UK developments

Sustainability Disclosure Requirements (SDR) and Investment Labels Regime

FCA anti-greenwashing rules and guidance now in force

On 31 May 2024, the FCA updated its SDR and investments labelling regime webpage to reflect that the anti-greenwashing rules and guidance are now in force.  Firms should ensure (if they have not already carried out a review) that they have updated internal policies, procedures and checklists to take into account the principles contained in the finalised guidance.  Further detail on the guidance is contained in our previous Engage article here.  The FCA has also added a new section to the webpage detailing the criteria for qualifying for an investment label.  Relevant firms can begin to use labels with accompanying disclosures from 31 July 2024. A summary of the criteria for investment labels is also set out in Annex 2 of PS23/16.

SDR 2024 Implementation Update

On 16 May 2024, HM Treasury, the Department for Energy Security and Net Zero (DESNZ), the Department for Business and Trade (DBT) and the Department for Environment, Food and Rural Affairs (DEFRA) published an economy-wide Sustainability Disclosure Requirements (SDR) implementation update.  The UK government committed to providing the update in the 2023 Green Finance Strategy and the update provides stakeholders with a summary of the timeframes and milestones for each of the core elements of the SDR, how the SDR proposals impact the financial services sector and wider economy and when interested stakeholders can expect to engage with the SDR proposals.  The update confirms that the government aims to make the UK-endorsed International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) baseline standards available in Q1 2025.  These will be known as the UK Sustainability Reporting Standards (UK SRS).   In addition, a decision is also expected to be made on whether disclosure requirements against the UK SRS are needed for companies that fall outside of the FCA’s regulatory remit, and the UK government intends to publish a decision on this in Q2 2025, along with any anticipated exemptions. Disclosure requirements introduced following this process will become effective no earlier than accounting periods beginning on or after 1 January 2026.  The Implementation Update was published prior to the calling of a General Election in the UK which was announced on 22 May 2024.  We will be monitoring whether the outcome of the General Election on 4 July 2024 will have an impact on the implementation timelines set out above and on the other developments covered by this briefing (see this Engage article for further details regarding the immediate implications for business following the calling of the General Election). 

HM Treasury and FCA roadmap for implementing overseas funds regime for certain EEA funds

On 1 May 2024, HM Treasury and the FCA jointly published a roadmap for implementing the overseas funds regime (OFR). Among other things, this explains that:

• The UK government will consult on extending the SDR to include funds recognised under the OFR from Q3 2024 and aims to lay any legislation required to implement its decision by the end of 2024. Depending on the outcome of this consultation, any legislative requirements related to the SDR and labelling for OFR funds are likely to come into force in the second half of 2025.

• If the government decides to legislate on the SDR and labelling for OFR funds, the FCA is likely to consult on rules to reflect this in 2025.

• The government intends to lay the legislation to enact the equivalence decision and extend the TMPR in Q2 2024.

The roadmap explains how the OFR is intended to be opened to EEA funds authorised under the UCITS Directive (2009/65/EC) following the government's announcement in January 2024 that it has found the EEA states equivalent under the OFR in relation to UCITS funds (with the exception of money market funds (MMFs)) and that it will extend the temporary marketing permissions regime (TMPR) until the end of 2026. The roadmap also gives an overview of the key stages of the process for applying for recognition of funds under the OFR.

Transition Finance

Transition Finance Market Review

The Transition Finance Market Review (TFMR) is set to report its findings to the UK government in July 2024 following industry consultation with various market participants feeding in their responses to the TFMR.   On 17 May 2024, TheCityUK (TCUK) published a detailed response highlighting that transition finance is an economy-wide issue that is dynamic and continually evolving as targets shift, new technologies become available and science develops.  TCUK outlines key barriers to accessing and deploying transition finance and raises the issue of a need for greater clarity on the scope of transition finance, in particular around the means to deliver the required results consistently across all sectors and jurisdictions.  On 29 May 2024, UK Finance published its response to the TFMR setting out that the TFMR should be clear on the role of the financial services sector as the providers of capital, within a clear policy framework set by government. In addition, UKSIF’s response published on 8 May 2024 also makes the point that there continues to be a lack of clarity on the definitions for transition finance approaches and standards in the UK and across other jurisdictions.

UK Transition Planning

UK Finance Report: Unlocking the SME Net Zero Transition

On 14 May 2024, UK Finance published a report analysing the challenges that SMEs face in the transition to a Net Zero economy.  Small and medium-sized enterprises (SMEs) are responsible for between 43-53% of greenhouse gas emissions. The report makes ten recommendations to government, businesses and financial services firms to help overcome the barriers facing SMEs, including the following:

• Using all available funds and schemes from the British Business Bank including the new Growth Guarantee Scheme and Start Up Loan Scheme to encourage carbon reduction activity.
• Relaunching the UK Business Climate Hub with improved content and greater publicity.
• Establishing a government-led taskforce to ensure the right policy support is in place for SMEs.

Diversity and Inclusion

HM Treasury, PRA and FCA respond to Treasury Committee recommendations in Sexism in the City inquiry report

On 14 May 2024, the House of Commons Treasury Committee published a report containing responses from HM Treasury, the PRA and the FCA to the recommendations set out in its report following its "Sexism in the City" inquiry.

Points of interest in the responses include:

• Non-disclosure agreements (NDAs) - HM Treasury states that there are legal limits to how NDAs can be used in an employment context and that an NDA will "most likely" be unenforceable to the extent it seeks to prevent employees from reporting a crime to the police or co-operating in a criminal investigation. In a related press release, the committee notes that the government does not commit to taking forward its recommendation to introduce a total ban on the use of NDAs in harassment cases.

• Impact of bonus cap removal -  The PRA and FCA agree it is important to monitor the impact of removing the bonus cap on gender pay and inequality. They will work with the government and the Equality and Human Rights Commission (EHRC) and they will formally review the policy at the earliest opportunity that sufficient evidence is available.

• Non-financial misconduct (NFM) - The FCA is now prioritising its work on NFM, including sexual harassment and bullying. It is assessing the responses received to the NFM survey issued to wholesale firms in the insurance, insurance intermediary, banking and broking sectors. It welcomes an opportunity to share its findings with the committee in due course. The FCA may issue similar surveys to other industry sectors in the future.

• Diversity data reporting and target setting - The FCA agrees it would not want any data collection to simply be a "tickbox" exercise without an appropriate focus on outcomes. The Women in Finance Charter annual review 2023 outlined the additional data being collected by signatories, which the FCA will consider in formulating its policy response.

• Whistleblowing - The FCA is currently considering how it can improve its approach to whistleblowing.

The FCA and the PRA are carefully reviewing the responses received to their consultation papers on diversity and inclusion (D&I). They will take the time necessary to consider next steps and set out how the committee's report has been taken into account when the final policy is published.

EU and International Developments

Sustainable Finance Disclosure Regulation (SFDR)

European Commission summary report on the implementation of the SFDR

On 3 May 2024, the European Commission published a summary report of the contributions to the public and targeted consultations on the implementation of the SFDR. The summary report contains a disclaimer stating that the document is not the official position of the Commission or its services and responses to the consultation activities cannot be considered as a representative sample of the views of the EU population and that it should be regarded solely as a summary of the contributions made by stakeholders to the open and targeted consultations that took place from 14 September 2023 to 22 December 2023.  Contributions include the following:

• There is widespread support for the broad objectives of the SFDR but divided opinions regarding the extent to which the regulation has achieved these objectives during its first years of implementation – 77% of respondents highlighted limitations of the framework such as lack of clarity regarding key concepts, limited relevance of certain disclosure requirements and issues linked to data availability.
• There is a consensus on the need to ensure consistency across the wider sustainable finance framework  - there are misalignments in the interactions between SFDR and EU Taxonomy, the CSRD and the sustainability rules under MiFID II, the Insurance Distribution Directive and the EU Climate Transition Benchmarks Regulation.
• There are split views on the relevance of SFDR entity level disclosures – a large majority of respondents called for these disclosure requirements to be simplified and streamlined across the sustainable finance framework.  Many respondents expressed concerns about a potential overlap between the transparency requirements on PAIs under the SFDR and the reporting obligations under CSRD.
• There is support for setting uniform disclosure requirements for all financial products offered in the EU as well as additional disclosures for products making sustainability claims.
• There is currently strong support for a voluntary categorisation system regulated at EU level.
• There is no clear preference for one of the two proposed approaches to the potential EU categorisation system – views are divided on whether categories should be based on new criteria not related to existing concepts under the SFDR or if Articles 8 and 9 should be converted into formal product categories by clarifying and adding criteria to support the already existing concepts.

EU anti-greenwashing rules

ESAs final reports on anti-greenwashing in the financial sector

On the 4 June 2024, the European Supervisory Authorities (ESAs) (that is the EBA, EIOPA and ESMA) published their final reports on greenwashing in the financial services sector in response to the European Commission’s request for input on greenwashing risks and the supervision of sustainable finance policies:

• EBA Final report on greenwashing monitoring and supervision
• ESMA Final report on greenwashing
• EIOPA Final report: advice to the Commission and opinion on sustainability claims and greenwashing in the insurance and pension sectors

The ESAs have taken a co-ordinated approach on greenwashing risks.  Each final report outlines the current supervisory response to greenwashing risks under the respective ESA’s remit.  The ESAs note that national competent authorities (NCAs) are already taking steps around supervision of sustainability-related claims and consider how sustainability-related supervision can be gradually enhanced. 

Sustainability-related Fund Names

ESMA Final Guidelines on funds’ names using ESG or materiality-related terms

On 14 May 2024, ESMA published its report containing guidelines on funds’ names using ESG or sustainability-related terms. To be able to use ESG or sustainability-related terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives.  The objectives of the guidelines are to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names and provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names. The Guidelines will be translated into all EU languages and published on ESMA’s website; they will start applying 3 months after that publication.

Corporate Sustainability Due Diligence Directive

Council of the EU formally adopts CSDDD

On 24 May 2024, the Council of the EU formally adopted the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) which is the last step in the decision making procedure.   The CSDDD introduces obligations for large companies requiring them to consider adverse impacts of their activities on human rights and environmental protection. The rules concern not only the companies’ operations, but also the activities of their subsidiaries, and those of their business partners along the companies’ chain of activities. The CSDDD will affect companies of more than 1000 employees with a turnover of more than €450 million, and their activities ranging from the upstream production of goods or the provision of services, to the downstream distribution, transport, or storage of products. Companies affected by the legislation adopted will have to implement a risk-based system to monitor, prevent or  remedy human rights or environmental damages identified by the directive.  The next step is for CSDDD to be published in the Official Journal of the EU following which, it will start to apply to in-scope firms from 2027. In relation to financial services, regulated financial undertakings that meet the thresholds are in scope of CSDDD. However, the required due diligence on the chain of activities does not include downstream business partners that are receiving financial services and products. Only the upstream part of their chain of activities is covered. The CSDDD includes a review clause, which will take effect two years after the regulation enters into force. This will allow for the possible future inclusion of due diligence requirements for the financial services sector. Financial undertakings fall within an obligation in the CSDDD to execute a transition plan.

Fines For Failures Relating To Climate and Environmental Risk Assessments

ECB imposes fines on banks for failure to progress on climate and environmental risk assessment

On 4 June 2024, Bloomberg reported that the European Central Bank (ECB) has imposed its first fines on banks for lack of progress on climate and environmental risk assessments.  The ECB has previously blogged that it expects banks to integrate climate and environment risks into their strategies, governance and risk management, starting with materiality assessments to manage and become resilient to these risks.

EFRAG releases new set of Q&A for the ESRS

On 30 May 2024, EFRAG released 44 new explanations and a compilation of technical explanations produced so far to support preparers and others in the implementation of CSRD. The EFRA ESRS Q&A Platform can be found here.

Interoperability of Sustainability Reporting Standards

IFRS Foundation and EFRAG publish interoperability guidance

On 2 May 2024, the IFRS Foundation and EFRAG published guidance material to illustrate the high level of alignment achieved between the ISSB Standards and the European Sustainability Reporting Standards (ESRS) and how a company can apply both sets of standards, including detailed analysis of the alignment in climate-related disclosures. As companies around the world are increasingly mandated to disclose sustainability-related information through the ISSB Standards and ESRS, EFRAG and the ISSB are committed to creating efficiencies where possible to advance transparency, comparability and accountability. Companies utilising this guidance will be better able to collect, govern and control decision-useful data once.

The guidance:

• describes the alignment of general requirements including on key concepts such as materiality, presentation and disclosures for sustainability topics other than climate; and

• provides information about the alignment of climate disclosures and what a company starting with either set of standards needs to know to enable compliance with both sets of standards.

GRI and IFRS Foundation collaborate to deliver full interoperability to enable seamless sustainability reporting

On 24 May 2024, the Global Reporting Initiative (GRI) and the IFRS Foundation reported that the two organisations would work together to optimise how GRI and ISSB Standards can be used together. The IFRS Foundation and the Global Reporting Initiative (GRI) are deepening their working relationship, building upon the Memorandum of Understanding signed in 2022. The collaboration is aiming to provide a seamless, global and comprehensive sustainability reporting system for companies looking to meet the information needs of both investors and a broader range of stakeholders. The increased collaboration will optimise how GRI and ISSB Standards can be used together to facilitate reporting on an organisation’s impacts, risks and opportunities, including risks that arise from the organisation’s impacts.

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.