It’s a Process…
Volume 13, Number 6
June 28, 2023
Advocacy News You Can Use
The International Sustainability Standards Board (ISSB) just issued its new sustainability-related disclosures for capital markets worldwide. The standards are designed to create a common language for disclosing the effects of climate-related risks and the reporting of sustainable related efforts a company may undertake. While these standards are designed for capital markets, they will have a great influence over the reporting that ultimately will be used by credit union supervisors. It is really the first direct requirements out of an international standard setting body for these types of sustainable reporting requirements (others have been principles so far).
It is no longer a question of “if” but “when” the reporting requirements will be mandatory for credit unions. These will be transformative for our industry and require changes in governance, investments, financial management, products and services, and many other areas. It is difficult to quantify the true effect the coming disclosures may have. Once all the reporting starts taking place, the market, the economy and our overall conduct in the world is likely to be transformed.
It is not all bad news, as both standards include proportionality measures (included at the urging of WOCCU’s multi-year engagement on this issue). While proportionality measures will greatly assist credit unions in dealing with the costs and regulatory burden, implementing them in a way that works for our industry will be an enormous challenge over the next several years. As those in the industry often hear, advocacy is a process, not an event. So, it will be on this issue that we now settle in for the hard work of implementing these standards in a way that will relieve credit unions of overburdensome regulations.
ISSB Issues Inaugural Climate Risk and Sustainability Disclosure Standards; Includes Proportionality
The International Sustainability Standards Board (ISSB) issued its inaugural standards—IFRS S1 and IFRS S2—related to sustainability disclosures for capital markets worldwide. The standards will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions. The standards are designed to create common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects. These standards will likely form the basis for disclosures that will ultimately be incorporated by supervisors for credit unions.
IFRS S1 specifically provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.
Together these standards support a comprehensive global baseline of sustainability-related disclosures that demonstrate the widespread demand for a consistent understanding of how sustainability factors affect companies’ prospects. The ISSB standards are designed to ensure that companies provide sustainability-related information alongside financial statements in the same reporting package.
Of importance to credit unions are the mechanisms included to address proportionality. These includes the use of reasonable and supportable information that is available without undue cost or effort and the consideration of an entity’s skills, capabilities and resources. This standard should allow for the implementation of disclosures that minimize the cost and expenditures credit unions to prepare their reporting (once implemented at the national-level).
WOCCU has been advocating for the inclusion of proportionality measures into the standard at all levels of development, including directly with the ISSB, the Basel Committee, and the Financial Stability Board, all of whom have been consulted during the development of this standard.
Work now will turn to jurisdictions and companies to work with the Transition Implementation Group that is being launched to support implementation of the standard.
A copy of the proposal can be viewed here.
Why this matters to your credit union: These are the first international standards setting out disclosures for sustainability including disclosures on climate risks. These standards will shape disclosures for credit unions over the next several years that will be implemented by national-level supervisors for credit unions sustainable activities. The inclusion of proportionality will help to make the standard workable for credit unions.
FSB Consults Third-party Risk Management Toolkit
The Financial Stability Board (FSB) published a public consultation regarding a toolkit for financial authorities and financial institutions as well as service providers for their third-party risk management and oversight.
The toolkit was developed against a backdrop of digitalisation of the financial services sector and growing reliance of financial institutions on third-party service providers for a range of services, some of which support their critical operations. These dependencies can bring many benefits to financial institutions including flexibility, innovation and improved operational resilience. However, if not properly managed, disruption to critical services or service providers could pose risks to financial institutions and, in some cases, financial stability.
The primary emphasis of the toolkit is on critical services given the potential impact of their disruption on financial institutions’ critical operations and financial stability. In light of changing industry practices and recent regulatory and supervisory approaches to operational resilience, the toolkit takes a holistic view of third-party risk management, which is wider than the historical focus on outsourcing. The principle of proportionality is applicable throughout the toolkit, allowing the tools to be adapted to smaller, less complex institutions or to intra-group third-party service relationships.
The toolkit aims to:
- Reduce fragmentation in regulatory and supervisory approaches to financial institutions’ third-party risk management across jurisdictions and different areas of the financial services sector;
- Strengthen financial institutions’ ability to manage third-party risks and financial authorities’ ability to monitor and strengthen the resilience of the financial system; and;
- Facilitate coordination among relevant stakeholders (i.e. financial authorities, financial institutions and third-party service providers).
A copy of the consultation ca be viewed here.
Why this matters to your credit union: Cybersecurity continues to be of the highest importance to regulators. This effort is shaping the requirements that credit unions will face when managing third-party vendors.
Basel Committee Meets on Market Developments, Risks, and Policy and Supervisory Initiatives
The Basel Committee on Banking Supervision followed up on its meeting in Hong Kong in March and met to further discuss recent financial and market developments, global banking system risks, and policy and supervisory developments. Specifically, the Basel Committee assessed current instabilities surrounding the banking system and the need to strengthen supervisory effectiveness. The Committee confirmed that all aspects of Basel II will be implemented “in full and consistently”. They are reviewing its Basel Core Principles (Core principles for effective banking supervision), and will consult on revisions to the principles with stakeholders by publishing a consultation paper next month.
The Basel Committee highlighted the following points regarding current banking turmoil:
- “The first and most important source of financial and operational resilience comes from banks' own risk management practices and governance arrangements.
- It is critical that supervisors have the ability and willingness to act early and effectively to identify and promptly correct weaknesses in bank practices.
- The Basel III reforms that have been implemented to date helped shield the global banking system and real economy from a more severe banking crisis. Members unanimously reaffirmed their expectation of implementing all aspects of the Basel III framework in a full and consistent manner, and as soon as possible, in order to further enhance the resilience of the global banking system.”
The Committee also discussed prudential treatment of banks’ cryptoassets exposure and potential revisions to existing standard, and climate-related financial risks as it relates to its development of a Pillar 3 framework addressing requirements for disclosure of a bank’s exposure to these risks. The framework will work in tandem with the other authorities such as the ISSB and the Committee will publish a consultation paper by the end of the year. Further, the Basel Committee “reviewed and approved the assessment reports on the United States' implementation of the Net Stable Funding Ratio and large exposures framework” under its Regulatory Consistency Assessment Programme.
More information on the Basel Committee’s June 6th meeting can be found here.
Why this matters to your credit union: Paying attention to the regulatory agenda of the key international standard setter gives us insight into upcoming regulatory changes. This knowledge will help a credit union make strategic decisions in the future.
Andrew T. Price, Esq.