ESG Regulation Monthly Round-Up – January 2023

2023 is here and ESG developments have continued apace throughout January with ESG remaining squarely on the financial services regulatory agenda in the UK and internationally.  In this edition, we share the latest key focal points to help navigate what is certain to be another busy year for ESG regulation.

UK developments

UK HMT publishes consultation and call for evidence on the regulation of cryptoassets

On 1 February 2023, HM Treasury published a consultation paper on the UK regulatory approach to cryptoassets. The paper includes a call for evidence relating to decentralised finance (DeFi), certain other cryptoasset activities and sustainability in the context of regulating cryptoassets.

Amongst other things, the government is seeking further views from respondents as to the following issues relating to the sustainability of cryptoassets:

  • information about the environmental impact or energy intensity that would be useful for consumers making decisions about investing in cryptoassets;

  • at what time in the investor journey this information would be particularly helpful to consumers; and

  • if there are particular indicators or metrics that can be used to calculate the environmental impacts.

Comments can be made on the paper until 30 April 2023. Once legislation is laid by the government, the FCA will consult on its detailed rules for the cryptoasset sector. Further details on the HMT cryptoasset consultation can be found in our Engage article here

UK independent review of the net zero target: Mission Zero

On 13 January 2023, the Department for Business, Energy & Industrial Strategy (BEIS) published an independent review, led by Chris Skidmore MP, of the government’s approach to delivering its net zero target.

In 2021, the government published its Net Zero Strategy, setting out a pathway to reaching net zero (100%) reduction in greenhouse gas levels (GHG) by 2050. Since then, the Russian invasion of Ukraine and other global factors have significantly changed the economic landscape in the UK. In addition, in July 2022, the High Court decided that the Net Zero Strategy is inadequate and the government will need to update it by the end of March 2023, to provide more detailed information, including how the policies will achieve the Climate Change Act 2008 target. The High Court's ruling followed a successful judicial review challenge by Friends of the Earth, ClientEarth and Good Law Project. In September 2022, BEIS published a call for evidence on the independent review.

The report addresses areas of financial services regulation that are designed to support the transition to net zero including regulation around greenwashing and the proposed Sustainability Disclosure Requirements (SDR) (further details about the SDR are set out below). The report also sets out specific recommendations for financial services as one of the central sectors to help turbocharge growth and decarbonisation including recommendations about what the updated Green Finance Strategy due to be published shortly should cover.  

UK FCA consultation (CP22/20): Sustainability Disclosure Requirements and investment labels

This month saw the end of the consultation period (23 January 2023) on FCA CP22/20 setting out the UK’s proposed SDR and new rules around investment labels.  The SDR will be key to the future of sustainability-related disclosures in the UK and will help shape future ESG rules on greenwashing and the wider ESG disclosure framework.  For further information about the SDR and the FCA’s proposals see our Engage article here

In addition, in relation to the SDR, on 30 January 2023, the UK Treasury Sub-Committee on Financial Services Regulations published a letter (dated 9 January 2023) from Nikhil Rathi, FCA chief executive, in response to questions about the SDR.  The letter stresses the following points: 

  • The FCA considered it necessary to add a specific "anti-greenwashing" rule to the ESG Sourcebook to link the clear, fair and not misleading principle directly to sustainability claims, so that all firms understand that it applies when making sustainability claims about their products and services.

  • As the FCA wants retail investors to be able to trust all products on offer, including overseas retail investment products marketed in the UK, it would welcome additional powers to apply its proposed labelling and disclosure rules to overseas products to avoid confusion to UK consumers. It is currently working with HM Treasury to consider options for how to treat these products and will consult on this in due course.

  • The FCA has sought to remain compatible and complementary with requirements in the EU, US and elsewhere. However, it notes that the starting point for its regime is different: its proposals aim to categorise products with consumers' trust and information needs as its primary concern, whereas both the EU and US regimes aim to categorise products so as to determine which disclosure requirements should apply.

  • The FCA's proposals will not affect UK investors' ability to invest in funds managed outside the UK as they apply to UK fund products and portfolio management. It is, however, seeing other regulators moving towards tackling greenwashing and providing greater clarity on sustainability features of funds based in other jurisdictions, such as ESMA's recent consultation.

EU and international developments

SBTi publishes guidance on overlap between science-based targets and TCFD reporting

On 18 January 2023, the Science Based Targets Initiative (SBTi) published its new SBTi Financial Sector and TCFD Reporting Guidance to support investors in dealing with the overlaps between its SBTi Financial Institutions framework and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. 

The guidance provides financial institutions with practical ways to co-ordinate science-based target setting with the preparation of climate-related disclosures in line with their net zero transition plans. Science-based targets must align with the latest climate science necessary to meet the Paris Agreement goal (to limit global warming to below 2°C above pre-industrial levels) while pursuing efforts to limit warming to 1.5°C.

ESAs respond on draft EFRAG European Sustainability Reporting Standards

The ECB, EIOPA and ESMA (the ESAs) have each issued opinions on the first draft EFRAG European Sustainability Reporting Standards (ESRS) at the request of the European Commission.  The draft ESRS were issued by EFRAG to the European Commission in November 2022. The EU Corporate Sustainability Reporting Directive (CSRD) disclosures will be based on a common disclosure framework which will be set out in the final ESRS.  For further details about the CSRD and the ESRS please see our November round-up here.

The ESAs broadly consider that the draft ESRS meet the objectives of promoting high quality disclosures of material sustainability information and interoperability with global standard-setting initiatives for sustainability.

The European Commission will now consider the opinions submitted by the ESAs in considering further work that needs to be done to finalise the ESRS in readiness for them to be adopted into delegated acts by 30 June 2023.  The links for the opinions can be accessed here: EIOPA, ECB and ESMA.

EU financial services industry associations consider CSDDD

On 23 January 2023, the International Swaps and Derivatives Association (ISDA) joined the Association for Financial Markets in Europe, the Futures Industry Association and the European Payment Institutions Federation (the Associations) to publish a whitepaper considering the proposed EU Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD is designed to foster sustainable and responsible corporate behaviour in value chains inside and outside Europe and to anchor human rights and environmental considerations in companies’ operations and corporate governance. 

The whitepaper highlights the potential challenges facing financial institutions as a result of the current proposals set out in the draft CSDDD particularly around downstream client relationships. 

The whitepaper considers the potential impact of including services such as trading, derivatives, custody, clearing and payments in the scope of the value chain. The Associations argue for a risk-based and proportionate approach, focusing on the provision of financing where the inclusion of the services within the CSDDD is expected to have the greatest impact on safeguarding human rights and the environment.



Authored by Rita Hunter, Julia Cripps and Melanie Johnson

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


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