UK/EU ESG Regulation Round-Up – Q1 2024

UK/EU/International ESG priorities for 2024/2025

UK

UK FCA Business Plan 2024/25 sets out key ESG priorities

The FCA Business Plan 2024/25 published on 19 March 2024 sets out the key UK ESG priorities during 2024/2025.  The FCA is supporting the financial sector in driving positive change, including the transition to net zero and the consideration of wider sustainability issues. 

Ongoing work in 2024/25 will involve the following:

Integrating the sustainability disclosure requirements (SDR) and investment labels across the market, including the anti-greenwashing rule and guidance. For an overview of the FCA's SDR and investment labelling regime, see this Engage article.

Continuing to expand the SDR regime, starting with a consultation on portfolio management in 2024.

Continuing to engage on new and emerging risks with UK and international partners. It will be progressing its work on transition finance and preparing to have regard to a "nature" regulatory principle coming into force.

Read more about the FCA Business Plan in our Engage article here.

UK Transition Finance Market Review

On 14 March 2023, a Call for Evidence in relation to the Transition Finance Market Review (TFMR) was published. Responses are due by 25 April 2024 from a wide range of stakeholders, including financial institutions.  The Transition Finance Market Review was launched in January 2024 and will report to the UK government in Summer 2024.  For further details, see our Engage article linked here.

UK House of Commons reports on the financial sector and the UK’s net zero transition

On 23 February 2024, the UK government published its response to the House of Commons' Environmental Audit Committee's (EAC's) November 2023 report, ‘The financial sector and the UK's net zero transition’.  The EAC’s report sets out how the UK financial sector can help achieve net zero greenhouse gas emissions by 2050.  The UK government response sets out its current initiatives as well as additional steps to achieve net zero including:

• Commissioning the Transition Finance Market Review (further details below).
• The UK’s approach to climate transition plans.
• An upcoming FCA consultation on guidance for listed companies’ transition plan disclosures and policy approach to ISSB standards.
• The FCA’s implementation of the Sustainability Disclosure Requirements (SDR) as set out in the 2023 Green Finance Strategy.
• Encouraging UK businesses to engage with the Taskforce on Nature-related Financial Disclosures (TNFD) recommendations.
• Consulting on the UK green taxonomy, the UK carbon border adjustment mechanism and high-integrity voluntary carbon markets.

EU

ECB’s work programme expands climate and nature priorities

On 30 January 2024, the European Central Bank (ECB) published its priorities in relation to climate change and nature loss and degradation which it has decided to expand for the upcoming year. The three focus areas that the ECB has identified are:

• The impact and risks of the transition to a green economy including considering the associated transition costs and investment needs.
• The increasing physical impact of climate change and how measures to adopt to a hotter world affect the economy.
• The risks stemming from nature loss and degradation and how they interact with climate-related risks and how they could affect the ECB’s work.

A comprehensive overview of the planned work programme for 2024 and 2025 is available in the Annex to the ECB’s programme. 

International

FSB work programme for 2024

On 24 January 2024, the Financial Stability Board (FSB) published its work programme for 2024.  One of the key priority areas of work for 2024 includes addressing financial risks from climate change.  The FSB will continue to co-ordinate international work in this area including analysis of the relevance of transition plans for financial stability and a stocktake of regulatory and supervisory initiatives related to the identification and assessment of nature-related financial risks.

UK/EU/US ESG regulatory developments

EU

CSDDD compromise text to be adopted by the European Parliament

On 19 March 2024, the European Parliament’s Legal Affairs Committee (JURI) voted in favour of the Corporate Sustainability Due Diligence Directive (CSDDD) after several failed attempts.  The compromise text remains to be formally adopted by the European Parliament at the next plenary meeting on 24 April 2024.  Once formally approved by the European Parliament and Member States the CSDDD will enter into force on the 20^th day following its publication in the Official Journal of the EU.  The first companies affected by the CSDDD could be required to comply with the CSDDD during 2027.

The revised text significantly reduces the companies in scope and extends the timeframe for compliance as the majority of companies will not be required to comply until five years after the CSDDD enters into force.

Particular changes to the original scope include:

• Thresholds for determining in scope EU companies and non-EU companies has increased to €450 million net worldwide turnover and an employee threshold of 1,000 employees.  This has reduced the in-scope companies to approximately 5000 companies.

• The downstream part of the definition of chain of activities has been limited by deleting references to product disposal.

• It will no longer be an obligation for companies above certain thresholds to promote the implementation of a climate change plan through financial incentives.

• The Commission will still need to present a report on additional due diligence requirements for the provision of financial services, there will no longer be a need for a joint political statement between the co-legislators on why such requirements are needed.

Read more about the CSDDD here.

ESMA consults on draft ETS for the registration and supervision of external reviewers under the EU Green Bond Regulation

On 26 March 2024, ESMA launched a consultation on draft regulatory technical standards (RTS) relating to the registration and supervision of external reviewers under the EU Green Bond Regulation (EuGB). ESMA will consider all comments received by 14 June 2024. The RTS will aim to clarify the criteria to be used for assessing an application for registration by an external reviewer.  In its proposals, ESMA aims to standardise registration requirements and contribute to developing a level playing field through lower entry costs for applicants.  The consultation will be of interest to future external reviewers of green bonds and sustainable debt and sustainability assurance providers. The EuGB entered into force on 21 December 2023 and will apply from 21 December 2024.  ESMA will consider the feedback received to the consultation and will submit the draft RTS and required implementing technical standards to the European Commission by 21 December 2024. 

EU Environmental Crime Directive

On 26 March 2024, the Council of the EU formally adopted a Directive revising the Environmental Crime Directive (2008/99/EC) by extending the list of environmental offences and introducing stronger sanctions. It will also provide protection for whistleblowers reporting on environmental offences.  The revised Directive also introduces the concept of “qualified offences” which are those committed intentionally causing the destruction of or irreversible or long-lasting damage to the environment.  The EU has also published this infographic setting out how it fights environmental crime. Once the Directive is formalised which is expected during spring 2024, EU member states will have two years to implement it. Environmental crimes should be identified and addressed within the ESG, financial crime and risk frameworks of a financial institution.

CSRD adoption deadline delayed

On 7 February 2024, the European Council and Parliament agreed to delay the deadline for the Commission adoption of sector-specific sustainability reporting standards and reporting standards for certain third-country undertakings from 30 June 2024 to 30 June 2026.  The European Sustainability Reporting Standards (ESRS) are being developed by the European Financial Reporting Advisory Group (EFRAG) and underpin the CSRD. The first ESRS were published in the Official Journal of the EU on 22 December 2023 and are sector agnostic. The sector-specific ESRS will cover sectors such as oil and gas and coal and mining.  The delay is intended to give EFRAG further time to develop quality standards.

EU Platform on Sustainable Finance reports on taxonomy and sustainable finance market practices

On 29 January 2024, the EU Platform on Sustainable Finance published a report containing a compendium of market practices, examining how the EU taxonomy and sustainable finance framework are helping financial and non-financial actors transition to net zero.  The report is accompanied by an Annex which contains a stocktake, case studies and analysis of current practice and a factsheet. The report covers seven groups that use the taxonomy, namely corporates, banks, insurers, investors, auditors, small- and medium-sized enterprises, and the public sector. 

UK

UK SDR: FCA industry-led working group for product sustainability claims

On 16 January 2024, the FCA announced that as part of the new UK regime for the SDR and investment labels, it has established an industry-led working group for financial advisers to support the industry in advising consumers on products making claims about sustainability.  The purpose of the group is to improve the trust and transparency of sustainable investment products.  For further information about the SDR see our Engage article linked here.

US

SEC adopts long-awaited climate reporting rules

On 6 March 2024, the US Securities and Exchange Commission adopted rules to enhance and standardise climate-related disclosures by public companies and in public offerings.  The rules are less burdensome than those proposed by the SEC in 2022, including dropping the proposed requirement to report scope 3 emissions, but will still require a substantially increased level of legal and accounting disclosures.  Further details are set out in this Engage article

UK/EU regulation of ESG ratings providers

UK Spring Budget – ESG ratings provider confirmation

The UK Spring Budget 2024, announced on 6 March 2024, confirmed that ESG ratings providers will be brought within the regulatory perimeter of the FCA where they assess ESG factors for the purposes of investment decisions and to influence capital allocation.  This is following a HM Treasury consultation that ran from 30 March 2023 to 30 June 2023.  In the holding response, the UK government confirmed that a consultation response and a legislative timeline for regulating ESG ratings providers will be published during 2024.  

Council of the EU publishes text of political agreement on proposed Regulation on ESG rating activities

On 14 February 2024, the Council of the EU published a compromise text (dated 9 February 2024) on the proposed Regulation on the transparency and integrity of environmental, social and governance (ESG) rating activities (2023/0177(COD)).

The text reflects the outcome of the provisional political agreement reached by the Council with the European Parliament on 5 February 2024. The provisional political agreement is subject to approval by the Council and the Parliament before going through the formal adoption procedure.

For further information about ESG ratings and data products providers see our Engage article here.

Additional ESG regulatory updates

UK Sexism in the City Treasury Committee report

On 8 March 2024, the UK Treasury Select Committee released its Sexism in the City Report examining barriers faced by women in financial services and the progress made towards removing gender pay gaps.  The findings suggest that prevalent sexual harassment and bullying remains in financial services.  Incremental improvements have been made in the proportion of women holding senior roles but some sectors such as venture capital, private equity and hedge funds have only achieved a small reduction in the average gender pay gap.  The Treasury Select Committee stressed that diversity and inclusion should be seen as a moral imperative and a competitive advantage rather than a tick-box exercise.  The report makes several recommendations to increase the pace of change towards a diverse and inclusive financial services sector where the widest range of people can prosper and thrive.

Fiduciary duties in the context of sustainability and climate change policies

On 6 February 2024,  the UK Financial Markets Law Committee (FMLC) published a paper which examines the fiduciary duty for pension funds and the existing uncertainties in the context of sustainability and climate change policies. The paper offers a useful guide for financial market participants in addition to pension funds as it clarifies the importance of climate change and sustainability as “financial” factors when considering fiduciary duties because ultimately they “may reduce risk or improve return”.

In a related update, in March 2024, Shivji KC & Stubbs KC et al issued an opinion which confirms that company directors have a duty to consider their company’s exposure to nature-related risks.  This is in addition to the recent George Bompas KC legal opinion on the requirements of a company to present a true and fair view of the company’s position and FMLC paper to clarify legal position on the fiduciary duty of trustees.

UNEP FI updates guidelines for climate target setting for banks: March 2024

On 13 March 2024, the United Nations Environment Programme Finance Initiative (UNEP FI) issued an updated version of its guidelines for climate target setting for banks.

The new version (version two) extends the scope of targets to include banks' capital markets activities. The UNEP FI points out that capital markets arranging and underwriting services provided in the issuance of new debt and equity instruments are for some banks their largest source of attributable greenhouse gas emissions.

The amendments also add, update and clarify technical language to reflect the evolution of practices, methodologies and data availability since the guidelines were first published in April 2021.  The guidelines are scheduled to be reviewed every three years by the Net-zero Banking Alliance (NZBA) who develop the guidelines and to whom they apply.

We closely monitor all aspects of ESG and sustainable finance regulatory developments so please get in touch with the Hogan Lovells contacts listed in this article if you would like to discuss any of the topics above or your wider ESG requirements. 

Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area.

This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Rita Hunter,  Melanie Johnson, and Emily Julier.