February 2023 Newsletter

Please find below a selection of relevant ESG stories and updates from February.

ISSB Update: standards effective from January 2024

The International Sustainability Standards Board (ISSB) has announced that the initial IFRS Sustainability Disclosure Standards, S1 and S2 will be finalised this year and become effective from January 2024. The first reports aligned with the standards are expected in 2025. The new standards incorporate S1 general requirements and S2 climate requirements; based on existing frameworks including TCFD and SASB, the ISSB seeks to provide a standardised framework for sustainability-related disclosure. Despite efforts at aligning frameworks, approaches to materiality are not always consistent. The ISSB has altered its definition of materiality: “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence investor decisions”. Updates to S1 requirements include its description of sustainability, while S2 updates include scenario analysis and financed emissions as additions. Read our article on the topic here. LINK

SEC Division of Examinations Announces 2023 Priorities

The Securities and Exchange Commission’s Division of Examinations sets its priorities each year to protect investors by highlighting areas which may present risks to investors and to market integrity. Among the priorities is a new Marketing Rule; the division will oversee whether registered investment advisers (RIAs) have adopted and implemented written policies and procedures that are reasonably designed to prevent violations on their part. The Advisor’s Act will be reviewed, and ESG-related advisors and funds remain a focus. The division will assess whether ESG products are being appropriately labelled and recommended under the correct circumstances. Other priorities are retail investors and working families, information security and operational resiliency, emerging technologies, and crypto assets. LINK

FCA to assess Asset Managers’ ESG and Sustainability claims

The Financial Conduct Authority (FCA) will test ESG claims made by asset managers in marketing communications. The Asset Management Supervision Strategy will monitor around 1,000 UK firms highlighting five main risks. The first is product governance, whereby the FCA will introduce a New Consumer Duty for financial services firms. The second risk involves ESG and sustainable investing; the priority in this area is routing out “misleading and inaccurate” claims. Product liquidity mismatch is a further risk in open-ended funds since the terms of redemption from these funds are not always clear. The final two risk areas are concerned with financial resilience – ensuring firms have “sufficient capital and liquidity to operate” – and investment in operations and resilience, whereby firms should review their “operational health” and be ready to report on it. See here for our article on the subject. LINK

Amended SFDR RTS taking into account gas and nuclear exposure

Earlier this month, the Sustainable Finance Disclosure Regulation (SFDR) released its updated Regulatory Technical Standards (RTS). This has now come into effect and takes into account gas and nuclear exposure. The additional disclosures for gas and nuclear-related activities include a yes/no question in the financial product templates of the SFDR Delegated Regulation to identify whether the financial product intends to invest in such activities; if “yes”, a graphical representation of the proportion of investments in such activities is required. Moreover, the existing disclosures in the SFDR Delegated Regulation are viewed as sufficient for fossil gas or nuclear investments by financial products that are not covered by the EU Taxonomy. See here for our summary. LINK

ESG: FCA opens discussion on governance, incentives and competence

In a new discussion paper (DP) titled “Finance for positive sustainable change: governance, incentives and competence in regulated firms”, the FCA reflects on proportionality and whether differently sized firms require different treatment. Among its key takeaways are the importance of good governance and business culture for financial service firms making the transition to net zero. The areas in which industry feedback is sought include whether additional regulatory measures should be introduced to encourage effective stewardship, how to maximise the efficacy of effective stewardship efforts and metrics and weights for linking remuneration to sustainability goals. The DP is split into two parts addressing firstly governance and incentive arrangements, and training and competence. The second part contains ten articles commissioned from various industry experts. LINK

As always, please let us know if you’d like any further information on any of these topics.