Policy & Regulation Update - Q4 2021

September 27 2021 - ,

Against the backdrop of the approaching G20 and COP26, in Q3 the world of sustainable finance has seen a relative slowing down in the developments of policy and regulation. In most cases, the initiatives taken have been a consolidation of existing developments, such as the FCA consultation on TCFD-developments, and the launch of the new EU Sustainable Finance Strategy.

Outside the halls of government, the most relevant news has been the launch of the IPCC Sixth Assessment Report on Climate Change. Among a number of other findings, the most striking affirmation is potentially the least surprising. For the first time since its founding in 1988, the IPCC clearly and unequivocally linked human-caused global warming and extreme weather and climate events, in particular precipitation and heat extremes. According to the Panel if, from 2020 onwards, worldwide GHG emissions remain below 500 billion tonnes, we have about a 50% chance of staying below the 1.5°C threshold of the Paris Agreement. Moreover, should we not make deep reductions in carbon dioxide and other greenhouse gas emissions in the coming decades, global warming of 1.5°C and 2°C will be exceeded during the 21st century.

Unfortunately, as things currently stand, government policies and commitments are nowhere near enough to achieve the 1.5°C threshold. Stronger and more detailed National Determined Commitments (NDC) will be needed from governments at the upcoming COP26 conference in Glasgow.

UK-Level Developments

Chancellor's Mansion House Speech

On 1st July the Chancellor, Rishi Sunak, delivered a speech highlighting the Government's view of the future of the financial services sector. The Chancellor announced several initiatives to develop the sector, aimed at maintaining London as a global centre for Green Finance. The Government is expected to set out its approach to green finance regulation ahead of COP26.

The first of these initiatives to be implemented will be "new requirements for businesses and financial products to disclose sustainability information" along the lines of the EU Sustainable Finance Disclosure Regulation (which is currently going through a difficult gestation, with the application of its Technical Regulatory Standards delayed until July 2022).

The Government will also work with the FCA to create a new sustainable investment label - a quality stamp - to help consumers compare the impacts and sustainability of their investments.

Meanwhile, the Government continues to work to deliver on the UK Green Taxonomy.

FCA letter to AFMs

In July the Financial Conduct Authority published a "Dear Chair" letter addressed to Authorised Fund Managers (AFMs), setting out its view regarding greenwashing in the financial industry, and the steps it intends to take to limit this phenomenon. In addition, an annex contains a set of principles setting out how the FCA believes the current rules applicable to authorised funds should be "interpreted" in respect of ESG and sustainability.

The main points that AFMs should take from this letter are:


  1. Assessing (or re-assessing) their fund names/strategies against the FCA's criteria. Where a fund does not meet the FCA's expectations in respect of ESG-focussed funds, fund managers should consider what changes to investment objectives or strategies should be made. Alternatively, fund managers should consider whether the name of the fund would be more appropriate without a mention of ESG or a related term.
  2. Fund managers should review their prospectuses, other fund documentation and ongoing reports and disclosures to ensure that these provide all the information that the FCA expects in respect of ESG-focussed funds.
  3. Fund managers should review their stewardship policies for their funds and consider whether these require amendments. This is an area that has yet to receive much focus (either under the EU or UK regulatory regime), but it is clear that the FCA is beginning to pay more attention and expects the fund's stewardship policies to be consistent with their objectives.
  4. Fund managers should consider their use of ESG data/analytics providers and internal ESG resourcing to ensure that their review of third-party data is robust and that their internal resourcing is sufficient. This is of particular importance where a fund manager is looking to apply for authorisation for a new fund in the short-term.


The FCA is not alone in bringing its attention to greenwashing practices. In August and September the International Organization of Securities Commissions (IOSCO) ran two consultations on Sustainability-related regulatory and supervisory expectations in asset management and ESG ratings and data providers.

In the US, the Securities and Exchange Commission announced several initiatives to combat greenwashing and, together with German authorities, launched investigations into Deutsche Bank AG's asset-management arm DWS Group, after a former senior executive alleged the firm exaggerated the environmental credentials of some investment products.

In late September the SEC also published a set of questions it could ask companies to address climate disclosure gaps, based on those identified by its internal review processes. 

Turning back to the UK, in September the Society of Pension Professionals launched an ESG Guide in which it clearly warns Trustees against the risks of greenwashing. 

FCA Consultations and Priorities

As part of the UK Government's roadmap to implement economy-wide TCFD-aligned disclosure by 2025, in August the FCA ran two consultations on Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers and Enhancing climate-related disclosures by standard listed companies.

The first consultation focused on the introduction of mandatory (albeit under a comply-or-explain regime) climate-related, TCFD-aligned disclosures for a series of FCA-regulated entities. These include:


  • asset managers
  • life insurers (including pure insurers)
  • non-insurer FCA-regulated pension providers, including platform firms and Self-invested Personal Pension (SIPP) operators
  • FCA-regulated pension providers


These entities will be required to produce:


  • Entity-level disclosures - An annual entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers.
  • Product or portfolio-level disclosures - Annual disclosure of a baseline set of consistent, comparable information in respect of their products and portfolios, including a core set of metrics.


The second consultation focused on proposals to extend the application of the already existing climate-related disclosure requirements (currently limited to premium listed companies) to issuers of standard listed equity shares. At the same time, the FCA also sought views on select environmental, social and governance (ESG) topics in capital markets, including the regulation of ESG data providers.

On 22 September 2021 Nihkil Rathi, the CEO of the FCA, delivered a speech entitled ‘Seizing opportunity: challenges and priorities for the FCA’

The three points highlighted focus on:


  • Testing the FCAs powers to their limits, to ensure market integrity and sustain competitiveness. The FCA will adopt a bolder risk appetite in dealing with serious misconduct, including using criminal powers in the most serious cases. It will also litigate more where needed.
  • Anchoring and shaping international standards. The FCA will be adopting an internationally cooperative approach on a number of issues, including the creation of the IFRS International Sustainability Standards Board. This is currently being developed by the IRFR, with the support of IOSCO, and is expected to launch around COP.
  • Becoming as much a data regulator as a financial one. With the importance of data constantly growing for the financial industry, the FCA CEO reiterated the important role that the FCA plays in regulating this space. In the sustainability world, this is shown by initiatives the FCA is taking with regards to regulating ESG rating providers, as much as the upcoming Sustainability Techsprint.


UK Stewardship Code 2020 Raises the Bar on ESG Requirements

In early September the Financial Reporting Council published the first list of successful signatories of the revamped 2020 UK Stewardship Code. The code contains new ESG requirements, with principle 7 stating that signatories should 'systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities’.

Organisations are required to report every year to the FRC on their application of the Code. Reports are assessed by the FRC, and organisations that meet the reporting expectations are accepted as signatories. As a possible show of the renewed scrutiny that ESG disclosures have been undergoing over the last year, the number of successful applications decreased compared to previous years (where compliance was reviewed against the old version of the Code). 

UK Modern Slavery Act Should Cover Financial Portfolios

In September the UK Independent Anti-Slavery Commissioner, Dame Sara Thornton, published a review of her engagement with financial services CEOs, making five recommendations on how the sector should be addressing modern slavery.

The recommendations focus on:


  1.   Risk management and mitigation
  2.   Systems for sharing
  3.   Collective action
  4.   Collaboration on electronics supply chains
  5.   Reporting of investment and lending portfolios under Section 54 of the Modern Slavery Act


Although the report does not have any direct legal effect and does not impose any obligation, financial services firms should be aware of the shift in public sentiment towards stricter scrutiny of their investment portfolios. It is highly possible that this scrutiny will move beyond climate (and, indeed, we are already seeing an expansion into other environmental issues such as biodiversity), to incorporate the social aspect of ESG.

EU-level Developments

New EU Sustainable Finance Strategy

In July the EU Commission launched a new Strategy for financing the transition to a sustainable economy. This aims to update and revise the Bloc's previous Sustainable Finance Action Plan, which gave birth to a number of policies and regulations, including the EU Taxonomy and the Sustainable Finance Disclosure Regulation.

The new strategy includes six proposed actions:


  1.   Develop a more comprehensive framework and help the financing of intermediary steps towards sustainability
  2.   Improve the inclusiveness of sustainable finance
  3.   Enhance economic and financial resilience to sustainability risks
  4.   Increase the contribution of the financial sector to sustainability
  5.   Monitor an orderly transition and ensure the integrity of the EU financial system
  6.   Set a high level of ambition in developing international sustainable finance initiatives and standards and to support EU partner countries.


According to the Commission, the strategy "sets out how the objectives of the European Green Deal are translated throughout the financial system and ensures actors across all sectors of the economy are able to finance their transition regardless of their starting point."

An interesting point to note is the EU's continued focus on the concept of double materiality (considering both sustainability's impacts on business' bottom line, together with business' impacts on people and the planet). This is in contrast with the TCFD's and the upcoming IFRS International Sustainable Standards Board's single materiality approach (a sole focus on the risks and opportunities that sustainability factors present for business' bottom line).

Fit for 55 Strategy

On 14 July 2021 the Commission presented the first series of adopted files under the 'Fit for 55' package. The package contains legislative proposals to revise the entire EU 2030 climate and energy framework, including the legislation on effort sharing, land use and forestry, renewable energy, energy efficiency, emission standards for new cars and vans, and the Energy Taxation Directive. The interconnected proposals have the underlying aim to reduce greenhouse gas emissions by 55% by 2030 (from 1990 levels).

The Commission proposes to strengthen the emissions trading system (ETS), extend it to the maritime sector, and reduce over time the free allowances allocated to airlines. A proposed new emissions trading system for road transport and buildings should start in 2025, complemented by a new social climate fund with a financial envelope of €72.2 billion to address its social impacts. New legislation is proposed on clean maritime and aviation fuels. To ensure fair pricing of GHG emissions associated with imported goods, the Commission proposes a new carbon border adjustment mechanism.

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