On 30 March 2023, the UK Government published (i) its updated Green Finance Strategy (Strategy) and (ii) a consultation on the future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers (Consultation). Both publications are part of a wider set of ESG-related publications such as the Powering Up Britain – Net Zero Growth Plan and Energy Security Plan and the more recent consultation on addressing carbon leakage risk to support decarbonisation.

In summary:

  • the Consultation introduces the new regime for ESG ratings providers as signposted in the Edinburgh Reforms unveiled by the Chancellor of the Exchequer, Jeremy Hunt, in December 2022. The Consultation will close on 30 June 2023.; and
  • the Strategy outlines the Government’s policy for mitigating climate risk and how it intends to pursue its ambition to become the world’s first Net Zero-aligned Financial Centre. The key aspect of the Strategy is the insights as to next steps on the long-awaited UK Green Taxonomy. A consultation on this is expected in the Autumn of 2023.

More details below.

The Strategy

The Strategy is an update to the UK’s 2019 Green Finance Strategy – some of the key updates from a financial regulatory perspective include:

  • delivering a UK Green Taxonomy. As a reminder of the state of play of the UK Green Taxonomy, the EU Taxonomy was onshored in the UK as part of the Brexit process but the EU Level 2 (technical screening criteria – which was not yet implemented in the EU) was not onshored. The UK Government was supposed to adopt UK technical screening criteria by 1 Jan 2023. However, on 14th December the Government indicated that the EU Taxonomy as onshored in the UK will be repealed by the Financial Services and Markets Bill (FMSB) along with the associated technical screening criteria requirements. The Government indicated that it would provide a further update on the UK Green Taxonomy as part of its Green Finance Strategy, which indeed it has. In the meantime, the Green Technical Advisory Group (GTAG) has been feeding into the Government’s policy on the Taxonomy and published advice on the development of this on 1 October 2022.

The Strategy does not provide a huge amount of insight as to the UK Green Taxonomy, but it does indicate that:

    • the Government is committed to delivering this;
    • it will include nuclear technology;
    • the regime will be proportionate so that it does not place an undue burden on companies whose size or scale makes the disclosure of taxonomy-related information unreasonable;
    • a consultation is expected in Autumn 2023 (which will propose the inclusion of nuclear technology as well); and
    • once the UK Green Taxonomy is finalised, it is expected that a two-year voluntary reporting requirement will be established before being replaced with a mandatory one.
  • introducing a new regime for ESG ratings providers (see further below);
  • committing to consult on the introduction of disclosure requirements, initially, for the UK’s largest listed companies and, later on, for private companies to disclose their transition plans if available, therefore replacing the existing requirement to disclose transition plans on a “comply or explain” basis;
  • assessing the financial reporting standards expected by the International Sustainability Standards Board in summer 2023 for their suitability in the UK;
  • reviewing the regulatory framework for the effective stewardship in respect of climate and environmental oversight, including the operation of the UK Stewardship Code;
  • monitoring the Stewardship Guidance (in late 2023) and clarifying the fiduciary duty; and
  • commissioning an industry-led market review to identify ways to facilitate raising transition capital (i.e., products and services that support higher emitting companies to decarbonise and reduce their environmental impact).

The Consultation

The Consultation builds on one of the Strategy’s action points (as first signposted in the Edinburgh Reforms), the introduction of a new regime for ESG ratings providers. Market participants had expressed their concerns about ESG ratings to the FCA in respect of the methodologies and objectives used by ESG ratings providers highlighting, among others, their lack of transparency, poor governance and systems and controls (see FS 22/4). In this context, the FCA concluded that ESG ratings providers need to be regulated when the ESG ratings and data are used in financial markets.

The table below sets out the key components of the proposed regime.

For ESG ratings providers that are captured by the proposed extended regulatory perimeter, the FCA is expected to consult on the applicable requirements for these providers. HM Treasury and the FCA have indicated that the proposed requirements would take into account IOSCO’s recommended key regulatory outcomes. In the meantime, a voluntary Code of Conduct for ESG rating and data providers developed by an industry working group is expected to be introduced that will also be in line with IOSCO’s recommendations and hence may have some similarities with potential FCA regulation.