Sustainable Fitch has released its second quarter ESG trends report, revealing increased corporate disclosure of climate-related financial figures, more ESG bonds issued by emerging market sovereigns, and increased momentum in overall environmental regulation. The report also includes market fatigue from this high regulatory pace and government interest in gaining control over the growing carbon credit market.
Two major International Sustainability Standards Board (ISSB) reporting standards for Scope 1 and Scope 2 emissions have greatly improved environmental assessment. The report explains how increased regulations surrounding environmental disclosures are reflected in banks’ public disclosure of direct and indirect, or Scope 3, emissions. European utilities also have some of the best GHG emission disclosures, mostly due to the EU’s taxonomy on all three scopes.
With the launch of these two standards in June, the ISSB is expected to become the de facto global baseline for sustainability reporting.
The overall pace of regulations has gained momentum as several countries make progress in creating sustainability taxonomies and addressing corporate greenwashing. The EU has recently proposed its Green Claims Directive, which assesses companies who claim to be “eco-friendly” and would impose penalties for false claims. California’s recently-proposed bills would expand climate-related disclosure for the U.S. by requiring increased disclosure of climate information and climate-related financial risks.
ESG Bonds Expand and Diversify, Increased Government Interest in Carbon Credits
Issuance of labeled bonds by sovereigns grew 90% year on year in the first half of 2023, largely due to strong issuance from Italy and Germany, but also because of more large-scale issuances from emerging markets, such as India and Turkey. Categories for Green and Sustainability sovereign bonds have diversified as well, with categories like pollution prevention and climate adaptation financing gaining ground. Corporate issuance in green bonds, however, has decreased globally, largely due to a nearly 33% decrease in the APAC region.
Carbon credits are also seeing a rapidly-changing regulatory atmosphere.
As global carbon trade between countries and private entities is guided by Article 6 of the Paris Agreement, government intervention in voluntary carbon markets has been on the rise since 2022. This comes as governments increasingly value natural resources available for carbon credits that may generate revenue for the state or may be used in domestic carbon projects.
Diverging political priorities are expected at the table for COP28 in December, namely over the pace, scale, and desirability of fossil fuel phase-outs. APAC countries, especially China, India, and Japan, along with Middle East hydrocarbon producers, are expected to push for carbon-intensive industries paired with carbon removal strategies. The G7’s position on coal and gas combined with limited progress on climate financing for emerging markets shows the likelihood of a low-ambition COP28, according to the report.