ESG factors have fast risen to the top in importance to Board of Directors across all sectors. There is an increasing awareness that a failure to address these matters can be detrimental both financially and reputationally. Increasing investor pressure and growing regulatory requirements and standards across the world mean that ESG matters are the focus for companies, consumers, investors, regulators and the wider environment.
What is ESG?
Environmental, Social Governance (“ESG”) is the term used to highlight matters that are typically associated with corporate responsibility or environmental sustainability. It can be described as a framework that helps stakeholders understand how an organisation is managing risks and opportunities related to environmental, social and governance criteria. ESG takes a holistic approach that sustainability extends beyond how an organisation manages risks related to environmental issues.
The Edinburgh Reforms
On 9th December 2022, Chancellor Jeremy Hunt announced a substantial set of reforms that are intended to instil growth in the financial services sector across several areas. The aim is to build a “smarter financial services framework for the UK”. It follows the Future Regulatory Framework (“FRF”) Review which determined what position the UK regulatory framework would take post- BREXIT. Among the changes proposed are the ESG-focused Sustainable Finance Reforms.
Sustainable Finance Reforms
The Government published a policy statement titled ‘Building a smarter financial services framework for the UK’. It sets out the timeline for the transition away from retained EU law (“REUL”). Sustainable finance measures are expected to be part of the second ‘tranche’ in the reforms’ roll out and we may expect to see the reforms finalised as soon as mid-2023.
As part of the reforms:
- The government will set out a new UK Green Taxonomy in 2023
- Consult on reviewing the regulation of ESG ratings in Q1 2023 and introduce anti-greenwashing rules
- Bring ESG data and ratings providers under regulatory scope
- Align the financial services sector with net zero commitments
- Repeal REUL and give more power to the regulator
ESG data and ratings providers
In June 2022, in a feedback statement on ESG integration in UK capital markets (FS22/4), the Financial Conduct Authority (“FCA”) made it clear they were in favour of introducing regulatory oversight of ESG data and ratings providers. In November 2022, the FCA announced the creation of the ESG data and ratings providers Code of Conduct working group, with a mandate to develop a voluntary Code of Conduct. The Code will address issues such as transparency, good governance, management of conflicts of interest, and systems and controls. It is expected that this will be published in 2023.
Anti-Greenwashing Rules
The FCA has introduced an ‘Anti-Greenwashing Rule’ which will apply to all regulated firms immediately upon publication of the final rules. It is expected that this will be finalised and enforced by mid-2023.
The new rule will require all regulated firms to ensure that the naming and marketing of financial products and services in the UK is not only clear, fair and not misleading but also consistent with the sustainability profile of the product or service i.e. proportionate and not exaggerated. There will be a specific rule added to the ESG Sourcebook – ESG 3.31R.
Sustainability Disclosure Requirements (“SDRs”) CP22/20
In 2023, ESG reporting will be formalised through the SDR framework. SDRs will be rolled out in the coming years and fully mandatory disclosure is expected by 2025.
Key points on SDRs include:
- Will apply to investment funds (primarily those marketed to retail investors in the UK) and the firms that manage or distribute those products
- Organisations will be able to manage sustainability-related risks, opportunities and impacts
- Set relevant metrics and targets
- SDRs will incorporate the new UK Green Taxonomy
- A classification system of which activities can be considered ‘green’ will be introduced
In response to the introduction of the Edinburgh Reforms on 13th December 2022, the FCA announced it will form an Advisory Committee to the FCA’s Board to work on its ESG strategy. The Committee will support the Board in executing oversight over ESG issues and provide guidance on emerging ESG topics in order to further develop its strategy.
The FCA is actively monitoring ESG-related business conducted by firms and reviewing climate disclosures by large and listed companies. These firms are already under regulatory scope and are required submit an annual Strategic/Directors Report on ESG under the Companies Act 2006. As part of the Government’s Transition Plan Taskforce, the FCA will also help develop future ESG framework, which will be used to draft policy and implement strategies. The result of which could mean more types of firms will also be required to submit ESG reports and sustainability disclosures.
The implications of the Edinburgh Reforms will not be felt until all consultation periods are brought to an end and policies are finalised this year. However, it is clear firms will no longer be able to take an optional approach towards reporting and disclosures or maintain an unclear stance regarding their ESG activities. The FCA has warned firms that failure to prepare for the upcoming changes could be damaging. As scrutiny increases, so will the consequences for inaction.
How can Complyport help?
At Complyport we are supporting many firms with implementing ESG requirements through:
- Compliance framework review to assess the impact of ESG requirements across the business
- Formulating roadmaps to implement this timely and efficiently
- Assessing the effectiveness and completeness of a roadmap
- Testing and reviewing
- Policy and procedure updates
- Training
Please contact Jan Hagen for any questions and assistance regarding ESG implementation plans via email at jan.hagen@complyport.co.uk to book in a free consultation.
About Complyport
Complyport is a market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.
Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. We have successfully assisted over 1000 firms to become authorised with the FCA and EU and are providing regulatory support to over 600 regulated firms on an ongoing basis globally. With presence in the UK and EU, as well as via our Associates Network, Complyport can assist firms across multiple jurisdictions.
We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice including support with:
- MIFIDPRU permissions
- Prudential support, IFPR, ICARA and financial resilience advice
- Consumer Duty implementation advice
- Cryptoasset registration
- Financial Promotions guidance, support, and management software solutions
- Operational resilience & Cybersecurity advice
- CASS advice and protections of client assets
- Compliance managed services and resourcing compliance personnel
- Financial Crime and Forensics
- Skilled Person Reviews and Regulatory Investigation
Contact our Head of Regulatory Business Solutions, Jan Hagen via email at: jan.hagen@complyport.co.uk to book a free consultation.
