ESG Market Alert – November/December 2023

In this month’s ESG Market Alert, we cover:

• Withdrawal of proposed UK corporate reporting regulations

• Changes to UK FRC guidelines

• Market Practice Update: EU regulatory developments

• FCA proposes new rules to tackle greenwashing

• Agreement on World Bank "loss and damage" fund

Withdrawal of proposed UK corporate reporting regulations

The changes to the FRC guidelines followed the UK government also withdrawing its draft proposed corporate reporting regulations, which were aimed at bolstering disclosure and reporting requirements for large listed and private companies, raising concerns among many over transparency and trust in future corporate reporting.

The measures, including annual resilience and fraud statements, were intended to enhance accountability for companies, but have been abandoned due to concerns raised during the government's consultation with businesses. The government's focus is now shifting to simplifying existing reporting requirements rather than introducing new ones.

While the government maintains it is committed to broader audit and governance reform, stakeholders emphasise the need to strike a balance between effective governance and maintaining the UK's competitiveness. Efforts to review regulators, and reassess reporting requirements signal ongoing attempts to streamline regulations. But debates continue regarding whether these changes adequately address the call for improved corporate transparency and governance.

Changes to UK FRC guidelines

The UK's Financial Reporting Council (FRC) has announced an overhaul of its proposed reforms, dropping more than half of the 18 changes which the FRC had previously proposed during consultations in May. Those recommendations that have been dropped include requirements relating to diversity reporting and new responsibilities for audit committees.

The initial reforms were proposed by the UK government following the high profile public failures of Carillion, Patisserie Valerie and BHS. The UK government is seeking to reduce the perceived ESG reporting burden on UK companies to maintain the UK's competitiveness, but many have criticised the government for abandoning its prior proposed reforms.

The policy update did not clarify exactly which recommendations the FRC proposes to retain, but they intend to issue an updated Code of Conduct in January 2024.

Market Practice Update: EU regulatory developments

The EU has seen a variety of new regulatory developments:

• The EU's green bond standard (GBS) has now been approved by the European Parliament. Labelled as a voluntary “gold standard” for green bonds, the GBS sets out uniform requirements for bond issuers wishing to use this gold standard. Among other requirements, those issuers wishing to use the GBS must publish a ‘factsheet’ and prospectus, have the bond externally reviewed by a reviewer registered with and supervised by ESMA, and there is a requirement that proceeds raised are deployed in accordance with the relevant EU Taxonomy Regulation.

• The European Commission has proposed two major changes to the Corporate Sustainable Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS) framework.

• The CSRD, supplemented by the ESRS, provides for the introduction, on a phased basis, of a sustainability reporting regime for EU and non-EU companies. In its 2024 statement of work, the European Commission has announced two significant changes to the CSRD:

  • the reporting deadline for sector specific disclosures has been postponed by two years (to 30 June 2026); and

  • as a consequence of changes made to the EU Accounting Directive (amended by the CSRD), roughly one million SMEs will no longer fall within the scope of the CSRD's disclosure requirements.

FCA proposes new rules to tackle greenwashing

The FCA has confirmed a substantial package of new measures, coming into force in December 2024, to tackle greenwashing and improve the trust and transparency of sustainable investment products.

The new measures will introduce:

• a general anti-greenwashing rule which authorised firms will need to comply with, to ensure sustainability-related claims are fair, clear and not misleading;
• product label requirements based on clear sustainability goals and criteria to help investors understand where their money is being invested and help them make sustainable investment decisions; and
• marketing restrictions preventing products from being described as having a positive impact when they do not.

Agreement on World Bank "loss and damage" fund

Countries have agreed on a draft framework for a "loss and damage" fund which will aid those worst hit by climate change. Initially administered by the World Bank, the fund will support reconstruction, rehabilitation, and relocation necessitated by climate disasters. Funding sources will include carbon markets, grants, and concessional loans from public and private sources. Concerns persist over whether the fund will provide sufficient aid to vulnerable countries, which might require trillions yearly to recover from extreme weather and slow-onset events. The agreed blueprint is expected to be formally adopted at the COP28 summit in Dubai at the end of the month.

ESG Counsel™ 

The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and geographic holistic advice as ESG Counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximise positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.

Authored by Nicola Evans, Patrick Sarch, Nick Cooke, Brian Chiu, Sheyna Cruz, Aun Hussain, Ben Littlewood, Bethan Savage, and Stephen Tang.