The sustainable finance space can expect to see further regulations in the near future following the launch of the International Sustainability Standards Board (ISSB)’s climate–related disclosure standards, according to Sustainable Fitch, Fitch Ratings (Fitch)’s sustainability arm.
“The proliferation of regulatory proposals in various jurisdictions is driven by a desire to stimulate sustainable finance and mitigate greenwashing,” the rating agency noted.
While the regulations in the banking and capital market space are expected to impact the market positively, the growing government intervention in the voluntary carbon market (VCM) sector may negatively affect stakeholders, according to the rating agency.
As a result of the maturating regulatory space, it expects to see more rated entities disclose Scope 1 and 2 greenhouse gas (GHG) emissions.
Currently, 70% of its rated entities already have some Scope 1 and 2 disclosures. This percentage is expected to increase as rated entities move to new standards that make reporting on GHG emissions by scope mandatory.
Fitch maintains that standardization of reporting and regulatory steering are the main determinants of the robustness of emission disclosures, which contribute to its overall ESG entity ratings.
The adoption of the ISSB standards will also affect the underlying metrics contributing toward Sustainable Fitch’s ESG rating assessments. A significant number of comprehensive and publicly available disclosures may translate to higher ratings for that component of Fitch’s ESG entity ratings.
It will likely impact other credit rating agencies which use an alphanumerical ESG ratings approach, an approach which S&P Global Ratings has notably opted out of earlier this month
In addition to the highly anticipated launch of the ISSB standards by the International Financial Reporting Standards, this year has seen considerable developments in the sustainable finance regulatory space with the implementation of naming and disclosure regulations for sustainable funds across jurisdictions.
Several regulations are currently under development including the carbon market regulations as a precursor to the launch of Indonesia’s carbon exchange in September 2023 as well as the UK Sustainability Disclosure Standards, which are expected to be issued by July next year.
In addition to the banking and capital market space, VCMs have seen considerable government intervention since 2022 as they seek to tap their natural resources to earn revenue from international carbon credit trading.
While regulations and government intervention contribute to the development of VCMs, these developments may affect carbon credit supply and prices. It may also adversely affect the users relying on VCMs to meet their decarbonization goals, the rating agency warned.
The top-down intervention in the VCM space also reflects the increasing scrutiny that carbon markets are seeing, the rating agency opined.
Notably, the verifier of carbon offsets, Gold Standard, suspended the issuance of credits from Zimbabwe in July this year following government intervention in its VCM.
The carbon offsets verifier argued that tighter regulations could reduce the supply of credits and increase the price of companies’ offsetting efforts.