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

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.

The report also indicates that the UK authorities may consider implementing more detailed and specific disclosure requirements in due course.

The challenge faced by ESG and mainstream rating agencies is the absence of a common language and rules around how to define, and thus properly rate, ESG factors.

Secondly, the UK will also implement its own green taxonomy, using the EU Taxonomy Regulation as its foundation.

A UK Green Technical Advisory Group has been set up: responsible for analysing the scientific metrics incorporated within the EU Taxonomy Regulation’s technical screening standards and assessing whether they are appropriate for the UK market.

This leaves scope for UK divergence from the EU Taxonomy Regulation, which could cause further issues in terms of future EU/UK regulatory alignment in this area.

The future

In response to growing demands from stakeholders and market participants, industry bodies (such as the International Financial Reporting Standards Foundation) have recently launched a consultation on the development of a global set of sustainability reporting standards for companies.

In addition, the CFA Institute is seeking to create a set of international disclosure standards for investment products with ESG-related features.

In light of the increasing focus on ESG disclosures, and the growing recognition that managing ESG risks can create long term value for a business, there will be pressure on companies, asset managers and other relevant market participants who are not yet making ESG disclosures to start doing so, even if it is not yet mandatory. 

For example, the Association of Investment Companies recently announced that it will be publishing individual investment company ESG disclosures on its website from the second quarter of 2021 onwards, giving member investment companies the opportunity to share their ESG policies in an accessible way.