Over the second quarter of 2021 a large number of developments hit the green investment space, both in the UK and internationally.
At the higher policy level these include the commitment by G7 countries to net zero no later than 2050, and to end new direct government support for unabated international thermal coal power generation by the end of 2021. Just as notably, the governments represented at the G7 Summit expressed their support for instituting mandatory climate-related financial disclosures based on the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. This, together with the support expressed in the Communiqué for the newly-established Task Force on Nature-Related Financial Disclosures, show growing awareness from governments of the need for better climate and environmental data.
The planned creation, by the IFRS Foundation with the support of IOSCO and the five major disclosure frameworks and standards setters (CDP, CDSB, IIRC, SASB and GRI), of an International Sustainability Standards Board, shows that the movements towards convergence of the "alphabet soup" of ESG reporting is already well underway. This development has also received the explicit support of the G7 Finance Ministers and Central Banks Governors.
With regards to data, the Network for Greening the Financial System recently launched a report on data gaps, highlighting the need for better climate-related data.
Current UK-Level Developments
Anti-Greenwashing Principles and Regulation of ESG Ratings Providers
The Financial Conduct Authority (FCA) is planning to consult on a set of "anti-greenwash" principles for the UK investment industry. These aim to clarify the regulator's expectations when assessing applications to authorise sustainable investment products, and will build on the existing requirement to be "clear, fair and not misleading."
The main expected requirements of these principles would include:
- Provide consistency in messaging and approach. A product's ESG focus should be clearly stated in its name and then reflected consistently in its objectives, its investment strategy, and its holdings.
- A product's ESG focus should be clearly and fairly reflected in its objectives. These objectives should be set out in a clear and measurable way.
- A product's documented investment strategy should set out clearly how its sustainability objectives will be met. This should include describing clearly any constraints on the investible universe, together with the fund's stewardship approach, including the manager's approach to divestment.
- An expectation for firms to report on an ongoing basis the product's performance against its sustainability objectives.
- The firm would be expected to assure ESG data quality, understand their source and derivation, and articulate clearly and accessibly how it is used. This includes the use of ESG ratings in the investment process.
Similar plans are currently underway in the EU as well.
FCA Consultation on TCFD-Aligned Disclosure
On 22nd June 2021 the UK Financial Conduct Authority launched two consultations (CP 21/17 and CP 21/18) as part of the wider Government push towards enhancing climate-related financial disclosures aligned with the TCFD. The two consultations focus on:
- CP 21/17: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers - The FCA is consulting on proposals to introduce climate-related financial disclosure rules and guidance for asset managers, life insurers, and FCA-regulated pension providers.
- CP 21/18: Enhancing climate-related disclosures by standard listed companies - The FCA is consulting on proposals to extend the application of its climate-related disclosure requirements to issuers of standard listed equity shares (currently only premium-listed issuers are required). The FCA is also seeking views on certain ESG topics in capital markets such as issues related to green, social or sustainable debt instruments and ESG data and rating providers.
These consultations could present an important opportunity to engage with the Regulator and to shape the reporting requirements that will enter into force in the next few years. The FCA is looking for responses online by 10th September 2021.
First steps in the creation of a UK Taxonomy
On 9th June the UK Government established the Green Technical Advisory Group (GTAG), an expert group chaired by the Green Finance Institute, made up of key financial market stakeholders and subject matter experts. Its goal is to provide independent, non-binding advice to the Government on developing and implementing a green taxonomy in the UK context, including technical screening criteria (TSC) on particular economic activities.
Response by the Government to the Pensions consultation
On 8th June 2021, the Department for Work and Pensions published its response to the January 2021 consultation, "Taking action on climate risk: improving governance and reporting by Occupational Pension Schemes", together with revised draft regulations and draft statutory guidance.
The regulations were largely unchanged, while the guidance was updated to provide more clarity. For a closer analysis of the requirements, see our previous regulation update.
Generally, from 1st October 2021, trustees will be required to meet climate change governance requirements based on the TCFD recommendations and to produce and publish (on a publicly-available website, accessible free of charge) a report on how they have done so.
The requirements will be phased in, based on the schemes' size.
In addition, in April the Pension Regulator published its new climate change strategy, setting out its strategic response to climate change and how it believes it can help trustees meet the challenges from climate change.
Net Zero and the Future of Green Finance
In April 2021 the House of Commons Treasury Committee published its report on Net Zero and the Future of Green Finance.
The report includes analysis of the state of green finance and how the Government can support its development. Topics covered include the Green Recovery, Net Zero, the role of private finance in funding the transition, the work needed to combat greenwashing (including the establishment of the UK Green Taxonomy), and the role of regulatory bodies, such as the FCA, PRA and FRC.
New UK Modern Slavery Statement Registry.
On 11th March 2021, the UK Government launched an online modern slavery statement registry. The announcement follows a commitment from the UK Government to strengthen the reporting requirements under section 54 of the Modern Slavery Act 2015 following its Transparency in Supply Chains Consultation.
New UK Infrastructure Bank
On 17th June 2021 the new UK Infrastructure Bank Ltd (UKIB) officially opened for business at its headquarters in Leeds. First announced in the Government's 2020 Spending Review, the Bank has the dual objectives of investing in projects to help mitigate and adapt to climate change, and to support regional economic growth across the UK.
The Framework Document specifying the Bank's structure, operations, governance and relationship with the Government provides further detail on UKIB's investment principles. Specifically on climate mitigation, the Document states that the Bank will not consider lending or providing other support to projects involving extraction, production, transportation and refining of crude oil, natural gas or thermal coal, with very limited exemptions. These exemptions include projects improving efficiency, health and safety and environmental perfomance, for Carbon Capture and Storage (CCS) or Carbon Capture, Usage and Storage (CCUS) where projects will significantly reduce emissions over the lifetime of the asset, or those supporting the decommissioning of existing fossil fuel assets. UKIB will also not support any fossil-fuel fired power plants, unless part of an integrated natural gas-fuelled CCS or CCUS generation asset.
Current Developments in Europe
ESAs consult on taxonomy-related sustainability disclosures for environmental products
In early 2021 the European Supervisory Authorities ran a consultation (which closed on 12th May) on the proposed regulatory technical standards (RTS) on the content and presentation of disclosures required under the Taxonomy Regulation. The Taxonomy Regulation amends the Sustainable Finance Disclosure Regulation (SFDR) to impose additional disclosure requirements, in particular for certain types of Article 8 and 9 products with an environmental focus, and introduces regulatory definitions for a range of environmental objectives, including climate change mitigation, pollution prevention and control, and the transition to a circular economy.
EU Ratcheting Up The Heat on Sustainability Reporting (CSRD)
On 21st April 2021, the EU Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which aims to amend the existing reporting requirements of the Non-Financial Reporting Directive (NFRD). The Commission proposal:
- extends the scope of the NFRD to all large companies and all companies listed on regulated markets (except listed micro-enterprises). For Small and Medium Enterprises the disclosure requirements are expected to be simplified, and enter into force at a later date;
- requires the audit (assurance) of reported information;
- introduces more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards; and
- requires companies to digitally 'tag' the reported information, so it is machine-readable and feeds into the European single access point envisaged in the capital markets union action plan.
The proposal is still in its infant state and has to pass through the scrutiny of the European Parliament and the Council. We will follow these developments in coming issues of the Policy & Regulation Update.
For an analysis of the requirements, see this briefing from CDP.
Other Events of Note
Loan Markets Association's new guidance on sustainability-linked loans
On 27th May 2021, the Loan Market Association published an updated and revised set of Sustainability Linked Loan Principles (SLLP), together with the related guidance.
SLLP are:
"any types of loan instruments and/or contingent facilities… which incentivise the borrower's achievement of ambitious, predetermined sustainability performance objectives. The borrower's sustainability performance is measured using predefined sustainability performance targets, as measured by predefined key performance indicators (KPIs), which may comprise or include external ratings and/or equivalent metrics, and which measure improvements in the borrower's sustainability profile".
For more information on the revised principles, see the dedicated LMA webpage.
Legal case against Shell in the Netherlands
In a landmark decision that is expected to have great repercussions on the world of climate litigation, on 26th May 2021, the Hague District Court handed down its judgment in the Milieudefensie et al. vs. Royal Dutch Shell case regarding Shell's compliance with the objectives of the 2016 Paris Agreement. This judgment is significant because it is the first time a national court has compelled a private company to reduce its emissions in line with the Paris Agreement. It builds on an earlier landmark decision (Urgenda Foundation v. State of the Netherlands) requiring the Dutch government to augment its policies to ensure speedier emissions reductions in line with the Paris Agreement.
Although Shell has announced its intention to appeal the ruling, the court declared the order provisionally enforceable, meaning it has immediate effect despite the appeal. Although the decision only has jurisdiction in the Netherlands, it is expected to set a precedent for other cases against large companies with high emissions where they are taking inadequate steps to reduce them.