Policy and Regulation Update - December 2022

Regulation
December 19 2022 - ,

The following is a summary of recent developments relating to sustainable finance policy and regulations, focusing on the last quarter of 2022.

UK Green Technical Advisory Group has published its first set of recommendations

On 1 October, the Green Technical Advisory Group ("GTAG") published its advice to the UK government on the development of the UK Green Taxonomy. The document is not binding, but it gives a hint of the direction that the UK Green Taxonomy development might take, including how it might or might not differ from the EU Taxonomy.

The main recommendation involves the suggestion to adopt the majority of the EU Technical Screening Criteria, revising the remainder where they are deemed unsuitable. It is important to note that the document recommends the highest possible level of alignment with the EU Taxonomy, especially considering that many UK financial market participants will also be subject to the EU Taxonomy.

In developing the regulation, the Government should adopt the following principles, in order of priority:

  • Avoid greenwashing and support economic transition
  • Simplicity and usability
  • International relevance and consistency

FCA to develop code of conduct for ESG data and ratings providers

The Financial Conduct Authority (FCA) announced, on 22 November, its plans to form a working group to develop a code of conduct for ESG data and ratings providers. This is in line with the commitments included in the regulator’s strategy launched last year, and the subsequent expression of support for introducing regulatory oversight of certain ESG data and ratings providers. 

The goal of the FCA is to “convene, support and encourage industry participants to develop and follow a voluntary Code of Conduct” along the lines of the  International Organization of Securities Commissions (IOSCO) recommendations published in 2021. The International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) will form the Secretariat of the newly formed group, which will be co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May. It will also include investors, ESG data and ratings providers, and rated entities. 

A new Code of Conduct is expected to provide further transparency in the market, something that Ethical Screening has always been supportive of. However, it is important that ESG data is not reduced to simplistic disclosures, and that space is left for meaningful and in-depth analysis.

UK Transition Plan Taskforce publishes draft guidance on preparing climate transition plans

The UK's Transition Plan Taskforce ("TPT") has issued draft guidance on preparing climate transition plans. Comments on the draft implementation disclosure framework and related implementation guidance will be accepted until 28 February 2023. This guidance will be welcomed by organisations wondering how to begin drafting a transition plan, as well as investors currently experiencing a broad range of approaches to transition planning in the market, with little comparability.

Ethical Screening's net zero research contains detailed narrative, including commentary on company transition plans, so please contact us for more information on these topical developments.

EFRAG approves the ESRS

On 15 November the European Financial Reporting Advisory Group (EFRAG) approved the final version of the European Sustainability Reporting Standards (ESRS), setting the rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU’s upcoming Corporate Sustainable Reporting Directive (CSRD). Sector-specific standards are expected to come around the end of 2023.

Ethical Screening will follow this development with interest and engage with clients to evaluate their data needs. Reach out if you would like to discuss how our products may help you comply with the upcoming requirements.

Growth in Disclosure Requirements for Companies and Financial Institutions is Expected to Continue 

The European Financial Reporting Advisory Group delivered its first draft European Sustainability Reporting Standards (ESRS) in November, which are sector-agnostic and due to be followed by a set of sector-specific standards in 2023. 

For reference, the PRI published a comparison of the different upcoming climate-related disclosure standards (ISSB, ESRS and SEC). The analysis shows that each draft standard has considerably leveraged the TCFD recommendations and guidance across each pillar, with varying degrees of alignment.

Discussions are underway within the ISSB regarding the content of the updated standards, and the way forward for the development of new standards. A consultation will be launched in the next months on the way forward for the ISSB. It can reasonably be expected that one of the new areas of focus for the Board will be Biodiversity, in line with a general increased interest for Nature-related topics. 

Heightened Scrutiny of ESG

Connected to all of the above, regulators around the world are placing ESG investing under more and more scrutiny.

The latest in the debate comes from the FCA who recently spoke about needing to delve into how ESG benchmarks are compiled, to help ensure that investors can meaningfully consider ESG as part of their investment decisions. This echoes a recent statement by the SEC calling for more disclosure on the use of ESG factors within portfolio management. The US Senate’s Banking Committee Ranking Member Pat Toomey (R-Pa.) is also asking ratings firms to provide information regarding their practices on calculating companies’ ESG scores.

This follows initiatives in the EU, where the European Securities and Markets Authority recently ran a survey of ESG ratings providers, concluding that it will “continue supporting the [European Commission] in their assessment of the need for introducing regulatory safeguards for ESG ratings”; the UK, where in June the FCA signalled the possibility of regulating the market, and India, whose capital markets regulator, SEBI, issued a consultation paper on regulation of Environmental, Social and Governance Rating Providers for Securities Markets. Proposed regulatory measures in the country include an accreditation framework for ESG ratings agencies, minimum capitalisation norms, and a standardised set of ratings across agencies.

Other Resources

See all resources

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