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.

Latham’s Global Co-Chair of the Financial Institutions Industry Group, Nicola Higgs, sits down with Lucy McNulty, host of the Following the Rules podcast, to discuss how financial services firms should adapt to the constant evolution of ESG requirements.

In this podcast interview, host Lucy McNulty talks to Nicola Higgs, Latham’s Global Co-Chair of the Financial Institutions Industry Group, about the rapid changes in environmental, social, and governance (ESG) requirements and how financial services firms should best respond.

“The ESG regulatory reform agenda presents quite an unprecedented challenge for management teams of regulated firms and in particular those with an international footprint,” says Higgs, who advises banks, fund managers, and insurers on UK and European financial services regulatory matters as a partner in Latham’s London office.

The FCA hopes the proposals will protect consumer trust in ESG-related financial products and help consumers navigate the increasingly complex ESG-related financial market.

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

On 25 October 2022, the UK’s Financial Conduct Authority (FCA) issued a consultation paper (the Consultation Paper) on Sustainability Disclosure Requirements (SDR) and investment labels.[1] According to the FCA, investment firms in the UK may intentionally or unintentionally be making exaggerated, misleading, or unsubstantiated sustainability-related claims about their products — also known as greenwashing — which has impacted consumer confidence in ESG-related or sustainable investment products in the UK. The proposals in the Consultation Paper seek to address this risk and restore consumer faith.

The policy change integrates climate change considerations for the first time into the ECB’s quantitative easing and repo facilities.

By Roberto Reyes Gaskin, Edward Kempson, and Peter Neuböck

On July 4, 2022, the European Central Bank (ECB) announced that it would integrate climate change considerations into Eurosystem monetary policy through changes to its corporate bond asset purchase program and its credit operations, to be implemented from October 2022 (the 2022 Announcement). The initial disclosure regarding this policy shift was tantalizingly brief, but nonetheless the 2022 Announcement has a number of implications for sustainable finance, the European investment grade debt market and, by extension, the entire European debt capital markets.

HM Treasury’s Transition Plan Taskforce aims to influence international standard setting and make the UK the world’s first net zero-aligned financial centre.

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

On 25 April 2022, HM Treasury (HMT) announced the launch of the UK Transition Plan Taskforce (TPT) to help drive decarbonisation by ensuring that financial institutions and companies prepare plans to achieve net zero, as well as to support efforts to tackle greenwashing. This move is an important step connected with the UK’s development of the new Sustainability Disclosure Requirements (SDR) regime that Chancellor Rishi Sunak announced at his Mansion House speech in July 2021. HMT’s stated aim is to develop “a gold standard for climate transition plans” and for the UK to become the world’s first net zero-aligned financial centre.

An increasing number of companies are making public commitments to decarbonise their operations and reach net zero emissions, but transition plans announced so far are, according to the TPT, “varied in detail and quality”,[i] thereby limiting the ability of stakeholders to assess the credibility of such transition plans. Proposed rules announced by the Chancellor at COP26 would require large companies and certain financial sector firms to publish a transition plan from 2023. The TPT will, over the next two years, develop: (i) a sector-neutral framework for private sector transition plans; (ii) a sector-specific guidance for finance and other sectors; and (iii) recommendations regarding the preparation and use of transition plans. The TPT’s expectations are for such transition plans to be science-based and to help inform the UK’s SDR. (See Latham’s recent briefing for an outline of the SDR regime.)

As the FCA’s remit continues to grow, the regulator pledges flexibility in the face of global financial and geopolitical headwinds.

By Rob Moulton, Anne Mainwaring, Jaime O’Connell, and Dianne Bell

On 7 April 2022, the FCA released its new Business Plan as part of a package including  a three-year strategy document setting out the outcomes it expects all firms to deliver across UK markets. In his introductory message, FCA Chief Executive Nikhil Rathi noted that the regulator’s broad and growing remit means “prioritisation is inevitable”. The FCA’s more outcomes-based approach means its commitments for the next three years fall into three stated areas of focus:

  1. Reducing and preventing serious harm: for example, protecting consumers from harm caused by authorised firms, including tackling fraud and poor treatment. The FCA expects to “harness data to assess problems more quickly”, with the aim of preventing harm from happening in the first place.
  2. Setting and testing higher standards: for example, focusing on the impact authorised firms’ actions have on consumers and markets. The FCA expects the new Consumer Duty to give firms greater certainty about how they should treat consumers as well as flexibility on how they deliver good outcomes.
  3. Promoting competition and positive change: greater regulatory open-mindedness, for example, by building on the globally copied “sandbox” and introducing a “scalebox”.

Proposed changes seek to reflect the integration of sustainability considerations into MiFID II.

By Nicola Higgs, Anne Mainwaring, Dianne Bell, and Charlotte Collins

ESMA is consulting on updates to its Guidelines on the MiFID II suitability requirements, in light of upcoming changes that will embed sustainability considerations into the MiFID II framework. These changes will require firms to consider sustainability preferences as part of the suitability process when providing advisory and portfolio management services. ESMA is considering how it needs to update its Guidelines to reflect these new requirements, in order to assist firms in understanding what is expected of them in an area potentially difficult to navigate given that many clients may have limited understanding of sustainability factors and ESG or sustainability-related products, and that the availability of such products is still reasonably limited.

The regulator is inviting views on potential criteria for classifying and labelling investment products, and on further entity- and product-level sustainability-related disclosures.

By David Berman, Paul A. Davies, Nicola Higgs, Anne Mainwaring, and Charlotte Collins

On 3 November 2021, the FCA published a Discussion Paper (DP21/4) on UK Sustainability Disclosure Requirements (SDR) and product labels. This paper was anticipated following the government’s recently published Roadmap to Sustainable Investing, which set out proposed timeframes for developments in this area.

The roadmap introduces sustainability disclosure requirements for UK companies and reveals further developments in relation to a UK Green Taxonomy.

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

On 18 October 2021, the UK government released a report titled “Greening Finance: Roadmap to Sustainable Investing” (the Roadmap), which is intended to encourage UK businesses and investors to have regard to climate and other environmental, social, and governance (ESG) considerations in their decision-making processes. The Roadmap follows the government’s 2019 Green Finance Strategy, which set out a suite of policies to assist in aligning UK financial flows with a low-carbon planet.

The government states that it views the task of “greening the financial system”[1] as composed of three fundamental phases. The Roadmap addresses the first phase: informing investors and consumers and addressing the information gap in relation to environmental and sustainability  issues between corporates and investors.[2] Notably, the Roadmap also introduces sustainability disclosure requirements (SDR) for UK companies and reveals further developments in relation to the UK Green Taxonomy (Taxonomy). In addition, the Roadmap identifies proposed timeframes for further developments on each of these topics.