1. INTRODUCTION

1.1  This Environmental, Social and Governance Disclosure Guidance (Guidance) is developed to guide Banks, Fund Managers and Insurers in integrating environmental, social and governance (ESG) factors into their operations and decision-making processes, fostering a more sustainable and responsible financial ecosystem within the AIFC.

1.2  This Guidance applies to all Banks, Fund Managers, and Insurers. For purposes of this Guidance, Banks, Fund Managers, and Insurers are collectively referred to as Financial Entities (FEs).

1.3  This Guidance serves as an informative resource and is not legally binding. AFSA will take a gradual approach to introduction of ESG disclosure practices for the FEs in the AIFС. At this stage, AFSA introduces voluntary ESG disclosure requirements. This initial stage allows FEs to familiarise themselves with best practices, adapt their operations and reporting processes, and demonstrate their commitment to sustainability.

1.4  Defined terms have the initial letter of the word capitalised, or of each word in a phrase. Definitions are set out in the AIFC Glossary. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning. 

1.5  FEs should publish an ESG disclosure report annually, covering the same period as their annual report.

1.6  An ESG report may be presented as part of the FE’s annual report or as a separate report. Regardless of the format adopted, the ESG report should be published on the FE’s website.

1.7  This guidance is not exhaustive. The AFSA encourages FEs to continuously monitor and implement general ESG disclosure requirements as outlined by the Global Reporting Initiative (GRI). Additionally, general and sector-specific financial reporting standards for sustainability and climate related disclosures based on IFRS S1 and IFRS S2 should be followed to ensure comprehensive ESG compliance and reporting.

2. BACKGROUND

2.1  In recent years, standard-setting bodies, including the GRI, Financial Stability Board, International Sustainability Standards Board and International Organization of Securities Commissions, have issued industry-specific recommendations for identifying, measuring, and disclosing ESG related information. These recommendations are particularly relevant for banks, insurers, and asset managers, whose activities can significantly impact environmental and social outcomes.

2.2  As financial intermediaries, Banks significantly impact the environment and society through their lending practices, both positively and negatively. ESG factors can materially affect the entities, assets, and projects to which Banks lend across various industries. Therefore, Banks should consider ESG factors when assessing the quality of collateral. Additionally, by promoting positive environmental and social outcomes, Banks can create significant revenue streams. Conversely, those that neglect these risks and opportunities may experience diminished returns and reduced shareholder value. Banks should also disclose how ESG factors are integrated into their lending processes and report the current level of portfolio risk related to specific sustainability trends.

2.3  Fund Managers have a fiduciary duty to their client to consider all material information, including ESG factors, in their investment decisions. This involves integrating ESG considerations into valuation, modelling, portfolio construction, proxy voting, and engagement with investees. ESG factors have become crucial as an effective ESG management can materially impact both accounting and market returns. A thorough understanding of investees’ ESG performance and integrating these factors into decision-making allows Fund Managers to generate superior returns. Conversely, neglecting ESG risks and opportunities can lead to diminished returns, reduced performance fees, asset outflows, loss of market share, and lower management fees.

2.4  Insurers should invest capital to preserve accumulated premium revenues equivalent to expected policy claim pay-outs and maintain long-term asset-liability parity. As ESG factors increasingly have a material impact on the performance of corporations and other assets, Insurers should incorporate these factors into their investment management. Failure to address these issues may diminish risk-adjusted portfolio returns and limit an Insurer’s ability to issue claim payments. Insurers, therefore, should enhance disclosure on how they incorporate ESG factors, including climate change and natural resource constraints, into the investment of policy premiums and how they affect the portfolio risk.

3. CONCEPTUAL FOUNDATIONS

3.1  According to IFRS S1, for ESG information to be useful, it must be relevant and faithfully represent what it purports to represent. These are fundamental qualitative characteristics of useful ESG information: 

a)    Relevance. Relevant ESG information can influence primary users' decisions if it provides predictive or confirmatory value.

b)  Materiality.  Information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions of primary users of reports.

c)     Faithful representation. To be a faithful representation, the depiction should be complete, neutral and accurate.

3.2  The usefulness of ESG information is enhanced if the information is comparable, verifiable, timely and understandable. These are enhancing qualitative characteristics of useful ESG information:

a)     Comparability. The decisions made by the primary users of ESG reports involve choosing between alternatives; for example, selling or holding an investment, or investing in one reporting entity or another. Comparability is the characteristic that enables users to identify and understand similarities in, and differences among, items.

b)   Verifiability. Verifiability means that various knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable.

c)    Timeliness. Timeliness means having information available to decision-makers in time to influence their decisions. Generally, the older information is, the less useful it becomes. However, some information may continue to be timely long after the end of a reporting period because, for example, some users may need to identify and assess trends.

d)  Understandability. ESG information should be clear and concise, avoid generic information, and not duplicate information or details presented in the general purpose financial reports.

4. CORE CONTENT AND DISCLOSURE STANDARDS

4.1  FEs should provide disclosures based on the following aspects:

a)   Governance — the governance processes, controls and procedures the FE uses to monitor and manage ESG risks and opportunities; 

b)   Strategy — the approach the FE uses to manage ESG risks and opportunities; 

c)   Risk management — the processes the FE uses to identify, assess, prioritise and monitor ESG risks and opportunities; and

d)   Metrics and targets — the FE’s performance in relation to ESG risks and opportunities, including progress towards any targets the FE has set or is required to meet by law or regulation.

4.2  FEs are encouraged to report ESG-related information in accordance with established and internationally recognised standards. The reporting can be divided into two main categories: financial disclosures and general disclosures.

Financial disclosures

4.3  FEs should utilise the IFRS S1 and IFRS S2 standards for their sustainability-related and climate-related financial disclosures, respectively. The IFRS S1 standard focuses on the reporting of sustainability-related financial information, ensuring that stakeholders are informed about the entity's sustainability performance and its financial implications. The IFRS S2 standard specifically addresses climate-related financial disclosures, providing a framework for FEs to report on their climate-related risks and opportunities.

4.4  Furthermore, sector-specific GRI standards, which are expected to be available in 2025, will offer additional guidance tailored to the unique ESG challenges and opportunities within specific sectors. FEs should monitor for the release of these standards and integrate them into their reporting practices as they become available.

General disclosures

4.5  For general ESG-related disclosures, FEs should refer to the Universal GRI Standards. These standards provide a broad framework for reporting on a wide range of ESG factors, ensuring that disclosures are comprehensive and reflect the entity's overall ESG performance.

4.6  In addition to the universal standards, FEs are encouraged to use topic-specific GRI Standards to report on particular ESG issues relevant to their operations. These include:

·       GRI 301: Materials 2016

·       GRI 302: Energy 2016

·       GRI 303: Water and Effluents 2018

·       GRI 304: Biodiversity 2016

·       GRI 305: Emissions 2016

·       GRI 306: Waste 2020

·       GRI 308: Supplier Environmental Assessment 2016

·       GRI 401: Employment 2016

·       GRI 402: Labor/Management Relations 2016

·       GRI 403: Occupational Health and Safety 2018

·       GRI 405: Diversity and Equal Opportunity 2016

·       GRI 406: Non-discrimination 2016.

4.7  FEs may also use other ESG reporting standards that are deemed acceptable by AFSA.

5. GOVERNANCE AND STRATEGY

5.1  The Board of Directors (Board) and senior management play critical roles in incorporating ESG considerations into the FE’s risk appetite, strategies and business plans. The Board and senior management should maintain effective oversight of the FE’s ESG risk management and disclosure, including the policies and processes to assess, monitor and report such risk. 

5.2  The Board and senior management should have an institution-wide view of the FE’s ESG risks exposures and oversee the integration of such risks into the FE’s risk management framework. Where ESG risks are deemed material to the FE, it should designate a senior management member to oversee those risks, to ensure that issues are reviewed at a sufficiently senior level.

5.3  The FE’s senior management should ensure that ESG factors are effectively embedded within the FE’s operations. Steps taken should include:

a)   Establishing a robust governance process to make ESG decisions (such as on business strategies, risk appetite, targets, scope, risk framework, implementation timelines and approach), founded on sufficient understanding of key assumptions, dependencies, and residual risks;

b)   Establishing a clear tone from the top around the need to address ESG risks;

c)   Establishing clear lines of communication and escalation across different parts of the FE to address risks that cut across functions;

d)   Ensuring that internal strategies and risk appetite statements are consistent with any publicly communicated ESG strategies and commitments; and

e)   Establishing mechanisms to implement business strategies and align internal behaviour to address ESG risks (such as through performance measurement, remuneration policy and incentive structures).

5.4  Where relevant, FEs should disclose their engagement strategies for stakeholders including shareholders, rating agencies, regulators and governments, and non-governmental organisations. FEs should also consider the use of credible and well-regarded green and transition taxonomies (e.g., the National Green Taxonomy of Kazakhstan, European Union Taxonomy for sustainable activities, Climate Bonds Initiative Taxonomy) in their product-level disclosures, such as labelling of sustainability and transition products offered by FEs, to facilitate better stakeholder understanding of how these products contribute to the FEs’ publicly committed ESG objectives.

5.5  The FE should regularly review its approach, including its risk appetite and risk framework, for continued appropriateness and effectiveness, as well as to incorporate industry developments and emerging best practices in a timely manner.

5.6  FEs should implement a robust implementation strategy. In particular, FEs should: 

a)     Equip their staff, including through capacity building and training, with adequate expertise to assess, manage and monitor ESG risks in a rigorous, timely and efficient manner;

b)     Update their internal governance and processes, including their risk management framework, to manage ESG risks systematically and regularly; and

c)     Develop and implement a data strategy to build, maintain and effectively utilise relevant ESG data to support effective decision-making.

5.7  Banks should describe their approach to the incorporation of ESG factors in their credit analysis. The scope of disclosure should include commercial and industrial lending as well as project finance. 

5.8  Fund Managers should describe their approach to the incorporation of ESG factors in their investment or wealth management processes and strategies. FE should disclose the amount of assets under management that employ ESG issues, sustainability-themed investing, and screening.

5.9  Insurers should describe their approach to the incorporation of ESG factors in their investment management processes and strategies.

6. RISK MANAGEMENT

6.1  FEs should clearly communicate their risk management strategies and approaches for different sectors, and how their financing activities relate to their publicly committed ESG objectives (where relevant), particularly where financing of such sectors or sub-sectors could be negatively perceived due to high financed emissions intensity in the short term. Such disclosures are critical in enabling stakeholders to understand FEs’ reasons for financing such assets, as well as the corresponding risk strategies and mitigation measures put in place by FEs to avoid adverse reactions and accusations of greenwashing, which may negatively impact FEs.

6.2  FEs should describe their risk management processes for identifying and assessing ESG risks. An important aspect of this description is how FEs determine the relative significance of ESG risks in relation to other risks. FEs should describe whether they consider existing and emerging regulatory requirements related to climate change (e.g., limits on emissions) as well as other relevant factors considered. FEs should also consider disclosing the following: 

a)     processes for assessing the potential size and scope of identified ESG risks; and

b)     definitions of risk terminology used or references to existing risk classification frameworks used.

6.3  Banks should consider characterising their climate-related risks in the context of traditional banking industry risk categories such as credit risk, market risk, liquidity risk, and operational risk. Banks should also consider describing any risk classification frameworks used.

6.4  Banks should discuss whether it conducts scenario analysis or modelling in which the risk profile of future ESG trends is calculated at the portfolio level of commercial and industrial credit exposure. ESG trends may include climate change, natural resource constraints, human capital risks and opportunities, and cybersecurity risks.

6.5  Insurers should describe the processes for identifying and assessing climate-related risks on insurance and reinsurance portfolios by geography, business division, or product segments, including the following risks: 

a)     physical risks from changing frequencies and intensities of weather-related perils;

b)     transition risks resulting from a reduction in insurable interest due to a decline in value, changing energy costs, or implementation of carbon regulation; and

c)     liability risks that could intensify due to a possible increase in litigation.

6.6  Fund Managers should describe, where appropriate, engagement activity with investee companies to encourage better disclosure and practices related to climate-related risks to improve data availability and asset managers’ ability to assess these risks. Fund Managers should also describe how they identify and assess material climate-related risks for each product or investment strategy. This might include a description of the resources and tools used in the process.

7. METRICS AND TARGET

7.1  FEs should provide the key metrics used to measure and manage ESG risks and opportunities. Metrics should be provided for historical periods to allow for trend analysis. In addition, where not apparent, organisations should provide a description of the methodologies used to calculate or estimate climate-related metrics. 

7.2  Banks should provide the metrics used to assess the impact of (transition and physical) climate-related risks on their lending and other financial intermediary business activities in the short, medium, and long term. Metrics provided may relate to credit exposure, equity and debt holdings, or trading positions, broken down by industry, geography, credit quality (e.g., investment grade or non-investment grade, internal rating system), and average tenor. Banks should also provide the amount and percentage of carbon-related assets relative to total assets as well as the amount of lending and other financing connected with climate-related opportunities.

7.3  Banks should describe how ESG factors are incorporated in the assessment of and influence the FE’s views on:

a)     Traditional macroeconomic factors such as the economic conditions, central bank monetary policy, industry trends, and geopolitical risks that affect creditworthiness of borrowers;

b)   Traditional microeconomic factors such as supply and demand for products or services that affect financial conditions and operational results of borrowers as well as their creditworthiness;

c)     Overall creditworthiness of a borrower;

d)     Maturity or tenor of a loan; 

e)     Expected loss, including probability of default, exposure at default and loss given default; and

      f)      Value of posted collateral.

7.4  Fund managers should:

a)     Detail metrics used to assess climate-related risks and opportunities for each product or investment strategy;

b)     Describe how these metrics have changed over time, where relevant;

c)     Share metrics that are considered in investment decisions and monitoring, where appropriate.

7.5  Insurers should provide aggregated risk exposure to weather-related catastrophes of their property business (i.e., annual aggregated expected losses from weather-related catastrophes) by the relevant jurisdiction.

7.6  To balance the need for transparency in disclosures with existing challenges that FEs may face (i.e. data and methodological challenges), AFSA proposes that FEs may disclose reasonable and supportable information that is available at the reporting date without undue cost and effort. However, FEs should disclose the factors, inputs, methodologies, material assumptions and dependencies underlying their disclosures to ensure transparency.