Environmental, Social, and Governance (ESG)

The EU regulators are reviewing the Sustainable Finance Disclosure Regulation introduced in 2021, exploring the need for potential additional adjustments.

By Paul A. Davies, Nicola Higgs, Michael D. Green, James Bee, and Anne Mainwaring

On 14 September 2023, the European Commission initiated a consultation on its sustainable financial disclosure practices, seeking feedback on Regulation (EU) 2019/2088 — the Sustainable Finance Disclosure Regulation (SFDR). The consultation surveys stakeholders’ experiences during the implementation of the SFDR and, in particular, solicits feedback on its interactions with the broader EU sustainable finance framework.

As the pace of reform increases, we take a look at key developments and the timeline ahead.

Significant progress has been made on the Edinburgh Reforms since they were announced in December 2022, with developments gathering pace before the summer break. Given the breadth and speed of the reforms, now is a good time to take stock of where things stand and what we can expect in the months ahead. In this publication, we highlight some of the key developments and set out expected dates for future progress.

An evolving landscape of reforms in the ESG ratings sector continues to pose challenges to providers of ratings and scores.

By Paul A. DaviesNicola HiggsRob Moulton, Michael D. GreenBecky Critchley, Anne Mainwaring, and Charlotte Collins

International momentum to regulate ESG ratings continues as the European Commission released a consultation on 13 June 2023 to create a new regulatory regime for ESG ratings providers. This consultation follows a Call for Evidence that the European Securities and Markets Authority (ESMA) issued on 4 April 2022.

The Commission has clarified requirements for financial product classifications and the definition of “sustainable investment” under the SFDR.

By Paul A. DaviesNicola HiggsMichael D. GreenAnne Mainwaring, and James Bee

In April 2023, the European Commission (Commission) published a series of answers to questions that the European Supervisory Agencies (ESAs) had raised in September 2022 on the legal interpretation of certain aspects of the Sustainable Finance Disclosure Regulation (SFDR). The answers seek to clarify outstanding questions from stakeholders, including in relation to the definition of “sustainable investment” under the SFDR. Previous uncertainty with respect to this definition contributed to considerable market movement in the form of product re-classifications in the latter half of 2022.

The government published a new document outlining its existing and proposed objectives to develop the UK’s sustainable economy.

By Paul A. DaviesMichael D. Green, and James Bee

On 30 March 2023, the UK government published an updated version of its Green Finance Strategy (the Strategy), titled “Mobilising Green Investment”. The Strategy is part of the UK government’s series of announcements for its Green Day (see this blog post for more on the broader Green Day announcements).

The Commission is also consulting on proposed targeted amendments to the Taxonomy Climate Delegated Act and on the Taxonomy Disclosures Delegated Act.

By Paul A. DaviesMichael D. Green, and James Bee

On 5 April 2023 the European Commission opened a consultation on its proposal for four additional environmental objectives under the EU Taxonomy Regulation[1] (the Taxonomy), including: (i) sustainable use and protection of water and marine resources; (ii) transition to a circular economy; (iii) pollution prevention and control; and (iv) protection and restoration of biodiversity and ecosystems.

The Commission is seeking feedback on technical screening criteria (TSC) for economic activities that may substantially contribute to one or more of those four environmental objectives. The TSC do not only identify the technical requirements that an activity must meet to be considered to make a substantial contribution to one of these areas, they also specify the conditions by which the activities can be considered to not do any significant harm to the remaining areas.

The Commission has already adopted TSC related to the economic activities of two other environmental objectives: climate change mitigation and climate change adaptation.

The Commission is also proposing amendments to the Taxonomy Climate Delegated Act, introducing additional activities that may be considered to substantially contribute to climate change mitigation or climate change adaptation, as well as the Taxonomy Disclosures Delegated Act.

The consultation considers what a potential regulatory regime would look like, and its proposed scope.

By Nicola Higgs, Paul A. Davies, Becky Critchley, Anne Mainwaring, Ella McGinn, and Charlotte Collins

On 30 March 2023, HM Treasury published a consultation on regulating ESG ratings providers, which ties in with and was published alongside the UK government’s latest Green Finance Strategy paper.

The government announced as part of the Edinburgh Reforms last year that HM Treasury would consult on a potential regulatory regime for ESG ratings providers. Now HM Treasury is seeking views on whether such a regime should be introduced, and what its potential scope should be. The government is not proposing to regulate ESG data providers for the time being. The consultation is open until 30 June 2023; no further timetable has been set at this stage but it could take a couple of years for any new regime to be finalised and take effect.

The regulator is concerned that ESG-related disclosures are not meeting expectations.

By Nicola Higgs, Becky Critchley, Anne Mainwaring, Ella McGinn, and Charlotte Collins

The FCA has published a Dear CEO letter sent to benchmark administrators on 20 March 2023, expressing concerns about the quality of their ESG-related disclosures. The FCA’s concerns are based upon a preliminary review of ESG benchmarks, which assessed the disclosures made by a sample of UK benchmark administrators. The review found the quality of ESG-related disclosures to be poor, and the letter sets out the FCA’s specific findings in this regard. The FCA states that it is acutely aware that poor practices in this area could lead to claims of greenwashing and dilute trust and confidence in ESG labelling. Therefore, the FCA is not only concerned about technical compliance with disclosure requirements, but also about ensuring the integrity of ESG-related products.

The discussion paper aims to encourage industry-wide dialogue on sustainability related-governance, incentives, and competence.

By Anne Mainwaring, Sara Sayma, and Dianne Bell

On 10 February 2023, the FCA published DP23/1: Finance for positive sustainable change: governance, incentives and competence in regulated firms.

The FCA considers that a firm’s governance, purpose, and culture are central to how it embeds environmental and social considerations into business, risk, and capital allocation decisions for the benefit of consumers. With this in mind, the FCA is seeking views on how it can move effectively beyond disclosure-based initiatives to help and encourage firms as they develop their arrangements for governance, incentives, and competence in the area of sustainability.

A new Latham & Watkins guide examines the recent increase in whistleblowing and poses self-assessment questions against which firms can benchmark themselves.

By David Berman, Andrea Monks, Nell Perks, Nathan H. Seltzer, Becky Critchley, and Charlie Bowden

Many sectors, including financial services, have encountered a discernible increase in whistleblows in recent times — a trend that shows no signs of abating. Indeed, some whistleblowers have seen fit to publicise their concerns in the press and/or