The UK has moved further along the dial of sustainability and reporting regulations with a slew of developments that suggest new rules are imminent.
Announcements covering data assurance and biodiversity disclosure standards were announced a week after the Chancellor of the Exchequer signalled in his annual budget speech that ratings companies will come under the purview of regulators.
The Financial Reporting Council (FRC), an independent body tasked with setting standards for corporate governance, reporting and auditing, last week launched a market study into the sustainability assurance market. The body established the study to ensure that providers are ready to meet demand for data assurance obligations in new regulations.
The UK’s sustainability disclosure recommendations published by the Financial Conduct Authority (FCA) in November envisage firms will be required to have their ESG data validated by independent assurance firms. This has been proposed to prevent greenwashing.
Sector Resilience
In its first-ever market study, the FRC will examine the state of the assurance industry, looking at the choice of services available, the ability of the sector to meet anticipated demand, the impacts assurance rules will have on audit markets and the likely impact of international regulations.
“It is vital that the market for sustainability assurance services is functioning properly – providing high quality, independent assurance without creating excessive costs and burdens on companies and their reporting,” said Mark Babington, executive director of regulatory standards at the FRC.
“By promoting transparency and high standards in this area, we can support the endeavours of UK companies to supply high quality information to financial markets that enables opportunities for growth and investment across the UK economy.”
Growing Market
FRC data indicates that the data assurance market is growing rapidly. In 2022, 84 of the 100 largest companies in the UK sought external assurance over at least some of their data, up from 68 in 2020.
Data assurance has become a feature of regulatory proposals, including the US Security and Exchange Commission’s recently announced climate disclosure rule and the EU Corporate Sustainability Reporting Disclosure, which came into effect this year. Malaysia has also included the measure in its own recommended ESG regulations.
Regulators have incorporated assurance requirements into their codes to help address concerns that poor-quality data is not only preventing investors from directing capital to climate-change mitigating companies and assets but is also enabling greenwashing. A study by not-for-profit sustainability services provider Ceres earlier this year found that investors and financial institutions believed that assurance services could solve many challenges they face in using ESG data.
Nature Definition
The FRC’s announcement came on the heels of the launch of a consultation into the first version of the British Standards Institution’s (BSI) nature investment standards. The call for input will seek to create principles covering and definitions of what is meant by nature for investors.
The consultation is intended to build on a programme to boost market confidence and investment into nature-focused assets and projects. The Nature Investment Standards Programme was established last year by the BSI and the government’s Department for Environment, Food & Rural Affairs.
The initial set of proposals, provisionally named BSI Flex 701 Nature Markets – Specification v1.0, will set the basic requirements for a nature scheme.
“The specification is designed to bring clarity and consistency to the market by establishing a standardised approach for investments that can boost confidence in the integrity of nature markets,” said BSI director general for standards Scott Steedman.
Ratings Regulations
In his budget speech earlier this month, Chancellor Jeremy Hunt confirmed that the FCA would soon oversee ESG ratings providers in the UK. The decision had been expected after the regulator drafted a Code of Conduct for service providers last year. Reports followed swiftly after that Prime Minister Rishi Sunak wanted a statutory measure with more teeth.
Sunak was said to want a binding law introduced around the same time that the EU issues its own ratings regulation, a move that’s likely this year after European leaders backed a regulatory proposal in February.
The UK code came into operation in January and Hunt said in his speech to Members of Parliament that consultations on tougher rules would be launched later in the year.
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