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New Law May Have Quietly Improved ESG Data Outlook for UK Investors

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A little-noticed insertion into the biggest shakeup of UK financial law in generations is expected to bring greater clarity to the way ESG data will be reported and government’s role in green finance.

The Financial Services and Markets Act (2023) – known as the FSMB, its initials when the law was a bill awaiting royal ascent – is a wide-ranging piece of legislation designed to redraw UK financial services regulations away from those of the EU. It is intended to implement the findings of the Future Regulatory Framework Review, which was tabled after the UK voted to leave the EU in 2016.

The FSMB’s passage into law at the end of June made headlines for many reasons, including its recognition of crypto assets as a regulated financial activity and the rolling back of some of the Solvency II regulations that EU lawmakers has imposed on member states.

It also contained, however, a number of last-minute amendments that observers have said will strengthen the UK’s sustainable investment markets. The most far-reaching is a clause that gives the government’s Treasury the authority to make and update specific disclosure requirements regarding sustainability through a “sustainability disclosure requirement (SDR) policy statement” that the nation’s regulators must take into consideration when making rules or issuing guidance on ESG reporting.

“The new FSMB marks an important step in the development of the UK’s sustainable finance regime, providing further clarity for investors on what to expect and the roles of the Treasury and financial regulators,” Nadia Humphreys, head of climate finance and regulatory solutions at Bloomberg told ESG Insight.

Concrete Base

As the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) vacillate on how they will approach sustainability reporting, the FSMB has been welcomed as a concrete base for future regulation.

“It is clear that the foundations are being laid for a much more rigorous and detailed set of sustainability disclosures to be required in public market transactions in the UK,” wrote international law firm Haynes and Boone.

The sustainability amendments were added in by the Lords, the UK’s lower parliamentary house. They also require that the FCA and PRA have regard to the government’s 2050 net-zero pledge and specifically consider any impact on the nation’s forests when formulating regulations.

The FCA has signalled it will create regulations to cover companies’ sustainability data disclosures but has given no firm date on when that will happen. In January it concluded consultations on its own SDRs and two months later said it would look at the submissions before taking its next steps.

The proposal was based on the reporting recommendations of the Taskforce for Nature-related Financial Disclosures (TCFD), which was last week absorbed into the International Sustainability Standards Board (ISSB). The FCA said it welcomed the move, which is seen as an important step in bringing harmony to ESG disclosure standards around the world.

The hope now is that, with an SDR enshrined in UK law, there will be rapid advances in the creation of new regulations.

“The inclusion of a policy statement on sustainability disclosure requirements will help provide the basis for the future UK fund labelling regime and for the adoption of ISSB standards for mandatory non-financial reporting,” said Bloomberg’s Humphreys.

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