December 2022 — Issue 4

This is a regular publication from KPMG's EMA Financial Services Regulatory Insight Centre, providing key updates on the latest ESG regulatory developments impacting financial services firms in the UK and the EU.

In the last few months, we have seen considerable activity in the ESG regulatory space. Combined with recent political commentary from COP27 in Sharm el Sheik, there is much for firms to digest. 

Reporting and disclosure requirements continue to expand. The Corporate Sustainability Reporting Directive (CSRD) has cleared the final legislative hurdles and will enter into force in the next few weeks with implementation by Member States 18 months later. The European Sustainability Reporting Standards (ESRS) supporting the CSRD have been finalised and submitted to the European Commission. In the UK, the Transition Plan Taskforce (TPT) has published its consultation on a framework for firms to disclose their net-zero transition plans. Once finalised, this will inform the Financial Conduct Authority’s (FCA’s) approach to setting formal rules. In the meantime, the FCA has launched its long-awaited consultation on Sustainability Disclosure Requirements (SDR). Whilst the majority of the initial SDR proposals will affect asset managers, all FCA-regulated firms will be in scope of a new anti-greenwashing rule.

Concerns around greenwashing are escalating rapidly. In response, the European Supervisory Authorities (ESAs) — the EBA, EIOPA and ESMA — have launched a call for evidence on the main risks and drivers of greenwashing. As well as consulting on the SDR, the FCA is convening a working group to develop a voluntary Code of Conduct for ESG data and ratings providers. And ESMA is consulting on the use of ESG or sustainability terms in fund names.

The TCFD’s 2022 status report, which reviewed the disclosures of 1,400 large companies across the globe, found encouraging signs of progress. However, in future, financial disclosures will go beyond climate, and November saw the publication of the TNFD’s third iteration of the framework for nature-related disclosures. Further regulatory developments on nature and biodiversity may follow the UN's COP15 Biodiversity Conference in Montreal.

Taxonomies remain in focus. As we approach the end of 2022, it is clear that the UK government’s initial timeline for developing a Green Taxonomy, set out in October 2021’s Greening Finance Roadmap, is no longer feasible. The Green Technical Advisory Group (GTAG) released a report advising the UK government on the development of the UK Taxonomy, and we await confirmation of revised timings. Looking to the EU Taxonomy, the Platform on Sustainable Finance (PSF) has released its recommendations on how to achieve compliance with the ‘minimum safeguards’ criteria, crucially noting that compliance with certain S-related criteria can be achieved through existing regulations without the need for a Social Taxonomy.

Climate-related financial risk also dominates the regulatory landscape. The ECB’s 2022 thematic review of climate-related and environmental (C&E) risks found that, although most banks now have in place basic practices to manage C&E risks, they lack sophisticated methodologies and granular data. To accelerate progress, the ECB has set out clear deadlines for alignment with supervisory expectations. The Bank of England (BoE) hosted a Climate and Capital Conference to gather views on whether and how climate-related risk should be reflected in prudential frameworks, and the Prudential Regulation Authority (PRA) issued a Dear CEO letter providing thematic feedback on how banks and insurers are delivering against the expectations of Supervisory Statement 3/19. At a global level, the International Sustainability Standards Board (ISSB) has mandated the use of climate scenario analysis in resilience assessments, and the Financial Stability Board (FSB) has asked regulators to enhance their scenario analysis toolkit.

On broader sustainability matters, the EU Parliament's Committee on Economic and Monetary Affairs (ECON) has put forward amendments to the proposed Corporate Sustainability Due Diligence Directive (CSDDD), widening the scope of firms captured under the directive. The European Council, on the other hand, has proposed a phase-in approach and included only very large companies in its scope. 

The EU Parliament has also adopted new legislation on gender balance on corporate boards to take effect from 2026. In the UK, we await the publication of the FCA, BoE and PRA joint consultation on diversity and inclusion in financial services firms.

For more information on these and other regulatory updates, please see below. 


More detail

Reporting and Disclosures

UK Transition Plan Taskforce consults on disclosure framework — see article

FCA consults on UK Sustainability Disclosure Requirements (SDR) and investment labels — see article above

Corporate Sustainability Reporting Directive (CSRD) adopted by EU

The European Parliament and Council have now both adopted the Corporate Sustainability Reporting Directive (CSRD) which will expand the scope and requirements of the EU Non-Financial Reporting Directive (NFRD) and require approximately 50,000 EU companies to report against the new European Sustainability Reporting Standards (ESRS).

Member States now have 18 months to implement the new rules in phases, depending on entity size:

  • Reporting in 2025 on financial year 2024 for companies subject to the NFRD — large public-interest entities with more than 500 employees
  • Reporting in 2026 on financial year 2025 for large companies not already captured by the NFRD, if they have more than 250 employees or €40 million in turnover or €20 million in total assets
  • Reporting in 2027 on financial year 2026 for listed SMEs except micro undertakings, small and non-complex credit institutions and captive insurance undertakings — possibility of voluntary opt-out until 2028
  • Reporting in 2029 on financial year 2028 for third-country undertakings

European Sustainability Reporting Standards (ESRS) submitted to the European Commission

Shortly after the adoption of the CSRD, the European Financial Reporting Advisory Group (EFRAG) submitted its first set of 12 draft European Sustainability Reporting Standards (ESRS) to the European Commission.

Changes have been made to all the draft standards based on consultation feedback. These are mostly minor, including adding definitions and better referencing internally and between standards to ensure consistency of application. There is also a more granular definition of materiality that aligns with existing standards such as GRI and ISSB S1. Following scrutiny by the European Parliament and Council, the standards are expected to be adopted as delegated acts in June 2023.

ESAs propose disclosure for fossil gas and nuclear energy investments

At the end of September, the ESAs delivered amended draft Regulatory Technical Standards (RTS) for disclosures required under the SFDR, to reflect the inclusion of natural gas and nuclear power generation in the EU Taxonomy. Key amendments: 

  • Bring the RTS wording broadly in line with the Complementary Delegated Act (CDA) to explicitly require firms to report the amount and proportion of Taxonomy-aligned activities linked to natural gas and nuclear in their KPIs
  • Update the forthcoming mandatory pre-contractual and periodic disclosure templates for SFDR Article 8 and 9 products to show the proportion of investments in gas and nuclear taxonomy-aligned activities
  • Include a 'yes/no' question in pre-contractual and periodic disclosure templates regarding whether products intend to or have invested in natural gas or nuclear taxonomy-aligned activities. If the answer is “yes”, further disclosure of the relevant proportion of investments is required

The implementation date for the amended RTS will be determined by the European Commission, but we would expect the timing to be aligned with that of the CDA and SFDR level two templates which come into effect on 1 January 2023. 

TCFD 2022 Status Report

The TCFD’s 2022 status report provides an overview of firms’ progression on climate-related financial disclosures over the past five years. Overall, the report finds that the percentage of companies disclosing TCFD-aligned information continues to grow, but that more urgent progress is needed:

  • In 2021, 80% of companies disclosed in line with at least one of the recommended disclosures, 40% disclosed in line with at least five, and only 4% disclosed in line with all eleven. All regions significantly increased their levels of disclosure over the last three years
  • Average disclosure levels across the eleven recommended disclosures were 41% for banks and insurance companies
  • Over 60% of asset managers and 75% of asset owners report to their clients and beneficiaries. Nearly 50% of asset managers and 75% of asset owners reported information aligned with at least five of the eleven recommended disclosures
  • The availability and quality of climate-related financial disclosures has increased since 2017 — 95% of respondents reported increases in availability and 88% improvements in quality
  • 90% of investors and other users incorporate climate-related financial disclosures in financial decision-making — 66% of these factor disclosures into the way they price financial assets
  • Of the eleven recommended disclosures, the resilience of companies’ strategies under different climate-related scenarios continues to have the lowest level of disclosure

The Financial Stability Board (FSB) has asked the TCFD to publish a further status report in 2023 to maintain momentum during the period until the ISSB’s global baseline standard is agreed and its implementation can be monitored. 

TNFD framework v0.3

The Taskforce on Nature-related Financial Disclosures (TNFD) has released the third iteration of its beta framework. This is the last iteration before a final consultation is launched in March 2023, with the full framework expected to be finalised in September 2023.

v0.3 contains significant updates to all four pillars of the framework — governance, strategy, risk management and metrics and targets. Three new baseline disclosures are recommended for all reporting entities, to enhance traceability, characterise the quality of stakeholder engagement and demonstrate how nature and climate targets are aligned and contribute to each other. In addition, exposure and magnitude metrics are introduced. New guidance on performing risk assessments in line with TNFD recommendations is also provided and a Tools Catalogue and Risk and Opportunity Register provide resources for organisations to use when performing their risk assessments.


Taxonomy developments

GTAG advice on the development of UK Green Taxonomy

The Green Technical Advisory Group (GTAG)’s report, advising the UK government on the development of its Green Taxonomy, focuses on four key themes:

  • How to approach onshoring the EU framework, on which the UK Green Taxonomy will be based, at a time when the UK has set out a policy ambition to move further and faster than the EU in some areas of climate change
  • Optimising the taxonomy’s international interoperability, given that 80% of UK-managed assets are invested in international capital markets
  • Streamlining ‘Do No Significant Harm’ to be usable and useful for reporting entities
  • Setting out a wide range of potential taxonomy use cases

The GTAG recommends that the government revises its original timeline for consultation on and finalisation of the Technical Screening Criteria (TSC) for the first two of the six environmental objectives of the Taxonomy. As the previously proposed deadline of end-2022 is no longer feasible, the GTAG suggests that the timeline be amended to allow consideration of points raised in this report and future GTAG papers. 

PSF guidance on EU Taxonomy ‘minimum safeguards’ criteria

In October, the PSF published final recommendations to the European Commission on how to meet the EU Taxonomy ‘minimum safeguards’ criteria. There was previously no guidance in this area. The recommendations will be considered by the European Commission and, if approved, will form part of the EU Taxonomy usability toolkit.

The PSF proposes that compliance with ‘minimum safeguards’ should be defined for four core topics: human rights (including workers’ rights), bribery / corruption, taxation, and fair competition. Crucially, the PSF does not consider it necessary to implement new legislation or regulations, such as an EU Social Taxonomy, to achieve compliance with the ‘minimum safeguards’ criteria but notes that requirements within the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD) can achieve this purpose. 


Climate-related financial risk

PRA feedback on SS3/19 expectations – see article above

ECB thematic review of climate and environmental risk – see article above

ISSB mandates use of climate scenario analysis

The International Sustainability Standards Board (ISSB) announced in November that firms will be required to use climate-related scenario analysis to inform their resilience assessments in order to help identify climate-related risks and opportunities and support their climate disclosures. The ISSB will:

  • Provide guidance on how to undertake scenario analysis, building on TCFD guidance on quantitative, partially quantitative, and qualitative analysis
  • Do further work to clarify the criteria for an entity to select a method of analysis, ensuring that firms’ analyses are commensurate with their size, capabilities, and level of exposure to climate-related risk

Firms will be required to make annual disclosures on climate resilience, even if scenario analysis is not conducted annually. These changes will be reflected in the final IFRS Sustainability Disclosure Standard S2, expected to be released by the end of this year.

FSB reports on supervisory and regulatory approaches to climate-related risks

In October the Financial Stability Board (FSB) published a final report on supervisory and regulatory approaches to climate-related risks. Whilst the report is addressed to supervisors rather than individual firms, it provides useful insight on regulatory expectations and areas of likely focus going forward. In particular, the report urges supervisors to identify data requirements and drive standardisation in definitions and regulatory reporting across jurisdictions. It also encourages them to enhance their scenario analysis toolkits. The report notes that micro-prudential tools are not yet sufficiently able to address the cross-sectoral, global and systematic nature of climate-related risks but that work is underway in the EU and UK to examine the use of risk buffers and explore capital adequacy mechanisms.

A further report in November, this time issued jointly with the Network for Greening the Financial System (NGFS), considers the adequacy of climate scenario analysis across financial authorities and at individual firm level. It notes that tail risks and spillovers associated with climate change, and their measure of exposure and vulnerability in scenario analysis, are likely understated. Crucially, the FSB and NGFS note that many exercises do not capture second-round effects such as abrupt asset price changes that result from fire sales during a shock. This report again calls for greater cross-border cooperation to share both knowledge and practices, and to issue robust guidance for firms.  


Wealth and asset management

For the FCA consultation on Sustainability Disclosure Requirements (SDR) and investment labels, see our article above.

ESMA consultation on the use of ESG or sustainability-related terms in fund names

ESMA is consulting until 20 February 2023 on the use of ESG or sustainability-related terms in fund names. The consultation reflects both the increasing demand for ESG-related investments and concerns that there is no effective application of sustainability criteria, such as the EU Taxonomy. ESMA proposes that:

  • Where a fund name has any ESG-related words in its name, a minimum of at least 80% of its investments should be used to meet environmental, social or sustainable objectives
  • Where a fund name uses the word ‘sustainable’ or any other term derived from ‘sustainable’, there would be an additional threshold stipulating that 50% of investments would need to be allocated to “sustainable investments” (those that meet the definition set out under SFDR)

ESMA guidelines

In September, ESMA published Final Guidelines on the MiFID II suitability requirements (following the introduction of requirements in August for firms to consider investors' sustainability preferences in suitability assessments).

MiFID II and associated guidelines have been updated to reflect changes in the following categories:

  • Informing clients on sustainability preferences
  • Collecting sustainability preference information from clients
  • Assessing sustainability preferences
  • Organisational requirements — staff must receive appropriate training on sustainability topics. Records of clients' sustainability preferences and any updates must be kept

The guidelines will apply from six months after their publication on ESMA's website (extended from the original two months proposed).

In addition, in July, ESMA launched a consultation to update its 2017 MiFID II product governance guidelines and align them with the November 2022 MiFID II sustainable finance amendments. The consultation closed on 7 October 2022 and ESMA expects to publish a final report in Q1 2023.

ESAs’ clarifications on SFDR

The ESAs published a Q&A in November to clarify further aspects of the Sustainable Finance Disclosure Regulation "Delegated Regulation" - the "level two" requirements that take effect from 1 January 2023. The Q&A covers 60 questions over six topics and follows publication of other clarification questions in September. Most of the questions relate to Principal Adverse Impact (PAI) disclosures and taxonomy-aligned investment disclosures.

The ESAs previously sent questions to the European Commission for clarification on 9 September 2022, but these have not yet been answered.

Separately, the ESAs wrote to the European Commission in October to notify it that they will be unable to meet the April 2023 deadline for the review of the SFDR PAI and financial product disclosures, and that the mandate may be delayed by up to six months.


Other regulator / standard setter updates.

ESAs Call for Evidence on greenwashing risks

The ESAs have launched a Call for Evidence to understand the main features, drivers and risks associated with greenwashing practices across the financial institutions within their remits. This Call for Evidence will feed into a previous request from the European Commission, which asked for the ESAs’ views on the supervision of greenwashing risks and whether the current supervisory response was adequate. The ESAs are seeking to collect:

  • Views from stakeholders on greenwashing and what the main drivers of it may be
  • Examples of potential greenwashing across the financial sectors within their remit
  • Data to help them have a concrete understanding of the scale of greenwashing, and to identify which areas are most at risk of greenwashing practices

The ESAs have asked for information to be provided at firm and product level and to include examples relating to marketing materials, social media claims, website content etc. The consultation will run until 10 January 2023.

UK Voluntary Code of Conduct for ESG data and ratings providers

The FCA has announced the formation of a working group to develop a voluntary Code of Conduct for ESG data and ratings providers. The FCA has previously expressed its support for regulatory oversight of ESG data and ratings providers, and while HM Treasury considers this position, the FCA has in the meantime convened a group co-chaired by M&G, Moody’s, London Stock Exchange Group and Slaughter and May. The voluntary Code of Conduct will aim to foster an effective, trusted and transparent market. The group’s first meeting will be later this year.  

Proposed amendments to EU Corporate Sustainability Due Diligence Directive

Non-binding recommendations for amendments to the scope and requirements of the proposed EU Corporate Sustainability Due Diligence Directive (CSDDD) were submitted to the European Commission in October by the European Parliament's Committee on Economic and Monetary Affairs (ECON). The CSDDD would introduce requirements for company directors to ensure that they steward companies in a manner that is consistent with the EU's sustainability strategy, including a 1.5 °C global warming pathway. Of the 98 amendments put forward by ECON, the most significant include:

  • The financial sector, including the provision of loans, pensions, risk management, payment services, insurance and reinsurance, investment services and other financial services, to be reclassified as "high-impact"
  • All direct and indirect business relationships to be in-scope
  • Small and medium sized undertakings to be part of the value chain considered, having previously been excluded
  • Scope to expand from EU companies with more than 500 employees, worldwide net turnover over EUR150m or in a high-impact sector with more than 250 employees and worldwide net turnover over EUR 40m to include EU companies with more than 250 employees and worldwide net turnover over EUR 50m or in a high impact sector with more than 50 employees and worldwide net turnover over EUR 10m
  • Executive directors to set sustainable investment targets of a minimum of 50% when establishing performance measurement criteria for determining variable remuneration

The European Council confirmed its position on the CSDDD on 1 December and has taken a narrower view on which firms should be captured, including only:

  • EU companies with more than 1,000 employees and EUR 300m net worldwide turnover
  • Non-EU companies with EUR 300m net worldwide turnover generated in the EU

The positions will now be considered by the European Commission. Based on the standard  timetable for the EU legislative process, CSDDD is unlikely to come into effect until 2025 at the earliest.

EU Parliament adopts legislation for company board gender targets

The EU Parliament has adopted a Gender Balance Directive that will require the boards of large EU listed companies to meet minimum female representation targets — at least 40% of non-executive directors or 33% across all board members. The Directive will come into effect from 30 June 2026 and will be enforced at a national level. It will apply to companies that are incorporated in the EU and are listed on an EU-regulated market. SMEs will be exempt and are defined as companies that have less than 250 employees and an annual turnover of less than EUR 50 million, or whose balance sheet total is less than EUR 43 million. In-scope companies will also have to provide information to regulators and on their website regarding the gender representation on their boards.



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