Policy and Regulation Update - January 2023

January 31 2023 - ,

Latest Developments in the UK

While the "Edinburgh Reforms" of financial services in the UK, announced in December, may not have contained many references to ESG issues, the Government intends to publish a revised Green Finance strategy in early 2023. This is expected to include updates about the Government’s plans for the delayed UK Green Taxonomy) and to start moving to regulate ESG data providers, as recommended by the FCA.

ESG strategy

The strategy of the Financial Conduct Authority (“FCA”) for 2022 – 2025 highlights the increasing relevance that ESG issues have for both companies and consumers when choosing products, services and investments.

A clear commitment was made by the FCA in its strategy document to:

  • building trust in the market for sustainable investment products and tackling greenwashing through work on sustainability disclosures and product labelling
  • supporting integrity in the ESG ecosystem, by encouraging improvements in ESG data, ratings, assurance and verification services
  • promoting well-designed, well-governed, credible and effective net-zero transition plans as a member of the Government’s Transition Plan Taskforce
  • consulting on a new regulatory framework and data requirements to accelerate the pace of change on diversity and inclusion
  • publishing final rules on diversity and inclusion on company boards and executive committees.

As part of the implementation of this strategy, the FCA established a working group with the goal of developing a globally consistent voluntary Code of Conduct for ESG data and ratings providers.

The Working Group should seek to publish a draft of the voluntary Code of Conduct for consultation within approximately 6 months of the first meeting, and the final version of the Code within approximately 4 months of the start of the consultation. This will take us to Q4 2023 - Q1 2024 for the final adoption.

No updates have yet been given about the work on board diversity and inclusion, although in December 2022 the FCA did publish research on “Understanding approaches to D&I in financial services”.

UK Independent Review of Net Zero Recommendations for Carbon Markets and Financial Services

The final report of the independent review of net zero has been published: "Mission Zero: Independent Review of Net Zero".  The review was established in September 2022 to assess the government's approach to achieving its target of net zero greenhouse gas emissions by 2050.

To achieve this goal, the review suggests that the UK Government should, through work within the UK Emissions Trading Scheme (ETS) Authority, develop a pathway for the UK ETS until 2040.

The review also recommends that the government should endorse international voluntary carbon market (VCM) standards as soon as possible, consult on adopting regulated standards for VCMs and setting up a regulator for carbon credits and offsets by 2024, and establish a programme for offsets and carbon credits.

Regarding financial services more specifically, the review recommends that through its update to the Green Finance Strategy the government should lay out a clear, robust and ambitious approach to disclosure, standard setting, and scaling up green finance. To create a level playing field for businesses in the approach to net zero, the UK should incentivise disclosure, set standards and align with international efforts. Including:

  • Endorsing and implementing the International Sustainability Standards Board (ISSB) standards as soon as possible.
  • Progress the work of the UK Transition Plan Taskforce on transition plan disclosures ensuring that its standards are made mandatory for both listed and private firms to ensure comparable disclosure standards.
  • Consider whether a transition taxonomy (alongside a green taxonomy) would be appropriate.

ISSB developments

On 15 December, the ISSB confirmed its initial decision to require financial institutions and investee companies to report Scope 3 carbon emissions. As a realisation of the challenges of this goal, the ISSB will provide guidance and context to help firms and investors to measure and understand the data, and suggest an extra year for Scope 3 reporting after Scope 1 and 2 reporting takes effect.

The ISSB standards are due to be incorporated into the UK’s Sustainability Disclosure Requirements, and are expected to be published in their final form in early 2023.

After this, the ISSB will move to consult on where to move next in its standard development process. The areas of interest include:

  1. potential research projects on:
  • biodiversity, ecosystems and ecosystem services;
  • human capital, with an initial focus on diversity, equity and inclusion; and

human rights, with an initial focus on labour rights and communities’ rights in the value chain; and

  1. a potential joint project with the International Accounting Standards Board (IASB) on connectivity in reporting, building on the IASB’s Management Commentary project and the Integrated Reporting Framework

COP15 and the Kunming-Montreal Global Biodiversity Framework

The Nature COP15, held in Montreal at the end of 2022, ended with the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF). The Framework aims to address biodiversity loss, restore natural ecosystems and to protect indigenous rights, including the “30x30 commitment” to protect 30% of the planet and 30% of degraded ecosystems by 2030.

It was also agreed that signatories (including the UK) will take legal, administrative or policy measures to encourage and enable large and transnational companies to report, monitor and disclose their risks, dependencies and impacts on biodiversity, including in their operations, value chains and portfolios. This is probably going to be done in line with the upcoming results of the work of the Task Force on Nature-Related Financial Disclosures (TNFD), which is set to finalise its disclosure recommendations by September of this year. In the future it seems likely that,, much like TCFD, TNFD reporting may become mandatory for large businesses and asset managers in the UK.

Europe and the Corporate Sustainability Due Diligence Directive

Lastly, the process for the development of a Directive requiring corporates (and, potentially, investors) to run human rights and environmental due diligence in line with the UN Guiding Principles on Business and Human Rights (UNGP), and the OECD Guidelines for Multinational Enterprises is ongoing. In late December, the Parliament reached a last-minute (if controversial) agreement on its position, which would practically exempt financial institutions from having to comply with the Directive’s requirements (with the option for each state to include them should they wish to). This position is not certain, though, as strong dissent can be heard from certain parts of the EU parliament , going into the final negotiations, which should take place in May 2023. The Directive is likely to affect UK companies having operations in the EU, as much as UK investors providing their services within the territory of the Union.

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