Policy and Regulation Update - April 2023

April 27 2023 - ,

Latest developments in the UK

2023 Green Finance Strategy

At the end of March, the UK government published its 2023 Green Finance Strategy, highlighting a set of proposals for mobilising green finance and investment in the UK. The strategy highlights five main areas of focus:

  • UK financial services growth and competitiveness; 

  • enhancing investment in the green economy; 

  • ensuring financial stability to manage risks from climate change and nature loss; 

  • incorporation of nature and climate adaptation; and aligning global financial flows with climate and nature objectives.

FCA policy statement on SDR

The FCA announced a delay to the publication of its policy statement and final rules on its Sustainability Disclosure Requirements (SDR) and investment labels regime. Originally expected at the end of Q2, it will now be published in Q3. In the policy statement, the FCA plans to consider, among others:

  • its approach to the marketing restrictions

  • refining some of the specific criteria for the labels 

  • clarifying how different products, asset classes and strategies can qualify for a label, including multi-asset and blended strategies

Interestingly, the FCA claims that it will “[seek] international coherence with other regimes and will continue to consider how to further support compatibility, while emphasising that we need robust standards for the UK to remain at the global forefront of sustainable investment.”

Latest developments in Europe

EU Parliament Legal Affairs Committee adopts a position on the Corporate Sustainability Due Diligence Directive

With 19 votes against 3 and 3 abstentions, MEPs on the Legal Affairs Committee adopted their position on so-called corporate sustainability due diligence. Firms would be obliged to identify, and where necessary prevent, end or mitigate the negative impact of their activities, including that of their business partners, on human rights and the environment.

Crucially, the compromise keeps financial institutions in scope of the Directive, introducing a specific article 8(a) that recognises the importance of stewardship and introduces principles regarding divestment. Some uncertainties remain about the definition of “ value chain” for FIs, and the so-called “pre-service limitation”, whereby financial undertakings are only obliged to carry out due diligence assessments before providing a financial service, or when they are notified of a possible or actual impact, instead of having to proactively conduct ongoing due diligence.

To read more about the directive and the role of financial institutions, see PRI and IIGCC‘s papers

EU Commission publishes a Q&A on SFDR 

On 14 April 2023, the European Commission published its responses to the questions on the questions that the the European Supervisory Authorities (“ESAs”) had raised on SFDR in September 2022, in particular regarding the “sustainable investments” test and the compliance requirements for Article 9(3) funds that track EU Paris Aligned Benchmarks (“PABs”) / Climate Transition Benchmarks (“CTBs”).

The responses cover a range of topics, including:

  • Key sustainable finance terminology and definitions: SFDR does not prescribe a specific approach or minimum requirements regarding the main parameters defining a ‘sustainable investment’ (i.e. (i) contribution, (ii) do no significant harm, and (iii) good governance). Financial market participants must conduct their own assessment of their financial products and disclose the underlying assumptions.

  • Scope of Article 9(3) SFDR: financial products with a reduction in carbon emissions as their objective can fall within the scope of Article 9(3), regardless of whether they use a passive or active investment strategy. 

  • Scope of Article 8 SFDR: Article 8 does not limit the types of characteristics that can be promoted. Therefore, the SFDR does not prevent a product from promoting carbon emissions reductions as part of its investment strategy  if the product does not have sustainable investment as its objective.

  • Scope of the product level consideration of Principal Adverse Impacts (PAIs): the description relating to the consideration of PAIs must include a description of both the adverse impacts and the procedures put in place to mitigate those impacts.

  • Frequency of the periodic disclosures for portfolio management services: the reporting frequency obligation for portfolio management services in the context of Article 11 SFDR is yearly. Since the regular report is produced on a quarterly basis, the SFDR template will need to be annexed to every fourth report.

ESAs consultation on SFDR PAI

On 12 April 2023, the ESAs published a consultation paper which outlines a suite of proposals to amend the SFDR Level 2 Measures.

The ESAs have proposed the extension of the mandatory indicators to incorporate additional “social indicators” (such as  impacts arising from earnings in non-cooperative tax jurisdictions). Other additional “opt-in” social indicators have also been proposed by the ESAs. New formulas have also been introduced for PAI indicators that did not already have them.

Other proposed changes include a focus on the disclosure of GHG reduction targets, changes to “Do No Significant Harm” disclosures, to the treatment of derivatives, among others. 

Feedback to the ESA Consultation Paper must be submitted to the ESAs using the required response form no later than 4 July 2023. 

European Commission Consultation on EU Taxonomy Framework

On 5 April 2023, the European Commission published a consultation seeking feedback to complete the regulatory regimes around the EU Taxonomy:

  • Technical screening criteria for the four remaining Environmental Objectives (beyond Climate Mitigation and Adaptation);

  • Proposed changes to the Taxonomy Climate Delegated Act to add technical screening criteria for economic activities not yet covered by the EU Taxonomy framework or complement existing technical screening criteria for climate change mitigation and climate change adaptation; and

  • Proposed changes to the Taxonomy Disclosures Delegated Act to ensure, in particular that newly added economic activities contributing to the Four Remaining Environmental Objectives are appropriately reported by both non-financial and financial undertakings that are required to report on the eligibility and alignment of their activities with the EU Taxonomy.

Interested stakeholders have until 3 May 2023 to provide their feedback on the proposals.

Latest developments internationally

ISSB request for information

The ISSB met on 19 April 2023 to discuss the due process steps taken to develop the draft request for information on its upcoming agenda priorities. The ISSB decided:

  1. to allow 120 days for comment on the request for information; and

  2. to publish the request for information for public comment.

The consultation on the agenda priority is expected in May 2023. 

IAASB standard for sustainability assurance

The International Auditing and Assurance Standards Board (IAASB) announced its decision to bring forward the start of the consultation on its proposed new standard for sustainability assurance, as part of its plan to deliver an assurance framework for end-2024 sustainability disclosures by market issuers.

Other Resources

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