07 Apr 2022

ESG in 2022: a year for heavy lifting

2021 provided a ‘roadmap’ for ESG regulation but 2022 will be a year in which a lot of heavy lifting is done in terms of consultation and implementation.

By Peter Flynn

Associate, Funds Regulation & Governance

5 minute read time

2021 was a critical year for environmental, social and governance (ESG) matters, especially with the COP26 climate change conference in Glasgow in November. However, whereas 2021 gave us a ‘roadmap’ for ESG regulation (literally, in the case of the UK Government’s Greening Finance Roadmap), 2022 will be a year in which a lot of the heavy lifting is done in terms of consultation and implementation.

 

Empowering investors

The key theme across UK and EU regulation, looking ahead, is empowerment: empowering investors to make informed decisions on sustainable products to avoid ‘greenwashing’. Key to this is providing verifiable, transparent, quantitative data that demonstrates exactly how fund managers are acting on the claims made in prospectuses, key investor information documents and marketing material.

 

Reporting and disclosing

There has already been an important milestone in 2022: the beginning of the first reporting period for mandatory Taskforce on Climate Related Financial Disclosures (TCFD) reporting for asset managers with over £50bn in AuM. Reports from mid-2023 will be required to align with TCFD reporting standards, which will go some way towards providing greater oversight. Smaller firms will be required to report the following year.

Aside from mandatory reporting, we will also see two additional reporting windows for the Financial Reporting Council’s Stewardship Code this year – in April and October – giving firms the opportunity to demonstrate how they deliver long-term, sustainable value for clients, the economy and society.

A lot of regulatory focus this year will be on the development of policy proposals first mooted in 2021 such as the Sustainability Disclosures Requirements (SDR) and the UK Green Taxonomy. SDR aims to support the consumer to make informed decisions on ESG products by providing an up-front ‘label’ on ESG products setting out what its characteristics are. The taxonomy will introduce a common language for sustainability investing, so that investors can be confident that terminology has a consistent meaning across products.

In the UK, ESG funds continue to gain attention and inflows – investors are attracted to the opportunities presented by sustainable and responsible investing. By enhancing the rules around ESG, regulators will help to enhance outcomes for consumers by making the market more objective and transparent, and will also support the government’s aim for the UK to continue to develop as a leading international jurisdiction in this area.

 

EU action

Other jurisdictions are also taking significant action. Particularly the EU, where the Sustainable Finance Disclosures Regulation (SFDR) sets prescriptive standards for firms to report against. ESMA has also issued new guidance relating to MiFID II which will require firms to take into account the sustainability preferences of their clients. And the EU has also published its own green roadmap, which focusses on preventing greenwashing, building national competent authorities’ competencies in sustainable finance, and monitoring, assessing and analysing ESG markets and risks.

 

Get the data right

A common denominator across jurisdictions is the increased focus on data: firms are increasingly being asked to provide granular metrics on carbon footprints, for example. This poses challenges in terms of time, cost, resources and quality of information, and a key aspect is the need for good quality, credible, independently verified data. 

And there are increasing risks associated with falling short on disclosures and data: there have been reports of fines and sanctions, and there is the prospect of class action in the event of suspected greenwashing. Getting data and disclosures right is therefore increasingly critical.

 

Don’t forget the ‘S’ and ‘G’

Arguably the regulatory treatment of ESG is still in its early stages, with the predominant focus on the ‘E’. As firms focus on carbon data or the prescriptive requirements of SFDR, for example, or the UK or EU green taxonomies, understandably minds will be concentrated around environmental metrics. However, we are already seeing increased focus on social and governance matters, for example in terms of diversity and inclusion. The geopolitical situation has rapidly accelerated focus on the ‘S’ and the ‘G’. 

What is clear is that across each aspect, the key to building trust and transparency lies with quantifiable, verified data, and transparent reporting, focussed on metrics and outcomes. The bar for asset managers - as set by investors, regulators and competitors - is set to keep on rising.

Keywords:

Latest insights

The past, present and future of sustainability linked loans

We examine some key considerations for borrowers and fund managers when using sustainability linked loans

03 Oct 2022

Alternative funds: 2022 so far

The year may have been an uncertain ride for fund managers, but the emergence of longer-term trends adds some much-needed context.

15 Sep 2022

QAHC regime

The UK has made itself a more attractive place for funds by implementing the Qualifying Asset Holding Companies regime, we explore why.

08 Sep 2022