Policy & Regulation Update - Q1 2022

February 11 2022 - ,

The news in the last quarter of 2021 was dominated by the announcements made and agreements reached at COP26 in Glasgow.  There has already been plenty of analysis of the results of the Conference, so we will limit ourselves to a short appraisal of the most relevant.

Regarding the negotiations, the full text of the Glasgow Climate Pact (GCP) can be found here, while all outcome texts from COP26 can be found here.


Notable outcomes arising from the negotiations were:

  • A request for countries to come forward with strengthened 2030 NDC targets in 2022, to keep warming in line with the Paris Agreement goals.
  • A historic first reference to coal in a UN Climate agreement. Although the original text stated the ambition to achieve a "phase-out" of coal, last minute interventions from China and India managed to water it down to an agreement to "accelerate efforts towards the phase down of unabated coal power and phase out of inefficient fossil fuel subsidies."
  • An agreement on finance for adaptation, with the Pact urging "developed country Parties to at least double their collective provision of climate finance for adaptation to developing country Parties from 2019 levels by 2025". It also calls upon financial institutions and the private sector to mobilise finance for adaptation.
  • An agreement on the so-called "Paris Rulebook" (the Paris Agreement's implementation guidelines), including initial rules for Article 6 (on carbon markets); the encouragement to the Parties to submit five-year emission reduction pledges every five years; and reporting under the Enhanced Transparency Framework.

In summary, while many have been disappointed by the lack of ambition in the negotiations results, the result of keeping 1.5° C  alive was achieved, although it will take a massive concerted effort to effectively implement the Rulebook.

In addition to the results of the negotiations, a number of other agreements were reached, including: the Global Methane Pledge; the China-US Climate Pact; the Glasgow Leaders' Declaration on Forests and Land Use; and the Financial Institutions Deforestation Commitment. Specifically relating to finance, the Glasgow Financial Alliance for Net Zero (currently representing over 450 firms in 45 countries), announced that financial sector net zero commitments exceed $130 trillion. Moreover, the creation of the International Sustainability Standards Board was announced, with the aim of developing standards for environmental disclosure. This last development is expected to have wide-ranging repercussions on the availability of climate-related financial information, with some countries already starting to announce their intention to link their securities regulation to the upcoming ISSB standards. In the meantime, Emmanuel Faber, former CEO of Danone, was appointed as Chair of the newly created entity.

On the UK front, on Finance day at COP the UK Chancellor Rishi Sunak unveiled the next step in the country's plans for sustainability reporting, announcing that the UK aims to become the world's first "Net-Zero Financial Centre". Among others, this means that the Government intends to introduce requirements for mandatory disclosure of net zero transition plans from UK financial institutions and listed companies.

Developments in the UK

Mandatory Climate-related Financial Disclosures Enter Into Force

On 17 January 2022 two new statutory instruments, The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 were published by the Department for Business, Energy and Industrial Strategy (BEIS).

The disclosure requirements will apply to over 1,300 of the UK's largest companies and financial institutions. In particular, the requirements will extend to all UK Relevant Public Interest Entities (PIEs) (those currently required to produce a non-financial information statement) as well as all other UK registered companies or LLPs with over 500 employees and a turnover of more than £500 million (determined on a consolidated basis).

In-scope entities will be required to disclose, in the non-financial information statement included in their strategic report, climate-related financial information in line with the four overarching pillars of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations (i.e. Governance, Strategy, Risk Management and Metrics & Targets). LLPs will disclose in the energy and carbon report made as part of their annual report.

The Regulations will come into force on 6 April 2022 and apply to financial years beginning on or after that date. Early in the year, BEIS is expected to produce guidance documents to assist in-scope entities in their disclosures.

It is expected that the scope and depth of the required disclosures will also expand in future years, so it is advisable that companies start considering making more complete disclosures on a voluntary basis, to better prepare for possible future developments.

New UK FCA Rules on Climate-Related Disclosures

On 17 December 2021, the UK Financial Conduct Authority (FCA) published its policy statement (PS21/24) setting out final rules and guidance relating to the requirements under a new climate-related disclosure regime for asset managers as well as "asset owners". Generally, the new rules are consistent with those proposed for public consultation in June 2021, and have been added through a new Environmental, Social and Governance sourcebook in the FCA Handbook.

They came into effect on 1 January 2022 for the largest firms (over £50 billion in AuM, or £25 billion assets under administration for asset owners), meaning that these firms will have to publish a first set of reports by 30 June 2023. Other firms with assets over £5 billion will see the rules enter into force on 1 January 2023. The thresholds will be reviewed after three years of disclosures.

In-scope firms will be required to make disclosures both at Entity- and Product-level, on an annual basis. These disclosures will have to be consistent with the TCFD Recommendations (both the 4 recommendations and the 11 recommended disclosures set out in Figure 4 of Section C of the TCFD Final Report.

The FCA's ESG rules will be supplemented by additional SDR and UK Green Taxonomy disclosures in "2-3 years" for funds with AuM over £5 billion (longer for smaller funds), as highlighted by the Roadmap to Sustainable Investing published by the UK Government in October 2021.

Under the SDR, the FCA is proposing to bring together new and existing sustainability reporting requirements for businesses (including listed companies), the financial sector, and investment products. The SDR will extend the disclosure requirements beyond climate change and will link to the UK Green Taxonomy so as to cover sustainability impacts as well as sustainability risks and opportunities.

FCA Consultation on Labels

7th January 2022 was the deadline for the FCA consultation on Sustainability Disclosure Requirements and Investment Labels, tied to the Sustainability Disclosure Requirements that the UK Government announced in its Roadmap to Sustainable Investment.


In the consultation, the FCA sought insights on the market's view on:

  • sustainable investment labels;
  • consumer facing disclosures for investment products; and
  • client and consumer-facing entity, and product-level disclosures by asset managers and FCA regulated asset owners.


With regards to investment labels, the FCA was contemplating a three-tier system, illustrating early views below:



With regards to consumer facing disclosures, the goal of the FCA is to accommodate the elements highlighted in the Roadmap (e.g. a wider scope going beyond climate, the adoption of a double materiality approach, etc.), inviting clear and comprehensible disclosures while limiting the burden for those preparing the disclosure. For example, the Authority is considering whether to mandate the use of templates or an ESG factsheet.

Moreover, the Authority is looking at how these new regulations affect (and are affected by) other factors along the investment chain. For example, the regulator is interested in better understanding the interaction with rating and index providers, and is planning to explore how to introduce new rules for financial advisers. The FCA is aiming to consult in Q2 2022 on proposed rules to implement SDR disclosure requirements for asset managers and certain FCA-regulated asset owners and sustainable investment labels within its Handbook.


Ethical Screening has been engaging directly with the FCA on labelling matters, with particular emphasis on the areas of "do no significant harm", and managing client expectations. Our principal concerns are:

  • how differentiation is made between funds with a genuine sustainability agenda (and those that don’t) in an increasingly crowded marketplace;
  • ensuring the client does not get lost in the discussion;
  • not always assuming that the client knows less than the investment manager.


Developments in the EU

Entry Into Force of the EU Taxonomy Requirements

The EU Taxonomy Regulation took effect on 1 January 2022, with the long-term aim of classifying environmentally sustainable economic activities. Asset managers and financial advisers will need to disclose the degree to which they commit to being invested in taxonomy-aligned activities within their financial products. Reporting on the first two of six categories, climate change mitigation and adaptation, is required during 2022.

Reporting under the EU Taxonomy Regulation is mandatory for financial and non-financial companies subject to publishing non-financial information under the Non-Financial Reporting Directive, meaning large public-interest companies (including companies listed on regulated markets, banks and insurance companies) with more than 500 employees.

Initially, reporting will be limited to climate change mitigation and adaptation (for which technical criteria have already been adopted). The criteria for the remaining areas of the taxonomy (sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems) should be adopted by mid-2022.

On 3 August 2021, the EU Platform for Sustainable Finance published a draft report with preliminary recommendations for technical screening criteria regarding the remaining four objectives. After the feedback period, the report was to be submitted to the Commission in November 2021. However, note that the report is not an official Commission document and it is yet to be seen to what extent the Commission will take its recommendations into account. If the delegated act regarding the remaining objectives is issued in 2022, from 1 January 2023 mandatory reporting will also include the remaining objectives.

ESMA Consultation on Updated MiFID II "Sustainability Preferences"

On 27 January the European Securities and Markets Authority (ESMA) published a consultation paper with proposed revisions to the current MiFID II suitability guidelines, to reflect the upcoming EU MiFID II ESG changes and certain other MiFID II updates. The consultation paper provides detailed guidance on how firms should implement these new sustainability preferences requirements, planned to enter into force from 2 August 2022.

The consultation document provides a series of draft guidelines, which will most likely form the basis for the initial disclosures. This is because, while the consultation closes 27 April, the final report is due Q3 2022, so potentially too late to support in the preparation of the first round of reports.


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