December 2023 — Issue 10

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.

2023 has been another busy year for ESG regulation — financial services firms have seen major publications and announcements from regulators and standard setters across the full range of ESG topics: from reporting and disclosures to climate-related financial risk, ESG data and ratings, investment labels and carbon markets.

The last two months have been no exception. Since the last edition of ESG Regulatory Essentials, the FCA has published its long-awaited policy statement on Sustainability Disclosure Requirements (SDR), along with a consultation on the anti-greenwashing rule. The UK Transition Plan Taskforce (TPT) has published sector-specific guidance for firms to support its overarching framework. The European Supervisory Authorities (ESAs) have proposed amendments to the Sustainable Finance Disclosure Regulation (SFDR) level two requirements and the European Central Bank (ECB) has published a review of the net zero commitments made by major international banks.

COP28 marked the completion of the work of the TCFD — the taskforce has now been officially disbanded and the IFRS Foundation will take over the monitoring of progress on companies' climate-related disclosures. For more insights from COP28, visit KPMG's resource centre here.

The Basel Committee on Banking Supervision (BCBS) has reported on banks' progress in complying with its Principles for the Effective Management and Supervision of Climate-Related Financial Risks and is consulting on how to include these risks in Pillar 3 disclosure templates. The EBA has published its final template for the 'Fit-for-55' one-off climate scenario analysis. For insurers, the IAIS is consulting on climate risk supervisory guidance and EIOPA on the prudential treatment of sustainability risks. 

UK fund managers will be interested in the FCA's supervisory review of its ESG guiding principles, and wider wealth and asset managers should note that, in 2024, ESMA will assess how EU firms have integrated MiFID II sustainability requirements into their suitability assessments and product governance processes and procedures. EU fund managers can also expect ESMA’s final fund name guidelines in Q2 2024.

IOSCO has launched a consultation on the integrity of voluntary carbon markets and a final report on supervisory practices to address greenwashing. HMT and the FCA have finalised a voluntary Code of Conduct for ESG Ratings and Data Providers. And the European Council and Parliament have reached provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD).

As always, there is a considerable amount for firms to digest and one notable omission: consultation on the UK Green Taxonomy was expected before Christmas but appears to have been postponed. 

For more information on these and other updates, read on. All that remains is to wish our readers all the best for the festive season and for 2024 — we'll be back in the new year! 

More detail

Reporting and disclosures

SDR policy statement and anti-greenwashing consultation 

The FCA has published its long-awaited policy statement on Sustainability Disclosure Requirements (SDR) and investment labels, alongside a consultation paper on guidance on its anti-greenwashing rule. For more information about both these publications, see our articles above. 

UK Green Taxonomy — consultation delayed

A consultation on the UK's proposed Green Taxonomy was expected in “Autumn 2023” as announced in the revised Green Finance Strategy in March. There has been no formal communication yet, but we understand that this is now expected on Q1 2024.

TPT consultation on sector-specific guidance 

The UK Transition Plan Taskforce (TPT) has published sector-specific guidance for consultation, covering banks, asset owners and asset managers. The guidance is aligned with the TPT's overarching disclosure framework and seeks to assist firms in interpreting the framework and applying it to sector-specific issues. 

The guidance considers foundations, implementation strategy, engagement strategy and metrics and targets. It looks at how firms can address impacts and dependencies on stakeholders, society, the economy, and the natural environment. Governance is not covered as it does not require a sector-specific approach. 

Firms have until 29 December 2023 to respond to the three consultations. Application of the TPT framework is currently voluntary, however, the FCA is “committed to consulting next year on new regulatory expectations in this area that draw on the TPT's outputs”.

EFRAG launches ESRS Q&A platform

The European Financial Reporting Advisory Group (EFRAG) has launched a Q&A platform to support implementation of the European Sustainability Reporting Standards (ESRS). 

The ESRS currently comprise 12 sustainability standards against which companies will have to report. The reporting requirements are set out in the Corporate Sustainability Reporting Directive (CSRD). 

EFRAG has launched the Q&A platform to allow stakeholders to submit technical questions that are currently unresolved. It will not answer questions relating to individual circumstances, so when asking questions stakeholders must explain why the issue is relevant to a wider group of companies.

ESAs propose amendments to SFDR RTS

The ESAs, the EBA, EIOPA and ESMA, have published (PDF 2 MB) a joint report on draft proposed amendments to the Sustainable Finance Disclosure Regulation (SFDR) level two text. This fulfils a  request from the Commission in April 2022 and follows a consultation by the ESAs in April 2023 (see a summary here). In the final report, the ESAs propose amendments to calculation methodologies and disclosures, as well as minor technical tweaks to align and standardise language. Proposed amendments include:

  • Extending the list of social indicators for principal adverse impacts (PAI) — several new PAI indicators proposed. 
  • Changes to environmental PAI indicators, including changes to how GHG emissions are calculated. 
  • Changes to the PAI framework, including a new disclosure requirement to make clear where data on PAI indicators have been received from investee companies or whether they are based on estimates. 
  • Inclusion of GHG emissions reduction targets in pre-contractual documents, websites and periodic reports (the draft RTS do not create any additional burden for products without GHG emissions reduction targets).
  • Minor changes only to Do No Significant Harm (DNSH) disclosures — to clarify existing policy and guidance.
  • Simplifications to disclosure templates based on consumer testing.

The ESAs' report has been submitted to the European Commission, which will study the draft RTS and decide whether to endorse them within three months. The application date is not yet known.

ESAs' analysis of voluntary SFDR PAI disclosures 

The ESAs have published their second annual review of voluntary disclosures of PAIs under the SFDR. Overall, the review shows an improvement compared to the prior year, although the quality and compliance of disclosures is still variable. The review covered entity-level PAI reports, as last year, and for the first time also product-level reports (which have only been required since December 2022). Areas for improvement include:

  • When explaining why a firm has not considered PAIs, explanations are still not fully complete and satisfactory.
  • Where PAIs are considered, the disclosures on the degree of alignment with the Paris Agreement are still vaguely formulated.
  • Disclosure of due diligence policies remains extremely limited and is usually limited to disclosure of a firm's participation in sustainability-related organisations and initiatives.

Next year's iteration of this report is likely to include an additional assessment of product-level voluntary disclosures and additional questions regarding processes and methods in comparing disclosures from previous years.

ESMA's explanations on aspects of the EU sustainable finance framework

In November, ESMA published three documents to help stakeholders navigate aspects of the sustainable finance framework. Importantly, ESMA noted that the documents do not provide official guidance and have no legal effect. They cover the following topics:

  • Concepts (PDF 0.32 MB) of sustainable investments and environmentally sustainable activities: explaining how the concept of sustainability is covered in the SFDR and the Taxonomy Regulation. 
  • Concepts (PDF 0.17 MB) of estimates: explaining how the SFDR, Taxonomy Regulation and Benchmarks Regulation deal with the use of 'estimates' and 'equivalent information', and the conditions where these are allowed to be used as sources of data to prepare mandatory ESG metrics. 
  • The Do No Significant Harm (PDF 0.35 MB) (DNSH) principle (definitions and criteria): explaining how the DNSH principle is applied under the SFDR, Taxonomy Regulation, and Benchmarks Regulation.  

BCBS consultation on Pillar 3 disclosure of climate-related risks 

See the update in 'Climate and environment-related financial risks'. 

Climate and environment-related financial risks

IAIS consultation on climate risk supervisory guidance 

IAIS has published its second round of consultations on climate risk supervisory guidance. There are two papers: one on scenario analysis and one on market conduct. The first aims to support supervisors and firms in their design and use of climate-related scenario analysis, while the second focuses on guidance for supervisors to help identify the potential unfair treatment of customers in relation to natural catastrophe (NatCat) and sustainability-focused products. 

The climate scenario analysis paper covers the following areas: the objectives and design of scenario analysis, macroprudential considerations for supervisors, and insurers' risk management and governance. These topics should be considered in light of existing Insurance Core Principles (ICP) 16 (Enterprise Risk Management for Solvency Purposes) and 24 (Macroprudential Supervision).

The paper on market conduct issues focuses mainly on greenwashing risk and the treatment of NatCat customers. Both should be considered in the context of ICP 19 (Conduct of Business) and ICP 21 (Countering Fraud in Insurance) where the specific facts of a greenwashing case may indicate behaviour that goes beyond misconduct to fraud. 

Stakeholders have until 23 February 2024 to respond to the consultations. 

EIOPA consults on the prudential treatment of sustainability risks 

EIOPA is consulting (PDF 2.81MB) until 22 March 2024 on the prudential treatment of sustainability risks. This follows the 2022 discussion paper in which it explored the possibility of recognising sustainability risks under existing elements of the Solvency II balance sheet (for more on the discussion paper, see our article here).

The consultation considers sustainability risks in the following areas:

  • Assets (market risk, equity and spread risk, and property risk) and transition risk exposures;
  • Non-life underwriting and climate change adaptation; and
  • Social risks and impacts.

Pillar 3 disclosure of climate-related risks 

The Basel Committee on Banking Supervision (BCBS) is consulting on the inclusion of climate-related financial risks in Pillar 3 disclosures. The proposals cover qualitative and quantitative disclosures, with draft templates provided for: 

  • Qualitative disclosures: governance, strategy, risk management and concentration risk. 
  • Quantitative disclosures: exposure by sector, financed emissions, exposures subject to physical risk by geographical area.
  • Bank-specific quantitative metrics: credit quality and maturity ladder. 
  • Forecasts: these would not be compulsory.
  • Quantitative metrics subject to jurisdictional discretion: real estate exposures in the mortgage portfolio by energy efficiency level, emission intensity per physical output, calculation and disclosure of financed emissions. 

Banks and other stakeholders have until 29 February 2024 to respond to the consultation, with the BCBS proposing an implementation date of 1 January 2026. 

BCBS newsletter on banks' progress in managing climate risks 

The BCBS has published a newsletter outlining banks' progress in complying with its Principles for the Effective Management and Supervision of Climate-Related Financial Risks. For more detail, see the article above. 

EBA publishes final templates for collecting 'Fit-for-55' climate-related data from EU banks 

The EBA has published the final templates to gather data for its 'Fit-for-55' one-off climate risk scenario analysis — an exercise that was requested by the European Commission from all three ESAs. It has also confirmed (PDF 156 KB) which banks will be included in the exercise. The templates seek data on the following risks: 

  • Credit risk (individual and aggregated exposures).
  • Interest and fees and commission income.
  • Market risk (individual and aggregated exposures).
  • Real estate risks (transition and physical).

The EBA began collecting data on 1 December 2023 and will continue to do so until 12 March 2024. The results of the scenario analysis exercise should be available no later than Q1 2025.

Wealth and asset management

In addition to the updates above regarding the SFDR and the TPT, the following are of relevance to wealth and asset managers:

FCA supervisory review of ESG 'Guiding Principles'  

The FCA published the findings from its review of fund managers' compliance with its ESG 'Guiding Principles'. For more detail, see our article above.  

ESMA postpones the adoption of its proposed fund name guidelines

ESMA has provided an update on its proposals to introduce new guidelines for funds where they use ESG and sustainability terms in their names. It now expects to publish the final guidelines in Q2 2024 followed by a phasing-in of the requirements.

ESMA explains that it has delayed publication to fully consider the outcome of the review of the AIFMD and the UCITS Directive — the provisionally agreed text would give ESMA specific mandates to develop these guidelines.

In the meantime, the update summarises the expected content of the final guidelines. ESMA has dropped its consultation (PDF 943 KB) proposal that 50% of investments must be sustainable (as defined in SFDR) where funds use sustainability terms in their name. Instead, ESMA suggests that sustainability terms could be used where i) 80% of investments are used to meet sustainability characteristics or objectives, ii) Paris-aligned benchmark exclusions are applied, and iii) the fund “invests meaningfully” in sustainable investments as they are defined in SFDR.

ESMA is also making changes to better accommodate transition investment strategies. These include introducing a new category for transition-related terms, separating consideration of “E” terms from “S” and “G” terms, and clearer expectations for funds using “impact” or “transition” related terms.        

ESMA to launch Common Supervisory Action on MiFID II sustainability requirements 

In 2024, ESMA will launch a common supervisory action (CSA) with national regulators to assess how firms have integrated MiFID II sustainability requirements into their suitability assessments and product governance processes and procedures. The CSA will take place in 2024 and will be led by national regulators under the authority of ESMA. The CSA will assess how firms have implemented the 2022 amendments to MiFID II requirements relating to sustainability. This includes:

  • How firms collect information on their clients' “sustainability preferences”.
  • What arrangements firms have put in place to understand and correctly categorise investment products for the purpose of making suitability assessments.
  • How firms ensure the suitability of an investment with respect to sustainability (including the use of a “portfolio approach”).
  • How firms specify any sustainability-related objectives a product is compatible with as part of the target market assessment of the investment product.

On 3 October, ESMA's updated MiFID II guidelines on suitability (PDF 0.6 MB) and product governance (PDF 0.8 MB) came into force. This CSA will include assessments against these guidelines. Firms should therefore review their compliance with the underlying requirements and the guidelines ahead of the review.


Supervisory approaches to greenwashing

IOSCO has published its final report (PDF 1.2 MB) on 'Supervisory Practices to Address Greenwashing'. The report focuses particularly on initiatives affecting asset managers and the provision of ESG data and ratings services. It also identifies challenges which prevent the full implementation of the recommendations in IOSCO's 2021 report on greenwashing.

The report finds that most jurisdictions do not define greenwashing in relevant legislation, although a number of supervisors have provided greenwashing guidance which aligns to IOSCO's definition of greenwashing as 'the practice of misrepresenting sustainability-related practices or the sustainability-related features of investment products'. 

In some jurisdictions the definition of greenwashing is extended to recognise that it misleads consumers, and non-environmental sustainability issues are explicitly included. However, the scope of the definition of greenwashing is uneven — some jurisdictions restrict the term to issuers and asset managers, while others recognise it across the entire value chain.

The report also considers the emergence of more specialist malpractice terms, such as 'greenhushing' and 'green bleaching', which have not received significant attention globally.

ECB report on large international banks' net-zero commitments   

The ECB has published (PDF 0.7 MB) a report on the net-zero commitments made by Global Systemically Important Banks (G-SIBs). It finds that, although banks have significantly increased their ambition and now disclose more details on their net-zero targets, there is room for improvement. The ECB identifies differences in sectoral targets used despite many banks sharing the same goal, widespread use of caveats, limited disclosures on exposure to carbon-intensive sectors, and, in some cases, reliance on carbon offsets.

The ECB's key findings are that:

  • Almost all G-SIBs have communicated publicly on net-zero commitments.
  • Commitments are too broadly define — specific problematic practices include aspirational language or commitments to unclear goals such as 'carbon neutrality'.
  • The scope of portfolio alignment metrics could be further enhanced — while banks use portfolio alignment widely to illustrate their net-zero convergence, the ECB observed several areas for improvement relating to the choice of underlying scenarios and pathways.
  • Exposures to carbon-intensive sectors could be better framed — banks often report their exposure to certain high-emitting sectors but do not cover the rest of the balance sheet, making meaningful net-zero assessments difficult.
  • The design of targets and indicators varies significantly across banks — targets are not sufficiently comparable and the methodological description of targets is often very vague.

The ECB flags the clear reputational and operational/litigation risk to banks from greenwashing, with even the allegation of greenwashing having the potential for significant impacts. It also notes that greenwashing may be the result of poor risk management practices and signposts the interrelationship with governance risk. Banks will want to review the ECB's findings and consider improvements that they could make to their own net zero disclosures.

EIOPA draft opinion on sustainability claims and greenwashing

EIOPA is consulting on its draft opinion on sustainability claims and greenwashing. The opinion contains four principles for harmonised supervision of sustainability-related claims, with the aim of limiting the risk of greenwashing. The principles establish that sustainability-related claims should be accurate, up to date, substantiated and accessible to stakeholders. 


European Green Bonds update

On 30 November, the European Parliament and Council approved the publication of the EU Green Bond Standard in the Official Journal of the EU. The standard will enter into force on 20 December, however issuers will not be able to apply it until 21 December 2024.

Integrity of voluntary carbon markets 

IOSCO is consulting (PDF 1MB) on good practices to maintain the integrity and functioning of voluntary carbon markets (VCMs). The proposed good practices build on the themes developed in IOSCO's November 2022 discussion paper, integrating feedback received from stakeholders. The proposals are aligned to the recommendations IOSCO has made for other types of commodity and derivative markets. The consultation closes on 3 March 2024.

Voluntary code of conduct for ESG data and ratings providers

The industry-based group convened by HMT and the FCA  and led by ICMA and the IRSG has finalised its voluntary ESG Ratings and Data Products Providers Code of Conduct. (PDF 406 KB) The code is structured around principles which deliver good governance practices, high quality systems and controls, oversight and management of conflicts of interest, and enhanced transparency of methodologies. In response to feedback, the code now clarifies further how ESG data products may apply relevant principles. While formal regulatory frameworks for ESG ratings are already being developed in the UK and EU, the code is the most developed initiative to emerge for data products.

Other regulatory and standard-setter updates

Provisional agreement on the Corporate Sustainability Due Diligence Directive

The European Council and European Parliament have reached provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD will set due diligence obligations for large companies to ensure they mitigate the actual and potential impacts of their value chain on the environment and human rights. According to the European Parliament announcement, FS firms will be captured in the directive with a requirement to produce climate transition plans. At the time of going to publication, the provisionally agreed text of the CSDDD has yet to be released.

FCA letter to chairs of remuneration committees 

The FCA has written (PDF 0.15 MB) to Chairs of the Remuneration Committee to outline regulatory themes, including key sustainability themes that should be considered in a firm's remuneration approach: 

  • Firms must cultivate a culture in which staff are able to speak up about things that could affect consumer/market outcomes or create risks for the firm. Roles and responsibilities must be clearly defined to facilitate individual accountability. There must be clear, strong and evidenced links between behaviour and remuneration outcomes.
  • The letter flags the recent publication of CP23/20 on improving D&I in regulated firms. 
  • Firms should link their sustainability-related objectives (including net zero) with their strategy, governance arrangements and remuneration structures.

Remuneration committee chairs are expected to consider the letter, and the FCA has made it clear that it will welcome firms' responses on how they will adopt the letters' principles. 

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