ESG Regulation Monthly Round-Up

November 2022

It has been a lively month for ESG and sustainability-related disclosures in the UK, EU and internationally with the adoption of the CSRD, the first draft of the ESRS and the conclusion of COP27.  This monthly round-up provides a summary of the key updates over the last month below.

UK developments

FCA announces new ESG data and ratings Code of Conduct working group

On 22 November 2022, the FCA announced the formation of a new working group to develop a voluntary Code of Conduct for ESG data and rating providers.

A key aim of the working group will be to identify and establish industry-led solutions relating to financial services firms' use of third-party ESG data and rating services. In addition, it will also support the FCA's ESG Strategy by promoting the rapid development of best practices on transparency, governance, systems and controls, and management of conflicts of interest. The new Code of Conduct will seek to be internationally consistent by taking account of IOSCO's recommendations, its recently released Call to Action published on 7 November 2022, and considering developments in other jurisdictions.

For further information regarding the Code of Conduct Working Group, see this Hogan Lovells Engage article.

TPT consultation on disclosure framework and implementation guidance

On 7 November 2022, the UK Transition Plan Taskforce (TPT) published for consultation its proposed disclosure framework for private sector climate transition plans and accompanying implementation guidance.

The TPT considers that a good practice transition plan should cover the following:

  • An entity’s high-level ambitions to mitigate, manage and respond to the changing climate.

  • Measures to address material risks to, and leverage opportunities for, the natural environment and stakeholders such as the workforce, supply-chains, communities or customers which arise as part of these actions.

  • The short, medium and long-term actions the entity plans to take to achieve its strategic ambition, alongside details on how those steps will be financed.

  • Governance and accountability mechanisms that support delivery of the transition plan and robust periodic reporting.

The accompanying draft guidance sets out steps for developing a transition plan in addition to how and where to disclose it.  Responses to the consultation are requested by 28 February 2023.

EU developments

Council of the EU approves the European Parliament’s position to adopt CSRD

On 28 November 2022, the Council of the EU formally adopted the EU Corporate Sustainability Reporting Directive (CSRD) following adoption by the European Parliament on 10 November 2022. The CSRD will enter into force 20 days after it is published in the Official Journal of the EU. EU member states will then have 18 months to transpose the wording into local law.

The CSRD is a major update to the 2014 Non-Financial Reporting Directive (NFRD), the current EU sustainability reporting framework. The new rules will significantly expand the number of companies required to provide sustainability disclosures and introduce more detailed reporting requirements in relation to a company’s impact on the environment, human rights and social standards and sustainability-related risk.  Though it is an EU directive, the CSRD also applies to non-EU countries that have a presence in the EU. CSRD disclosures will  be based on a common framework of European Sustainability Reporting Standards (ESRS) currently being developed by the European Financial Reporting Advisory Group (EFRAG).  The first draft of ESRS was submitted by EFRAG to the European Commission this month (see further details in the news story on this below).

The CSRD will apply to all large companies (with over 250 employees and a 40 million euro turnover whether listed or not) and require public disclosure of information on the way they operate and manage environmental risks in an aim to make businesses more accountable, end ‘greenwashing’ and lay the groundwork for sustainability reporting standards at global level.  

The rules will start applying between 2024 and 2028 as follows:

  • For large public-interest companies (with over 500 employees) already subject to the NFRD the first reports will be due in 2025 for financial years starting on/after 1 January 2024.

  • For large companies not presently subject to the NFRD Requirements (with more than 250 employees and/or EUR40 million in turnover and/or EUR20 million in total assets) the first reports will be due in 2026 for financial years starting on/after 1 January 2025.

  • For listed SMEs and other undertakings, the first reports will be due in 2027 for financial years starting on/after 1 January 2026 (opt-out possible until 2029).

  • For non-EU third country companies, the first reports will be due in 2029 for financial years starting on/after 1 January 2028.

For further detail about the CSRD and it’s impact on non-EU entities see this Hogan Lovells Engage article.

EFRAG delivers the first set of the draft ESRS to the European Commission

On 22 November 2022, EFRAG submitted the first set of draft ESRS to the European Commission, to support the CSRD.  The CSRD requires in-scope companies with a presence in the EU to report against the ESRS.  The draft package of ESRS comprises:

  • General requirements (including explaining double materiality, the value chain and how to prepare and present sustainability information) and general disclosures (including on governance, strategy, and impact, risk and opportunity management).

  • Specific standards on environmental disclosures, covering climate change, pollution, water and marine resources, biodiversity and ecosystems, and resources and the circular economy.

  • Specific standards on social disclosures, covering an organisation's own workforce, workers in the value chain, affected communities and customers and end-users.

  • A specific standard on governance, which covers business conduct.

The Commission will consult with other EU bodies (including the European Environment Agency and the European Central Bank) and member states on the draft ESRS.  It is expected that the Commission will adopt the final standards by delegated acts in June 2023.  EFRAG will now work on the second set of draft ESRS which are sector specific covering the Global Reporting Initiative (GRI) sectors.

ESMA consults on guidelines on funds names using ESG or sustainability-related terms

On 18 November 2022, ESMA published a consultation paper on guidelines on funds' names using ESG or sustainability-related terms. The guidelines follow up on ESMA’s May 2022 supervisory briefing on sustainability risks and disclosures in investment management, which contained principles-based guidance for funds’ names with ESG and sustainability-related terms.

The purpose of the guidelines is to set out criteria to assess whether the name of a fund referring to ESG or sustainability terms in any way misleads consumers as to the nature of the investments the fund makes.  The guidelines apply to UCITS management companies, alternative investment fund managers (AIFMs), as well as EuVECA, EuSEF and ELTIF managers and competent authorities.

ESMA's expectations include the following:

  • If a fund has any ESG-related words in its name, a minimum proportion of at least 80% of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy, as disclosed under the SFDR Delegated Regulation.

  • If a fund has the word "sustainable" or any other term derived from it in its name, it should allocate within the 80% of "ESG" investments at least 50% of minimum proportion of sustainable investments as defined under the SFDR.

  • Funds designating an index as a reference benchmark should use ESG and sustainability-related words in their name only if specified thresholds are met.

  • Funds using the word "impact" or "impact investing" in their name should meet specified thresholds and also make investments with the aim of generating positive and measurable social or environmental impact alongside a financial return.

The deadline for responses is 20 February 2023.  ESMA expects to publish the final version of the guidelines by Q2 or Q3 2023 with the guidelines apply three months after the date of their publication on ESMA’s website in all EU official languages. 

ESAs publish new Q&A on SFDR and the SFDR Delegated Regulation

On 17 November 2022, the Joint Committee of the European Supervisory Authorities (ESAs) published a new, detailed set of questions and answers (Q&A) on Commission Delegated Regulation (EU) 2022/1288, which supplements the Sustainable Finance Disclosure Regulation ((EU) 2019/2088) (SFDR) with regard to regulatory technical standards (RTS) on content and presentation of information (SFDR Delegated Regulation).

The expansive Q&A aim to provide clarification on the interpretation of both the SFDR and the SFDR Delegated Regulation across a range of topic areas applying to firms subject to the SFDR including the following:

  • Current value of all investments in PAI and taxonomy-aligned disclosures

  • Principal adverse impacts (PAI) disclosures

  • Financial product disclosures

  • Multi-option products

  • Taxonomy-aligned investment disclosures

  • Financial advisers and execution-only financial market participants (FMPs)

The Q&As fall into the following broad categories: 
Core SFDR scoping points 

This section covers the products for entity-level PAI reporting, the treatment of short positions in the PAI regime, the assessment of good governance for Article 8 products, permitted approaches to defining "sustainable investments", and the meaning and status of the percentage commitments in the pre-contractual disclosure templates.

Interpretation of how to comply with specific regimes in SFDR

This section examines the PAI regime and the Taxonomy-alignment reporting.  In respect of PAI there is clarification for estimating data, the use of delegates, mapping quarterly snapshots onto annual reports of investee companies.  In respect of Taxonomy there are further clarifications on green bonds, permitted estimates, exclusion of swaps and other derivatives and avoiding double counting.

Technical clarifications on detailed aspects of the RTS

This section provides further technical guidance on IORPs, multi-option products and application to execution-only sales.  Further aspects of the PAI regime (particularly the meaning of various Annex 1 indicators), and the Taxonomy alignment calculation are also clarified from a technical perspective.

For further detail about the new Q&A and the potential implication for in-scope firms see this Hogan Lovells Engage article.

ESAs call for evidence on greenwashing

On 15 November 2022, the ESAs published a Call for Evidence in order to gain a better understanding of ‘greenwashing’ practices.

In the Call for Evidence, the ESAs request:

  • Views across the financial sector on how to better understand the main drivers for greenwashing.

  • Examples of potential greenwashing practices across the EU financial sector relevant to various segments of the sustainable investment value chain and of the product lifecycle.

  • Any available data to help the ESAs gain a sense of the scale of greenwashing and identify areas of high greenwashing risks.

The deadline for comments is 10 January 2023.

ESAs announce delay to proposed amendments to SFDR RTS

On 14 November 2022, the ESAs informed the European Commission that there would be a six-month delay to the production of amendments to the SFDR Delegated Regulation which supplements the SFDR around the content and presentation of sustainability-related disclosures.

In April 2022, the Commission requested the ESAs to produce amendments to the SFDR relating to the indicators for PAI and the financial product disclosures by April 2023. In the letter the ESAs state that it will not be possible to meet the original deadline of April 2023 and there will be at least a six-month delay meaning the proposed amendments will probably not be published before November 2023.

Council of EU adopts its negotiating position on the Corporate Sustainability Due Diligence Directive

The Council of the EU adopted its general approach on the Corporate Sustainability Due Diligence Directive (CSDDD) on 1 December 2022. The rules of the CSDDD will apply to large EU companies and non-EU companies active in the EU. CSDDD lays down obligations for large companies regarding actual and PAIs on human rights and the environment, The CSDDD also contains provisions for penalties and civil liability for violating the obligations set out in CSDDD. Lastly, it lays down obligations for companies to adopt a plan ensuring their business model and strategy are compatible with the Paris Agreement.

The Council of the EU’s general approach provides the Council presidency with a mandate to start negotiations with the European Parliament.

Next steps

We will continue to monitor for further developments in this fast moving and ever-evolving area.



Authored by Rita Hunter, Julia Cripps and Melanie Johnson.

Rita Hunter
Julia Cripps
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