Author: Carl Gurney
While the pace of regulatory change may slow down, there are still several new initiatives on the horizon for 2024*. This article explores the key regulatory developments in ESG for financial services in the European Union (EU) and the United Kingdom (UK) and their potential impact.
Uncertainty Surrounding the EU's Sustainable Finance Disclosure Regulation (SFDR)
The SFDR, in force since 2021, is facing a review, creating uncertainty about its future. Asset management firms need to closely monitor forthcoming developments that may affect their compliance with this regulation. Proposals for changes to the SFDR's detailed implementing standards are also underway, which could have significant implications for financial market participants. The aim is to align the SFDR with a labelling regime similar to the UK's SDR, promoting trust in sustainable products.
UK's Anti-Greenwashing Rule
The UK's Sustainability Disclosure Requirements and Investment Labels regime, finalized in November 2023, includes an anti-greenwashing rule applicable to all regulated firms. This rule emphasizes the importance of clear, fair, and non-misleading sustainability-related claims. FCA-regulated firms must review their approach to ESG and sustainability across all product types and disclosures to comply with this new obligation. The rule's implementation has been delayed until May 2024, allowing firms limited time to make necessary compliance and governance changes.
Corporate Sustainability Reporting Directive (CSRD): The EU's CSRD, which entered into force in 2023, requires companies to publish sustainability reports based on this year's data, with the first reports expected in 2025. EU member states have until July to transpose the directive into national law.
However, few countries have made significant progress in transposition. The challenge for multinational firms operating in multiple jurisdictions lies in potential variations and gold-plating of the CSRD requirements. Interoperability between reporting regimes and alignment with International Sustainability Standards Board (ISSB) standards are ongoing concerns.
Transition Plans
The UK's Transition Plan Taskforce (TPT) has developed a sector-neutral disclosure framework, finalized in October 2023, with sector-specific guidance expected soon. The UK government plans to consult on requirements for the largest companies to disclose their transition plans. The FCA will also consult on strengthening transition plan disclosure requirements and implementing UK-endorsed ISSB standards. Globally, the forthcoming Corporate Sustainability Due Diligence Directive (CSDDD) and EU Banking Package will mandate transition plan disclosure.
Regulation of ESG Rating and Data Providers
ESG rating and data providers are likely to face increased regulation. In the UK, a new regulated activity is proposed to bring ESG rating providers under FCA regulation. In the EU, an authorization requirement is proposed for EU and non-EU ESG rating providers operating in the EU. Negotiations are ongoing to address concerns about the broad definition of an ESG rating and potential conflicts of interest.
2024 will be a year of implementing and enforcing ESG regulations in the EU and UK. The uncertain future of the SFDR, the UK's anti-greenwashing rule, the CSRD, transition plans, and the regulation of ESG rating and data providers are key areas to watch. Financial services firms must stay informed and adapt their strategies and operations to comply with these evolving regulatory frameworks.
