Throughout October, we saw a number of reports published with the aim of providing companies with guidance on the direction of ESG reporting as the significant interest in "green" investments continues to fuel policymakers to codify sustainable financial products and sustainability reporting. In this brief update, we provide a summary of four key reports: (1) European Commission FAQs on sustainable disclosures under Article 8 of the EU Taxonomy Regulation; (2) the Green Technical Advisory Group report on UK Green Taxonomy; (3) FRC Lab report on net-zero disclosures; and (4) FCA consultation paper on sustainability disclosure requirements and investment labels.
1. European Commission FAQs on sustainable disclosures under Article 8 of the EU Taxonomy Regulation
The Disclosures Delegated Act (the Delegated Act) under Article 8 of the EU Taxonomy Regulation imposes reporting obligations on financial and non-financial undertakings.
On 6 October, the European Commission published the final version of its 33 frequently asked questions on the interpretation of these obligations. The FAQs provide further clarification on the implementation of the regulation and cover areas such as:
- how the NACE code should be used to identify Taxonomy-eligible activities in the context of eligibility reporting;
- how turnover, CapEx and OpEx are defined;
- double reporting;
- reporting in relation to non-EU activities; and
- how the Delegated Act interacts with the proposed Corporate Sustainability Reporting Directive.
2. Development of the UK Green Taxonomy
On 7 October, the Green Technical Advisory Group (GTAG) (the independent adviser established to advise the government on standards for green investment) published its advice on the development of the UK Green Taxonomy (UKGT) – the criteria which specific economic activities must meet to be considered environmentally sustainable. The UK has onshored the majority of the EU Taxonomy Regulation, but the Delegated Acts which include the Technical Screening Criteria (TSC) have not been onshored as they were introduced following Brexit. The UK is developing its own TSC using the EU TSC as its foundation. The report does not contain any concrete legislative proposals but serves as a useful indicator of how the Sustainability Disclosure Requirements (SDR) (proposed by the FCA) and UKGT may look when introduced. In particular, the report notes:
- Whilst the UKGT should be closely aligned with the EU Taxonomy to avoid unnecessary burdens and obligations on companies, some areas of the EU Taxonomy are not fit for purpose in the UK (for example, in relation to the renovation of existing buildings, bio-energy and the manufacture of hydrogen, amongst others). The report recommends an "adopt some and revise some approach".
- The hierarchical principles behind the UKGT should be: (1) avoiding greenwashing and supporting an economy-wide transition; (2) being simple and usable; and (3) being internationally relevant and consistent.
- The "do no significant harm" criteria in the EU Taxonomy are complex and making it challenging and costly for businesses to comply. There is an opportunity for the UK to streamline this process.
- The UKGT will apply to corporates, asset owners and managers, and investment products. Obligations to report under the UKGT could be enacted through the new SDR regime, changes to the Companies Act 2006, amendments to Listing Rules and/or FCA Disclosure Guidance and Transparency Rules, new ISSB Standards and/or updates to voluntary initiative and codes.
Further GTAG advice and a consultation on the TSCs for mitigation and adaptation should follow in due course, but exact timings are currently unknown.
Next steps – the government will publish a consultation on the TSC for the first two of the six environmental objectives included in the UKGT.
Key dates – Q1 2023, the government will consult on expanding the climate criteria and the remaining four environmental objectives under the UKGT.
3. FRC Lab report on net-zero disclosures
On 11 October, the Financial Reporting Council Lab (FRC Lab) produced a report on net-zero disclosures and other greenhouse gas emission reduction commitments following a period of stakeholder engagement. Current ESG reporting is often considered aspirational, too high-level and frequently fails to provide users with sufficient information. The report provides guidance on what might be considered when preparing net-zero disclosures and identifies challenges and successes, as well as areas for improvement. It is supported by a detailed example bank to help companies further. Companies are advised to take a subjective approach in determining which reporting elements are material for them.
4. FCA consultation paper on sustainability disclosure requirements and investment labels
The Financial Conduct Authority (FCA) has published its proposed rules, exceptions and timeline for implementation for the labelling and marketing of investment products. The rules intend to deal with growing concerns that firms may be making "exaggerated, misleading or unsubstantiated" sustainability-related claims about their products. The proposals focus on funds and portfolio management based in the UK with mention of other types of investment products (i.e. pension products). They cover: (1) sustainable investment labels; (2) qualifying criteria firms must meet to use the label; (3) product-and-entity level disclosures; and (4) marketing rules. The FCA notes that this is a starting point for the regime which will expand and evolve over time.
- Separate consultation on how the proposals may be applied in respect of overseas funds to be published in due course.
- FCA to publish final version of the rules subject to consultation feedback.
- June 2023 – FCA expects to have published final sustainability disclosure requirements and investment label rules. The anti-greenwashing rule will come into effect immediately on publication.
- 30 June 2024 – the earliest the labelling, naming and marketing, and initial disclosure requirements under the regime, would come into effect.
- 30 June 2025 –
- ongoing sustainability-related performance information disclosure obligations to come into effect for all in-scope firms; and
- entity-level disclosure obligations to come into effect for all in-scope firms with £50 billion or more in AUM.
- 1 July 2025 – ongoing sustainability-related performance information disclosure obligations to come into effect for firms providing portfolio management and those managing unauthorised AIFs not listed on a recognised exchange.
- 30 June 2026 – entity-level disclosure obligations to come into effect for firms with less than £50 billion in AUM, but with £5 billion or more in AUM.