ESG Investing  

What advisers should know about the EU's ESG disclosure rules

  • Explain the impact of EU's ESG disclosure rules on firms
  • Identify how Brexit changes the way rules will be adopted in the UK
  • Explain the UK's plans for implementing similar rules in the future

For example, the requirement to ensure a sustainability risk-related policy is in place, and to publish information on the integration of sustainability risks in the investment decision-making process on firms’ websites and in their pre-contractual documents.

The EC confirmed that many firms which currently comply with non-financial reporting requirements under the EU Accounting Directive 2013/34/EU, or which adhere to international standards, should consider using that information to aid their compliance with the SFDR in the absence of the finalised technical standards.

The technical standards should be endorsed by the EC within three months of their publication (by 4 May 2021), and ESG Firms will be expected to comply with the technical standards from 1 January 2022.

The UK and Brexit impact

As already noted, the UK government has not implemented the SFDR in the UK, but will instead establish its own green taxonomy and ESG disclosure regime.

That said, UK firms may still be subject to the requirements in the SFDR to the extent that they market certain financial products in the EU.

For example, a UK fund manager may be required to comply with the SFDR if it markets fund products in the EU under the national private placement regime.

Additionally, UK portfolio managers acting under a delegation agreement with an EU fund manager may be contractually required to comply with certain requirements of the SFDR and the Taxonomy Regulation to facilitate the EU fund manager’s and/or fund’s compliance with the disclosure or internal procedures requirements imposed on them by the SFDR. 

UK regulations

On 9 November 2020, the Chancellor of the Exchequer announced various proposals for the financial services sector in the UK, to support the green economy.

The key announcements included, firstly, that the UK will make climate-related financial disclosures mandatory for certain firms including occupational pension schemes, insurers, banks and building societies and asset managers by 2025 by adopting the recommendations of the UK’s joint regulator and government Task Force for Climate-related Financial Disclosures (TCFD). 

The TCFD published an interim report which set out a roadmap towards compliance with mandatory financial disclosures, with large UK asset managers being subject to disclosure requirements as of 2022 and other asset managers following suit in 2023.

While the interim report did not detail the substance of the disclosures that will need to be made, it is anticipated that these will be aligned to the TCFD’s principles-based disclosure recommendations, which focus on governance, strategy, risk management, metrics and targets.