ESG in the UK

Following the UK's departure from the European Union (commonly known as Brexit), the UK Government (HMG) announced that it would not adopt the EU's sustainable finance framework (i.e., SFDR and the Taxonomy Regulation) but would, instead, develop its own ESG regime.

HMG set its plans for this out in the Greening Finance: A Roadmap to Sustainable Investing report (the Roadmap), published in October 2021. For our summary of the Roadmap, see here.

Following a Call for evidence in May 2022, the 2023 Green Finance Strategy (the 2023 Strategy) was published to both support the Roadmap and update the 2019 Green Finance Strategy.

The Roadmap proposed the development of:

• a new Sustainability Disclosures Regime and

• a UK Green Taxonomy.

Looking at these in turn:

A. Sustainability Disclosures Regime

The Roadmap laid the foundations for the introduction of a new Sustainability Disclosures Regime (the Regime). The Regime includes (i) the FCA's climate-related disclosure rules for asset managers (the Rules) and (ii) its anticipated Sustainability Disclosure Requirements and investment labels (the SDR).

(i) Climate-related Disclosure Rules

On 17 December 2021, the FCA published its final rules on "climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers" (PS21/24). The Rules summarised the feedback that the FCA received in response to consultation paper CP21/17 and confirmed the FCA's final policy position on the implementation of a new climate-related disclosure regime for asset managers. The Rules represented a significant development in the UK ESG regulatory landscape and created material new obligations for groups with UK regulated asset management entities.

For more detail on the Rules and their implications, see our summary, here.

The Rules are based on the Task Force on Climate-Related Financial Disclosures (TCFD) disclosure recommendations, published in 2017 and which came into force on 1 January 2022.

For more information about the TCFD, see our client note, here.

(ii) Sustainability Disclosures Requirements

Informed by the Rules, CP22/20 on "Sustainability Disclosure Requirements (SDR) and investment labels" (October 2022), proposed the introduction of a package of measures aimed at clamping down on greenwashing.

The SDR include sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing.

The SDR will cover three types of disclosure:

(1) Disclosure by corporates

• new requirements for companies (including those in the
  financial services sector) to make sustainability disclosures in accordance with international standards and using the proposed UK Green Taxonomy;

(2) Disclosure by asset manager and asset owners

• new requirements for asset managers and asset owners to disclose how they take sustainability into account; and

(3) Investment product disclosure

• new requirements for creators of investment products to report on the product's sustainability impact and relevant financial risks and opportunities. This information would form the basis of a new sustainable investment labelling regime.

Disclosures across the three regimes centre around the four key themes identified by the TCFD Recommendations:

• governance

• strategy

• risk management and

• metrics and targets.

What's the latest position on the SDR?

On 25 October 2022, the FCA published CP22/20, "Sustainability Disclosure Requirements (SDR) and investment labels" (the CP), which formed part of the FCA's Strategy for positive change: our ESG priorities.

The CP included proposed new rules for (among other things):

• a new opt-in labelling regime for sustainable investment products
• a requirement to prepare consumer-facing product-level disclosures
• additional requirements on pre-contractual disclosures for products using an investment label or where sustainability features are otherwise integral
• ongoing sustainability reporting for firms using investment labels

On 28 November 2023, the FCA published Policy Statement PS 23/16 (the PS), which sets out the final rules for the FCA’s new SDR and investment labels regime.

For more information on the key provisions of the new SDR as contained in the PS, see our client note here

Extending the SDR

With the exception of the anti-greenwashing rule (which applies to all UK FCA authorised firms as of 31 May 2024), the PS confirmed that the new regime would initially apply only to UK fund managers (including UCITS management companies, full-scope AIFMs and small authorised AIFMs).

On 23 April 2024, the FCA issued a consultation (CP24/8) on extending the regime to portfolio management of sustainability products. This consultation was primarily aimed at wealth management services for individuals and model portfolios for retail investors and proposed that portfolio managers are subject to a similar set of rules under the SDR regime as UK fund managers.

The consultation closed on 14 June and the FCA expected the final rules applicable to portfolio managers to come into effect in December 2024. However, in an update in September 2024, the FCA noted that the policy statement to CP24/8, along with further information on implementation, would be delayed to Q2 2025.

The possible extension of the SDR to overseas funds that sell to UK investors under the Overseas Funds Regime (OFR) is also under consideration. HMT had intended to publish a consultation by the end of September 2024 – however, as of October 2024, it was understood that the consultation would not be published "imminently".

What does the SDR contain?

The rules, which will be phased-in across the next 3 years and will affect all UK firms, include

• a new opt-in labelling regime for sustainable investment products
  The FCA has decided on a new opt-in labelling regime for sustainable investment products, framed around four labels

  • Sustainability Focus
  • Sustainability Improvers
  • Sustainability Impact and
  • Sustainability Mixed Goals

  It has also introduced overarching principles around which the label criteria are structured - Sustainability Objective; Investment Policy and Strategy; KPIs; Resources and Governance and Investor Stewardship.

  The labels will be available to use from 31 July 2024.

• consumer-facing product-level disclosures

  The CP’s proposals for new consumer-facing disclosures covering all products marketed to retail clients (whether or not the product has a sustainability-related objective) have been scaled back - consumer-facing disclosures will only be required in respect of products using a sustainability label, or using sustainability-related terms in their naming and marketing

  These disclosures apply from the date on which a label is first used (31 July 2024 at the earliest) or from 2 December 2024 for products without a label. They must be reviewed and updated at least annually.

• pre-contractual disclosures for products using an investment label or where sustainability features are otherwise integral.

  A pre-contractual reporting requirement will apply to all products that either use a sustainability label or use one or more sustainability-related terms in relation to a product.

  Disclosures may cross-refer to information in ongoing product disclosures (e.g. Stewardship Code reporting) and disclosures relating to investment policy and strategy are not required to be in a separate section of the pre-contractual documents.

  These measures apply from the date a label is first used for in-scope products (31 July 2024 at the earliest) or from 2 December 2024 for products without a label.

• sustainability reporting for firms using investment labels

  Firms using investment labels will need to include sustainability-related information in their annual product reports. For certain in-scope products (e.g. portfolio management clients and AIFMs managing unauthorised AIFs), the FCA proposed an on-demand reporting regime.

  A sustainability report will need to be produced for all products that either (a) use a sustainability label or (b) use one or more sustainability-related terms in relation to a product.

  The PS also introduces an on-demand reporting regime for certain products - in line with the TCFR rules, firms can either provide information as at an agreed calculation date or select the most recent calculation date for which up-to-date information will be available.

  In-scope products will need to produce ongoing product-level disclosures annually, 12 months after the date on which a label is first used or 12 months from when sustainability-related terms are first used.

  The earliest reports would be required by 31 July 2025 (i.e., a year after the labels are first available).

B. The UK Green Taxonomy

As with the regime (see our Taxonomy Regulation page, here), the UK Green Taxonomy (the UK Taxonomy) is intended to set out the criteria which specific economic activities must meet in order to be considered environmentally sustainable and, therefore, Taxonomy-aligned.

Reporting against the UK Taxonomy will also form part of SDR disclosures.

The Roadmap indicated that the UK Taxonomy would use the same six environmental objectives as the EU Taxonomy, namely:

(1)     Climate change mitigation

(2)     Climate change adaptation

(3)     Sustainable use and protection of water and marine resources

(4)     Transition to a circular economy

(5)     Pollution prevention and control

(6)     Protection and restoration of biodiversity and ecosystems

As with the EU Taxonomy, each environmental objective would  be underpinned by technical screening criteria (TSC) which identify how a given activity can make a substantial contribution to the environmental objective.

What's happened since the Roadmap was published?

At the time of the Roadmap’s publication, HMG's expectations were that:

• it would consult on the UK draft TSC for the two climate change objectives in Q1 2022

• the resultant legislation would come into force by the end of 2022

• it would then consult on the remaining four objectives in early 2023

• implementation of these would be in late 2023.

However, this timeline has proved to be overly ambitious and, in a statement by the Economic Secretary to the Treasury on 14 December 2022, HMG confirmed that it would notmake secondary legislation under the on-shored Taxonomy Regulation in 2022.

On 30 March 2023, HMG published its 2023 Strategy, which (among other things) confirmed its intent to consult on the UK Taxonomy in 2023.

The 2023 Strategy supports the work undertaken by HMG's Roadmap
(October 2021) and was developed following feedback to the May 2022 call for evidence, "Update to [the 2019] Green Finance Strategy".

The 2023 Strategy sets out how HMG intends to:

• continue the UK's leadership on green finance

• cement the UK's place in this growing global market; and

• mobilise the investment needed to meet the UK's climate and nature objectives.

The 2023 Strategy also laid plans to establish a framework to assess the suitability of the International Sustainability Standards Board's (ISSB) first two new standards, IFRS S1 andIFRS S2, for endorsement in the UK, and the creation of the first two UK Sustainability Disclosure Standards (SDS).

For more information on the ISSB's IFRS Sustainability Disclosure Standards, see our report, here.

HMG aims to make endorsement decisions on the first two standards by July 2024.

For further details on the 2023 Strategy, see our summary here.

What happens next?

The 2023 Strategy confirmed HMG's intention to consult on the UK Green Taxonomy in 2023 - we will be monitoring and reporting on developments as they emerge.