Overview of the ESG landscape from a financial services regulatory perspective

The FCA published the latest version of its ESG strategy in December 2021, and previously noted in its 2021/2022 business plan that “Financial services and markets have a central role in the transition to a low carbon economy and a more sustainable future. The UK Government has committed to achieving a net zero economy by 2050. We will support this aim by adapting our regulatory framework to enable a market-based transition”. The government is planning to require listed companies, asset managers and regulated asset owners to publish net zero transition plans setting out how they will decarbonise in the period to 2050.

So what is ESG and what standards must firms meet?

Whilst the primary focus to date has been on environmental considerations, social and governance considerations should not be forgotten. Environmental considerations include climate change mitigation and adaptation. Social considerations include issues relating to inequality, inclusiveness, employee relations and human rights. Governance refers to management structures, employee relations and executive remuneration.

The UK green taxonomy (which is similar to the EU Taxonomy Regulation, that was partially onshored in the UK as part of the Brexit process) sets out six environmental objectives against which certain economic activities will be assessed. To be taxonomy aligned, an activity must meet three tests: it must make a substantial contribution to one of the environmental objectives; it must do no significant harm (DNSH) to the other environmental objectives; and it must meet a set of minimum safeguards. Certain companies will be required to make financial disclosures in relation to their taxonomy-aligned activities, and investment product providers will then disclose the extent to which those products are taxonomy-aligned, based on their constituent assets.

Commercial companies with a UK premium listing (for financial years beginning on or after 1 January 2021) and companies with a standard listing of shares (other than investment entities or a shell companies) (for financial years beginning on or after 1 January 2022) are required by the Listing Rules to make comply or explain disclosures in their annual reports in relation to the TCFD recommendations and recommended disclosures.

Asset managers, life insurers and FCA-regulated pension providers under the new FCA ESG sourcebook [1] (in force from 1 January 2022 – with a phased approach to implementation), must make the following two categories of annual disclosures consistent with the TCFD’s recommendations:

• Entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers; and

• Product or portfolio-level disclosures: a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.

How might crypto measure up?

There is a tendency when thinking about the ESG credentials (or lack thereof) of crypto to focus on the energy usage, but there are other considerations ranging from use of the underlying technology to enabling financial inclusion.

Read more in our series: ESG in the balance - will crypto be a vehicle for advancement or will it undermine positive change?

• ESG in the balance: Will crypto be a vehicle for advancement or will it undermine positive change? Part 1

• ESG in the balance: Will crypto be a vehicle for advancement or will it undermine positive change? Part 2

• ESG in the balance: Will crypto be a vehicle for advancement or will it undermine positive change? Part 3

[1] For more detail see FCA policy statement PS21/24 PS21/24: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers.