A new sustainability regime for the UK

In October 2021, the UK government published a policy paper entitled “Greening Finance: A roadmap to sustainable investing”, setting out the first phase of its plans to deliver on the ambition of making the UK “the best place in the world for green and sustainable investment”.

In addition to work on a UK taxonomy, rules to be developed will require financial services firms and corporates to report consistent information on sustainability.

The new regime will streamline existing disclosure requirements and add new requirements, including the reporting of environmental impact. Investment products will need to make consumer-focused disclosures showing the impact, risks and opportunities of the activities they finance. This will be accompanied by a consumer-facing label. In addition, asset managers, asset owners and investment products will be required to substantiate their sustainability claims.

Delivering phase 1

Phase 1 of the government's roadmap will be delivered through new economy-wide Sustainability Disclosure Requirements (SDR) and a consumer-facing investment label. These fall within the remit of the FCA and are the subject of a discussion paper (PDF 485 KB) which seeks initial views on:

• sustainable investment labels
• consumer-facing disclosures for investment products
• client and consumer-facing entity- and product-level disclosures by asset managers and FCA-regulated asset owners.

Feedback received will inform policy proposals to be issued for consultation in Q2 2022.

1. Disclosures

SDR aims to bring together existing sustainability-related disclosure requirements and new requirements in a single, integrated framework, building on leading global standards and best practice.

SDR will interact with the recommendations or requirements of the Task Force on Climate-Related Financial Disclosures (TCFD), the International Sustainability Standards Board (ISSB) and the UK Green Taxonomy:

• TCFD disclosures, which are being implemented in the UK for climate risk reporting, will be expanded to cover topics from the wider sustainability landscape. This may include supply chain management and workers' conditions, the responsible use of marine or other environments or the protection and restoration of biodiverse environments.
• The global baseline sustainability reporting standards to be developed by the ISSB in 2022 will form a core component of the SDR framework, and the backbone of its corporate reporting element. The ISSB standards will themselves build on the TCFD recommendations.
• The UK's forthcoming Green Taxonomy (see below), which will define and provides clarity to investors as to which investments may be defined as `environmentally sustainable', may be used to generate SDR disclosures in the Annual Report or an appropriate accompanying publication.

Asset managers and owners and investment products will be required to substantiate ESG claims in a way that is comparable between products and accessible to clients and consumers. They will also need to disclose whether and how they take ESG-related matters into account in governance arrangements, investment policies and investment strategies:

• Asset managers and owners (including pension funds and applicable insurers) will be required to disclose the processes for identifying and managing sustainability related risks and opportunities, as well as the actual and potential impact of these risks on their strategy and investment policy.
• Banks, pension funds and other firms offering investment products will additionally have to disclose how sustainability risks impact their investment opportunities at an individual product level.
• All financial services firms will have to identify and disclose targets and metrics for measurement of targets for their sustainability risks. Progress and performance against these metrics will also need to be disclosed and firms will need to provide information as to how their investments align to the UK Green Taxonomy.
• Corporates will be required to disclose similar information, including how sustainability risks affect their business strategies and financial plans and how their business aligns to the UK Green Taxonomy.

The EU Sustainable Finance Disclosure Regulation (SFDR) also requires firms to report on their sustainability risks and impacts. The FCA recognises that many UK firms and their products are subject to SFDR in respect of their cross-border EU business. It is therefore asking for views on the extent to which UK policy can remain as consistent as possible with SFDR, while reflecting the needs of the UK market.

The FCA is also considering how overseas funds marketing into the UK should be treated, including in respect of the incoming Overseas Funds Regime.

2. Sustainable investment labels

Certain investment products will be required to display a label reflecting their sustainability characteristics. This will complement the entity- and product-level SDR disclosures.

The FCA will develop and implement the labels, building on existing work under other domestic and international initiatives by industry and official sector initiatives.

What counts as green?

The government is implementing a UK Green Taxonomy to define which economic activities count as environmentally sustainable. The taxonomy aims to:

• Create clarity and consistency for investors
• Improve understanding of companies' contribution to environment impact
• Provide a reference point for companies, for example to develop and communicate net zero and capital investment plans.

The UK Taxonomy will draw heavily on the EU Taxonomy and will be designed to be compatible with other international frameworks. In Q1 2022, the government will consult on the first two environmental objectives, climate change mitigation and climate change adaptation, with a view to finalising legislation by the end of 2022. Consultation on the remaining objectives will follow in Q1 2023.

Each environmental objective will be underpinned by a set of detailed standards or Technical Screening Criteria (TSC). Each economic activity included in the Taxonomy will have a TSC.

As in the EU, to be considered Taxonomy-aligned, an activity will need to meet three tests:

• Make a substantial contribution to one of the six environmental criteria
• Do no significant harm to the other objectives
• Meet a set of minimum safeguards

The Taxonomy will also recognise Enabling Activities, those which support the transition by enabling substantial contributions to environmental objectives in other sectors, but which are not yet sustainable themselves.

Investor Stewardship

The UK government expects the pension and investment sectors to use the information generated by SDR to deliver on their responsibilities as stewards of capital across all asset classes and markets. They should seek to integrate ESG considerations into their investment decision-making, monitoring and engagement strategies, escalation and collaboration, and voting practices.

In November 2021, the Financial Reporting Council (FRC) will publish a review of reporting to highlight effective examples and communicate its expectations for 2022.

By the end of 2022, the FRC will communicate an approach to differentiating or tiering signatories based on the quality of their reporting.

At the end of 2023, the government will assess progress by the pension and investment sectors against:

• Work on stewardship within the organisation
• Taking into account the information generated by SDR when allocating capital
• Actively monitoring, encouraging and challenging companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation
• Transparency around their own and their service providers' engagement and voting
• Providing leadership