based in part on their collateral benefits as long as financially relevant , and ESG factors may have direct relationship with financial value of investment
4. 2020, swung back as DOL issued a final rule that removed all mention of ESG concepts and replaced with words non-financial objectives.
a. Scenarios based on non-financial factors are very rare
b. Fiduciaries must evaluate investments based only on financial factors
c. Docs required for considering ESG-orientated investing
5. 2021, DOL released statement of non-enforcement and issued a new rule to allow consideration of ESG criteria and proxy voting in private sector retirement plans
6. 2022, DOL clarifies retirement plan fiduciaries may consider climate change and other ESG factors
82
What id John Kays report state in the UK?
1. emphasized the need for a culture of long-term decision making, trust, and stewardship to protect savers’ interests.
2. The report recognized the essential role that fiduciary duties play in the promotion of such a culture
3. but highlighted the damage being done by misinterpretations and misapplications of fiduciary duty in practice.
4. In response, the gov asked the Law Commission to investigate the subject in more detail
83
What did the Law Commission find about Fiduciary duty in its report in the UK
1. On financial factors, Trustees should take into account financially material factors”
2. On non-financial factors (ESG) the report concluded: In broad terms, trustees should take into account financially relevant factors. However, the circumstances in which trustees may make non-financially related decisions are more limited.
84
What are the tests that 2/3 need to be met for non-financial figures to be taken into account according to the Law Commission?
1. trustees should have good reason to think that scheme members would share the concern; and
2. the decision should not involve a risk of significant financial detriment to the fund”
85
Describe the EU's Shareholders Rights Directive:
1. 2019, seeks to improve the level and quality of investors with their investee companies, better aligning executive pay with corporate performance
2. and increasing disclosure on how an asset manager’s investment decisions contribute to the medium- and long-term performance of investee companies.
3. In order to achieve that, it requires investors to have an engagement policy and annually report on a number of factors
86
What does the EU's Shareholders Rights Directive require investors to report on?
1. how this is integrated into their investment strategy,
2. how the dialogue is carried out,
3. how voting rights and shareholder rights are being executed,
4. how the manager collaborates with other shareholders, and
5. how potential conflicts of interest are dealt with.
87
What do investees include
1. All entities in which investments can be made
2. Companies
3. Projects (infrastructure projects and joint ventures)
4. Agencies (World Bank and International Finance Corporation)
Jurisdictions (countries/regions, provinces and cities)
88
What are the 3 main ways that Governments have recognised the investment industry responsible play a role in achieving positive outcomes for society?
1. Social security systems and public pensions are in a predicament in many countries, and their citizens are thus turning to corporate or private pension plans for financial stability later in life.
2. Many countries, developed or developing, need to build or restore public infrastructure (such as water systems, transportation means, and energy distribution), which is usually costly for government treasuries
3. Many governments have recognized that a transition to a low-carbon economy will require significant shifts in capital.
