UK sustainable finance regulatory update
UK SFDR and investment labels
On 25 October 2022, the FCA published CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels, which, in effect, represents the UK's answer to the EU Sustainable Finance Disclosure Regulation (EU SFDR) but with the addition of formal product labelling. You can read our recent briefing on the consultation, and our commentary on the proposals, particularly as regards the introduction of labels, in our Sustainability Insights publication.
UK Green Taxonomy
On 1 October 2022, the Green Technical Advisory Group (GTAG) published its independent advice to the Government on the development of the UK Green Taxonomy. The paper summarises what GTAG calls the first "tranche" of its advice: this includes advice and recommendations on the 'onshoring' of the highly-detailed EU technical screening criteria (broadly, GTAG has moved to a position of close alignment with the EU TSC, except in the case of incompatibility, under an "adopt some and revise some" approach), the concept of 'do no significant harm' (DNSH) (with a view to streamlining DNSH having learned the lessons from EU implementation), the need for international interoperability between various taxonomies and related policies) and Taxonomy use cases. The Government's UK Green Taxonomy consultation is still awaited. GTAG has made it clear that there are a number of important issues that the Government should consult on before finalising the relevant legislation. GTAG will be publishing further advice and recommendations on these issues later this year, and on other matters, in due course.
TCFD requirements for UK asset managers
By way of reminder, the FCA's TCFD-aligned disclosure rules under the Environmental, Social and Governance sourcebook (ESG) will come into force for UK asset managers with assets under management of less than £50bn on 1 January 2023 (except for those firms with assets under management of less than £5bn calculated as a 3-year rolling average on an annual assessment which will be exempt from the disclosure requirements for as long as they remain below that threshold). Such in-scope firms will therefore have a deadline of 30 June 2024 for their first entity-level disclosure and (if relevant) their first public, product level disclosure. However, public product disclosure is not required for certain types of product – e.g. discretionary portfolio management and AIFMs managing non-listed unauthorised AIFs. Here, disclosures should be made available to clients on request ("on demand TCFD product reports") to satisfy their own climate-related financial reporting obligations. The first demand cannot be any earlier than 1 July 2024, in respect of any reporting period starting after 1 January 2023. Note that the above SDR proposals are intended to overlay these existing requirements in the ESG sourcebook.
EU sustainable finance regulatory update
Greenwashing and fund names
On 18 November 2022, the European Securities and Markets Authority (ESMA) published a consultation on the text of proposed guidelines relating to the use of ESG - or sustainability-related terms in funds' names – see our briefing for further details.
Taxonomy-aligned screening criteria for nuclear and fossil gas
The Taxonomy Complementary Climate Delegated Act – which introduces Taxonomy-aligned screening criteria for certain nuclear and gas activities and specific disclosure requirements for businesses related to their activities in those sectors – will apply from 1 January 2023. On 30 September 2022, the European Supervisory Authorities published their Final Report on draft regulatory technical standards, which amend the existing RTS in Delegated Regulation (EU) 2022/1288)(the EU SFDR RTS) on information to be provided in pre-contractual documents, on websites, and in periodic reports. The amendments relate specifically to disclosures about the exposure of financial products to investments in fossil gas and nuclear energy activities. Whether these amendments are adopted by the Commission in time to be applicable as from the start date of the Taxonomy Complementary Climate Delegated Act remains to be seen.
Q&As on the EU SFDR Delegated Regulation
On 17 November 2022, the European Supervisory Authorities published a set of Q&As on the EU SFDR Delegated Regulation (i.e. the EU SFDR RTS). This includes Q&As on the current value of all investments in PAI and Taxonomy-aligned disclosures, PAI disclosures, financial product disclosures, multi-option products and Taxonomy-aligned investment disclosures. There is also a section on financial advisers and execution-only FMPs. The ESAs' Q&As on EU SFDR follow those from the European Commission in relation to the interpretation of EU SFDR and the EU Taxonomy Regulation earlier in the year.
Technical screening criteria for the four remaining environmental objectives under Article 9
At the time of writing, we are still awaiting the arrival of the technical screening criteria for the four remaining environmental objectives under Article 9 of the EU Taxonomy Regulation – i.e. the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. Earlier in the year (March 2022), the Platform on Sustainable Finance had published a report with its recommendations on such technical screening criteria, together with an Annex setting out the proposed technical screening criteria themselves. On 28 November 2022, the Platform on Sustainable Finance published a report with supplementary advice on methodology and technical screening criteria for the climate and environmental objectives of the EU Taxonomy. This supplements the Platform's March report.
Minimum safeguards in sustainable finance regulation
Earlier this year (July 2022), the EU's Platform on Sustainable Finance – an expert group established to advise the European Commission – published a helpful draft report on so-called "minimum safeguards" under sustainable finance legislation. The concept of "minimum safeguards" appears in various recent EU ESG rules and is concerned with the negative impacts of economic activities. Most notably, the EU Taxonomy Regulation makes clear that an activity will not be "taxonomy-aligned" unless it is "carried out in compliance with minimum safeguards", which are defined as "procedures implemented by an undertaking … to ensure … alignment with the OECD Guidelines for Multinational Enterprises (OECD Guidelines) and the UN Guiding Principles on Business and Human Rights (UNGP)".
For more on this, please refer to our briefing.
ESG and competition law: sustainability collaborations and information exchange in financial services
Industry collaborations have been high on the competition law agenda in recent years, with businesses seeking to navigate an ever-growing number of 'horizontal' competitor collaborations, industry initiatives, and bilateral as well as multilateral information exchanges. Indeed, many forms of collaboration covered by the European Commission's Horizontal Guidelines have been placed under strain in recent years, due in part to fast-moving developments in the Tech and ESG spheres. Within the financial services sphere specifically, the interaction between industry cooperation and competition law has been thrown into sharp and public relief in recent months by the decision – on competition law grounds – of the Glasgow Financial Alliance for Net Zero (GFANZ) to drop adherence to the UN's "Race to Zero" initiative as a requirement of its membership.
Change is, however, being seen at both the EU and UK levels. The European Commission is currently revising its Block Exemption Regulations and has published new proposed Horizontal Guidelines, taking into account recent case law and developments relating to ESG and the growth of the digital economy. The new rules will likely come into effect on 1 July 2023. The UK Competition and Markets Authority will also need to produce its own horizontal guidelines and Block Exemption Orders.
Our briefing discusses two key themes within the EU Guidelines, each of which will have an important bearing on collaborations within the financial services industry, particularly in relation to: sustainability and ESG cooperation; and the information which needs to be exchanged between parties to make horizontal co-operation effective.
ESG and pension schemes
Mandatory climate-related disclosures
Many workplace pension schemes are now subject to mandatory TCFD climate-related governance and disclosure requirements. With the first wave of schemes having come into scope on 1 October 2021, we are expecting their TCFD reports to start appearing online imminently. A second wave of schemes came into scope on 1 October 2022, with reporting to start during 2023. The Pensions Regulator has indicated it is likely to take a flexible approach to enforcement of the regime for schemes in their first reporting year.
Following COP26, the Government has added to these requirements. Trustees subject to the regulations are now required to calculate and disclose an additional 'portfolio alignment' metric, setting out the extent to which their investments are aligned with the Paris Agreement goal of limiting the global average temperature increase to 1.5 degrees Celsius above pre-industrial levels.
This requirement applies in addition to the existing requirements for in-scope schemes to calculate and disclosure a minimum of one absolute emissions metric, one emissions intensity metric and one additional climate change metric.
For more on the climate-related governance and disclosure requirements for pension schemes, you can watch this episode of our Spotlight on ESG video series.
Our chapter in the International Comparative Legal Guide to ESG law also highlights the less frequently discussed governance perspective that underpins most ESG legal requirements for pension schemes.
The current Government's plans for further sustainability-related disclosure requirements for pension schemes is not yet clear.
The Government has finalised some ambitious best practice stewardship guidance for pension schemes including non-statutory guidance in relation to their statements of investment principles (SIPs) and statutory guidance in relation to implementation statements (ISs) relating to those SIPs. The statutory guidance applies to ISs in respect of scheme years ending after 1 October 2022. The non-statutory guidance on SIPs applies immediately but is not mandatory.
The guidance is intended to help occupational pension schemes develop their investment policies and stewardship approaches including, in particular, a focus on voting and engagement, interaction with investment managers, taking account of member views and producing member-friendly summaries of the SIP and IS.
The Government has published its response to the March 2021 call for evidence on consideration of social risks and opportunities by pension schemes. A new task force will aim to help pension schemes address the risks and take advantage of opportunities of the “social” element in ESG investing, including the identification of reliable data and metrics.
There is a growing focus on the implications of climate change and other ESG factors for the employer covenant in defined benefit schemes. As well as being covered by the mandatory TCFD climate-related regulations referred to above, both the Employer Covenant Practitioners' Association and the Society of Pension Professionals have published commentary on this area.
UN-PRI integrating sustainability goals across the UK investment industry
A Travers Smith team comprising Pensions experts, Andy Lewis and Harriet Sayer, Head of our Derivatives and Structured Products team, Jonathan Gilmour, and Simon Witney, Senior Consultant in our Financial Services and Markets team, have contributed to the latest paper from Principles for Responsible Investment (PRI): A legal framework for impact (UK): integrating sustainability investment goals across the investment industry.
Produced by the UN-supported PRI in partnership with the United Nations Environment Programme Finance Initiative and the Generation Foundation, the paper examines relevant aspects of the UK legal and regulatory framework and identifies areas where guidance and policies are insufficiently clear, potentially limiting institutional investors’ willingness or ability to pursue sustainability impact goals. It then recommends policy measures that would empower investors both to consider sustainability factors and to pursue sustainability impact goals, in particular, where these are relevant to financial returns.
Our team worked collaboratively with the PRI and other contributors, providing ongoing legal input into the paper on a variety of topics including the common law, statutory and regulatory frameworks for workplace pension funds and other institutional asset owners and managers in this important area.