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A new chapter: UK’s roadmap for ESG funds clarified

  • United Kingdom
  • Financial services and markets regulation - ESG
  • Financial services


ESG investment products in the UK following the end of the Brexit transitional period and the Chancellor’s statement on the new green plan for sustainable finance

Over the last few weeks we have had some clarity on the UK’s approach to ESG and green finance and some more granular detail from the FCA on its direction of travel on ESG funds.  In particular, Richard Monks’ keynote speech on the FCA’s approach to sustainable investment made in late October to SRI Services & Partners Good Money Week 2020, set out further detail of the FCA’s thinking and approach.

The statement made on 9 November 2020 by Rishi Sunak, Chancellor of the Exchequer, was a welcome clarification of the UK’s position on ESG more widely and provided further context.  We look at the Chancellor’s green plan in more detail below, but an immediate point to note for UK product providers is the Chancellor’s statement on HMG’s position on the adoption of a UK equivalent of the EU sustainable finance package. 

It has become increasingly clear over the last few weeks that the FCA and the Treasury believe they have discretion over whether to onshore the EU Taxonomy and Sustainable Finance Disclosure Regulation (“SFDR”)[1], as they come into effect after the end of the Brexit Transition Period.  For firms which have in-scope products in the UK and the EU27 this has given rise to considerable uncertainty.  It has not been clear what the position will be in the UK and this raised the spectre of having to deal with differing UK and EU27 regulatory approaches to what are often similar ranges offered in both jurisdictions.

Guidance from the FCA’s Director of Strategy, Richard Monks, on their approach to ESG initiatives and the prevention of greenwashing

On 21 October Richard Monks gave a keynote speech to SRI Services & Partners Good Money Week 2020 on the FCA’s approach to sustainable investment products.

Preventing greenwashing

Monks indicated that the FCA is keen to prevent market participants taking advantage of the growing demand for sustainable finance products by greenwashing, by which the FCA means the packaging of the product in a manner which makes it appear sustainable when it is not.

The quality of ESG data

The collection of ESG data at a corporate level is still in its infancy.  Non-financial disclosures are often incomplete and in many cases cannot be meaningfully compared across different jurisdictions, products and providers.  The outputs of the ratings providers are therefore less robust for ESG than other ratings.

However, the FCA believes that divergence between different rating agencies’ methodologies is no bad thing, with Monks citing the strikingly different rating of Tesla by Sustainalytics and MSCI as an example.  The Chancellor’s Statement is further step forward in making relevant data more widely available, at least in respect of listed and larger private companies.

Product names

The FCA is concerned that product names should correctly align with objectives and strategies, asset allocation and exposures.  They are particularly concerned about words open to  broad interpretation, such as “GREEN”, “ESG”, “IMPACT” and “CLIMATE”.


The FCA want to see the names of products coinciding with a clearly explained strategy on the disclosure requirements of the Taskforce on Climate-related Financial Disclosures (“TCFD”).  The types of holdings should be specified.  If there are good reasons for including investments which don’t immediately look right, e.g. oil and gas, these must be clearly explained, e.g. by a strategy of engagement with management rather than simple divestment.

Ongoing performance reporting

Monks’ concerns about the quality of ESG data apply equally to ongoing performance testing.  Again, financial reporting is well established and consistent, however measurement against non-financial factors remains inconsistent.  Some products don’t track performance in a way that is clearly understood by consumers.  In particular, products with an impact objective struggle to measure and demonstrate real world effect.

Actions the FCA is taking

Corporate reporting

As discussed below, the Chancellor has made an announcement on the application of the TCFD to listed companies.  Monks referred to this in his keynote speech, although he referred to it happening in the coming months.  It is unclear whether the Chancellor has accelerated this programme or Monks was exercising the usual civil servant caution when talking about the timing of forthcoming events.

The FCA is looking more widely at corporate reporting on sustainability and whether it can do more to promote best practice on non-financial disclosures on an international basis.  The FCA is promoting this through its role as co-chair of the IOSCO Sustainable Finance Network.

The FCA is also seeking to further regulate disclosures in respect of ESG focussed products and activities, with climate related products as its initial focus.  As so often, social and governance come after environment, perhaps because environmental aspects of products are easier to measure consistently than social and governance characteristics and because there is a greater political consensus around the need for action.

The FCA will consult in 2021 on TCFD aligned disclosures for asset managers, life assurance and contract-based pension providers, using the Climate Financial Risk Forum Guide 2020 Disclosures Chapter as the inspiration for proposals.

EU measures

The FCA welcomes HMG’s commitment to matching ambitions of EU plans for sustainable finance and is working with HMG on this.  Finding a way to onshore the provisions of SFDR and the Taxonomy Regulation are ‘immediate areas of focus’, with the adoption of a “Green Taxonomy” being announced in the Chancellor’s statement.  The FCA recognises the benefit of internationally-aligned standards and wants to strengthen the UK’s position as leader in sustainable finance. 

Research on disclosures

The FCA plans to conduct online consumer behaviour experiments before the end of 2020, e.g. in respect of consumer understanding of key ESG terms and testing the presentation and content, with results to be published in 2021.  Monks believes that this may test the limits of the effectiveness of current disclosure models (e.g. Key Investor Information Documents (“KIIDs”)), even referring to some disclosure requirements as being ‘old school’.

Tackling misleading claims

Over last 18 months, the FCA has seen a significant rise in ESG focussed funds.  Monks was at pains to stress that the overarching requirement for fund documentation to be written in a manner which is fair, clear and not misleading extends to non-financial objectives.

Making public FCA guiding principles on ESG product design and disclosure

In what will be a welcome consolidation of its approach to reviewing these funds, the FCA are planning to issue guiding principles on ESG product design and disclosures, under the following 5 headings:

  • Consistency in messaging and approach (the Ronseal test)
    • Any ESG focus should be reflected in the name of the product
    • Any ESG focus should be reflected consistently in objectives, investment strategy and holdings
    • Matches consumer expectations
  • An ESG focus should be clearly and fairly reflected in objectives
    • Targeting characteristics to be set out in clear and measurable way
    • Real world sustainability targets to be set out in clear and measurable way
  • Investment strategy should say how objectives will be met, setting out
    • Any constraints on types of investments
    • Screening criteria
    • Portfolio holdings
    • Stewardship approach and actions to be taken if firms miss ESG targets
  • Performance against sustainability objectives to be measured and reported on, on an ongoing basis
  • Assure quality of ESG data
    • Customers will need to understand the source and derivation of the data
    • Firms need to explain how the data is used
  • Firms need to explain how the data is used

UK responses to EU legislative initiatives

Monks observed that the FCA and HM Treasury need to come up with a UK response to various EU initiatives.  While much of the EU’s sustainable finance programme will not be onshored into UK law,[2] as the relevant legislation is not in force and applicable at the end of the Brexit Transitional Period, the UK needs to fill this gap in its regulatory framework in order to stay at the forefront of green finance and sustainable investing.

This poses a number of difficult questions.  The FCA will think hard before departing from EU standards and is mindful that EU standards are frequently international standards.  However, while the UK will align policy outcomes, the idiosyncrasies of the UK market will mean that the details of rules may not align.  The UK doesn’t consider this as meaningful divergence, but the EU may.   

Chancellor sets out new green plan

The Chancellor of the Exchequer’s statement set out a new plan for the UK in relation to green finance, supported by policy papers published online, UK joint regulator and government TCFD Taskforce: Interim Report and Roadmap.  Speaking a year ahead of the rescheduled UN Climate Change Conference (COP26) in Glasgow, Rishi Sunak announced policies designed to manage climate risks in the financial sector while also seeking to position the UK at the forefront of the move to a sustainable future.

The Chancellor’s announcements were flanked by press statements from Andrew Bailey, Governor of the Bank of England and Nikhil Rathi, Chief Executive of the Financial Conduct Authority.

Together the package of measures announced include:

  • Mandated TCFD (the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures) disclosures for all listed firms and financial institutions by 2025

    This builds upon the FCA Consultation Paper CP20/3 (Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations).  It was announced in conjunction with policy papers published by a joint regulator and Government TCFD taskforce including a roadmap (A Roadmap towards mandatory climate-related disclosures) which sees enhanced supervisory expectations and mandatory disclosures for seven categories of organisation: listed commercial companies; UK-registered large private companies; banks and building societies; insurance companies; asset managers; life insurers and FCA-regulated pension schemes; and occupational pension schemes, with obligations biting between 2021-2025.

    The application of the TCFD approach to disclosures to premium listed companies was expected but timing for firms will be very tight.  It will however mean that there is more data for investors to review when deciding on whether to invest in a company and this will be very welcome given the increasing desire for firms to invest in a sustainable way.
  • Banks and Insurers will have to include climate risks as part of their capital adequacy stress testing
  • The UK will launch its first ‘green gilts’ (including the first Sovereign Green Bond in 2021) to fund low carbon infrastructure projects
  • The UK intends to adopt a Green Taxonomy

    Though it was not stated explicitly, this is presumably the EU Taxonomy standard which provides a scientific basis under which it can be determined how sustainable a business’ activities are, how sustainable the broader company is, and in turn how sustainable an entire portfolio of companies is.  How the taxonomy will be used in the UK is not yet clear but a UK Green Technical Advisory Group will be established to review these metrics to ensure they are suitable for the UK market.

The Chancellor addressed parliament and then later gave a statement at the Green Horizon Summit hosted by the City of London, Green Finance Institute and the World Economic Forum.  Eversheds Sutherland is participating in the event which runs from 9 November – 11 November.

How Eversheds Sutherland can help

Our in depth understanding of the sector and experience with the practical implementation of ESG (including how screening processes work in practice) mean that we are very well placed to guide you through the implementation process and next steps in order to comply with the new legislation. We can also assist with gap analysis highlighting gaps between your current processes and the new rules. 

[1] Regulation (EU) 2019/2088.

[2] For directly effective EU law to be onshored into UK law under s. 3 EU (Withdrawal) Act 2018, that law must be in force and applicable to the UK on 31 December 2020.