Grania Baird
Partner
Jessica Reed
Partner
Kya Fear
Associate
As the EU and UK sustainable finance regulatory landscapes develop at pace, please see below a useful timeline which sets out the key developments to date and what we can expect in 2023.
For the background to the development of sustainable finance in the UK, please see our UK Guide, and for the background to the development of sustainable finance, please see our EU Guide.
Last reviewed - January 2023
UK Timeline
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The window for application to take part in the FCA’s Green Fintech Challenge closed on 6 December 2021
6 December 2021
<p><strong>What is the Green Fintech Challenge?</strong></p><p>The Green Fintech Challenge is part of the FCA Innovation programme. It is open to firms that are developing innovative green solutions that require regulatory support to bring their proposition to market. The FCA is interested in firms that are developing innovations for ESG data and disclosure obligations.</p>
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The PRA expects firms to have fully embedded its Supervisory Statement 3/19 which sets out how firms should deal with climate-related financial risks
31 December 2021
<p><strong>What is the PRA’s Supervisory Statement 3/19?</strong></p><p>The PRA expects firms to have fully embedded its <a href="https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2019/ss319" target="_blank" rel="noopener">Supervisory Statement 3/19</a> by December 2021. From January 2022, the PRA will include these expectations in its supervisory regime. Under the five key expectations set out in SS3/19 firms are expected to:</p><ul><li>embed climate-related financial risks into their governance framework;</li><li>allocate responsibility for identifying and managing climate-related financial risks to the relevant existing Senior Management Function (SMF) as part of the Senior Managers Regime, and ensure that these responsibilities are included in the SMF’s Statement of Responsibilities;</li><li>incorporate climate-related financial risks into existing risk management frameworks;</li><li>undertake longer-term scenario analysis to inform strategy and risk assessment;</li><li>develop an appropriate approach to climate disclosure in line with the TCFD framework</li></ul>
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Reference period for firms affected by Phase 1 of the implementation of the Environmental, Social and Governance (ESG) Sourcebook took effect. First disclosures are to be published by 30 June 2023
1 January 2022
<p><strong>When does the FCA intend to implement the ESG Sourcebook? </strong></p><p>The FCA intend to implement its proposed new rules and guidance in a new Environmental, Social and Governance (<strong>ESG</strong>) Sourcebook. Initially, the ESG Sourcebook will relate to the climate-related disclosures, but the FCA anticipates that it will expand to cover related and wider ESG topics over time. Asset managers with Assets under Management (<strong>AuM</strong>) in excess of £50 billion and asset owners with AuM (or under administration) in excess of £25 billion in relation to in-scope business will be affected by phase 1 implementation. First disclosures are to be published by 30 June 2023 and subsequent disclosures by 30 June each calendar year. In relation to “on demand“ disclosures to institutional clients, firms must provide the information from 1 July 2023.</p><p>Remaining in scope asset managers and asset owners fall under phase 2 implementation. First disclosures are to be published by 30 June 2024 and subsequent disclosures by 30 June each calendar year. In relation to “on demand“ disclosures to institutional clients, firms must provide the information from 1 July 2024.</p>
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Comments and feedback on DP21/4 – Sustainability Disclosure Requirements (SDR) and labels were to have been received by the FCA
7 January 2022
<p><strong>What is DP21/4? </strong></p><p>The FCA set out its thinking on sustainability disclosure requirements and investment labels in a discussion paper (<a href="https://www.fca.org.uk/publication/discussion/dp21-4.pdf">DP21/4</a>) in November 2021. The FCA is proposing a three-tiered disclosure regime with both entity and product-level disclosures. Under this approach, the entity-level and product-level disclosure requirements would build on the FCA’s proposed TCFD-aligned disclosure requirements as set out in CP21/17.</p>
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Digital Sustainability Sandbox pilot finished. Outcomes published in June 2022
March 2022
<p><strong>What is the Digital Sandbox? </strong></p><p>Building on the lessons learned from the digital sandbox pilot, the FCA ran a second cohort focused on providing support to innovators looking to develop and validate solutions in the area of ESG data and disclosure.</p><p>The purpose of this sustainability cohort was to accelerate innovation and to address the specific market challenges set out below:</p><ul><li>how can technology enable transparency in disclosure and reporting on sustainability, especially on the characteristics of corporate assets and the profile of their supply chains?</li><li>how can technology be used to automate the assurance of a listed issuer’s ESG data and validation of its ESG-labelled corporate bond issuance?</li><li>how can technology help consumers understand the ESG characteristics of the products and providers they engage with, as well as provide visibility around alternatives aligned with their needs and preferences?</li></ul><p>In June 2022 the FCA published a <a href="https://www.fca.org.uk/publication/corporate/digital-sandbox-sustainability-pilot-report.pdf" target="_blank" rel="noopener">report</a> providing an overview of the sandbox and the lessons learned. The FCA identified key lessons including:</p><ul><li>that the sandbox initiative demonstrated that collaboration and access to data can have a significant impact on innovation acceleration, although a more structured approach towards facilitating collaboration may be helpful, including more in-person activities;</li><li>that while the sustainability pilot bridged the gap between financial services and sustainability, participants noted that ESG data and disclosures is a broad theme that can be difficult to link with financial services; and </li><li>that when selecting areas for future digital sandbox initiatives, the FCA should consider the data available in the field to ensure that there is sufficient quality data to meet participants' testing requirements.</li></ul><p>The FCA is continuing its research and engagement to ensure that the future service meets the needs of its end-users, exploring certain further potential uses for the sandbox including more regulatory collaboration in, for example, developing SupTech solutions. The FCA is also exploring methods to make the digital sandbox data assets openly accessible in a way that complies with data protection laws.</p>
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The Department for Business, Energy and Industrial Strategy (BEIS) published a Call for Evidence on updating the UK Government’s July 2019 Green Finance Strategy. Work in this area is ongoing and the updated strategy is expected to be published in Q1 2023.
12 May 2022
<p><strong>Why has the UK Government published a Call for Evidence on updating the Green Finance Strategy?</strong></p><p>The Government wants to update its Green Finance Strategy, which was published in 2019, as there have been material developments in this area, including COP 26 and the UK Government’s plans to make the UK the world’s first Zero-aligned Financial Centre. The updated Green Finance Strategy will take stock of progress made by the UK and set out how the UK’s financial services can support the UK’s energy security, climate and environmental objectives.</p><p>The <a href="https://www.gov.uk/government/consultations/update-to-green-finance-strategy-call-for-evidence/update-to-green-finance-strategy-call-for-evidence-accessible-webpage">Call for Evidence</a> published in May 2022 set out 39 questions and covered the following four areas:</p><ul><li><strong>Capturing green finance opportunities</strong> - including whether the UK's green finance regulatory framework is world class and opportunities for green finance growth in the financial services sector</li><li><strong>Financing the UK’s energy security, climate and environmental objectives</strong> - including how the UK can support a financial system that leverages private investment to meet these objectives, how to mobilise private investment into transition activities for decarbonising sectors</li><li><strong>Greening the financial system</strong> – including include how the UK can become the world's first net-zero-aligned financial centre (as the government announced at COP 26), integrating environmental factors into financial decision-making and the role of government and regulators</li><li><strong>Leading internationally</strong> – focussing on the global transition to a net zero, nature-positive financial system, including the challenges for emerging and developing economies in transitioning and the potential role of green bond issuances for those economies</li></ul><p>The Call for Evidence closed on 22 June 2022 and in the Edinburgh Reforms the Chancellor of the Exchequer <a href="https://questions-statements.parliament.uk/written-statements/detail/2022-12-09/hcws425">stated</a> that he expected an updated Green Finance Strategy in early 2023.</p>
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The Bank of England published its Climate Biennial Exploratory Scenario exercise results
24 May 2022
<p><strong>What is the Climate Biennial Exploratory Scenario (CBES) exercise? </strong></p><p>The Bank of England (BoE) launched the CBES exercise in June 2021, which explores the resilience of the business models of the largest UK banks and insurers to the physical and transition risks associated with climate change. This is the first time the BoE is testing both banks and insurers to capture interactions between them and understand the risk presented by climate change across the financial system. The BoE hopes that this exercise will:</p><ul><li>assess the financial exposures of participants and the financial system more broadly to climate-related risks;</li><li>understand the challenges to participants’ business models from these risks; and gauge their likely responses and the implications for the provision of financial services; and</li><li>help participants to enhance their management of climate-related financial risks. This includes engaging counterparties to understand their vulnerability to climate change.</li></ul><p>The BoE published the CBES <a href="https://www.bankofengland.co.uk/stress-testing/2022/results-of-the-2021-climate-biennial-exploratory-scenario">results</a> on 24 May 2022, and the BoE it noted the following:</p><ul><li>UK banks and insurers are making good progress in some aspects of their climate risk management, and this exercise has spurred on their efforts further. However, UK banks and insurers still need to do much more to understand and manage their exposure to climate risks. The lack of available data on corporates’ current emissions and future transition plans is a collective issue affecting all participating firms. The BoE will give firm-specific feedback to participants, and will use findings from the CBES to help target their efforts.</li><li>Climate risks captured in the CBES are likely to create a drag on the profitability of banks and insurers, particularly if they are unable to manage these risks effectively. But there is substantial uncertainty around the true magnitude of these risks. And climate risks outside the scope of the CBES (such as trading losses for banks and mortality risk for life insurers) could be material.</li><li>One recurrent theme across participants’ submissions was a lack of data on many key factors that participants need to understand to manage climate risks. Another was the range in the quality of different approaches taken across organisations to the assessment and modelling of these risks. All participating firms have more work to do to improve their climate risk management capabilities.</li></ul>
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The Climate Financial Risk Forum (CFRF) launched a beta version of an online climate scenario analysis narrative tool to support smaller firms. CFRF will continue to work on this tool and expects to update the tool in Q1 2023.
June 2022
<p><strong>What is the CFRF? </strong></p><p>The FCA and PRA jointly established the Climate Financial Risk Forum (CFRF) in March 2019. The objective of the CFRF is to build capacity and share best practice across financial regulators and industry to advance financial sector responses to the financial risks from climate change.</p><p>In October 2021, the CFRF published a second set of guides to help financial services firms approach and address climate-related financial risks, including risk management, scenario analysis and disclosure obligations. The guides follow on from and build on the CFRF’s June 2020 guide on managing climate-related financial risks. More information on the CFRF and the guides can be found <a href="https://www.fca.org.uk/transparency/climate-financial-risk-forum" target="_blank" rel="noopener">here. </a> </p><p><strong>What is climate scenario analysis? </strong></p><p>Climate scenario analysis helps companies to identify and prepare for the impacts that climate change will have on their business models through a structured exploration of different possible futures to identify the most relevant risks and opportunities for their businesses.</p><p><strong>What is CFRF’s online climate scenario narrative tool?</strong></p><p>It is an online climate scenario analysis narrative tool developed to support smaller firms which launched in a beta version in 2022. The idea of the tool is that firms can input some basic information regarding their business activities, products, or risks into the tool which then outputs a narrative description of climate risks and opportunities. The narratives draw on data from scenarios developed by the Central Banks and Supervisors Network for Greening the Financial System (NGFS) as at June 2021. It is designed to help smaller firms analyse and manage their climate risks and opportunities. The CFRF Scenario Analysis Working Group is continuing to collect feedback from users on this beta version of the tool up to Q3 2022 and will update the tool to enhance content and reflect the latest NGFS scenarios in Q1 2023.</p>
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Publication of the Financial Services and Markets Bill 2022-2023
20 July 2022
<p><strong>What is the Financial Services and Markets (FSM) Bill 2022-2023</strong><strong>? </strong></p><p>Following the conclusion of HMT’s Future Regulatory Framework, the <a href="https://publications.parliament.uk/pa/bills/cbill/58-03/0146/220146.pdf">FSM Bill</a> will enact significant reforms to the regulation of the UK financial services sector, including:</p><ul><li>changes to the regulators’ statutory objectives and the introduction of a new principle*;</li><li>the regulators’ accountability, scrutiny and engagement arrangements with HM Treasury, Parliament, and stakeholders; and</li><li>issues arising from the post-Brexit legislative situation, including the transfer of retained EU law primarily to the regulators’ rulebooks and the establishment of the Designated Activities Regime.</li></ul><p>*The Bill introduces a new regulatory principle for the FCA and PRA to have regard to the need to contribute to compliance with section 1 of the Climate Change Act 2008 (the Government’s commitment to net zero) when discharging their general functions.</p>
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The FCA published its first TCFD-aligned disclosure report
22 July 2022
<p><strong>What is the FCA’s TCFD Report? </strong></p><p>As the FCA wishes to hold itself to the same standards that it applies to regulated firms, it has published its first TCFD-aligned <a href="https://www.fca.org.uk/publication/annual-reports/climate-financial-disclosures-2021-22.pdf">report</a> on 22 July 2022. This report considers the FCA as an operating entity and as a regulator The FCA will report on an annual basis thereafter.</p><p>The report outlines the risks and opportunities from climate change relevant for both the FCA’s regulatory and corporate activities and is aligned with the recommendations of the TCFD. The report also covers the steps the FCA is taking to strengthen its understanding of such risks and opportunities, and its actions in response to them.</p>
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UK government commissioned a review of the Net Zero 2050 target
26 September 2022
<p><strong>What is the Net Zero Review? </strong></p><p>The BEIS Secretary of State commissioned a <a href="https://www.gov.uk/government/consultations/review-of-net-zero-call-for-evidence/net-zero-review-call-for-evidence">review</a> of the government’s approach to delivering its net zero target, which aims to ensure that net zero is delivered in a way that is pro-business and pro-growth. The review will be led by Chris Skidmore MP.</p><p>BEIS has stated that the review will consider how the government's approach to net zero can:</p><ul><li>deliver maximum economic growth and investment, driving opportunities for private investment, jobs, innovation, exports, and growth right across the UK;</li><li>support UK energy security and affordability for consumers and business and the need to rapidly increase and strengthen UK energy production and supply; and</li><li>minimise costs borne by businesses and consumers, particularly in the short-term.</li></ul><p>The review will assess the economic co-benefits associated with different policies and how we can drive down the cost curve for net zero technologies. It will consider innovative approaches and ways of delivering our target that ensure the government maximises the economic opportunities presented by net zero.</p><p>As part of the review, BEIS also launched a Call for Evidence with 30 questions, some of which were aimed at specific stakeholders.</p>
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GTAG UK publishes its independent non-binding advice on the development of a UK Green Taxonomy
7 October 2022
<p><strong>What is the GTAG’s advice on the development of a UK Green Taxonomy</strong><strong>? </strong></p><p>The <a href="https://www.greenfinanceinstitute.co.uk/wp-content/uploads/2022/10/GTAG-Advice-on-the-development-of-a-UK-Green-Taxonomy.pdf">advice</a> which was published on 7 October 2022, and summarises the GTAG’s non-binding advice that it has given to the government regarding the development of the UK Green Taxonomy. The overall principles which GTAG thinks should underpin the UK Green Taxonomy are:</p><ol><li><strong> Avoid greenwashing and support economic transition</strong>: TSC should support whole-economy economic transition by setting a clear and specific expectation of what will be required for the activity to be compatible with the transition to a net zero and nature-positive global economy by mid-century, and with the UK’s target for net zero emissions by 2050 and its adaptation needs. TSC should be compatible with the UK’s sectoral transition pathways, and / or with targets set by devolved administrations and any intermediate climate targets.</li><li><strong> Simplicity and usability:</strong> In order to ensure usability, TSC should be as simple and unambiguous as possible with clear metrics for companies to report against. Data required must be available or should be possible to provide without undue cost burden. The information reported should be available for a third party to verify. Metrics in existing UK reporting regimes should be aligned with the UK Taxonomy over time in order to minimise duplication.</li><li><strong>International relevance and consistency</strong>: Sending a constructive and, as far as possible, consistent signal to markets and minimise reporting burdens for UK firms must be key. To achieve this, TSC should, to the extent possible, be identical or equivalent to TSC set out or under consideration by other major economies with ambitious net zero commitments and / or to those under discussion in relevant multilateral forums. Where possible consistent methodologies and metrics should be adopted – while noting different TSC thresholds for compliance may be needed. Where possible and appropriate, DNSH criteria should reference international standards as well as UK domestic legislation. This would serve the aim of contributing constructively to the international taxonomy debate – including on taxonomy alignment, interoperability and potentially increasing global ambition where suitable.</li></ol>
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The FCA published the Consultation Paper Sustainability Disclosure Requirements (SDR) and investment labels on the proposed rules to implement SDR disclosure requirements as set out in DP21/4
25 October 2022
<p><strong>What is the FCA Consultation on SDR disclosure requirements? </strong></p><p>In November 2021, the FCA published a <a href="https://www.fca.org.uk/publication/discussion/dp21-4.pdf">discussion paper</a> on sustainability disclosure requirements (SDR) and investment labels (DP21/4). Following feedback to the DP, the FCA published proposed rules in Consultation Paper Sustainability Disclosure Requirements (SDR) and investment labels (<a href="https://www.fca.org.uk/publication/consultation/cp22-20.pdf">CP22/20</a> ).</p><p>The CP proposals cover the following areas:</p><ul><li><strong>General anti-greenwashing rule</strong> which reiterating requirements for all regulated firms that sustainability-related claims must be clear, fair and not misleading. Since this proposal aims to clarify existing rules, it would come into effect immediately on publishing of the FCA’s Policy Statement.</li><li><strong>Sustainable investment labels</strong> to help consumers navigate the investment product landscape and enhance consumer trust.</li><li><strong>Consumer</strong><strong>‑</strong><strong>facing disclosures</strong> to help consumers understand the key sustainability-related features of a product.</li><li><strong>Detailed disclosures</strong> targeted at a wider audience (e.g. institutional investors and consumers seeking more information):<ul><li><strong><em>pre</em></strong><strong><em>‑</em></strong><strong><em>contractual disclosures</em></strong> (eg in the fund prospectus), covering the sustainability-related features of investment products</li><li><strong><em>ongoing sustainability</em></strong><strong><em>‑</em></strong><strong><em>related disclosure</em></strong> such as performance information including key sustainability-related performance indicators and metrics, in a sustainability product report</li><li><strong><em>a sustainability entity report</em></strong> covering how firms are managing sustainability-related risks and opportunities.</li></ul></li></ul><ul><li><strong>Naming and marketing rules</strong> restricting the use of certain sustainability-related terms in product names and marketing materials unless the product uses a sustainable investment label.</li></ul><p>The feedback period for this CP closes on the 25 January 2023 and the FCA intends to publish a policy statement including final rules by the end of H1 2023.</p><p>For more information, please see our <a href="https://www.farrer.co.uk/globalassets/sustainability-disclosure-requirements-sdr-and-investment-labels-2023.pdf">guide</a>.</p>
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UK Transition Plan Taskforce published consultation on its proposed disclosure framework for private sector climate transition plans
8 November 2022
<p><strong>What is the Transition Plan Taskforce (TPT)? </strong></p><p>In November 2021, the UK government <a href="https://www.gov.uk/government/publications/fact-sheet-net-zero-aligned-financial-centre/fact-sheet-net-zero-aligned-financial-centre">announced</a> that the UK will be the world’s first Net Zero-aligned Financial Centre and that it will require UK financial institutions to have robust transition plans in place as to how such firms intend to meet the net zero carbon goal. The UK will require financial firms to publish such transition plans, and in order to establish consistent standards for such plans, the government announced that it will establish a TPT to develop a “gold standard” for transition plans. The TPT was officially launched in April 2022 with a two-year mandate. In May 2022, the TPT announced a <a href="https://transitiontaskforce.net/wp-content/uploads/2022/05/TPT_Call_for_Evidence.pdf">Call for Evidence</a> (CfE) to provide an early indication of the TPT to support companies who are Working on their transition plans. The CfE also seeks industry views on how to develop a sector neutral transition framework.</p><p><strong>What has the TPT published? </strong></p><p>Following the CfE, the Transition Plan Taskforce has published for consultation its <a href="https://transitiontaskforce.net/wp-content/uploads/2022/11/TPT-Disclosure-Framework.pdf">proposed disclosure framework</a> for private sector climate transition plans and accompanying implementation guidance. The consultation is open for comment until 28 February 2023.</p>
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The Climate Financial Risk Forum (CFRF) published further guides to help the financial industry address climate related risks and opportunities
13 December 2022
<p><strong>What is the CFRF? </strong></p><p>The FCA and PRA jointly established the Climate Financial Risk Forum (CFRF) in March 2019. The objective of the CFRF is to build capacity and share best practice across financial regulators and industry to advance financial sector responses to the financial risks from climate change.</p><p>The CFRF have published a series of guides to help financial services firms approach and address climate-related financial risks, including risk management, scenario analysis and disclosure obligations. The guides follow on from and build on the CFRF’s June 2020 guide on managing climate-related financial risks. More information on the CFRF and the guides can be found <a href="https://www.fca.org.uk/transparency/climate-financial-risk-forum">here. </a> </p>
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Government announced delay to the development of the UK Green Taxonomy
14 December 2022
<p><strong>What is the UK Green Taxonomy</strong><strong>? </strong></p><p>The government intends to implement a UK green taxonomy that will set out the criteria and a shared understanding as to which economic activities count as “green”. The taxonomy is being introduced because the lack of common definitions makes it difficult for companies and investors to clearly understand the environmental impact of their decisions, and HMT believes this can lead to consumer harms such as greenwashing. The <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1031805/CCS0821102722-006_Green_Finance_Paper_2021_v6_Web_Accessible.pdf">Greening Finance: A Roadmap to Sustainable Investing </a>(<strong>roadmap</strong>) sets out how the UK will develop a UK green taxonomy. The UK taxonomy will draw on the EU Taxonomy and will have the same six environmental objectives:</p><ul><li>Climate change mitigation</li><li>Climate change adaption</li><li>Sustainable use and protection of water and marine resources</li><li>Transition to a circular economy</li><li>Pollution prevention and control</li><li>Protection and restoration of biodiversity and ecosystems</li></ul><p>Each of the environmental objectives will be underpinned by a set of detailed standards, known as Technical Screening Criteria (<strong>TSC</strong>).</p><p><strong>Where are we in terms of the development of the UK Green Taxonomy?</strong></p><p>Initially the UK Government was expected to consult on the UK Green Taxonomy and draft TSC in 2022. However, due to various delays including the delayed publication of the independent advice from GTAG which was published on 7 October 2022, the UK Government stated in a <a href="https://questions-statements.parliament.uk/written-statements/detail/2022-12-14/hcws444">written statement</a> that it will be “reviewing its approach to taxonomy development”. No further deadlines for the UK taxonomy implementation have yet been set. GTAG responded to the statement <a href="https://www.greenfinanceinstitute.co.uk/news-and-insights/statement-from-the-green-technical-advisory-group-in-response-to-written-ministerial-statement-on-a-uk-green-taxonomy/">here</a> and noted that it will continue to provide advice to the UK Government on taxonomy development.</p>
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The government intends to legislate on climate change mitigation and climate change adaptation criteria under the UK green taxonomy
14 December 2022
<p><strong>What are the legislative plans for climate change mitigation and climate change adaption? </strong></p><p>Each of the six taxonomy environmental goals will be underpinned by detailed technical screening criteria (TSC). In the <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1031805/CCS0821102722-006_Green_Finance_Paper_2021_v6_Web_Accessible.pdf" target="_blank" rel="noopener">Greening Finance Roadmap</a>, the government confirmed that it was reviewing the TSCs the first two Taxonomy environmental objectives (climate change mitigation and climate change adaption) and plans to consult on the draft TSCs in 2022 before legislating for such TSCs by the end of 2022. However, given delays to other parts of the UK green taxonomy, such legislation is now expected in 2023.</p>
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Results of the Net Zero Review published
13 January 2023
<p><strong>What was the Net Zero Review? </strong></p><p>BEIS commissioned a review of the government’s approach to delivering its net zero target, which aims to ensure that net zero is delivered in a way that is pro-business and pro-growth. The review was led by Chris Skidmore MP and <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1128689/mission-zero-independent-review.pdf">reported its findings</a> on 13 January 2023.</p><p>The review clearly set out the importance of achieving net zero for economic and environmental reasons. The review (which engaged extensively with stakeholders including more than 50 roundtables and 1800 submissions) noted that net zero is a significant investment opportunity for the UK. It highlights the importance of clarity of purpose and policy from the UK Government in order to achieve the net zero target.</p><p>The review is divided into two parts:</p><p>Part 1 explains the opportunity and benefits to individuals and the economy. It places domestic action in an international context and emphasises that the UK must go further and faster to realise the economic benefits of net zero.</p><p>Part 2 sets out how to achieve the opportunity of net zero across six pillars, including how the UK can secure net zero and how net zero can support the economy.</p>
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The feedback period for the FCA’s Sustainability Disclosure Requirements (SDR) and investment labels Consultation Paper closes
25 January 2023
<p>This section will be updated in due course.</p>
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Transition Plan Taskforce consultation on disclosure framework and implementation guidance closes to comments
28 February 2023
<p>This section will be updated in due course.</p>
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The UK Government expects to publish its updated Green Finance Strategy
Q1 2023
<p>This section will be updated in due course.</p>
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The government intends to consult further on bringing ESG data and ratings providers within the scope of FCA authorisation and regulation
Q1 2023
<p><strong>What plans are there for regulating ESG data and ratings providers</strong><strong>? </strong></p><p>In November 2021 IOSCO published its<a href="https://www.iosco.org/library/pubdocs/pdf/IOSCOPD690.pdf"> Final Report</a> on ESG ratings and data product providers which set out the numerous challenges facing the industry when it comes to accessing and using ESG data and ratings. For example, the IOSCO report highlighted the lack of transparency around ESG rating methodologies. In order to address various reliability and consistency issues, IOSCO set out a number of recommendations including:</p><ul><li><em>Regulators could examine their existing regulatory regimes and where applicable consider whether there is sufficient oversight of ESG ratings and data products providers;</em></li><li><em>Regulators could support voluntary industry-led development of standardised definitions for the terminology used and referred to by ESG rating and data products providers.</em></li></ul><p>This report has encouraged the government and the FCA to consider regulating this sector.</p><p>The FCA sought feedback on ESG data provider issues in a discussion chapter of CP21/18 and Published its feedback statement in <a href="https://www.fca.org.uk/publication/feedback/fs22-4.pdf">FS22/4</a> in June 2022. FS22/4 confirmed that the FCA believes there is a clear rationale for regulatory oversight of certain ESG data and rating providers. Therefore the FCA will continue to work with HMT, who are considering bringing ESG data and rating providers within its regulatory perimeter.</p><p>Should HMT extend the FCA’s regulatory perimeter, the FCA will develop and consult on an appropriate regulatory regime. Until the implementation of such a regime, the FCA would work with HMT to support and encourage industry to develop and follow a voluntary Code of Conduct. Such a voluntary Code could potentially continue to apply for ESG data and rating providers that fall outside the scope of any future regulatory regime.</p><p>The UK government has confirmed in its Greening Finance Roadmap that it is considering bringing ESG data and ratings providers into the scope of our authorisation and regulatory perimeter. It intended to set out further detail during 2022, although to date HMT has not yet published plans for extending the FCA’s regulatory perimeter to bring ESG data and ratings providers within scope.</p>
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The FCA intends to engage with stakeholders on transition plans, focusing on governance and the content and disclosure of transition plans
2023
<p>This section will be updated in due course.</p>
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The FCA will continue to implement its ESG strategy
2023
<p><strong>What is the FCA’s ESG strategy? </strong></p><p>The FCA published its <a href="https://www.fca.org.uk/publications/corporate-documents/strategy-positive-change-our-esg-priorities#lf-chapter-id-our-esg-strategy-core-principles">ESG priorities</a> in November 2021 to coincide with COP 26. The FCA’s ESG strategy is built on core principles including building an ESG capability beyond climate change, supporting positive market-led solutions and using it’s influence beyond rulemaking. The strategy is further supported by five core themes:</p><p><strong>Transparency</strong> – <em>promoting transparency on climate change</em></p><p><strong>Trust </strong>– <em>building trust and integrity in ESG labelled products</em></p><p><strong>Tools</strong> – <em>working with industry to support firms’ management of climate-related and wider sustainability risks, opportunities and impacts</em></p><p><strong>Transition</strong> <em>– working to support the role of finance in delivering a market-led transition to a more sustainable economy</em></p><p><strong>Team </strong>- <em>developing strategies and resources to support the integration of ESG considerations into the FCA’s activities</em></p><p><strong>Where can I find more on the FCA’s strategy?</strong></p><p>The FCA has provided an interim update on the progress of the ESG strategy in its <a href="https://www.fca.org.uk/publications/business-plans/2022-23">Business Plan 2022/23</a> and also in its <a href="https://www.fca.org.uk/publication/corporate/our-strategy-2022-25.pdf">FCA Strategy for 2022 to 2025</a>. The FCA also intends to publish a more detailed stock-take on progress in 2023.</p>
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The FCA aims to publish its Policy Statement on Sustainability Disclosure Requirements (SDR) and investment labels
H1 2023
<p>This section will be updated in due course.</p>
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The FCA’s general “anti-greenwashing” rule is expected to come into force
H1 2023
<p>This section will be updated in due course.</p>
EU Timeline
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The Commission is due to adopt technical screening criteria for remaining environmental objectives under Taxonomy Regulation. However, this has been delayed until 2022.
31 December 2021
<p><strong>What are the remaining environmental objectives? </strong></p><p>The remaining environmental objectives under Taxonomy Regulation (in addition to climate change mitigation and climate change adaption) are:</p><ul><li>sustainable use and protection of water and marine resources;</li><li>transition to a circular economy;</li><li>pollution prevention control; and</li><li>protection and restoration of biodiversity and ecosystems.</li></ul><p><strong>What are technical screening criteria? </strong></p><p>Technical screening criteria are granular criteria designed to supplement the Taxonomy Regulation and, for example, includes details such as:</p><ul><li>specify the minimum requirements that need to be met to avoid significant harm to all relevant environmental objectives;</li><li>set out quantitative requirements if possible and contain threshold;</li><li>use sustainability indicators; and</li><li>be based on conclusive scientific evidence.</li></ul><p>The technical screening criteria for the remaining environmental objectives have been delayed. However, in March 2022, the Platform on Sustainable Finance published its <a href="https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/220330-sustainable-finance-platform-finance-report-remaining-environmental-objectives-taxonomy_en.pdf">final recommendations</a> on the technical screening criteria for the remaining environmental objectives. These recommendations were passed to the Commission for their consideration.</p><p>As at October 2022, the Commission had not yet published the technical screening criteria for the remaining objectives.</p>
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Taxonomy Regulation - European Commission to publish a report about the provisions required for extending the scope of the Taxonomy Regulation beyond environmentally sustainable economic activities. However, this has been delayed until later in 2022.
31 December 2021
<p><strong>How is the Taxonomy Regulation being extended? </strong></p><p>In line with Article 26(2) of the <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32020R0852&from=EN" target="_blank" rel="noopener">Taxonomy Regulation</a>, the Commission is obliged to publish a report describing what provisions would be required to extend the regulation beyond environmentally sustainable economic activities, including what would be required for the regulation to cover:</p><ul><li>economic activities that do not have a significant impact on environmental sustainability and economic activities that significantly harm environmental sustainability, as well as a review of the appropriateness of specific disclosure requirements related to transitional and enabling activities; and</li><li>covering other sustainability objectives, including social objectives.</li></ul><p>The Commission’s report has been delayed. However in March 2022, the EU Platform on Sustainable Finance published its <a href="https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/220329-sustainable-finance-platform-finance-report-environmental-transition-taxonomy_en.pdf">report</a> on the <a href="https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/220329-sustainable-finance-platform-finance-report-environmental-transition-taxonomy_en.pdf">Extended Environmental Taxonomy</a>. This report was passed to the Commission for its consideration.</p><p>As at October 2022, the Commission had not yet published the report.</p>
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Periodic disclosure obligations under Article 11 of the SFDR (as it relates to Article 8 and 9 products) start to apply
1 January 2022
<p><strong>What are the periodic disclosure obligations under the SFDR? </strong></p><p>Article 11(1) to (3) of SFDR applies from 1 January 2022. These provisions relate to the publication of a periodic report for Article 8 and Article 9 products. The periodic report shall include:</p><ul><li>in relation to Article 8 products, a description of the extent to which “E“ or “S“ characteristics are met; and</li><li>in relation to Article 9 products, a description of either:<ul><li>the overall sustainability-related impact of the financial product by means of relevant sustainability indicators; or</li><li>where an index has been designated as a reference benchmark, a comparison between the overall sustainability-related impact of the financial product with the impacts of the designated index and of a broad market index through sustainability indicators.</li></ul></li></ul><p>The RTS relating to these disclosures has yet to be finalised, but firms are encouraged to consider the recent consolidated draft RTS published by the Commission in October.</p>
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ESMA published its Sustainable Finance Roadmap for 2022-24 which identified its upcoming priorities for this area
11 February 2022
<p><strong>What are ESMA’s priorities for sustainable finance</strong><strong>?</strong></p><p>ESMA’s <a href="https://www.esma.europa.eu/sites/default/files/library/esma30-379-1051_sustainable_finance_roadmap.pdf" target="_blank" rel="noopener">Sustainable Finance Roadmap</a> sets out three priorities for its work until 2024. These are:</p><ul><li>Tackling greenwashing and promoting transparency – such as working to reduce misrepresentation, mis-selling and mislabelling.</li><li>Building NCAs’ and ESMA’s capacities – so that the regulators understand and can implement the new legislation and appreciate the supervisory implications of such new regulation.</li><li>Monitoring, assessing and analysing ESG markets and risks – ESMA is clear that as a developing market it is key that supervisors can access sound evidence and data to monitor ESG markets and associated risks. It notes that it may be possible to leverage from other data capabilities already in existence in the capital markets, such as CCP stress testing and that RegTech and SupTech may assist supervisors here too.</li></ul>
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The EU Platform on Sustainable Finance published its final report on social taxonomy
28 February 2022
<p><strong>What is the EU Platform on Sustainable Finance’s report on a social taxonomy? </strong></p><p>On the 28 February 2022, the Platform on Sustainable Finance (the Platform) published its <a href="https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/280222-sustainable-finance-platform-finance-report-social-taxonomy.pdf">final report on a social taxonomy</a>. The Commission had requested the Platform’s advice as to whether the EU taxonomy should be extended to include social issues. The Platform’s report sets out a suggested structure of a social taxonomy. While the Platform proposes that some of the same environmental taxonomy structures are carried across into the social taxonomy (for example the development of social objectives and the “do no significant harm” criteria) it also suggests sub-objectives highlighting various aspects of three social objectives:</p><ul><li>decent work (including for value-chain workers);</li><li>adequate living standards and wellbeing for end-users; and</li><li>inclusive and sustainable communities and societies.</li></ul><p>The Commission is continuing to consider the Platform’s report.</p>
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The ESAs published an updated supervisory statement on the application of SFDR, to try to reduce the risk of a divergent application of SFDR and articles 5 and 6 of the Taxonomy Regulation
24 March 2022
<p><strong>What guidance is included in the updated supervisory statement</strong><strong>? </strong></p><p>The <a href="https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Draft%20Technical%20Standards/2021/RTS%20on%20disclosure%20under%20SFDR/1028649/JC%202022%2012%20-%20Updated%20supervisory%20statement%20on%20the%20application%20of%20the%20SFDR.pdf" target="_blank" rel="noopener">updated supervisory statement</a> confirms that firms have to report against the Taxonomy-aligned related product disclosures from 1 January 2022. The update also states that the supervisory expectation for the interim period until the final RTS are in place is that an explicit quantification should be provided through the numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy-aligned. Firms cannot rely on estimates – although they can rely on 'equivalent information on taxonomy alignment obtained directly from investee companies or from third party providers'. </p><p>The ESAs suggest that firms refer the requirements set out in the draft RTS of the final reports that have been submitted to the European Commission on 4 February and 22 October 2021. In particular the draft RTS submitted to the European Commission on 4 February and 22 October 2021 can be used as a reference for the purposes of applying the provisions of Articles 2a, 4, 8, 9, 10 and 11 of the SFDR and Article 5 and 6 of the TR in the interim period. </p>
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The Commission published a targeted consultation regarding the functioning of ESG ratings market and sustainability factors in credit ratings
4 April 2022
<p><strong>What obligations do credit rating agencies (CRAs) have in relation to ESG factors? </strong></p><p>CRAs are obliged under <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2009.302.01.0001.01.ENG">Regulation 1060/2009</a> to take into account all factors that are ‘material’ for the probability of default of the issuer or financial instrument when issuing or changing a credit rating or rating outlook. This also covers ESG factors. ESMA adopted <a href="https://www.esma.europa.eu/sites/default/files/library/esma33-9-320_final_report_guidelines_on_disclosure_requirements_applicable_to_credit_rating_agencies.pdf">guidelines</a> for CRAs on the extent to which ESG factors should be subject to disclosure requirements in April 2020. Further to additional work by ESMA and the Commission in 2021, and ESMA’s <a href="https://www.esma.europa.eu/press-news/consultations/call-evidence-market-characteristics-esg-rating-providers-in-eu">call for evidence</a> on 3 February 2022, the Commission to published its <a href="https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2022-esg-ratings-consultation-document_en.pdf">consultation</a> on the functioning of the market for ESG ratings on 4 April 2022</p><p>The Commission believes that this consultation will allow it to gain a better insight on the functioning of the market for ESG ratings, as well as better understand how credit rating agencies (CRAs) incorporate ESG risks in their creditworthiness assessment. The Commission considered responses to the consultation which closed on 6 June 2022 and published a summary report in August 2022 see below for further information.</p>
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The Commission adopted a delegated regulation supplementing SFDR with respect to the RTS specifying certain content and presentation requirements
6 April 2022
<p><span style="font-weight: normal !msorm;"><strong>What </strong></span><span style="font-weight: normal !msorm;"><strong>key points </strong></span><span style="font-weight: normal !msorm;"><strong>does the adopted delegated regulation supplementing SFDR </strong></span><span style="font-weight: normal !msorm;"><strong>include?</strong></span></p><p>The <a href="https://ec.europa.eu/finance/docs/level-2-measures/C_2022_1931_1_EN_ACT_part1_v6%20(1).pdf">adopted delegated regulation</a> with respect to the RTS sets out:</p><ul><li>the details of the content and presentation of the information in relation to the principle “do no significant harm”; and</li><li>the content, methodologies and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports.</li></ul><p>The ESAs published joint reports on the draft RTS in February and October 2021 and the European Commission explains in the explanatory memorandum to the delegated regulation that it has bundled the 13 standards into a single legal act due to the interconnectedness of the two sets of draft RTS. The Delegated Regulation will now be examined by the Council of the EU and the European Parliament. It is due to apply from 1 January 2023.</p>
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European Commission published a Q&A in response to ESA’s questions on SFDR and Taxonomy alignment disclosures
17 May 2022
<p><strong>What guidance has the Commission provided to the ESAs in relation to queries submitted by the ESAs on 13 May 2022?</strong></p><p>The Commission has provided responses to questions raised by the European Supervisory Authorities (ESAs) on 13 May 2022 in relation to the interpretation of SFDR and TR. The questions raised can be grouped into four main categories:</p><ul><li>Principal adverse impact (PAI) disclosures</li><li>Transparency of the integration of sustainability risks and rules for products no longer made available</li><li>Good governance practices</li><li>Scope of Art 5 and Art 6 TR disclosure obligations</li></ul><p>A brief summary and explanation of these queries and the responses from the Commission is set out below:</p><table><tbody><tr><td width="189"><p><strong>ESA Query </strong></p></td><td width="521"><p><strong>Commission Response</strong></p></td></tr><tr><td style="width: 189px; text-align: left; vertical-align: top;" width="189"><p>Product-level PAI – can below threshold financial market participants (FMPs) consider PAI for some of their products without having to do so at entity level?</p></td><td style="width: 521px; vertical-align: top; text-align: left;" width="521"><p>In short, the response from the Commission indicates that such FMPs could offer products which consider PAI without having to consider PAI at entity level. This approach will offer firms flexibility in applying harm reduction strategies without having to comply with entity level PAI.</p></td></tr><tr><td style="width: 189px; vertical-align: top;" width="189"><p>Does Art 6&7 SFDR apply to pre-existing products which were in existence prior to March 2021?</p></td><td style="width: 521px; vertical-align: top;" width="521"><p>The Commission confirms that pre-existing products which are open to new investments are fully in scope of SFDR. Therefore the Commission implicitly excludes pre-existing, closed products from the scope of pre-contractual disclosure obligations. However the Commission confirms that such pre-existing closed products are still subject to website and periodic disclosure requirements.</p></td></tr><tr><td style="width: 189px; vertical-align: top;" width="189"><p>What is the extent of the good governance obligation in Art 8 or Art 9 SFDR products?</p></td><td style="width: 521px; vertical-align: top;" width="521"><p>The Commission states that good governance applies only to investments in companies and not to other asset classes, including government bonds.</p><p>However, the Commission also states Art 8 and Art 9 products must only invest in companies that follow good governance practices. </p></td></tr><tr><td style="width: 189px; vertical-align: top;" width="189"><p>Taxonomy - alignment disclosures. In relation to Art 8 and Art 9 SFDR products to what extent are firms obliged to meet Art 5 and Art 6 TR disclosure requirements?</p></td><td style="width: 521px; vertical-align: top;" width="521"><p>Taxonomy alignment disclosures for Article 8 or Article 9 products are not only required where a financial product commits to investing in economic activities that contribute to an environmental objectives. Such disclosures are required for any Art 8 or Art 9 products that promote environmental characteristics, if the product invests in economic activities that contribute to an environmental objective.</p></td></tr></tbody></table>
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ESMA published a supervisory briefing for national supervisory authorities on the integration of sustainability risks and disclosures in relation to asset management
22 May 2022
<p><strong>What guidance has ESMA provided to the National Competent Authorities (NCAs) in relation to their supervisory approach to sustainability obligations ?</strong></p><p>ESMA’s supervisory briefing is designed to promote common supervisory approaches and practices across the EU to minimise the risk of different levels of investor protection depending on where the relevant fund is domiciled or marketed on a cross-border basis and reduce risk of greenwashing. The guidance emphasises that the national competent authorities should ensure certain standards including that that Fund documentation and marketing material information provided to investors to evaluate proposed funds must be accurate, fair, clear, not misleading, simple and concise.</p><p>In addition, NCAs should:</p><ul><li>verify compliance with pre-contractual disclosures;</li><li>verify the consistency of information in fund documentation and marketing material;</li><li>verify compliance with website disclosure obligations; and</li><li>verify compliance with periodic disclosure obligations.</li></ul><p>In relation to the Integration of sustainability risks by AIFMs and UCITS managers the ESMA guidance states that NCAs should verify AIFMs’ compliance with the new requirements by:</p><ul><li>checking the description how sustainability risks are integrated in the AIFM’s investment decisions in precontractual fund disclosures under SFDR; and</li><li>ensuring that the AIFM reviews relevant internal policies and procedures on a periodic basis.</li></ul><p>To verify compliance with disclosure of sustainability risk integration on websites, NCAs are encouraged to perform sample checks based on surveys and questionnaires relating to the integration of sustainability risks.</p><p>Also, ESMA reminds NCAs of their obligation to take appropriate enforcement action where the requirements under the SFDR have been breached. ESMA is clear that NCAs remain fully responsible for determining:</p><ul><li>the appropriate course of action to take in order to mitigate the supervisory risks and regulatory breaches which they identify; and</li><li>what administrative measures to adopt after further investigation.</li></ul>
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The European Supervisory Authorities (ESAs) published a statement clarifying the draft RTS issued under SFDR
2 June 2022
<p><strong>Why did the European Supervisory Authorities (ESAs) publish a statement clarifying the draft RTS issued under SFDR ?</strong></p><p>The statement is part of the ESAs’ efforts to promote a better understanding of the disclosures required under the technical standards of the SFDR ahead of the planned application of the rules on 1 January 2023, as laid out in the Delegated Regulation adopted by the European Commission on 6 April 2022.</p><p>The statement provides clarification on key areas of the SFDR disclosures, including:</p><ul><li>use of sustainability indicators;</li><li>principal adverse impact (PAI) disclosures;</li><li>financial product disclosures;</li><li>direct and indirect investments;</li><li>taxonomy-related financial product disclosures;</li><li>“do not significantly harm” (DNSH) disclosures; and</li><li>disclosures for products with investment options.</li></ul>
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The Commission is due to publish a report on the application of the Taxonomy Regulation by 13 July 2022. As at October 2022, this report had not yet been published.
13 July 2022
<p><strong>What is the Commission’s review of the Taxonomy Regulation about? </strong></p><p>Under Article 21 of the Taxonomy Regulation, the Commission is due to publish a report on the application of the Taxonomy Regulation by 13 July 2022 and every three years thereafter. Key issues that the initial review will cover include:</p><ul><li>the progress of the development of TSC for environmentally sustainable economic activities;</li><li>the possible need to revise the criteria for considering an economic activity environmentally sustainable;</li><li>the use of the definition of environmentally sustainable investment in EU law;</li><li>the effectiveness of the taxonomy in channelling private investments into sustainable activities;</li><li>access to reliable, timely and verifiable information and data about companies; and</li><li>the application of Articles 21 and 22, which deal with supervisory powers available to competent authorities together and the availability and use of effective and proportionate measures to the competent authorities.</li></ul><p>As at October 2022, this report had not yet been published.</p>
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Under Article 18 SFDR the ESAs have to report to the Commission on best practices relating to the transparency of adverse sustainability impacts, and the implications of due diligence practices on disclosures under the SFDR
28 July 2022
<p><strong>What is the ESA’s obligation to report to the Commission on the transparency of adverse sustainability impacts?</strong></p><p>Under Article 18 SFDR ESAs are required to deliver an annual report to the Commission (i) on best practices for entity and product-level disclosure of the principal adverse impacts of investments on sustainability factors and (ii) making recommendations regarding voluntary reporting standards. The report must consider the implications of due diligence practices on disclosures under SFDR and must provide guidance on the issue.</p><p>On 28 July 2022, the ESAs published their first annual <a href="https://www.esma.europa.eu/sites/default/files/library/jc_2022_35_-_joint_esas_report_on_the_extent_of_voluntary_disclosures_of_pai_under_sfdr.pdf">report</a> on the extent of voluntary disclosure of principal adverse impact under the SFDR.</p><p>Key points from the report include:</p><ul><li><em>the extent of compliance with voluntary disclosures varies significantly across respondents, but, overall, the first disclosures since the application of the SFDR are not very detailed - this is expected to change for the disclosures made for the 2022 reporting period once the SFDR Delegated Regulation applies;</em></li><li><em>there is an overall low level of disclosure on the degree of alignment with the objective of the Paris Agreement – when disclosure of alignment is made, it is often vague; and</em></li><li><em>there is a low level of compliance with the details required for explaining why financial market participants do not take into account the adverse impact of their investment decisions.</em></li></ul><p>The report also includes a set of recommendations for NCAs to ensure appropriate supervision of financial market participants’ practices, such as running regular surveys in their own market to determine whether supervisory entities comply with Article 4 SFDR disclosures.</p>
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The Commission published a summary report following its targeted consultation regarding the functioning of ESG ratings market and sustainability factors in credit ratings
3 August 2022
<p><strong>What did the targeted consultation reveal</strong><strong>? </strong></p><p>The Commission launched consultation to gain a better insight on the functioning of the market for ESG ratings, as well as to better understand how credit rating agencies (CRAs) incorporate ESG risks in their creditworthiness assessment. It has published a <a href="https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2022-esg-ratings-summary-of-responses_en.pdf">summary report</a> on the findings from the consultation.</p><p>Key findings set out in the summary report include that:</p><ul><li>the use of ESG ratings was varied amongst the respondents, although most use a combination of overall ESG ratings with E.S and/or G ratings;</li><li>the ESG ratings market is not functioning well today;</li><li>there was a problem with the lack of transparency of the methodologies used by providers;</li><li>most respondents believed that regulatory intervention in this market is necessary.</li></ul><p>The Commission is continuing to reflect on these findings and to consider its next steps.</p>
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Level 2 amendments to UCITS directive AIFMD, MIFID, Solvency II and IDD to integrate sustainability factors begin to apply
August 2022
<p><strong>What amendments are being made to other key EU legislation to integrate sustainability? </strong></p><p>Delegated legislation integrating sustainability into MiFID 2, AIFMD and UCITS Directive was published in the Official Journal in August 2021. The delegated legislation is designed to supplement the SFDR and the Taxonomy Regulation and integrate sustainability factors in the relevant legislative regimes. Relevant key points are set out below.</p><table><tbody><tr><td width="121"><p>Relevant Legislation</p></td><td width="656"><p>Key points</p></td></tr><tr><td width="121"><p>MIFID 2</p></td><td width="656"><p>Integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms, including, for example, considering the client’s sustainability preferences when assessing suitability.</p><p>Integration of sustainability factors into product governance obligations for investment firms when manufacturing financial instruments, including, for example, considering sustainability-related objectives when identifying the target market for the instrument.</p><p>Inclusion of sustainability risks within the firm’s risk management policy.</p></td></tr><tr><td width="121"><p>AIFMD</p></td><td width="656"><p>Integration of the sustainability risks into certain organisational and operating requirements for AIFMs, including, for example, the selection and ongoing monitoring of investments in line with its due diligence obligations.</p><p>Integration of sustainability factors into the AIFM’s governance obligations, including, for example, ensuring that the AIFM’s senior management is responsible for the integration of sustainability risks in its investment policy for each AIF.</p><p>Inclusion of sustainability risks within the AIFM’s risk management policy.</p></td></tr><tr><td width="121"><p>UCITS</p></td><td width="656"><p>Integration of the sustainability risks into certain organisational and operating requirements for management companies, including, for example, the selection and ongoing monitoring of investments in line with its due diligence obligations.</p><p>Integration of sustainability factors into the management company’s governance obligations, including, for example, ensuring that its senior management is responsible for the integration of sustainability risks in its investment policy for each UCITS.</p><p>Inclusion of sustainability risks within the UCITS management company’s risk management policy.</p></td></tr></tbody></table>
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ESMA publishes updated version of its suitability guidelines to include sustainability factors
23 September 2022
<p>On 23 September 2022, ESMA released an updated version of its <a href="https://www.esma.europa.eu/sites/default/files/library/esma35-43-3172_final_report_on_mifid_ii_guidelines_on_suitability.pdf">Guidelines</a> on suitability requirements as provided for under MiFID II. The Guidelines have been supplemented by new developments on the sustainability factors.</p>
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The Platform on Sustainable Finance’s report on Data and usability of the EU taxonomy published
11 October 2022
<p><strong>What is the report on the Data and usability of the EU taxonomy? </strong></p><p>The Platform was asked by the Commission to review the data and usability of the EU Taxonomy and to:</p><ul><li>advise on data quality, availability, and market preparedness for the disclosure obligations under the Taxonomy Regulation and notably under Article 8;</li><li>advise on the possible role of sustainability accounting and reporting standards in supporting the application of the technical screening criteria (non-financial and reporting standards);</li><li>advise on usability of the criteria; and</li><li>advise on the evaluation and development of sustainable finance policy issues.</li></ul><p>The Platform provides detailed recommendations including a simplified disclosure regime.</p><p>The Commission will consider the report carefully before taking any further steps.</p>
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The Platform on Sustainable Finance’s report on minimum safeguards published
11 October 2022
<p><strong>What is the report on minimum safeguards? </strong></p><p>The Platform provides advice on the application of minimum safeguards (MS) as required by the Taxonomy Regulation. The MS requirement in the Taxonomy Regulation requires The Platform identifies four core topics for which compliance with minimum safeguards is necessary. These four core topics are:</p><ul><li>Human rights, including workers’ rights</li><li>Bribery/corruption</li><li>Taxation</li><li>Fair competition</li></ul><p>Key recommendations include considering the following as evidence of non-compliance with the minimum safeguards:</p><ul><li>Inadequate or non-existent corporate due diligence processes on human rights (including labour rights, bribery, taxation and fair competition), or a final court conviction on any of these matters.</li><li>Failing to co-operate with a national contact point (NCP) (under the OECD Responsible Business Conduct Guidelines for Multinational Enterprises) or an assessment of non-compliance with the OECD Guidelines by an OECD NCP.</li><li>Failing to respond to allegations by the Business and Human Rights Resource Centre.</li></ul><p>The Commission will consider the reports carefully before taking any further steps</p>
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Publication of the Corporate Sustainability Reporting Directive in the Official Journal
16 December 2022
<p><strong>What is the Corporate Sustainability Reporting Directive (CSRD)? </strong></p><p>The CSRD requires affected companies to report information on a full range of ESG issues relevant to their businesses. The CSRD applies to all large EU companies not currently subject to the NFR Directive (with over 250 employees and/or EUR40 million turnover and/or EUR20 million in total assets), whether listed or not, and listed SMEs (with the exception of listed micro-enterprises).</p><p><strong>Does it apply to non-EU countries? </strong></p><p>To a limited extent, the CSRD also covers non-EU companies with substantial activity in the EU market (EUR150 million in annual turnover in the EU) and which have at least one subsidiary or branch in the EU.</p><p><strong>What does the CSRD require?</strong></p><p>Under the CSRD, in-scope companies need to report on their business model and strategy, sustainability targets and progress towards achieving those targets, the role of management and supervisory bodies with regard to sustainability matters, the company's policies on sustainability matters, a description of implemented due diligence process on sustainability matters, principal actual and potential adverse impacts on the company's value chain and actions to mitigate or remedy impacts, principal risks on sustainability matters and indicators relevant to these disclosures.</p><p><strong>What is the implementation timeline?</strong></p><ul><li>1 January 2024 – the CSRD will apply to large public interest companies already subject to the NFR Directive with reports due in 2025</li><li>1 January 2025 for companies not currently subject to the NFR Directive with reports due in 2026</li><li>1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings, with reports due in 2027</li></ul><p>SMEs can opt out until 2028.</p>
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SFDR – product level disclosures on principal adverse impacts began to apply
30 December 2022
<p><strong>How do the SFDR product level disclosures on principal adverse impacts apply? </strong></p><p>From 30 December 2022, the prospectuses of funds under management must disclose how the relevant fund considers principal adverse impacts on sustainability factors in the investment decision-making process and a statement that further information on this matter is available from the relevant website.</p><p>Where a fund management company does not consider principal adverse impacts as part of the investment decision-making process applicable to the relevant fund, the prospectus of that fund should disclose that the management company does not take these matters into account and the reasons for this.</p>
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The Commission may bring forward a legislative proposal for amending the Mortgage Credit Directive with proposals related to energy-efficient mortgages
Q1 2023
<p><strong>Why did the Commission consider energy efficient mortgages as part of its review of the Mortgage Credit Directive (MCD)? </strong></p><p>Mortgage loans in Europe are equivalent to around 46% of the European Union’s GDP. The EU believes facilitating the transition to energy efficient mortgages is crucial to the realisation of a climate-neutral economy.</p><p><strong>What is an energy efficient mortgage? </strong></p><p>An Energy Efficient Mortgage (<strong>EEM</strong>) aims to encourage borrowers to improve the energy efficiency of their buildings and/or acquire highly energy efficient properties. The incentives for borrowers could be favourable mortgage financing conditions and/or an increased loan amount to finance the energy efficiency improvement of the property and enhance its Energy Performance Certificate (<strong>EPC</strong>) level. Both aim to reflect the reduced credit risk of EEMs and drive action to improve the energy performance of Europe’s building stock.</p><p><strong>How did the Commission reviewing energy efficient mortgages as part of its MCD review? </strong></p><p>The Commission published a <a href="https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2021-mortgage-credit-review-consultation-document_en.pdf">consultation paper</a> on 22 November 2021 reviewing the MCD. The consultation paper asks for input as to whether an EU wide definition of a green mortgage is required and whether it would be beneficial. The Commission also wants input as to whether any definition should be based on the EU taxonomy criteria. Responses were to be submitted to the Commission by 28 February 2022.</p><p>The Commission published a <a href="https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13090-Mortgage-credit-review-of-EU-rules/public-consultation_en">summary</a> of the responses in April 2022.</p>
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The Commission is expected to publish a report on the potential financial risks associated with biodiversity loss and ecosystem degradation
During 2023
<p><strong>What is the Commission’s expected report on bio-diversity loss about? </strong></p><p>Based on the <a href="https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en">European Green Deal</a>, the EU has made various commitments, including an ambition to become the first climate-neutral continent by 2050. In addition, it aims to strengthen its resilience to embedded climate change by reducing and reversing biodiversity loss. To reach its Green Deal targets, the EU believes that the alignment of all sources of finance – public, private, national and international is required. The EU sustainable finance framework is one of the tools the EU is using to achieve this alignment.</p><p>The Commission is aware that financial institutions are increasingly exposed to the accelerating degradation of ecosystems and loss of biodiversity. To advance efforts in measuring the financial risks stemming from a significant loss of biodiversity and ecosystem degradation, the Commission is preparing a report on the measurement and presence of such risks in the EU. The Commission report will also look at approaches and methods to measure those risks and outline next steps in this area. This report is expected to present a methodological framework and assess the potential financial risks associated with biodiversity loss and ecosystem degradation at both micro and macro-level and explore the possible sustainable finance policy changes needed.</p><p>It is expected that it will feed into amendments and developments of relevant EU legislation, including the Taxonomy Regulation.</p>
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The Commission plans to evaluate the application of the SFDR
2023
<p><strong>How is the Commission due to evaluate the application of the SFDR? </strong></p><p>In accordance with Article 19 of the <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R2088&from=en">SFDR</a>, by 30 December 2022, the Commission shall evaluate the application of the SFDR, including:</p><ul><li>whether the reference to the average number of employees in Article 4(3) and (4) should be maintained, replaced or accompanied by other criteria, and shall consider the benefits and proportionality of the related administrative burden; and</li><li>whether the functioning of the SFDR is inhibited by the lack of data or the quality of the data.</li></ul><p>The Commission has received the <a href="https://finance.ec.europa.eu/system/files/2022-10/221011-sustainable-finance-platform-finance-report-usability_en.pdf">EU Platform on Sustainable Finance’s recommendations on data and usability of the EU taxonomy</a> which will feed into it’s evaluation of the SFDR may lead to legislative changes.</p><p>In a speech in December 2022, the Commissioner for Financial Services noted in a speech that the Commission intends to publish a consultation on the implementation the SFDR early in 2023.</p>
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The Commission is expected to publish a report on social taxonomy under the Taxonomy Regulation. Initially this report was expected in 2022, but as of January 2023 it had not yet been published.
2023
<p><strong>What is the social taxonomy and how is it being developed? </strong></p><p>The EU’s sustainable finance strategy has included social elements from its outset. The EU has acknowledged the need for social investments in order to achieve sustainable development goals, as well as to realise the social internal market envisaged in the Treaty on the European Union. The EU is also aware of the need to ensure that businesses show respect for human rights as envisaged in the UN Guiding Principles on Business and Human Rights. It is also worth noting that investors see social investments as an opportunity, and that it can be risky not to take social factors into account in investments. The EU, therefore, believes that it is crucial to spell out what constitutes a social investment, as has been done in the case of environmental investments in the Taxonomy Regulation.</p><p>The <a href="https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance/platform-sustainable-finance_en#activities">EU Platform for Sustainable Finance</a> has prepared a <a href="https://finance.ec.europa.eu/system/files/2022-08/220228-sustainable-finance-platform-finance-report-social-taxonomy_en.pdf">report</a> on how a social taxonomy could be developed and has suggested three main objectives for a social taxonomy :</p><ul><li>decent work (including value-chain workers);</li><li>adequate living standards and wellbeing for end-users;</li><li>inclusive and sustainable communities and societies.</li></ul><p>The Platform notes that each of these main objectives will need to be supported by sub-objectives and that further work is needed on how such sub-objectives can be designed. The report does contain suggested non-exhaustive lists of sub -objectives for each of the three main objectives. The report also contains example use cases for guidance.</p><p>The Commission is continuing to consider this report.</p>
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SFDR RTS – delayed applications of the content, methodologies, and presentation of sustainability-related disclosures began to apply
1 January 2023
<p><strong>What are the delayed SFDR RTS? </strong></p><p>While the SFDR sets out the framework for sustainability disclosures, the content, methodologies and presentation of information required to be disclosed by the SFDR are set out in Regulatory Technical Standards (SFDR RTS) developed by the EBA, EIOPA and ESMA (the ESAs). Initially, the SFDR RTS was supposed to be in effect for the implementation of SFDR, however the first draft RTS was controversial, and there were several delays. In addition, aiming to avoid duplication and to minimise complexity, the Commission confirmed it intended to bundle the SFDR RTS with certain Taxonomy RTS (which amend the SFDR RTS that deal with disclosure requirements for taxonomy aligned products). In October 2021, a <a href="https://www.esma.europa.eu/sites/default/files/library/jc_2021_50_-_final_report_on_taxonomy-related_product_disclosure_rts.pdf">consolidated draft RTS</a> was published. The Commission adopted the final RTS on 6 April 2022.</p><p>The bundled RTS cover the presentation of certain aspects of principal adverse impact statements for financial products and have a material impact on the presentation of Article 8 and Article 9 SFDR financial products in particular.</p><p>For example, in relation to the presentation of pre-contractual information for Article 8 financial products, these RTS include requirements as to:</p><ul><li>section headings</li><li>the formula as to the calculation of the taxonomy alignment of investments</li><li>website disclosure</li></ul><p>And in relation to Article 9 SFDR financial products, these RTS cover the presentation of pre-contractual information, including:</p><ul><li>Section headings</li><li>Details of how to present the sustainable investment objective</li><li>Investment strategy</li><li>Asset allocation</li><li>Website disclosure</li></ul>
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Disclosure requirements in the Taxonomy Regulation relating to remaining environmental objectives began to apply
1 January 2023
<p><strong>What are the remaining environmental objectives in the Taxonomy Regulation? </strong></p><p>There are four remaining environment objectives:</p><ul><li>The sustainable use and protection of water and marine resources</li><li>The transition to a circular economy</li><li>Pollution prevention and control</li><li>The protection and restoration of biodiversity and ecosystems</li></ul><p><strong>What additional disclosure requirements does the Taxonomy Regulation impose in relation to these remaining environmental objectives? </strong></p><p>The Taxonomy Regulation imposes certain additional disclosures, including for example:</p><ul><li>information on the environmental objective or environmental objectives to which the investment underlying the financial product contributes; and</li><li>a description of how and to what extent those underlying investments are themselves invested in environmentally sustainable economic activities, including specifying the share of investments in environmentally sustainable economic activities.</li></ul><p>The relevant product will also be obliged to comply with the following criteria as set out in Article 3 of the Taxonomy Regulation:</p><ul><li>it does not significantly harm any environmental objectives</li><li>it complies with minimum safeguards</li><li>it complies with technical screening criteria</li></ul>
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First detailed reports on Principal Adverse Impacts under the SFDR to be published
30 June 2023
<p><strong>What are Principal Adverse Impact (PAI) reports? </strong></p><p>The SFDR RTS provided detailed guidance on disclosures relating to principal adverse impacts on sustainability factors (“PAIs”) at the financial market participant (“FMP”) level and pre-contractual, periodic and website disclosures of Financial Products promoting environmental or social characteristics (so-called “Art. 8 SFDR Products”) or having sustainable investment as their objective (so-called “Art. 9 SFDR Products”).</p><p><strong>Who does it impact?</strong></p><p>The Disclosure Regulation applies to FMPs, notably fund and asset managers, insurers, pension funds, banks and investment firms, which offer “Financial Products” subject to SFDR. Financial Products include funds, investment-based insurance products (“IBIPs”) and certain pension products and also extends to the portfolio management of segregated accounts. Under the SFDR, FMPs must make pre-contractual, periodic and website sustainability-related disclosures (including on sustainability risks integration, PAIs and on certain environmental and social aspects in case of Art. 8 and Art. 9 SFDR Products).</p><p>Despite the implementation delay of the RTS, FMPs were still obliged to issue the first periodic reporting for their financial products in 2022, containing the information prescribed by the level 1 provisions of SFDR and the Taxonomy Regulation.</p><p>Where applicable, FMPs will need to publish their first detailed entity-level PAI statement by 30 June 2023 as specified by the RTS. That first PAI statement should cover the first reference period 1 January 2022 to 31 December 2022.</p>
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Commission expects to report on the implementation of its strategy for financing the transition to a sustainable economy
End of 2023
<p>This section will be updated in due course.</p>
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