Policy & Regulation Update - Q1 2021

January 12 2021 - ,

Significant changes are underway in the legislative landscape for ESG and responsible investment. The following is the first in Ethical Screening's regular updates on these developments.

UK level

Mandatory TCFD Disclosures

On 10 November 2020 the Chancellor Rishi Sunak announced the UK Government's new approach to the Financial Services sector, with a specific focus on Green Finance and Fintech. The document contains a series of commitments, the most relevant of which is mandating TCFD disclosure for companies in a number of sectors in 2021/22.

The announcement includes a roadmap, with most measures planned to be put in place by 2023, and full coverage 'across the economy' to be achieved by 2025. This timeline is in line with the Government's commitments in the Green Finance Strategy, accounting for a "gap year" to respond to the Covid crisis.

The companies that will be required to report include: listed companies, largest private companies (size for inclusion will depend on a public consultation), banks and building societies and insurance companies, life insurers and FCA-regulated pension schemes, occupational pension schemes, and asset managers. For this last segment of the industry, nearly full coverage is expected by 2023.

For some sectors, the Government states that it may be appropriate to phase the introduction of mandatory disclosures, and anticipates that disclosure obligations will be introduced - at least initially - on a comply or explain basis. The details of implementation will be determined by the relevant regulator or Government department subject, among other things, to consultation and cost-benefit analysis. Consultation processes are ongoing and, in some cases, are yet to begin.

Further clarity on applicability, including to any UK subsidiaries of non-UK headquartered companies, is expected in early 2021.

In addition to the TCFD requirements, the UK authorities may in due course consider implementing more specific, detailed disclosure requirements. The Government makes a reference to non-binding guidelines to be developed, which could potentially make reference to "relevant metrics in existing reporting frameworks". Lastly, the Government will provide an update on progress in the 2022 refresh of the Green Finance Strategy.

Other announcements include:

Issuing a UK Green Sovereign Bond

The Government states that the bond will be used to "help finance projects that will tackle climate change, finance much-needed infrastructure investment and create green jobs across the country", howver, there is not great clarity as to how this will be structured in practice.  The bond will be issued in 2021 "subject to market conditions" and will likely follow the Green+ Gilt framework set out by the Green Finance Institute, Impact Investing Institute and London School of Economics.

UK Green Taxonomy

According to the Government Press Release, the UK taxonomy will take the scientific metrics in the EU taxonomy as its basis and a UK Green Technical Advisory Group will be established to review these metrics to ensure they are right for the UK market.

Joining the International Platform on Sustainable Finance.

Both the Network for Greening the Financial System and the Coalition of Finance Minister for Climate Action are observers of the Platform, which just launched a project to develop a Common Ground Taxonomy (putting together all the different national and regional Sustainability Taxonomies). 

What does this mean for you?

The main impact on the market will come from the introduction of mandatory TCFD reporting. Although some of the largest asset managers are already on course to reporting against the recommendations, the new requirement will considerably increase the reporting burden for those who have not started planning for it yet.


The TCFD recommendations focus on reporting on 4 main areas:

  • Governance - Disclose the organisation's governance around climate-related risks and opportunities
  • Strategy - Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation's businesses, strategy and financial planning where such information is material
  • Risk Management - Disclose how the organisations identifies, assesses, and manages climate-related risks
  • Metrics and Targets - Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.


It is advisable that asset managers and other organisations start planning now for how they will report. A useful starting point is the latest TCFD guidance, released on the 29th October 2020.

EU level

Delay in the full application of the Sustainable Finance Disclosure Regulation.

On 30 October 2020, the European Commission confirmed in a letter to the European Supervisory Authorities, that the Level 2 draft regulatory technical standards (RTS) due to accompany the Level 1 requirements of the Sustainable Finance Disclosure Regulation (the Disclosure Regulation) from 10 March 2021 have been delayed.

According to the letter, the unprecedented economic and market stress caused by Covid-19 has necessitated an extension of the deadline for the public consultation on the draft RTS, thus delaying the whole process. However, it also clarifies that the application of the Disclosure Regulation itself is not conditional on the formal adoption and entry into force of the RTS.

As a reminder, the Regulation requires certain qualitative and quantitative disclosures on sustainability-related topics from a number of market participants, including AIFMs; UCITS managers; and MiFID firms providing the service of portfolio management. A subset of the rules (mostly high level and principle-based) applies to financial advisers (including MiFID firms, AIFMs, and UCITS Managers which provide standalone investment advice).

What does it mean for you?

Irrespective of the delay regarding Level 2 disclosures, from 10 March 2021, in-scope firms should still seek to comply with the general Level 1 principles of sustainability-related disclosures. It is expected that the revised deadline will be January 2022. In the meantime, it would be prudent to start gathering information based on the elements mentioned in the draft RTS. A useful analysis of the regulation itself, and the draft disclosure standards, can be found here.

It is currently unclear whether and to what extent the Level 2 disclosures will be applied in the UK, since they will enter into force after Brexit. It is however expected that the UK government will either reproduce these in their entirety, or publish a simplified set of requirements.

MiFID II developments

The EU is proposing to alter the MiFID II rules on suitability to require the consideration of clients' sustainability preferences when undertaking a suitability assessment. The text as drafted at the end of the latest round of consultation (which closed in July and included the meaning of sustainability preferences) requires advisers to ask whether a client would like "Article 8" or "Article 9" funds included in their investment strategy. The nature of these products is defined in the upcoming Sustainable Financial Disclosure Regulation: an Article 9 fund is a 'sustainable investment fund', and is closely aligned to the EU Taxonomy; an Article 8 fund is a fund that 'promotes environmental or social characteristics', but its nature is as yet unclear.

What does it mean for you?

It is believed that there will be no need to repaper existing clients to collect their preferences, but this has not been formally confirmed yet by the EU Commission.

The Suitability assessment will be a two-step process. In order to avoid the client's sustainability preferences clashing with their "normal" suitability requirements, they will have second preferecve. First, advisers will have to follow their current processes for arriving at an understanding of the client's objectives and risk profile. In case of a clash, the "ordinary" suitability requirements will have priority, so that clients are not forced to take on more risk than would otherwise be suitable for them.

There will be a twelve-month implementation period following the publication of the final rules, meaning that they are expected to enter into force Q1 2022. The changes to MiFID II will not be impacted by Brexit.

International level

Merger of SASB and IIRC

In September 2020 CDP, CDSB, GRI, IIRC and SASB - whose frameworks, standards and platforms guide the majority of sustainability and integrated reporting, set out in a Statement of Intent a shared vision of what is needed for progress towards comprehensive corporate reporting - and the intent to work together to achieve it. The statement can be found here.

Partly as a result of this initiative, in December the Sustainability Accounting Standards Board and the International Integrated Reporting Council announced their intention to merge, creating a new Value Reporting Foundation, to be headquartered in London and San Francisco. The declared goal of the merger is to simplify and streamline the reporting landscape. In the words of SASB chair Robert Steel 'Capital markets are hungry for information linked to enterprise value creation, but they cannot easily digest what comes from a fragmented reporting landscape. This merger is an important step toward businesses and investors communicating with clarity and ease about the issues that matter most to financial performance.'

IFRS consultation on the creation of a Sustainability Standards Board

In late September 2020 the Trustees of the IFRS Foundation published a Consultation Paper to assess demand for global sustainability standards and, if demand is strong, assess whether and to what extent the Foundation might contribute to the development of such standards. The consultation is open for comment until 31 December 2020.

On 16 December the European authorities replied to the consultation highlighting their "support [for] the IFRS Foundation's initiative to consider the potential for globally accepted sustainable reporting standards to promote internationally consistent and comparable non-financial reporting." They also place emphasis on the concept of 'double-materiality' to require the reporting on the impact of sustainability risks on business models as well as the impact of businesses on sustainability factors. The letter also highlighted the need to not limit the work of a future Sustainability Standards Board to environmental matters, but also on the other relevant environmental, social and governance aspects.

In order to achieve consistency at international level, the UK Government stated it "strongly supports the International Financial Reporting Standards (IFRS) Foundation's proposal to create a new, global Sustainability Standards Board, as well as complementary work underway on harmonisation by an alliance of voluntary standard-setting organisations."

What does it mean for you?

A simplified reporting landscape will allow for better research and analysis of non-financial information, with advantages in terms of cost and reliability of the information provided. This also links to the many additional reporting requirements being imposed by regulators. Better access to data relating to portfolio companies will help meeting these requirements.

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