ESG Weekly Update – December 8, 2023

8 December 2023

UK: FCA Releases Final Policy Statement on Sustainability Disclosure Requirements

On November 28, 2023, the Financial Conduct Authority (FCA), a UK financial regulator, released its final policy statement on the long-anticipated Sustainability Disclosure Requirements (SDR). The policy aims to enhance trust in the sustainable investment market and address concerns about greenwashing. Notable changes include introducing a fourth fund label, altering the stewardship and disclosure requirements for “sustainable improver” funds and modifying the implementation timeline, with the first measures taking effect on May 31, 2024.

The new fourth fund label, “sustainability mixed goals,” is intended to capture funds that invest using blended sustainability strategies, which would not be captured by one of the other three categories (i.e., “sustainable focus” funds, “sustainable improver” funds and “sustainable impact” funds). Additionally, stewardship requirements have been adjusted for funds applying for the “sustainable improver” label. Such funds will no longer need to demonstrate a causal link between stewardship and asset improvements but instead must specify what kind of stewardship strategy they use and demonstrate how they will measure performance against the investment objectives of the fund. The FCA emphasized the importance of transparent disclosures, stating that firms employing a sustainability approach must disclose details on assets that are not meeting sustainability objectives or that have negative environmental or social impacts.

The FCA is also launching a new consultation on its proposed anti-greenwashing rule, inviting industry feedback by January 26, 2024.

The FCA’s SDR adjustments aim to enhance clarity and trust within the sustainable investment market, while also aligning with other sustainable investment disclosure frameworks and regulations such as the reference to GRI Standards in the FCA’s guidance on entity-level disclosures.

FCA Policy Statement

Global: Basel Committee Proposes Detailed Climate Disclosures from Banks

On November 28, 2023, the Basel Committee on Banking Supervision (the “Committee”) issued proposed disclosure requirements under which banks would be required to publish the impact of climate-related financial risks on their business. The goal of the requirements is to aid investors and regulators alike in assessing how banks are managing the risks of climate change, comparing climate exposures at lenders and ensuring that banks are holding enough capital to remain stable in the face of such risks.

The Committee comprises banking regulators across the globe and proposes high-level rules that members commit to applying in their home jurisdictions. With respect to the proposed disclosure requirements, the Committee is predominantly seeking feedback from industry stakeholders on its proposal for qualitative and quantitative Pillar 3 disclosure requirements that would “complement the work of other standard setters,” such as the International Sustainability Standards Board, and set a uniform disclosure benchmark for banks that conduct business globally. Notably, however, it is currently unclear how the Committee’s proposed disclosure requirements will tie in with EU corporate climate disclosure requirements. The Committee will also consider which elements will be mandatory and which will be discretionary.

The Committee, like many other standard-setting bodies and regulators, acknowledged that the availability of data on climate-related financial risks is continuously evolving and noted that such data may become more readily available with the implementation of the disclosure framework.

The Committee invites public comment on the proposals by February 29, 2024.

Basel Committee Press Release

EU: International Federation for Human Rights Publishes Recommendations for Trilogue Negotiations on the EU Due Diligence Directive

On June 1, 2023, the European Parliament voted in favor of the Corporate Sustainability Due Diligence Directive (CSDDD), which imposes due diligence obligations on corporations with respect to their environmental and human rights impacts throughout their value chain. Following that vote, the European Parliament, European Commission and EU Council have been in trilogue negotiations to finalize the text of the CSDDD. After months of negotiations, the debate has narrowed to questions regarding the scope of the CSDDD’s applicability and obligations. In particular, the parties are considering the criteria for bringing companies in-scope of the directive, the definition of “value chain” and whether the financial sector should be included.

The International Federation for Human Rights (FIDH) recently published recommendations for the newly resumed trilogue negotiations. FIDH recommended that the finalized CSDDD have broad scope and applicability and that financial institutions be included in the CSDDD’s scope. Consistent with their recommendation that the CSDDD have broad applicability, FIDH advocated for a definition of value chain that includes both upstream and downstream value chains to encompass impacts generated after the service or product has left the company. Finally, FIDH recommended ensuring that the final text include effective and rigorous enforcement and liability mechanisms, following the European Parliament’s recommendation. In particular, FIDH encouraged negotiators to include a complaint, monitoring and remedial mechanism for affected individuals and communities.

The trilogue negotiations on the CSDDD will resume on December 13, 2023.

EU Council Draft
European Parliament Draft
European Commission Draft