Policy and Regulation Update - February 2023

March 2 2023 - ,

Latest developments in the UK

Finance for positive sustainable change

On 10 February the FCA published a discussion paper on “Finance for positive sustainable change”, asking for views on sustainability-related governance, incentives and competence in regulated firms. 

The paper is set against the backdrop of increased adoption of TCFD, the upcoming developments around nature related disclosures, and the work of the International Sustainability Standards Board, the Transition Plans Taskforce and GFANZ. The FCA sets out to consider firms’ sustainability-related objectives and strategies, and how these are supported by their governance and incentive arrangements. They also reflect on how asset managers and asset owners organise and govern their stewardship activities.  

Key points raised in DP23/1 include the following:

  • The possibility of introducing additional training and competence expectations to help fill sustainability-related knowledge gaps across the financial sector.
  • Discussion about whether additional regulation should be included to extend individual responsibility for sustainability-related matters for senior management, and whether specific expectations should be set around the roles and responsibilities of governing bodies (e.g. fund boards).
  • How to stop firms claiming ESG-related expertise without being able to substantiate those claims (so called “competence washing”).
  • Exploring metrics for linking remuneration to sustainability goals and how to treat cases when targets are not met.
  • How governance arrangements, incentives, structures and capabilities should keep pace with the increased focus on sustainability.
  • The possibility of introducing regulation to encourage effective stewardship at asset managers.
  • How conflict policies should specifically consider issues as they relate to stewardship.
  • Whether certain specific rules (e.g. around Market Abuse Regulation) should be relaxed to aid effective stewardship.

The deadline for the consultation accompanying the paper is 10 May 2023. 

ClientEarth brings legal challenge against the FCA over fossil fuel company's climate risk disclosures

On 16 February the environmental law firm ClientEarth announced that it had filed a judicial review case against the UK financial regulator over its decision to approve the prospectus of a company with significant interests in the Cambo and Rosebank oil and gas fields in the North Sea (Ithaca Energy).

According to the law firm, although Ithaca’s prospectus acknowledges that climate change presents risks to the oil and gas industry in general,  the company allegedly does not appear to explain how these risks affect its business specifically, or how significant these risks are for the company.

The case also argues that failing to provide investors with a meaningful indication of how Ithaca’s business and finances might be affected by full or even partial achievement of the Paris Agreement goal deprives them of the information necessary to make an informed assessment of the company’s financial position. For these reasons, ClientEarth argues that the FCA should not have approved the company’s prospectus.  The case is now in front of the High Court, and if successful will likely represent the first of many similar cases. 

On a similar note, still in February the same law firm brought a case against oil firm Shell’s Board of Directors, alleging that the Directors are failing in their legal duty to promote the success of the company and to act with reasonable care, skill and diligence by not properly managing climate risk.

ESMA consultation on Guidelines on funds’ names using ESG or sustainability-related terms

On 20 February the deadline ended for the consultation on Guidelines on funds’ names using ESG or sustainability-related terms run by the European Securities and Market Authority. 

In summary, the general requirements highlighted that “funds’ names in fund documents or marketing communications should not be misleading, as the disclosure of sustainability characteristics should be commensurate with the effective application of those characteristics to the fund. The use of ESG- and sustainability-related terminology in fund names should be used only when supported in a material way by evidence of sustainability characteristics, or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy and its strategy as described in the relevant fund documentation.”

Latest developments from the ISSB 

On 16 February the International Sustainability Standards Board (ISSB), unanimously voted to require that global climate and sustainability disclosure rules take effect for annual periods beginning on or after 1 January 2024, (meaning first disclosures in 2025). The Board also agreed that the standards could be adopted earlier if both are adopted at the same time. Companies that choose to apply the standards earlier will have to disclose that fact.

The ISSB also declined to re-open its two standards (S1, General Sustainability-related Disclosures and S2, Climate-related Disclosures), for consultation, although several revisions were made following the original round of consultation. The rules should be issued by the end of June.

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