Environment, social and governance | UK Regulatory Outlook January 2024
Published on 11th Jan 2024
FCA publishes Sustainability Disclosure Requirements | How UK and EU regulators plan to hold financial service providers accountable for greenwashing | Continuation of regulatory scrutiny of green claims
FCA publishes Sustainability Disclosure Requirements
As set out in the November edition of our international ESG knowledge update, the Financial Conduct Authority (FCA) has published its long-awaited Sustainability Disclosure Requirements. The rules aim to bring trust and transparency to the UK market for sustainable investment products and represent a major ESG shift for the UK financial services sector.
Most significantly, the rules bring in a new general anti-greenwashing rule for all FCA-authorised firms. This will come into force on 31 May 2024 (the FCA is currently consulting on guidance about how it will operate). The other new rules, aimed at UK asset managers, include an investment labelling regime, which firms will be able to use from 31 July 2024, as well as new naming and marketing rules and disclosure obligations, which will come into force from 2 December 2024 onwards. See our Insight for more on what businesses should be doing now to prepare for these upcoming changes.
How UK and EU regulators plan to hold financial service providers accountable for greenwashing
There have been significant recent supervisory developments in the UK and EU regarding the risks of greenwashing in the financial services sector. Our Insight explores some of these developments and what financial service providers can do in 2024 to mitigate the risk of accusations of greenwashing.
Continuation of regulatory scrutiny of green claims
Throughout 2023, both the Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA) have taken enforcement action against misleading environmental claims. In 2024, we expect this scrutiny to continue, in particular with the CMA focusing on the fashion industry and fast-moving consumer goods sectors.
The ASA has also recently taken greenwashing action in the aviation sector, and the CMA has hinted that the travel and transport sector is one that it could look at in the future as part of its sector investigations into greenwashing.
Ultimately, in 2024 businesses need to continue to be cautious as to what claims they make, as any claim that is unclear in scope is at a high risk of being considered misleading by regulators.
Provisional agreement has been reached on Corporate Sustainability Due Diligence Directive
The European Parliament and Council has reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDD).
The final text is not yet available, but below are some of the key points from the press releases:
- Scope of the directive: The directive applies to large companies with more than 500 employees and a net worldwide turnover of €150 million. For non-EU companies, it applies if they have a €150 million net turnover generated in the EU, three years after the directive comes into force. The Commission will publish a list of non-EU companies falling under the directive's scope. The European Parliament's press release also outlines that it will apply to companies with over 250 employees and with a turnover of more than €40 million if at least €20 million are generated in one of the following sectors: manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction.
- Financial sector exclusion: The financial sector is temporarily excluded from the directive's scope, but there is a review clause for possible inclusion in the future based on impact assessment.
- Climate change and civil liability: The directive requires large companies to adopt a transition plan for climate change mitigation. It also strengthens access to justice for affected individuals and establishes a five-year period to bring claims. Companies must end business relationships with partners causing adverse impacts if prevention or resolution is not possible.
- Penalties: Companies violating the directive may face fines of up to 5% of their net worldwide turnover.
- Definitions: The directive clarifies the obligations for companies described in Annex I, a list of specific rights and prohibitions that constitutes an adverse human rights impact when they are abused or violated. The list makes references to international instruments that have been ratified by all Member States and that set sufficiently clear standards that can be observed by companies.
The provisional agreement reached now needs to be formally approved by both institutions, which are expected to vote early next year.
Full implementation of the directive is expected by the end of 2024.
In the UK, a private member's bill has been introduced: the Commercial Organisations and Public Authorities Duty (Human Rights and Environment) Bill. Its aim is to introduce similar obligations as set out under the CSDD by mandating commercial organisations and public authorities to conduct due diligence on their supply chains to prevent human rights and environmental harms.
The bill had its first reading in the House of Lords on 28 November 2023 and the second reading is yet to be scheduled. However, as a private member's bill, it will not be given as much time as other public bills and a minority of private members' bills actually become law. Therefore we do not anticipate this bill to progress very far,n or how far it will get in its legislative process, but businesses should have this on their radar in case the House of Lords continue to push it through.
First reporting obligations under the Corporate Sustainability Reporting Directive
The Corporate Sustainability Reporting Directive (CSRD) entered into force on 3 January 2023. It extends existing requirements under the Non-Financial Reporting Directive (NFRD) and requires firms to report on the impact of their activities on the environment and society. The CSRD will extend the reporting obligations under the NFRD to all large companies and imposes an obligation to report accurate and verified information on environmental factors (such as climate change mitigation and adaptation, water and marine resources, resource use and circular economy, pollution, biodiversity, and ecosystems). An audit of the reported information will also be required as a form of assurance. For more on which companies are in scope and the information that must be reported, see our Insight.
Member States of the EU must bring into force the laws, regulations and the administrative provisions necessary to implement CSRD by 6 July 2024. An estimated 50,000 companies will be caught by the newly extended NFRD as opposed to the 11,000 currently obligated to report.
EU public interest entities already subject to the existing reporting requirements need to begin reporting from 2025 for financial years starting on or after 1 January 2024.
EU large companies need to begin reporting from 2026 for financial years starting on or after 1 January 2025.
EU small or medium-sized companies need to begin reporting from 2027 for financial years starting on or after 1 January 2026.
Non-EU companies need to begin reporting from 2029 for financial years starting on or after 1 January 2028.
With the first reports due in 2025, companies due to report should collect and prepare the relevant information throughout 2024 ready to meet this first deadline.
UK Sustainability Disclosure Requirements
The UK Sustainability Disclosure Standards (SDS) will set out the necessary disclosures for companies in relation to sustainability-related risks and opportunities. The standards will form the basis of future reporting requirements in the UK.
These standards will be based on the International Sustainability Standards Board IFRS disclosure standards, and will only divert for UK specific matters where absolutely necessary. The IFRS standards incorporate and expand upon the Taskforce for Climate-related Financial Disclosure's recommendations, so firms already voluntarily reporting in line with these requirements will be at an advantage. The secretary of state for Business and Trade will consider the endorsement of the IFRS standards and creation the UK SDS by July 2024.
The decision as to whether to require disclosure in line with the UK SDS will be taken independently by the UK government for UK registered companies and LLPs and by the FCA for UK listed companies.
Transition Plan Taskforce publishes disclosure framework
On 9 October 2023, the Transition Plan Taskforce published its disclosure framework, which sets out good practice recommendations to assist companies in making robust and credible disclosures about their climate-related transition plans.
The FCA expects to consult in 2024 on proposals for UK listed companies to publish their transition plans.
EU deforestation-free products regulation set to come into force
As part of the EU's effort to reduce global deforestation, new legislation is being introduced requiring companies to carry out extensive supply chain due diligence before a product is placed on the market in the EU, or exported from the EU.
The Regulation on Deforestation-free products (EUDR) covers seven commodities: cattle, cocoa, coffee, oil palm, rubber, soya and wood. Many products deriving from these materials (such as leather and chocolate) are included in the annex of the regulation. However, there have been recent discussions that other commodities, such as tea, could be bought within scope and so businesses should be alive to a potentially broader scope.
In order to place these products on the market in the EU or export them from the EU, a company must show that they are:
- deforestation-free (from land that has not been converted from forest to agricultural use after 31 December 2020);
- produced in accordance with relevant legislation in the country of production; and
- covered by a due diligence statement that there is no or negligible risk of non-compliance.
Penalties for non-compliance will be set out in national law, but they may include fines of up to 4% of the company's EU turnover or confiscation of products.
The regulation will come into effect on 30 December 2024.
The UK has recently announced it will be introducing similar measures to tackle deforestation. The Forest Risk Commodities Scheme will be introduced through provisions in Schedule 17 of the Environment Act 2021. This proposed new legal framework in the UK will place a similar duty on businesses and prevent the placement of regulated commodities on UK markets unless a due diligence statement is supplied which confirms that the commodities are deforestation-free.
The new laws will apply to businesses with a global annual turnover of over £50 million and who use over 500 tonnes of regulated commodities a year. The list of commodities in scope is non-dairy cattle products (beef and leather), cocoa, palm and soy (which diverges from the EUDR as neither coffee nor rubber are included in the UK scheme, but are under EUDR).
Enforcement and the detailed requirements of the duty are subject to secondary legislation being implemented, which will be introduced "when parliamentary time allows".
Increasing scrutiny and enforcement for greenwashing relating to food
Please see food law.
Regulation prohibiting products made with forced labour on the Union market
Please see modern slavery.
Please also see our new international ESG Knowledge Update, for a round-up of legal, regulatory and market news.
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