ESG Regulation Monthly Round-Up - December 2022

As we round up 2022, December has remained lively in terms of ESG and sustainability-related disclosures developments in the UK, EU and internationally. This round-up provides a summary of the key updates over the past month as firms prepare for SFDR Level 2 compliance by 1 January 2023.

UK developments

Edinburgh Reforms: ESG developments

As part of the Edinburgh Reforms announced on Friday 9 December 2022, the UK government confirmed that it will publish the updated Green Finance Strategy for the UK in early 2023.  In addition, ESG ratings providers will be brought under the regulatory perimeter and a consultation will follow on this from the UK regulators in Q1 2023.

The UK government has also confirmed that it will repeal the Taxonomy Regulation as part of its wider repeal of retained EU law.  One of the effects of this is a repeal of the statutory requirement to make technical screening criteria regulations by 1 January 2023.  The UK government will then use powers contained in the Financial Services and Markets Bill to restate and modify retained EU law and specify the approach the UK will take going forward.

The UK is intending to build a UK Green Taxonomy, the scope of which will be limited to environmentally sustainable activities at least initially.  The UK government has established a Green Technical Advisory Group (GTAG) to advise on the development of the UK Green Taxonomy.

For more information about the Edinburgh Reforms which are a wide-ranging package of measures to reform UK financial services regulation post- Brexit, please see this Engage article here.  

FCA review on approach to diversity and inclusion in financial services

On 12 December 2022, the FCA published a webpage containing the results of a multi-firm review on how financial services firms are designing and embedding diversity and inclusion (D&I) strategies.

The review covered 12 firms across multiple sectors.

Key points highlighted by the FCA include:

  • Many firms' strategies were generic and did not take a holistic view. They lacked both a clear articulation of purpose and actions oriented to achieving their goals. Firms are also not systematically tracking the effectiveness of their measures and initiatives.
  • The FCA found considerable variation in the range of data that firms are collecting and the level of analysis conducted on that data (with intersectionality being specifically highlighted). Few firms have actionable data beyond gender and ethnicity.
  • Many firms said senior managers would be held accountable for progress and that it was part of their objectives. However, it was often unclear how progress to goals would actually affect a performance grade or reward, and many firms could not give examples of situations that would call for a tangible adjustment to reward.
  • Few firms talked about the behavioural biases that affect inclusion or the role of systemic discrimination. Some firms did not seem to have recognised that fundamental issues, such as psychological safety and welcoming different perspectives, are critical to an inclusive culture. Interventions were usually limited in scope and likely effectiveness.

The FCA encourages firms to consider the FCA's findings and use them to assess their current D&I strategies and practices.

FCA Primary Market Bulletin – climate-related financial disclosures

The FCA has published Primary Market Bulletin No 42, which amongst other things provides the following FCA observations on climate-related disclosure requirements.

  • TCFD Non-Financial Groups -  Some companies in the TCFD Non-Financial Groups (Energy; Transportation; Materials and Buildings; and Agriculture, Food, and Forest Products) had either: 
    • not identified climate change to be an applicable or material risk to their business; or
    • had identified climate change to be a principal risk but had not made disclosures under the Strategy or Metrics and Targets pillars of the TCFD framework that were consistent with the TCFD’s Supplemental Guidance for Non-Financial Groups.
  • Climate change in financial statements. Typically, the extent to which financially material climate-related risks identified in the narrative sections of companies' disclosures are reflected in the financial statements is not clear. The FCA notes that these connections are particularly important for investors' assessment of a company’s enterprise value. The FCA encourages companies to show clear connectivity between the climate disclosures in the front half of their annual financial report and their financial statement disclosures.
  • In terms of next steps on listed company climate-related financial disclosures,  the FCA plans to consult on strengthening its disclosure expectations for transition plans, drawing on the outputs of the TPT, once final. The FCA plans to consult on adapting its climate-related financial disclosure rules to reference the ISSB's standards once these are finalised and available for use in the UK. In 2023, the FCA plan consider TCFD-aligned disclosures made by all listed companies in scope of climate-related financial disclosure rules (that is, premium listed and standard listed companies).
FCA announces ESG Advisory Committee to its Board

The FCA has established a new advisory committee to the FCA’s Board to work on ESG issues.

Earlier this year the FCA Board committed to establishing a new ESG Advisory Committee to help execute its ESG-related responsibilities. This includes meeting the Government’s expectation that the FCA 'have regard' to the UK's commitment to achieving a net zero economy by 2050, when considering how to advance and achieve the FCA's objectives and functions. 

The following members of the Committee have been appointed: 

  • Tom Gosling, Executive Fellow in the Department of Finance at London Business School and Executive Fellow at the European Corporate Governance Institute 
  • Catherine Howarth OBE, Chief Executive of ShareAction  
  • Tim Mohin, former Chief Sustainability Officer for Persefoni AI and formerly Chief Executive of the Global Reporting Initiative 
  • Desiree Fixler, Founder of RYSN Consulting and Chair of VentureESG 
  • Sonali Siriwardena, Partner and Global Head of ESG at Simmons and Simmons  
  • Harald Walkate, Senior Fellow at the Center for Sustainable Finance & Private Wealth (CSP) at the University of Zurich   

The Committee will also include the FCA’s Chair, other Non-Executive Directors and the Director of ESG. Terms of Reference for the Committee can be viewed here, and further information on the FCA Board can be found here.

EU and international developments

Corporate Sustainability Reporting Directive published in Official Journal

On 16 December 2022, Directive (EU) 2022/2464 of the European Parliament and of the Council amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (the CSRD) was published in the Official Journal.

The directive will enter into force on 5 January 2023, 20 days after publication in the Official Journal. Member States must bring into force the laws, regulations and administrative provisions necessary to comply with Articles 1 to 3 of the directive by 6 July 2024. Article 4 shall apply from 1 January 2024 for financial years starting on or after 1 January 2024.

Further information about CSRD is contained in our November newsletter and this Engage article.

European Commission EU Taxonomy Regulation FAQs

On 20 December 2022, the European Commission published:

  • A draft Commission notice on the interpretation and implementation of certain legal provisions of the EU Taxonomy Climate Delegated Act ((EU) 2021/2139) establishing technical screening criteria for economic activities that contribute substantially to climate change mitigation or climate change adaption and do not significant harm (DNSH) to other environmental objectives
  • A draft Commission notice on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act ((EU) 2021/2178) under Article 8 of the EU Taxonomy Regulation on the reporting of Taxonomy-eligible and Taxonomy-aligned economic activities and assets.

The notices contain frequently asked questions relating to the EU Taxonomy Climate Delegated Act and the EU Taxonomy Regulation respectively and complement previous guidance issued.

The European Commission has approved these drafts in principle and after being translated, formal publication in the Official Journal will take place – this is likely to be in Q2 2023.

The application of the technical screening criteria is key for firms to be able to demonstrate alignment with the Taxonomy but it is also important for identifying the potential for improvement for economic activities that are Taxonomy-eligible but are not yet aligned.

CSSF FAQs on the Sustainable Finance Disclosure Regulation

The Luxembourg financial services regulator, the CSSF, has published FAQs which aim to clarify aspects of the SFDR across the following topics:

  • Updates of prospectuses/issuing documents
  • Website disclosures
  • Pre-contractual disclosures; and
  • Periodic disclosures

These FAQs build on previous clarifications provided by the ESAs and the European Commission earlier this year and are particularly helpful for Lux-domiciled AIFs and any non-Lux AIFs being marketed into Luxembourg.

European Commission webpage: guidance on SFDR reporting under the Taxonomy

Approximately 4000 large companies will start reporting on their environmental performance under the EU Taxonomy from 1 January 2023. On 20 December 2022, the European Commission published a webpage which sets out useful high level guidance on the criteria for determining when an economic activity qualifies as sustainable and on reporting obligations.

EBA roadmap on sustainable finance

On 13 December 2022, the EBA published a roadmap outlining the objectives and timeline for sustainable finance and ESG risks.

The roadmap how the EBA intends to integrate ESG risks considerations in the banking framework and support the EU's efforts to achieve the transition to a more sustainable economy over the next three years.

The EBA’s work on ESG risks will primarily cover the three pillars of the banking framework (market discipline, supervision, prudential requirements), as well as other related areas and the monitoring and assessment of risks. In particular:

  • Fostering transparency and market discipline on ESG issues through enhanced disclosures (that is, prudential Pillar 3 and other sustainability-related disclosure requirements) has been and will continue to be a key priority for the EBA.
  • Similarly, to maintain a safe and resilient banking sector, there is a pressing need to ensure robust management of ESG risks by institutions through a set of harmonised rules at the EU level. Institutions' practices and exposures to ESG risks will in turn have to be progressively assessed and supervised by competent authorities under Pillar 2, including through further developments on climate stress tests.
  • In parallel, the EBA has started reflecting on the merits of introducing potential changes to the prudential treatment of exposures under Pillar 1 and will continue this work.
  • As the market for sustainable finance develops, further work is necessary to determine the relevance and content of additional ESG standards or labels and identify possible measures to address emerging risks such as greenwashing.
  • Considering developments around data and metrics, the ESG risks and sustainable finance developments will have to be assessed and monitored on an on-going basis. For that purpose, the stress testing and scenario analysis will remain a particularly important tool in the coming years.

The roadmap supersedes the EBA's December 2019 action plan on sustainable finance.

COP15 conclusions: Kunming-Montreal Global Biodiversity Framework

The COP15 Convention on Biological Diversity (CBD) conference concluded on 19 December 2022 in Montreal, Canada.  The CBD has three main objectives:

  • Conservation of biological diversity.
  • Sustainable use of the components of biological diversity.
  • Fair and equitable sharing of the benefits arising from the use of genetic resources.

On 19 December 2022 at COP15, the Kunming-Montreal Global Biodiversity Framework (GBF) was agreed.  The GBF has four long-term goals for 2050 around biodiversity which are underpinned by 23 targets summarised as “30 by 30”. 

Target 15 is to take legal, administrative or policy measures to encourage or enable business, and, in particular, large and transnational companies and financial institutions to:

  • Regularly monitor, assess and transparently disclosure their risks, dependencies and impacts on biodiversity alongside their operations, supply and value chains and portfolios.
  • Provide information needed to consumers to promote sustainable consumption.
  • Report on compliance with access and benefit-sharing regulations and measures, as applicable, to progressively reduce negative impacts on biodiversity, increase positive impacts, reduce biodiversity-related risks to business and financial institutions, and promote actions to ensure sustainable patterns of production.

This target, however, does not include any wording that would make sure disclosure mandatory.

Further information is set out in this European Commission press release here.

Implementing Regulation on prudential disclosures of ESG risks under CRR published in the Official Journal of the EU

On 19 December 2022, Commission Implementing Regulation (EU) 2022/2453, which amends the implementing technical standards (ITS) laid down in Implementing Regulation (EU) 2021/637 as regards the disclosure of ESG risks, was published in the Official Journal of the European Union.

Implementing Regulation (EU) 2021/637 specifies uniform disclosure formats and instructions for disclosures required under the Capital Requirements Regulation (575/2013) (CRR). Article 449a of the CRR requires large institutions with securities traded on a regulated market of any member state to disclose prudential information on ESG risks, including physical risks and transition risks. Implementing Regulation (EU) 2022/2453 will enter into force on 8 January 2023, 20 days following its publication in the Official Journal.

Article 449a of the CRR requires that information on ESG risks is disclosed as of 28 June 2022, on an annual basis for the first year and biannually after that. Therefore, the first annual disclosure reference date has been set as 31 December 2022. The European Commission adopted the Implementing Regulation on 30 November 2022.

ECB report on good practices for climate stress testing

On 19 December 2022, the European Central Bank (ECB) published a report on good practices for climate stress testing. The aim of the report is to provide banks with examples and suggestions on how to improve their climate stress testing capabilities based on identified good practices from the ECB's 2022 climate stress test, the results of which were published in July 2022.

In addition, it aims to facilitate banks' efforts to align their practices with the supervisory expectations set out in the ECB's guide on climate-related and environmental risks.

The report's conclusions include the following:

  • The ECB found that institutions which are more advanced in their data sourcing approaches and estimation methodologies for climate data are also more advanced with respect to quantifying the impact of climate-related risk on their exposures.
  • Climate and environmental risks will remain key priorities of the ECB and other EU authorities. Banks are expected to be able to properly manage their climate and environmental risks by the end of 2024.
  • Supervisory climate stress testing will remain a key tool to assess the vulnerability of banks to climate-related risks and also the progress banks make over the next two years.
  • The good practices referred to in the report do not prescribe a "one-size-fits-all" approach to climate stress testing. Each bank must find its own way, depending on its specific circumstances and business model needs.

The ECB notes that the 2022 climate stress test acted as a catalyst for banks to start or continue working on all aspects of prudent climate stress testing. Although banks have made some progress on incorporating climate-related risks into their stress testing frameworks and have delivered comprehensive and innovative information despite the prevailing challenges, the results also show that this is the start of a long journey. There is a high level of inconsistency across banks' practices and several areas of climate stress testing have been identified where there is need for improvement.



Authored by Rita Hunter, Julia Cripps and Melanie Johnson.

Rita Hunter
Bryony Widdup
Julia Cripps
Melanie Johnson
Senior Knowledge Lawyer
Jochen Seitz
Eoin O Connor
Managing Partner
Pierre Reuter
Office Managing Partner
Sarah Wrage


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