UK/EU/International ESG Regulation Monthly Round-Up – August 2024

1. UK Developments

1.1 FCA consults on sustainability related disclosure in prospectuses under the POATR (CP24/12)

On 26 July 2024, the FCA released a consultation paper on the more detailed rules including proposals for sustainability related disclosures in prospectuses for the admission to trading on a regulated market under the Public Offers and Admission to Trading Regulations (POATR), which will replace the current UK prospectus regime (CP24/12).

Amongst other things, the FCA is proposing minimum expectations around the presentation of sustainability-related information including, in relation to issuers of equity securities, climate-related disclosures, where the issuer has identified climate-related risks as risk factors, or climate-related opportunities as material to the issuer’s prospects. This may be complemented by further guidance, subject to views received.  In relation to debt securities, the FCA is proposing that issuers should include a statement as to whether their debt securities are marketed as ‘green’, ‘social’ or ‘sustainable’ or issued under a bond framework or a similar document. Where that is the case, issuers would be prompted to consider whether any further information should be disclosed and the FCA sets out suggestions as to what further information issuers may wish to consider disclosing in respect of use of proceeds bonds and sustainability-linked bonds.

The FCA also proposes to update its expectations to reflect the development of new disclosure standards such as the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, the International Sustainbality Standards Board (ISSB) Standards and the Transition Plan Taskforce (TPT) Disclosure Framework.

The consultation closes on 18 October 2024.

1.2 Rachel Reeves announces intention to regulate ESG rating agencies

On 7 August 2024, the Rachel Reeves announced the government’s intention to legislate to regulate ESG rating agencies next year.  She expects the legislation to be in line with other leading economies such as the EU. 

This follows the previous Chancellor’s announcement earlier this year and the finalisation of the voluntary code of conduct for ESG data and ratings providers last year.

1.3 FCA offers limited temporary flexibility for Sustainability Disclosure Requirements (SDR) ‘naming and marketing’ rules compliance

On 9 September 2024, the FCA announced that it is offering limited temporary flexibility” until 5pm on 2 April 2025 for certain firms meeting conditions to comply with the ‘naming and marketing’ rules under the UK SDR in relation to a sustainability product (as defined in the FCA Handbook Glossary).

The flexibility is available to UK authorised investment funds in exceptional circumstances where the firm (i) has submitted an application for approval of amended disclosures in line with ESG 5.3.2R for that fund by 5pm on 1 October 2024 and (ii) that fund is currently using “sustainable”, “sustainability” or “impact” (or a variation of those terms) in its name and is intending to either use a label or change the name of that fund. See our briefing here for more information.

1.4 FCA published downloadable SDR labels

On 19 August 2024, the FCA updated its webpage on the UK sustainability disclosure and labelling regime adding a section on downloadable labels under Investment labels. The new section provides distributors with access to the official investment labels.

1.5 Nature: GFI published Biodiversity Net Gain: A Roadmap for Action 

On 1 August 2024, the Green Finance Institute (GFI) published Biodiversity Net Gain: A Roadmap for Action.  The report highlights and assesses 40 challenges across the four pillars they have delineated: metric, central governance, supply and demand.  It sets out some case studies with potential solutions to challenges.  The GFI also published NFM Research Fund: Unlocking Investment from the Insurance Sector into National Flood Management which discusses the challenges with national flood management and the lack of potential buyers.  The report offers a solution in the NFM Research Fund, which would act as a mechanism through funding could be pooled for deployment in eligible projects across the country.

2. EU and International Developments

2.1 Corporate Sustainability Reporting Directive (CSRD): draft FAQs

On 7 August 2024, the European Commission published draft frequently asked questions (FAQs) on CSRD.  The FAQs provide clarification on the implementation of certain provisions in the CSDR.  The FAQs do not create additional obligations, but provide helpful clarification for companies.  See our Engage article here.

2.2  Sustainable Finance Disclosure Regulation (SFDR): ESAs update consolidated Q&As

On 25 July 2024, the European Supervisory Authorities (ESAs) updated the consolidated Q&As on the Sustainable Finance Disclosure Regulation 2019/2088 (the SFDR) and SFDR Delegated Regulation 2022/1288 (the SFDR Delegated Regulation). 

The updated Q&As clarify several points of confusion with regards to the interpretation of the SFDR, including (i) how to calculate PAI indicators in respect of exposure to companies active in the fossil fuel sector and energy consumption intensity for high impact climate sector and (ii) matters concerning sustainable investment, such as calculating the share which qualifies as environmentally sustainable and measuring sustainable investments at the economic activity and investment level.  See our Engage article here.

2.3 EU Taxonomy: NGOs challenge the EU Taxonomy in European Court of Justice

In November 2023, the European Commission included aviation and shipping as eligible activities in the EU sustainable finance taxonomy. 

Non-Governmental Organisations (NGOs) asked the Commission to review this decision earlier in the year but the Commission held that the request was unfounded and that the taxonomy was compliant with the Paris Agreement. 

On 28 August 2024, a coalition of NGOs filed a suit against the European Commission to force them to reconsider. 

2.4 Greenwashing: ESMA publishes translations in all official languages for the new guidelines on the use of ESG and sustainability-related terms in funds’ names

On 21 August 2024, the European Securities and Markets Authority (ESMA) published the translations in all official EU languages of its guidelines on the use of ESG and sustainability-related terms in funds’ names.  The guidelines were originally published on 14 May 2024 in the Final Report following ESMA’s public consultation on its proposals.

The publication of the translations triggers a two month period in which national competent authorities must notify the ESMA whether they will comply or intend to comply with the guidelines.  The new guidelines will apply from 21 November 2024 (three months after the date of publication of the translations).

2.5 IASB published illustrative examples on how companies should apply IFRS

On 31 July 2024, the International Accounting Standards Board (IASB) published an exposure draft setting out illustrative examples demonstrating how to apply the International Financial Reporting Standards (IFRS) to climate-related financial statements.  The project was a response to concerns that information about the effects of climate-related risks in the financial statements was insufficient or appeared to be inconsistent with information entities provide outside the financial statements, particularly information reported in other general purpose financial reports.

The examples focus on materiality judgement, disclosure of assumptions, disclosure of credit risk, disclosure about decommissioning and restoration provisions and also disclosure of disaggregated information.

The consultation is open for comments until 28 November 2024.

2.6 ESMA publishes report on Trends, Risks and Vulnerabilities

On 29 August 2024, ESMA published a risk report reporting on trends, risks and vulnerabilities, including a section on transition finance.  It notes that there are concerns about mobilising enough private capital to finance the transition to net zero.  Highlighting political pressure as a driver for cautious implementation of ESG (especially in the US), it notes that this hinders change through shareholder engagement.  The risk report also highlights the importance of transition plans to “establishing clear strategic priorities and identifying relevant information to collect internally”. 

2.7 Australia: new climate-related financial disclosure rules passed

On 22 August 2024, the Australian Senate passed the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 which provides mandatory climate-related financial disclosure rules.  On 10 September 2024, the Australian Government House of Representatives confirmed the amendments and Royal Assent is expected to occur within 7-10 days of this confirmation.

The Australian Accounting Standards Board (AASB) will finalise the Australian Sustainability Reporting Standards (ASRS) under which in-scope entities will need to report.  The ASRS are based on the IFRS Sustainability Disclosure Standards (although there are some differences, at least in the interim until the AASB has completed further work). 

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, Julia Cripps, Dominic Hill, Emily Julier, and Jessica Dhodakia.