UK/EU ESG Regulation Monthly Round-Up – September 2023

Hogan Lovells

Hogan Lovells

September has got off to a very busy start for ESG regulatory developments following the summer break. We have seen the launch of the final recommendations from the Taskforce on Nature-related Financial Disclosures (TNFD), the European Commission’s consultations on the SFDR which could result in a considerable rewrite and an FCA consultation on a new diversity and inclusion framework for financial services. Just in case you missed them, we’ve also included key updates from August including the announcement of new UK sustainability disclosure standards by the UK Department for Business and Trade and new GTAG reports on the UK Green Taxonomy.

EU and International Developments

European Commission seeks industry views in SFDR targeted consultation

On 14 September 2023, the European Commission launched a targeted consultation and a public consultation seeking feedback on Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR). The EU Commission’s in-depth consultations taking place over the next three months until 15 December 2023, will analyse whether the SFDR is meeting investors needs and expectations and is fit for purpose. As we discuss in the following article, the consultation could lead to a fundamental rewrite of the SFDR. Please see here for our Engage article setting out further information.

Voluntary disclosure of PAIs under SFDR: 2023 Joint ESAs Report

On 28 September 2023, the joint European Supervisory Authorities (ESAs) published the Annual 2023 Joint ESAs Report on the extent of voluntary disclosure of principal adverse impacts (PAIs) under the SFDR. The main findings of the report include that whilst there is still significant variation in compliance with disclosure requirements both across financial market participants and jurisdictions, the results of the most recent survey of national competent authorities show an overall improvement in the application of voluntary disclosures. Disclosures are also easier and more straightforward to find on websites. However, the explanation of non-consideration of PAIs are still not fully complete and satisfactory. The ESAs will carry out further analysis on voluntary disclosures of PAI consideration by financial products as the current level of understanding on such disclosures is limited. The ESAs say that the European Commission may want to consider the ESAs’ findings and take them into account in carrying out the comprehensive assessment on the functioning of the SFDR mentioned in the development above.

ESMA updated its Sustainable Finance Implementation Timeline

On 3 August 2023, ESMA released a revised edition of its Sustainable Finance Timeline. The timeline provides a useful summary of the regulatory landscape in the EU for sustainability-related disclosures. The updated timeline includes key upcoming developments in relation to the SFDR and other relevant EU legislation such as the application of the revised MiFID II guidelines on suitability and product governance with added information relating to sustainability from 3 October 2023. We expect that the timeline will be updated again soon to include the European Commission’s SFDR targeted consultations.

Nature-related disclosure rules

TNFD releases final recommendations

On 18 September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published its framework and final recommendations for managing and disclosing nature-related risks. The framework is modelled on the Task Force on Climate-related Financial Disclosures (TCFD) framework but is focused on helping businesses assess nature-related impacts, dependencies, risks and opportunities. The TNFD is seeking feedback from industry on the draft guidance for financial institutions which can be found here. The finalised guidance for financial institutions is due to be published next year. This will include specific metrics around exposure to high-impact sectors and sensitive locations.

EU Greenwashing
EU reaches provisional agreement on new anti-greenwashing directive

On 19 September 2023, the European Parliament announced a provisional agreement on a proposed directive which will include banning the following:

  • generic environmental claims (e.g. “environmentally friendly”, “natural”, “biodegradable”, “climate neutral” or “eco”, without proof of recognised excellent environmental performance relevant to the claim);
  • claims based on emissions offsetting schemes that a product has neutral, reduced or positive impact on the environment;
  • commercial communications about goods that contain a design feature to limit product durability, only sustainability labels from approved certification schemes will be allowed.

The proposed directive will require final approval by the Council of the EU and the EU Parliament. When the directive comes into force, EU member states will have 24 months to implement into national law.

Climate stress testing
ECB occasional paper on climate stress testing (financial institutions)

On 6 September 2023, the European Central Bank (ECB) published an occasional paper (no 328) setting out the results of its second economy-wide climate stress test. The first economy-wide stress test exercise was published in September 2021.

The paper introduces three short-term transition scenarios (i.e. an accelerated transition, a late push transition and a delayed transition) and sets out the impact of these scenarios on euro area financial institutions over the next eight years.

The ECB notes that by comparing different transition scenarios, the results of the stress testing exercise show that acting immediately and decisively would provide significant benefits for the euro area economy and financial system, not only by maintaining the optimal net zero emissions path (and therefore limiting the physical impact of climate change), but also by limiting financial risk. Firms are encouraged to engage and to consider fast tracking to net zero, as summarised in the EBA's blog.

Transition finance
GFANZ releases consultative document: Defining Transition Finance and considerations for decarbonization contribution methodologies

On 20 September 2023, the Glasgow Financial Alliance for Net Zero (GFANZ) launched a consultation to gather views and approaches in respect of defining transition finance and decarbonisation methodologies building on their previous work. The consultation is open to all and closes on 2 November 2023.

Climate-related risks
Network for Greening the Financial System climate-related litigation guidance (multi-sector)

On 1 September 2023, the Network for Greening the Financial System (NGFS) published the following two complementary reports, building on their previous report on growing sources of risk (November 2021).

  • Climate-related litigation: recent trends and developments: this report provides an update on climate-related litigation and a notable trend for an increase in ongoing climate-related litigation cases. The report identifies three categories of climate-related litigation and provides an overview of the trends and developments observed in each of these categories. The report focuses, in particular, on how these trends can impact the financial sector, and the work of central banks and supervisors.

  • Report on micro prudential supervision of climate-related litigation risks: This report offers insight on the current supervisory landscape on climate-related litigation risk (CLR) and notes the challenges of reliably evaluating and predicting the evolution of these risks. The report considers possible supervisory approaches and emerging practices, whist noting that this area will likely only grow in importance.

UK developments

UK Green Taxonomy
UK Green Taxonomy technical advice published by GTAG

The latest update on timing for the UK Green Taxonomy consultation is that it is due to be published in Autumn 2023. In August and September 2023, the Green Technical Advisory Group (GTAG), set up by the Government in 2021 to provide independent advice on the design and implementation of a UK Green Taxonomy, published the following papers:

UK Greenwashing
FCA hosts first Greenwashing TechSprint

On 20 September 2023, the FCA hosted the first Global Financial Innovation Network (GFIN) Greenwashing TechSprint showcase day. Participating firms and regulators showcased their potential solutions that could help tackle the risk of greenwashing in financial services to a panel of independent judges, made up of industry experts, professionals and innovators. As Chair of the GFIN, the FCA brought together 13 firms and 15 international regulators and organisations to collaborate using its Digital Sandbox with a focus on Environment, Social and Governance (ESG) as a collective priority. The participants took on one of the 2 problem statements centred around greenwashing in financial services and built a solution in response to these challenges:

  • How can technology, including AI and Machine Learning, enable regulators and supervisors to verify that ESG-related product claims to retail consumers are accurate and complete?

  • How can technology help monitor, collate and identify examples of greenwashing from financial services firms’ websites, social media platforms and other documentation or data which can also be shared across jurisdictions?

Diversity and Inclusion
FCA and PRA consult on diversity and inclusion in the financial sector

On 25 September 2023, the FCA and PRA published long-awaited consultations (FCA CP23/20 and PRA CP18/23) which set out proposals to boost diversity and inclusion in financial services including a new regulatory D&I framework. For the first time, non-financial misconduct including bullying and harassment will be incorporated in other established rules (in relation to regulatory references, conduct rules and fitness and propriety). There will be new D&I-related reporting requirements, with a new proposed form of return. Larger firms could be required to publish a D&I strategy and appoint a new SMF to be responsible for the D&I strategy. Responses to the consultations are requested by 18 December 2023 and there is an FCA webinar on 30 October which can be signed up to here. The FCA have said they will publish a follow-up Policy Statement in 2024 and the implementation date for changes would be 12 months after publication of that Policy Statement.

Corporate reporting
UK Government publishes guidance on UK Sustainability Disclosure Standards

As mentioned in the Engage ESG Market Alert, on 2 August 2023, the Department for Business and Trade published guidance on the government's plans to create UK Sustainability Disclosure Standards.

Corporates will be required to disclose the sustainability related risks and opportunities that they face. The standards will form the basis of future legislative or regulatory requirements for corporate sustainability reporting.

The guidance sets out that:

  • UK Sustainability Disclosure Standards will be based on the IFRS Sustainability Disclosure Standards issued by the ISSB. The government previously made plans to assess the suitability of IFRS Sustainability Disclosure Standards for endorsement in the UK, and the creation of UK Sustainability Disclosure Standards.

  • The Secretary of State for Business and Trade will consider the endorsement of the IFRS Sustainability Disclosure Standards, to create the UK Sustainability Disclosure Standards, by July 2024. It is expected that UK endorsed standards will only differ from the global baseline if necessary for UK specific matters.

  • To assist with the assessment and endorsement of the IFRS Sustainability Disclosure Standards, and the implementation of the UK Sustainability Disclosure Standards, the government has established two committees: the UK Sustainability Disclosure Technical Advisory Committee (TAC) (supported by the FRC) and the UK Sustainability Disclosure Policy and Implementation Committee (PIC). Members of PIC consist of UK government departments and regulators, including the Bank of England, FCA, FRC and HM Treasury.

UK FCA upcoming ISSB consultation in relation to listed companies

On 10 August 2023, the FCA published Primary Market Bulletin 45 (PMB 45), its newsletter for primary market participants.

In the newsletter, the FCA sets out its plans to consult in the first half of 2024 on updated climate-related disclosure rules for listed companies referencing the UK-endorsed newly launched IFRS Sustainability Disclosure Standards IFRS S1 and S2 issued by the International Sustainability Standards Board (ISSB) on 26 June 2023 and new guidance on disclosures regarding transition plans adopted by listed companies. Assuming the Government's endorsement process is completed in the timeframe envisaged, the FCA aims to finalise its policy position by the end of 2024, with a view to bringing new requirements into force for accounting periods beginning on or after 1 January 2025. The first reporting would begin from 2026.

In the bulletin, the FCA:

  • sets out key features of the FCA's process for implementing the standards and plans for consultation.

  • explains how it will continue to supervise existing disclosures under the Task Force on Climate-related Financial Disclosures (TCFD) framework, until any new requirements are implemented.

  • advises issuers on what they can do now to prepare for any future obligations relating to reporting on the ISSB standards.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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