UK/EU ESG Regulation monthly round-up – February 2023

UK developments

FCA discussion paper on finance for positive sustainable change

On 10 February 2023, the FCA published a discussion paper (DP23/1) on finance for positive sustainable change, which explores how firms' sustainability-related governance arrangements, incentives and competencies can support the role of finance in driving positive sustainable change and delivery in line with firms' sustainability-related objectives. 

There are two parts to DP23/1:

• The first part considers how firms' governance, incentives and competence can support positive change, along with how firms embed sustainability-related considerations into their objectives and purpose, and how these are then reflected in its culture, business strategy, governance and incentives. It also considers training and competence on sustainability in regulated firms. In particular, the FCA explores good industry practices, identifies where knowledge gaps currently arise and queries whether further regulatory measures are necessary to help deal with them.
• The second part includes a series of articles commissioned by the FCA from, among others, industry practitioners and academics, with relevant perspectives on firms' sustainability-related governance, incentives, competence and stewardship arrangements. The FCA notes that these may encourage firms to review their practices, even without it setting further regulatory expectations.

Comments can be made on DP23/1 until 10 May 2023. The FCA will use feedback to DP23/1, together with ongoing analysis and supervisory engagement with firms, to consider how it can better support the industry and whether there is a case for further regulatory measures in the area of firm governance, incentives and competencies to support the role of finance in contributing to positive change.

The FCA encourages firms to reflect on the matters raised in DP23/1 and consider, as appropriate, incorporating them as they review and refine their current approaches to governance, remuneration, incentives and training

For further information, please see our Engage article here.

HM Treasury speech on an environmental, economic vision for the UK

On 21 February 2023, the Rt Hon John Glen MP, Chief Secretary to HM Treasury delivered a speech on how the UK can rewire the global financial system for a sustainable, prosperous future. The speech indicates what we can expect when the revised UK Green Finance Strategy is published later this year, with a strong focus on encouraging private investment in new nature markets, scaling up voluntary carbon markets and using financial services to help preserve ecosystems and biodiversity.

A new Big Nature Impact Fund is being proposed to invest £30m of UK government de-risking capital into a new, private sector, blended impact fund for domestic nature recovery. 

The speech emphasises support for the development of the nature risk management and disclosure framework due to be finalised by the Taskforce on Nature-related Financial Disclosures later this year.  The UK government appears to be ambitious in its plans to keep the momentum going on ESG.

Treasury Committee Inquiry into whether ‘sustainable’ investment funds are greenwashing

On 14 February 2023, the Treasury Sub-Committee on Financial Services Regulations (the Sub-Committee) opened an inquiry into ‘Greenwashing: sustainability disclosure requirements’ (Inquiry). The Sub-Committee is part of the Treasury Committee and its role is to scrutinise newly proposed draft financial services regulations which are open for consultation by the UK regulators.

The Inquiry follows the publication of the FCA’s proposals for Sustainability Disclosure Requirements (SDR) and investment labels set out in FCA Consultation Paper 22/20 (CP22/20) published on 25 October 2022 and discussed further in our earlier Engage article.  In CP22/20, the FCA proposes introducing criteria that a UK investment fund needs to meet before it can describe itself as ‘sustainable’, ‘ESG’, ‘green’ or similar. A key concern is that firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims about their products that don’t stand up to closer scrutiny (so-called ‘greenwashing’). CP22/20 closed for comments on 25 January 2023 and the FCA is expected to finalise the SDR in a policy statement due by the end of H1 2023. The SDR and labelling rules are then expected to come into effect on 30 June 2024 subject to consultation feedback.

A first formal oral evidence session of the Sub-Committee was held on 22 February 2023 to gather witness evidence and views on greenwashing.  The Inquiry is also considering whether tighter regulations could drive funds away from ESG investing, and how the proposals compare internationally.  For further information, please read our Engage article here.

FCA discussion paper on updating and improving the UK regulatory regime for asset management

On 20 February 2023, the FCA published a discussion paper on ‘Updating and improving the UK regime for asset management’ (DP23/2).  The FCA’s aim is to obtain a broad range of views about the current UK regime for regulating funds and the asset management industry.  DP23/2 sets out ideas for how UK asset management regulation might be reformed to support the UK’s position as a world-leading centre for asset management, better meeting the needs of UK markets and consumers and taking into account the developments of technology and supporting innovation.

In relation to ESG, DP23/2 suggests that in modernising prospectus disclosures it will look to ensure that ESG is given sufficient prominence in order to provide in-depth information to fund investors. In addition, in relation to maximising the participation of fund investors in unitholder meetings, the FCA suggests that better use of technology could improve interactions between fund managers and investors allowing better access to information about the fund’s strategy including a fund’s approach to ESG considerations.

Further information can be found in our Engage article here.

UK Financial Services Regulatory Initiatives Forum publishes sixth edition of the Grid

On 28 February 2023, the eagerly awaited sixth edition of the Financial Services Regulatory Initiatives Grid (Grid) was published by the Financial Services Regulatory Initiatives Forum. The delay to its publication (originally expected in November 2022) is explained by the need for the regulators to better consider how the opportunities provided by the December 2022 Edinburgh Reforms, including the Government’s policy statement ‘Building a Smarter Financial Services Framework for the UK’, will impact the regulatory pipeline and initiatives over the coming years.

In relation to ESG, the Grid sets out the key developments expected in ESG over the coming year including the publication of the updated Green Finance Strategy “in the coming months”, the FRC consultation on revising the UK Corporate Governance Code and the latest FCA sustainable finance Discussion Paper published on 10 February 2023 discussed further above.

For further information, please read our Engage article here.

​​​​​​​CCC report highlights need for climate adaptation investment

The Climate Change Committee (CCC) released a new report on 2 February 2023, “Investment for a well-adapted UK”, on the UK’s investment in climate change adaptation. The report calls for greater investment in UK climate resilience, identifies barriers to delivery, and highlights how investment can be scaled up.

Report recommendations relating to financial services include a recommendation to help unlock investment via public financial institutions with sustainability-linked instruments and adaption finance strategies.

Dr Ben Caldecott, CGFI Director and CCC Adaptation Committee Member, said:

“Government funding and public financial institutions have a critical role to play in unlocking private investment but we also need others to play their part. Regulated industries, like the railways and water sector, need to have updated mandates so they can increase investment in climate defences. Financial regulators and government policy must push companies and financial institutions to do much more, including through mandatory adaptation planning and enhanced supervision“.

Further recommendations include the following:

• Greater clarity on adaptation goals and roles for investment, including via the upcoming Third National Adaptation Plan and 2023 Green Finance Strategy;
• Resilience mandates for regulators, with regulators providing guidance on physical risk and risk interdependencies and regular climate risk stress testing; and
• Building on the work of the Transition Plan Taskforce, for which CGFI is part of the Secretariat, to define standards for high-quality adaptation plans featuring physical climate risk management. 

UK government announces new Department of Energy Security and Net Zero

On 7 February 2023, the UK Prime Minister's Office announced in a press release the creation of a new Department for Energy Security and Net Zero, which "has been tasked with securing our long-term energy supply, bringing down bills and halving inflation". 

The new department will replace the Department for Business, Energy and Industrial Strategy (BEIS), which itself replaced the Department of Energy and Climate Change (DECC) in 2016. Grant Shapps MP will become the Secretary of State for Energy Security and Net Zero.

The government says that the new department highlights the need for the UK to secure more energy from domestic renewable and nuclear sources to achieve its legally binding net zero target. Under the Climate Change Act 2008, net zero means a 100% reduction in greenhouse gas emissions below 1990 levels by 2050. The government published its net zero target review in January 2023, which sets out policies to achieve this.

The UK government also announced:

• A new Department for Science, Innovation and Technology.
• A combined Department for Business and Trade.
• A re-focused Department for Culture, Media and Sport.

EU and international developments

Delegated Regulation incorporating nuclear and gas disclosures into SFDR RTS published in OJ

On 17 February 2023, Commission Delegated Regulation (EU) 2023/363 was published in the Official Journal of the European Union.

The Delegated Regulation amends and corrects the regulatory technical standards (RTS) laid down in Delegated Regulation (EU) 2022/1288 (SFDR RTS) as regards the content and presentation of information in relation to disclosures in pre-contractual documents and periodic reports for financial products investing in environmentally sustainable economic activities.
Among other things, the Delegated Regulation updated the template disclosures in Annexes II, III, IV and V of the SFDR RTS to require firms to disclose the extent to which a financial product is invested in Taxonomy-aligned activities that are related to fossil gas and/or nuclear energy. The Delegated Regulation (2023/363) entered into force on 20 February 2023.

European Commission: A Green Deal Industrial Plan for the net-zero age

On 1 February 2023, the European Commission adopted a Communication: A Green Deal Industrial Plan for the Net-Zero Age. The initiative was announced by President von der Leyen in a speech at Davos on 17 January 2023. The Commission aims to adopt the legislative proposals related to the Plan before the European Council summit on 23-24 March 2023.

The European Green Deal, presented by the Commission on 11 December 2019, sets the goal of making Europe the first climate-neutral continent by 2050.  The EU Climate Law enshrines in legislation the EU's commitment to climate neutrality and the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.

The Green Deal Industrial Plan aims to ensure that the EU has access to the technologies, products and solutions that are key to transiting to net-zero and that represent a major new source of economic growth and quality jobs. It seeks to strengthen the competitiveness, attract investments in the net-zero industrial base and in green industrial innovation.

The Green Deal Industrial Plan is based on four pillars:

• A predictable, coherent and simplified regulatory environment, which supports the quick deployment of net-zero manufacturing capacities.
• Faster access to sufficient funding, by boosting investments while avoiding the fragmentation of the Single Market.
• Skills, by ensuring that the European workforce is skilled in the technologies required by the green transition.
• Open trade for resilient supply chains, based on co-operation with the EU's partners to ensure diversified and reliable supplies and fair international competition.

EBA consults on amending ITS on supervisory disclosures

On 8 February 2023, the European Banking Authority (EBA) launched a public consultation on its draft Implementing Technical Standards (ITS) on supervisory disclosures. The amended draft ITS incorporate the changes to the EU legal framework, in particular those related to supervisory reporting and investment firms. 

The draft amending ITS aim at specifying the format, structure, contents list and annual publication date of the supervisory information to be disclosed by competent authorities. The amendments to the ITS aim to reflect the changes to the EU legal framework under (Capital Requirements Regulation) CRR2 and Capital Requirements Directive (CRD V), in particular those related to supervisory reporting for investment firms.  

Moreover, by amending the existing supervisory disclosure framework, the draft ITS are intended to enhance the quality and comparability of the reported data by supervisors and enhance transparency by providing the market with more information. 

Comments to the consultation can be sent to the EBA until 9 March 2023.

EBA seeks input from credit institutions on green loans and mortgages

On 13 February 2023, the EBA launched an industry survey to receive input from credit institutions on their green loans and mortgages as well as market practices related to these loans. The purpose of the survey is to collect both quantitative and qualitative information the EBA can use to advise the European Commission. The work is part of the Commission’s Strategy for financing transition to a sustainable economy. The deadline for the call for input is 7 April 2023.

SFDR: AMF proposes a targeted review to include minimum environmental criteria

The AMF has published recommendations proposing the introduction of minimum environmental requirements in European law that must be met by financial products in order to be disclosed in accordance with Article 8 or Article 9 under the Sustainable Finance Disclosure Regulation (SFDR).  The SFDR has no minimum requirements and does not include specific thresholds within the definition for a sustainable investment. In this way, the AMF argues that  Article 8 and Article 9 of the SFDR do not assess a manager’s commitment to sustainability.  The AMF suggests that the use of “Article 8” and “Article 9” may be misconstrued by savers as a guarantee that they are participating in the financing of a more sustainable European economy.  Hence the AMF suggests minimum requirements to avoid this ambiguity and better meet the expectation of savers.

ECON reports on proposed CRR III Regulation and CRD IV Directive

The European Parliament's Economic and Monetary Affairs Committee (ECON) has published the following reports relating to the legislative proposals for the CRR III Regulation and the CRD VI Directive:

• A report (dated 10 February 2023) on the proposal for a Directive amending the CRD IV Directive (2013/36/EU) as regards supervisory powers, sanctions, third-country branches and ESG risks (CRD VI Directive) (2021/0341(COD)).
• A report (dated 9 February 2023) on the proposal for a Regulation amending the Capital Requirements Regulation (575/2013) (CRR) as regards requirements for credit risk, credit valuation adjustment (CVA) risk, operational risk, market risk and the output floor (CRR III Regulation) (2021/0342(COD)).

The reports contain draft European Parliament legislative resolutions, the text of which sets out suggested amendments to the proposed legislation.

The Parliament's legislative procedure files for the legislation states that the reports have been tabled for discussion in plenary and that it is awaiting Parliament's position at first reading.

ECON voted to adopt the reports at its meeting on 24 January 2023. ECON also voted to enter into interinstitutional negotiations with the Council of the EU. The Council agreed its general approach on the proposals in November 2022.

UNEP FI strengthens climate ambition of Principles for Responsible Banking

On 16 February 2023, the United Nations Environment Programme Finance Initiative (UNEP FI) published a press release (dated 9 February 2023) on its Principles for Responsible Banking.

Among other things, UNEP FI explains that since the Principles were launched in 2019, global climate ambitions have increased and the goal of limiting global warming to well below 2 degrees is no longer considered sufficient. As a result, at a 2022 meeting of the Principles' board, signatories decided to strengthen the Principles' climate ambition. The climate ambition definition now specifies that, in accordance with the Paris Agreement, all signatory banks that have a significant impact on greenhouse gas (GHG) emissions must align their portfolios with a pathway towards 1.5 degrees warming.

For signatories operating in developed countries, this includes achieving net-zero GHG emissions by at least 2050. In the meantime, these banks should also aim at aligning with the 1.5 degrees ambition.

UNEP FI has produced a suite of supporting documents for banks at different maturity levels to support target setting, including an updated version of the Foundations of Climate Mitigation Target Setting, which introduces banks to the key stages in the climate mitigation journey, and the Guidelines for Climate Target Setting for Banks, which outlines key principles to underpin the setting of credible, robust, impactful and ambitious targets in line with achieving the Paris Agreement objectives.

In October 2021, UNEP FI published its first report on the progress made by signatories on implementing the Principles.

Authored by Rita Hunter, Julia Cripps and Melanie Johnson.