UK developments

DRWG consults on a draft code for ESG ratings and data product providers

On 5 July 2023, the ESG Data and Ratings Code of Conduct Working Group (DRWG) supported by the International Regulatory Strategy Group (IRSG) and the International Capital Market Association (ICMA) published a consultation on a draft voluntary code of conduct for ESG ratings and data product providers. The consultation closes on 5 October 2023. The DRWG intends to publish the final code at the end of 2023.

The draft code sets out the following best practice principles:

• Good governance – ESG ratings and data products providers ensure appropriate governance arrangements are in place including transparency and conflict management.
• Systems and controls – implementing written policies and procedures to ensure a high quality of products, consistency and effective engagement practices.
• Conflicts of interest – ESG ratings and data products providers manage activities that may compromise the independence and objectivity of ratings and operations.
• Transparency – establishing adequate levels of public disclosure and transparency as a priority for ESG ratings and data products, including methodologies and processes.

FSM Bill receives Royal Assent: sustainability requirements

The Financial Services and Markets Bill 2023 (the FSM Act) was enacted on 29 June 2023. In relation to sustainability disclosure requirements (SDR), the Act requires the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to have regard to an SDR policy statement by HM Treasury when making rules or issuing guidance about such requirements.

The FCA and PRA are also required to comply with a request by HM Treasury to provide a report in order to inform a HM Treasury policy statement and to report in their annual reports how they have regard to any HM Treasury policy statement when making SDR rules.

Further information about the Financial Services and Markets Act 2023 is set out in this Engage article.

FCA letter on sustainability-linked loan market review

On 29 June 2023, the FCA outlined its concerns with regards to sustainability-linked loans (SLLs) after engaging with stakeholders in March and April 2023. Although the FCA does not regulate this market directly, it wants to ensure that the sustainable finance market works well, and that market integrity is maintained. The FCA states that it has no current plans to introduce regulatory standards or a code of conduct for SLLs, but that it will reconsider this if it considers that the market needs it.

FCA welcomes launch of ISSB standards

Following the International Sustainability Standards Board (ISSB) launch of its first sustainability-related reporting standards (ISSB Standards) on 26 June 2023 (further details set out in the EU and international section below) the FCA announced that it would be establishing a mechanism for formal UK endorsement and adoption of the standards. Once available for use in the UK, the FCA intends to update its climate-related disclosure rules to reference the ISSB standards.

The FCA stated that it remains committed to playing an active role in supporting implementation of the ISSB Standards and helping to build capacity to adopt these around the world. The FCA says it will continue to influence and promote the ongoing development of a global baseline of sustainability-reporting standards to meet the needs of capital markets and serve the public interest.

Sacha Sadan, Director of Environmental, Social & Governance, at the FCA said: 'At its launch at COP26 in November 2021, our CEO, Nikhil Rathi, referred to the ISSB as a ‘game-changer’ – and what we’ve seen over the past 18 months or so is that he was absolutely right. We have been working closely with the ISSB since the start and are hugely supportive of its mission to create a common, global language for companies around the world to communicate their sustainability stories in a consistent and comparable way. That is why we are delighted to see the final standards launched today.'

FCA speech on how culture must change to meet expectations including around ESG

On 26 June 2023, the FCA published a speech by Emily Shepperd, FCA Chief Operating Officerand Executive Director of Authorisations, on how financial services firm culture must change to meet expectations.

The speech referred to the FCA's work on the SDR and investment labelling as crucial. The FCA is “determined to clean up "ESG" and "sustainability" classifications, restoring credibility and confidence to the system, before cynicism destroys what is a potentially huge and beneficial market”.

DBT and FRC consult on non-financial reporting requirements

On 8 June 2023, the Department for Business and Trade (DBT) and the Financial Reporting Council (FRC) published a call for evidence (applying to multi-sector including financial services) as an initial step in their review of non-financial reporting requirements. The call for evidence is open to financial market participants, companies, accounting firms and other stakeholders - until 16 August 2023. The responses will inform the UK’s future approach to reporting requirements and active participation is encouraged.

In light of the increased focus on non-financial reporting requirements and the need to be aligned with international changes, such as the ISSB Standards, the aim of the review is to update and rationalise the UK’s framework for non-financial information, allowing companies to produce information that is focused, comparable and concise.

UK Government holds first Net Zero Council with business and finance leaders

On 9 May 2023, the UK government convened a new Net Zero Council with business and finance leaders to drive forward the industry's transition to net zero. The Council is co-chaired by Energy Minister Graham Stuart and Co-op Group chief executive Shirine Khoury-Haq. The key objectives of the Council are to:

• Lead a systematic review of the financing challenges and the roles of government, industry and the financial sector in addressing them.

• Ensure sectors and companies have a pathway to net zero, including looking at the barriers and connections across sectors.

• Identify key challenges facing SMEs in reducing their carbon footprints and supporting their transition.

While not currently mandatory, many UK companies are already publishing their commitments to achieve net zero, including transition plans, on a voluntary basis.

UK FRC consults on Corporate Governance Code

On 8 May 2023, the Financial Reporting Council (FRC) published a consultation paper on proposed changes to the Corporate Governance Code (the Code) (applying to multi-sector companies including relevant financial services companies). The consultation closes on 13 September 2023 with changes to the Code expected to apply for reporting periods beginning on 1 January 2025. The key focus of the reforms is to take a look at strengthening the governance system of companies as well as including a number of ESG requirements set out below:

• Sustainability reporting – the FRC is considering a requirement for the board committee to monitor the integrity of sustainability reporting.
• Diversity and inclusion – encouraging board diversity beyond gender and ethnicity.
• Remuneration – a requirement to align remuneration to the company’s long term strategy including ESG objectives.

Bank of England speech on climate action

On 18 April 2023, the BoE published a speech by Sarah Breeden, BoE Executive Director, Financial Stability Strategy and Risk, on climate action.

The speech in summary sets out that although there has been a step-change in the approach of UK banks and insurers to managing climate risks since 2020 there is still much more to do.

The BoE outlined four key challenges that need to be overcome if aspiration is to be turned into action that advances the transition:

• Firms should not delay taking action to set out clear and comprehensive policies to the pathway to net zero to better understand how such transition might impact their businesses.

• Filing capability gaps in the transition finance infrastructure – firms need to be equipped with forward-looking information to allocate capital effectively.

• Firms need to be nimble and adaptable in the near term while continuing to make progress in the long term against the backdrop of unexpected political and economic headwinds and limited bandwidth.

• Firms should be stretching their horizons – but system wide change is complex as the actions of one are dependent on actions of others, so it is important to coordinate action throughout the supply chain. That does not mean immediately ceasing to deal with high emission counterparties and suppliers. Rather, economy-wide emissions reductions will come through proactive engagement with counterparties and suppliers, and decisions aligned to the transition over time.

FCA Business Plan 2023/24: ESG priorities

On 5 April 2023, the FCA published its Business Plan 2023/24 which refers to its continued collaboration with its recently formed ESG Advisory Committee and emphasises that sustainability-related matters are becoming increasingly material to firms' future prospects. Key activities that will be started or continued by the FCA in 2023/24 include:

• Consulting on changes to the FCA’s Listing Rules to reference the final ISSB standards.

• Providing a Feedback Statement to the Discussion Paper on ESG governance, incentives, and competence, including planned next steps.

• Furthering work on ESG governance, incentives, competence and SDR and labels and beginning the implementation process.

• Publishing its own net zero transition plan.

Further detail about the FCA Business Plan is contained in this Engage article.

HM Treasury published a consultation paper on its proposed regulatory regime for ESG ratings providers

On 30 March 2023, the HM Treasury published a consultation paper setting out proposals on the scope of a new regulatory regime for ESG ratings providers. The consultation closed on 30 June 2023. HM Treasury considers that there is clear benefit to be gained from improving the transparency of methodologies, governance, and processes of ESG ratings providers through regulation. The consultation focused on ESG ratings specifically and did not consider ESG data. In the meantime, we note that a voluntary Code of Conduct applicable to ESG ratings and ESG data expected to be in line with IOSCO recommendations will continue to be developed in parallel.

Powering up Britain: government publishes strategies on net zero, energy security, green finance, and associated policies and responses

On 30 March 2023, the Department for Energy Security and Net Zero published Powering up Britain: Net Zero Growth Plan, setting out how the UK government aims to enhance the UK's energy security, seize the economic opportunities of the low carbon transition and deliver the government's net zero commitments. The UK has made net zero commitments under the Climate Change Act 2008 (CCA 2008). It must also achieve its nationally determined contribution (NDC) under the UNFCCC Paris Agreement. In 2022, the High Court found that the government's 2021 Net Zero Strategy was inadequate and gave it until the end of March 2023 to produce a revised plan.

Updated Green Finance Strategy 2023

On 30 March 2023, the government published its updated net-zero Green Finance Strategy. The Strategy sets out the plan for a global transition to a resilient, nature-positive, Net Zero economy with “trillions of pounds” reallocated and invested in new technologies and services and infrastructure. It updates the previous 2019 Green Finance Strategy. In a joint statement, the FCA, the FRC, the BoE and the TPR welcomed the Government’s update Green Finance Strategy The key elements of the updated Green Finance Strategy are set out in this Engage article.

FCA update on SDR and investment labels consultation

On 29 March 2023, the FCA published an update regarding CP22/20 on SDR and investment labels which closed on 25 January 2023. Further to the update, the H1 2023 date for the SDR final rules and policy has been pushed back until Q2 2023 and the proposed effective dates will also be adjusted to reflect this delay. Further details on this development can be found in our Engage article.

Dear CEO: FCA outlines where improvements are needed in ESG benchmarks

On 20 March 2023, the FCA published a Dear CEO letter to benchmark administrators outlining the findings of its preliminary review on ESG benchmarks. The review found that the overall quality of ESG-related disclosures made by benchmark administrators was poor. These were some of the issues identified:

• Not enough detail on the ESG factors considered in benchmark methodologies.
• Not ensuring that the underlying methodologies for ESG data and ratings produces used in benchmarks are accessible, clearly presented and explained to users.
• Not fully implementing ESG disclosure requirements.
• Benchmark administrators failing to implement their ESG benchmarks’ methodologies correctly – for example, using outdated data and ratings or failing to apply ESG exclusion criteria.

The FCA states that it expects all benchmark administrators to have strategies to address the issues identified in the letter. It will be doing more work in this area to address the potential failings, and expects firms to be able to explain these strategies on request. The FCA has said that it will support regulation of ESG ratings.

Climate Change Agreements (CCAs): UK government publishes further consultation on a future scheme

On 15 March 2023, the Department for Energy Security and Net Zero (DESNZ) published a consultation on its proposals for a future climate change agreement (CCA) scheme. The consultation closed on 10 May 2023.

Bank of England: Report on climate-related risks and the regulatory capital frameworks

On 13 March 2023, a report published by the BoE sets out its views on climate-related risks and regulatory capital frameworks. The report includes updates on: capability and regime gaps; capitalisation timelines; and areas for future research and analysis.

The BoE has identified a number of next steps and will:

• Maintain its focus on ensuring that firms make progress to address capability gaps to improve the identification, measurement, and management of climate risks.
• Further develop its capabilities to test the resilience of the financial system to climate risks including scenario exercises and stress tests
• Progress work to understand material regime gaps in the capital frameworks. The Bank will consider the potential systemic risks of climate change and explore whether any changes to the macroprudential framework might be appropriate.
• Support ongoing international and domestic initiatives to enhance climate disclosures by the wider economy needed by banks and insurers to manage and measure risk, including the adoption of ISSB standards.
• Play an active role in promoting high quality and consistent accounting of climate risks, given accounting is a foundational building block of the capital framework for banks.

Alongside this, the BoE will continue to engage in relevant discussions at international fora on how regulatory frameworks and supervisory practices need to be adjusted to account for climate risks.

Bank of England: Understanding climate-related disclosures of UK financial institutions

On 10 March 2023, the BoE published a staff working paper setting out research on voluntary climate-related disclosures in the UK banking and insurance sectors with the aim of encouraging comments and debate. The working paper found that climate-related disclosures by UK banks and insurers have increased over time with significant increases in disclosures across all TCFD themes in 2019 and 2020.

The findings suggest that regulators setting clear timelines for mandatory disclosures accelerates disclosures leading to greater convergence across firms.

Treasury Committee calls for further work on the FCA's greenwashing proposals

On 9 March 2023, the Treasury Sub-Committee on Financial Services Regulations, which scrutinises regulatory proposals, called for the FCA to spell out how those consumers who currently invest in funds accused of greenwashing will have to pay to move their investments into new ‘sustainable’ funds.

It has also asked for a more detailed cost benefit analysis of the FCA’s SDR proposals and what enforcement work the FCA will be doing to tackle funds who have misled consumers. They have also asked if there is a risk that tighter regulations could drive funds away from ESG investing or out of the UK, reducing consumer choice.

EU and international developments

ISSB issues inaugural global sustainability disclosure standards

On 26 June 2023, the ISSB issued its ISSB Standards – IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) which are designed to usher in a new era of sustainability-related disclosures in capital markets worldwide. The ISSB Standards aim to help improve trust and confidence in company disclosures about sustainability to inform investment decisions. For the first time, the Standards create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects.

IFRS S1 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.

Both fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The ISSB developed IFRS S1 and IFRS S2 with the benefit of extensive market feedback and in response to calls from the G20, the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), as well as leaders in the business and investor community.

Following the issuance of IFRS S1 and IFRS S2, the ISSB will work with jurisdictions and companies to support adoption. The first steps will be creating a Transition Implementation Group to support companies that apply the Standards and launching capacity-building initiatives to support effective implementation.

European Commission Sustainable Finance Package

On 13 June 2023, the European Commission issued a package of measures to build on and strengthen the EU sustainable finance framework (the Sustainable Finance Package). The EU has been building a sustainable finance framework since 2018 and has made significant progress with the implementation of Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable lending (Taxonomy Regulation) and Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR).

The package includes the following:

• A new EU Taxonomy Environmental Delegated Act including the technical screening criteria for the remaining four environmental objectives under the EU Taxonomy Regulation;
• Amendments to the EU Taxonomy Climate Delegated Act introducing technical screening criteria covering additional economic activities for the climate change mitigation and adaption objectives under the EU Taxonomy Regulation;
• Proposal for a Regulation on ESG rating activities (see further detail in this Engage article); and
• Commission Notes with guidance on the EU Taxonomy Regulation

In issuing the Sustainable Finance Package, the European Commission acknowledges that, whilst the framework is beginning to work as intended, companies are facing challenges when transitioning to a climate neutral and sustainable economy. Complying with disclosure and reporting requirements is also challenging.

The Sustainable Finance Package aims to:

• Ensure the EU sustainable finance framework continues to support companies and the financial sector, while encouraging the private funding of transition projects and technologies.
• Increase the transparency of sustainable investments.
• Ensure the usability and inclusiveness of the framework for companies of different sizes, business models and with different starting points in the transition.

The European Commission's communication introduces the measures. It also explains how the Commission will encourage additional investments into sustainable activities and how it envisages the framework being developed and refined.

Key points of interest include:

• A consultation on assessing the SFDR will launch in autumn 2023. This will focus on assessing shortcomings in the SFDR to improve legal certainty, enhancing usability and improving the legislation's role in mitigating greenwashing.
• The Commission is committed to strong co-operation at an international level, noting that it wants to ensure international interoperability.
• The Commission will continue to provide guidance to support the application of rules in a clear and effective way. It will also assess gaps and usability concerns and how to address them. Specific focus will be placed on assessing how to make the sustainable finance framework more usable and inclusive for SMEs. Another priority will be to continue work on facilitating transition finance, including by exploring how to better integrate the taxonomy into the framework in a simple and user-friendly way. The Platform on Sustainable Finance and the European Supervisory Authorities (ESAs) will provide input into this work.
• It is the ultimate intention of the Commission that when a company reports sustainability information in accordance with the European sustainability reporting standards (ESRS), they will be deemed to be compliant with global standards. This is why the Commission has been working closely with the ISSB and the Global Reporting Initiative (GRI). Separate standards will be developed for listed SMEs that are proportionate to the capacities and the characteristics of SMEs and to the scale and complexity of their activities. The Commission is also keen for EFRAG to develop a voluntary standard for non-listed SMEs.

A Commission staff working document on enhancing the usability of the EU taxonomy and the overall EU sustainable finance framework (SWD(2023) 209 final) accompanies the communication. It provides an overview of the key pillars of the regulatory framework and summarises actions taken to enhance the usability of the taxonomy and the wider sustainable finance framework.

Finally, as part of the sustainable finance package, the Commission published further guidance in a Notice on the interpretation and implementation of certain legal provisions of the Taxonomy Regulation and links to SFDR (dated 12 June 2023). The guidance includes an important clarification on how “Taxonomy-aligned investments” can qualify as “sustainable investments” under the SFDR. Further information can be found in this Engage article.

European Commission consults on draft Regulation on first set of EU sustainability reporting standards

On 9 June 2023, the European Commission published a consultation on a proposed Delegated Regulation setting out the first set of EU sustainability reporting standards, the ESRS. The Corporate Sustainability Reporting Directive 2022 ((EU) 2022/2464) (CSRD) amended the Accounting Directive (2013/34/EU) to introduce requirements for in scope companies to report against the ESRS. The consultation closed on 7 July 2023.

In November 2022, EFRAG (formerly the European Financial Reporting Advisory Group) submitted the first set of draft ESRS that it has developed to the Commission. The proposed Delegated Regulation sets out the ESRS that apply to all undertakings under the scope of the CSRD regardless of which sector or sectors the undertaking operates in.

Proposed Annex I contains:

• Two sets of cross-cutting ESRS. The first covers general requirements (including explaining double materiality, the value chain and how to prepare and present sustainability information). The second covers general disclosures (including on governance, strategy, and impact, risk and opportunity management, and metrics and targets).
• A set of specific ESRS on environmental disclosures, covering climate change, pollution, water and marine resources, biodiversity and ecosystems, and resources and the circular economy.
• A set of specific ESRS on social disclosures, covering an organisation's own workforce, workers in the value chain, affected communities and customers and end-users.
• A specific ESRS on governance, which covers business conduct.

Proposed Annex II contains the list of acronyms and the glossary of definitions to be used for the ESRS.

The CSRD requires the Commission to adopt this first set of ESRS by June 2023. The CSRD also requires the Commission to adopt by June 2024, sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies. EFRAG is working on the second set of draft ESRS.

European Parliament adopts its negotiating position on CSDDD proposal

On 1 June 2023, the European Parliament agreed its negotiating position on the Commission’s proposal for a Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) amending Directive (EU) 2019/1937. CSDDD is part of the European Green Deal and the aim of it is to foster sustainable corporate behaviour, anchoring human rights and environmental considerations in companies’ operations and corporate governance. The Council of the EU reached its own negotiating position on the CSDDD in December 2022. The official negotiations between the Parliament and the Council (trilogues) began on 8 June 2023. Final agreement on the CSDDD is expected by the end of 2023. We will keep a close eye on further changes to the current draft of the CSDDD in particular in relation to key issues such as the inclusion of financial services and civil liability.

ESAs Progress Report on greenwashing

On 31 May 2023, the European Supervisory Authorities (ESAs) published a Progress Report on Greenwashing. The ESAs’ publication is important because it provides a definition of greenwashing, displays the regulators’ intention to enforce on sustainability-related matters, and outlines the areas in which the ESAs believe that current regulations might need reform.

The Progress Report is a response to a request from the European Commission (EC) in May 2022 for the ESA’s input on “greenwashing risks and the supervision of sustainable finance policies”. The call for input asked for guidance on the definition of greenwashing, understanding the risks posed by greenwashing for the financial sector, the implementation of policies to prevent greenwashing, and potential improvements to EU regulations. ESMA also identified the need to address greenwashing as one of its priorities in its Sustainable Finance Roadmap 2022-2024.

A final report is expected by May 2024 which will outline the ESA’s final recommendations, including possible changes to the EU regulatory framework.

UNEPI publishes guidance for financial institutions and other business on measuring business dependencies on nature

On 29 May 2023, the UN Environment Programme Finance Initiative (UNEPFI) published guidance for businesses and financial institutions on measuring business dependencies on nature.

The guidance explains why it is important to measure business dependencies on nature. It also includes recommendations for financial institutions and businesses that:

• Measurements are holistic, that is, that they go beyond how a business relies on particular ecosystem services and instead incorporate wider nature trends and the impacts of other businesses and local communities.

• Financial institutions and businesses appreciate the differences between dependencies on different types of ecosystem services and whether they involve consumption of an ecosystem asset.

• Measurements look ahead to when essential ecosystem services could reach tipping points.

The guidance sets out how to measure the key components of business dependencies on nature (reliance on the ecosystem service, impact drivers from the business's own activities, external drivers of change, state of nature supporting the ecosystem service and ecosystem service). The approach is aligned with the "evaluate" phase of the "Locate, Evaluate, Assess and Prepare" (LEAP) assessment process developed by the TNFD.

The final version of the TNFD framework is due to be released in September 2023.

ESMA speech highlights role in facilitating the transition to a low carbon economy

On 25 May 2023, ESMA published a speech by Natasha Cazenave, ESMA’s Executive Director, focusing on ESMA’s contribution to facilitating the transition to a low carbon economy. The speech addresses key points, including the complexity of the sustainability-related disclosures framework for investors and the potential benefits of introducing labels for sustainable financial products to support an orderly transition. ESMA also highlights the need for specific criteria to prevent greenwashing in investment funds that claim to have sustainability characteristics or goals, particularly in fund naming practices. Furthermore, ESMA prioritizes ESG disclosures as a strategic supervisory focus, aiming to promote consistent scrutiny across the sustainable investment value chain through supervisory actions conducted by National Competent Authorities (NCAs) across the EU.

ESAs issue consolidated Q&As on SFDR

On 17 May 2023, the Joint Committee of the ESAs published a set of consolidated Q&As relating to the SFDR and Commission Delegated Regulation (EU) 2022/1288, which supplements the SFDR with regard to RTS on content and presentation of information (SFDR Delegated Regulation).

The Q&A document combines responses given by the European Commission to questions relating to the practical application or implementation of the SFDR.

Council of the EU adopts new rules to minimise deforestation and forest degradation

On 16 May 2023 the Council formally adopted the Deforestation Due Diligence Regulation (DDDR). This follows political agreement reached by the EU Parliament and Council in December 2022 and the Parliament’s formal adoption on 19 April 2023. The Regulation is aimed at minimising the risk of deforestation and forest degradation associated with products that are imported into or exported from the EU. In relation to financial services, the DDDR could have an impact in potentially restricting financial financial institutions’ activities in relation to for example forest risk commodities.

LMA publishes model provisions for sustainability-linked loans

On 4 May 2023, the LMA published draft model provisions for sustainability-linked loans (SLLs). The purpose of the model provisions is to provide a proposed form of draft SLL provisions for inserting into LMA loan documentation that meet the Sustainability Linked Loan Principles and accompanying guidance.

The model provisions aim to reflect current market practice and provide a basic drafting framework to help parties in the negotiation of the document. They also include drafting notes that set out points for parties to consider when undertaking a SLL transaction. The provisions are available to LMA members on the LMA website.

For further information on the model provisions and an in-depth look at the suggested model terms please see this Engage article.

EBA consultation paper on draft guidelines on the benchmarking of diversity practices (financial institutions)

On 24 April 2023, the EBA published a consultation on draft guidelines for the benchmarking of diversity practices under the Capital Requirements Directive IV (CRD IV) and the Investment Firms Directive. The consultation closes on 24 July 2023. The guidelines are intended to cover the information which should be collected from credit institutions and investment firms about diversity practices (i.e. diversity policies and the gender pay gap of management bodies).

European Commission responses to the inquiries from ESAs regarding SFDR

On 14 April 2023, the European Commission published responses to the questions raised by the ESAs regarding the SFDR. These responses address concerns related to the "sustainable investments" test and compliance requirements for funds that track EU Paris Aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs) under Article 9(3) of the SFDR.

Importantly, the Commission has revised its previous guidance on Article 9(3) funds tracking EU PABs/CTBs. Initially, it was suggested that these funds would need to comply with the sustainable investment requirements outlined in Article 2(17) of the SFDR. However, the Commission has now clarified that passively tracking an EU PAB/CTB will be sufficient for the fund to be treated as an Article 9 product. This clarification is significant because it removes the additional compliance requirement that would have been placed on these funds. Instead, by adhering to the specific requirements of tracking EU PABs/CTBs, these funds will be considered as meeting the criteria for Article 9 classification under the SFDR.

Overall, the Commission's responses provide clarity to the industry and alleviate concerns about potential tightening of standards.

ESAs consult on amendments to the RTS supplementing EU SFDR

On 12 April 2023, ESA published a joint consultation paper in response to the joint mandate they received from the EU Commission to review and revise the RTS set out in Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing the SFDR. The purpose of the review is to broaden the existing disclosure framework and address some of the technical issues that have arisen since SFDR was originally agreed.

In the Consultation Paper, the ESAs propose the following changes:

• extension and enhancement of the list of social indicators for the disclosure of the principal adverse impacts (PAIs) of investment decisions;

• refinement of the content of other indicators for adverse impacts and their respective definitions, applicable methodologies, metrics and presentation; and

• adding product disclosures regarding decarbonisation (greenhouse gas (GHG) emissions reduction) targets, the level of ambition and how the target will be achieved.

The consultation period ended on 4 July 2023. Further details and a discussion of the amendments are set out in our Engage article here.

Climate change: European Commission prepares Communication on 2040 climate target

On 31 March 2023, the European Commission adopted a call for evidence for an Impact Assessment and launched a public consultation on a Communication, to be adopted in Q1 of 2024, on a 2040 climate target.

The call for evidence and public consultation aim to prepare a 2040 climate target, to tackle climate change and strengthen the EU's global leadership role in the fight against climate change. There are also co-benefits, synergies and potential trade-offs with air pollution, water supply, waste management, resource efficiency, circular economy and biodiversity.

The public consultation ended on 23 June 2023.The feedback received to the public consultation will be integrated into the Impact Assessment supporting this initiative, which is expected to be published in 2024.

TNFD releases the fourth and final draft framework addressing risks

On 28 March 2023, the TNFD unveiled its fourth and final draft framework, focusing on the management and disclosure of nature-related risks and opportunities. The consultation period concluded on 1 June 2023, with the TNFD expected to publish the final version of the framework in September 2023.

TNFD has incorporated minor adjustments to the risk and opportunity assessment process based on feedback. TNFD will strongly encourage all businesses to disclose the relevant 14 metrics on a "comply or explain" basis. These metrics align with the global policy objectives of the COP15 biodiversity conference. Additionally, the TNFD has released draft guidance on stakeholder engagement and sector-specific guidance for various sectors including financial services. The TNFD also published a fictional case study featuring a bank that faces challenges in aligning with the draft recommendations.

ECB and the ESAs call for enhanced climate-related disclosure for structured finance products

On 13 March 2023, the ESAs, together with the European Central Bank (ECB), published a Joint Statement on climate-related disclosure for structured finance products. The Statement encourages the development of disclosure standards for securitised assets through harmonised climate-related data requirements.

Currently, there is a lack of climate-related data on the assets underlying structured finance products. This poses an obstacle for the classification of products and services under the EU Taxonomy Regulation and SFDR and hinders the proper assessment and management of climate-related risks. The Statement sets out the joint efforts of the ECB and the ESAs to facilitate access to climate-related data with a view to improving sustainability-related transparency in securitisations and to promote consistent and harmonised requirements for similar instruments.

US SEC climate-related disclosure rules are delayed

The wait continues for the release of the final climate risk disclosure rule, the rule was initially set to be published in December 2022, but was subsequently postponed to the end of April this year. However, a former SEC Commissioner shared on a TD Cowen webinar on 27 April 2023, that it is not likely that the rule will be finished until late this year, or even early 2024.

The proposed rule, that was initially published in March last year for consultation, would require publicly traded companies to disclose their greenhouse gas emissions and any climate-related risks to their operations.