ESG Policy and Regulation Round up: June 2022

Providing a comprehensive ESG* Policy and Regulation update to help those in sustainable finance get ahead of the latest directives shaping the market.

Table of Contents

Recent policy developments and implications for those in sustainable finance – mainly focused on updates from within the UK and EU

  • Glasgow Financial Alliance for Net Zero (GFANZ) publications on transition planning


Other announcements and publications

  • SEC Proposal on Enhanced Disclosures by Certain Advisers on ESG Investment Practices
  • Basel Committee principles for the effective management and supervision of climate-related financial risks
  • FCA discussion paper and feedback statement on ESG in capital markets
  • EU Parliament committees’ preliminary votes to reject inclusion of nuclear and gas into the EU Taxonomy
  • EU Law on Nature Restoration


What to look out for?

  • UK Green Taxonomy public consultation
  • FCA proposal for consultation on Sustainability Disclosure Requirements (SDR)
  • EU Corporate Sustainability Reporting Directive (CSRD) final legislation 
  • Pension schemes disclosures on how their investments support the Paris Agreement climate goals


Recent sustainable finance developments and implications for investors, lenders, issuers and borrowers

GFANZ publications on transition planning

On June 15, GFANZ, a private sector-led initiative to reach net-zero emissions, proposed the Net-zero Transition Plan framework that is open for public comment until the end of July. The goal of the proposal is to help the financial sector prepare net-zero transition plans and support ‘real-world’ decarbonisation.  In addition, GFANZ has published interconnected tools and resources relevant to financial institutions, real-economy companies, the public sector, and civil society with guidance to support a global effort towards net-zero.

The resources include:

  • Guidance on Use of Sectoral Pathways for Financial Institutions [3]: Can support financial institutions’ use of sectoral pathways, in line with institutional and/or client goals, for the: creation of net-zero transition plans, alignment of their portfolios, and engagement with real-economy firms.
  • Concept note on Portfolio Alignment Measurement [4]: Sets out the goals of the Portfolio Alignment Measurement workstream, outlines the work plan for the current year, and identifies remaining barriers to adoption of portfolio alignment metrics.
  • Introductory note on Expectations for Real-economy Transition Plans [5] (work-stream co-chaired by NatWest): Seeks to help companies understand how to navigate the existing transition plan guidance landscape and bring together real economy transition plan frameworks.
  • Report on the Managed Phase-out of High-emitting Assets [6]: Proposes “Managed Phaseout” as a net zero-aligned approach for the operation and financing and eventual retirement of high-emitting assets.


Key considerations for sustainable finance market participants

Whilst many of the recommendations are in line with already established best practices, GFANZ’s recommendations can help instil the consistency of approaches to be potentially embedded in national legislative and regulatory frameworks to drive the next-zero transition (e.g. as covered in our May newsletter [7], the UK Government has recently launched the Transition Plan Taskforce (TPT) to develop a “gold standard” for climate transition plans in the UK). 

While the focus of the plan requires financial institutions to detail the actions they will take, metrics to report on progress and evidence that their decisions are aligned with limiting global warming to 1.5oC, there are obvious implications for non-financial corporates as well.


Investors / Lenders

Requirements to prepare transition plans under the recommended guidelines, paired with the standards for transition planning for the real-economy, could help re-shape and re-direct capital flows from finance providers in alignment with the respective net-zero pathways – where the latter would be expected to be tailored to national/jurisdictional considerations and government policies. 

For asset managers of all sizes, the guidance should be helpful in setting up a transition plan, as well as in doing more of this work in-house. Their end-clients (asset owners) may expect this type of plan as part of periodic reporting.

The robustness of climate financing frameworks would be measured in relation to, and in the context of,  the issuer’s/borrower’s transition plans. For example, the assessment of key performance indicators (KPIs) in sustainability-linked finance transactions will likely be viewed through the lens of the issuer’s/borrower’s transition planning to ensure consistency – i.e. that the fulfilment of the particular KPIs would contribute to the realisation of the broader plans. Similar rigour would be applied to the use of proceeds instruments – where investors would seek to understand how the financing of certain projects/assets/capital expenditures will fit into the issuer’s/borrower’s wider transition strategy. 


Issuers / Borrowers

Clearly documenting a transition plan would promote accountability and would help signal the expectation on how funding may be provided towards climate solutions, such as renewable energy; how companies that are already aligned with a 1.5oC future will be supported, as well as those that aren’t, including those from high-emitting sectors; and provide transparency on the managed phase out of high-emitting assets.

Issuers are likely to face more scrutiny from their investors, many of whom will be GFANZ signatories. Companies of all sizes across all sectors and industries that do not have credible transition plans may face higher cost of capital as well as potential constraints accessing financial products and services (e.g restricted insurance); whereas companies with credible transition plans may be able to differentiate themselves and access products and services at lower cost and under more business tailored terms.

While the recommendations and guidance are voluntary and focused on financial institutions, corporations should focus on the expected disclosures and metrics that financial institutions themselves will disclose. A key aspect of the transition plans is that financial institutions will rely on benchmarks of companies and overall portfolio performance against sectoral pathways. Therefore, corporates should understand how their sector is measured in terms of transition to net zero and while pathways are not predictions, corporate issuers can align their carbon reduction disclosures and targets to these pathways to help communicate to financial institutions how they are aligned to those goals.

Transparency on the scope, ambition and assumptions of net zero plans and receiving validation from parties like the Science-Based Target Initiative (SBTi) are all actions that can be taken to highlight to financial institutions alignment with net zero ambitions. To support hard-to-abate sectors such as oil and gas, steel and aviation, GFANZ will be publishing sector-specific briefs ahead of COP27. In short, the GFANZ frameworks may dictate to corporates the requirements around their real-economy transition plans whilst corporates should still review the eventual guidance against other disclosure regimes to ensure they are meeting key stakeholder expectations.

Other Announcements/ Publications

SEC Proposal on Enhanced Disclosures by Certain Advisers on ESG Investment Practices

In addition to the recent changes proposed by the US Securities and Exchange Commission (SEC) to the Investment Company Act “Names Rule”, as covered by our previous newsletter [8], on May 25 the SEC also proposed amendments to rules and reporting forms aiming to standardise and promote consistent, comparable and reliable information on ESG related disclosures [9]. The changes seek to categorise certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. The proposal would differentiate between three different ESG investment strategies: “ESG Integration”, “ESG-Focused”, and “ESG Impact”. The below table provides a quick summary of the investment product categorisation under the rules or proposals in the EU and UK, compared to those by the SEC. Notably there is no precise way to map them.

Source: NatWest

Increased transparency around ESG considerations in investment products is surely a welcome step though it may well lead to more investment managers “chasing” for certain labels and new funds that don’t have an ESG impact or focus becoming less marketable, albeit probably not as severely as in the European market. 


Basel Committee principles for the effective management and supervision of climate-related financial risks

The Basel Committee on Banking Supervision issued principles [11] to improve banks' risk management and supervisors' practices around climate-related financial risks. It contains 18 principles (12 addressed to banks and 6 to supervisors) and aims to provide a common standard for internationally-active banks by providing recommendations on corporate governance, internal controls, risk assessment, management and reporting. Banks are expected to implement measures such as having a process to assess the impact of potential climate-related risks, ensuring effective oversight, integrating risks into their internal control frameworks, and conducting climate scenario analysis. The recommendations are largely in line with those published by the UK and EU central banks and banking supervisory authorities, as well as NGFS (global Network for Greening the Financial System).


UK FCA Primary Markets Bulletin on ESG integration in UK capital markets

In its consultation paper CP21/18 [12] on climate-related disclosure rules for listed issuers, the FCA included a discussion chapter on some ESG issues in capital markets, such as i) issues related to green, social and sustainable debt instruments; and ii) ESG data and rating providers.

On June 29 the FCA published [13] key findings from the consultation. The FCA encourages issuers of ESG-labelled Use of Proceeds debt instruments to consider voluntarily applying or adopting relevant industry standards, such as the Principles and Guidelines that the International Capital Market Association (ICMA) has developed for green, social, and sustainability bonds. It also reminds issuers, their advisors and other relevant market participants, of their existing obligation to ensure any advertisement is not inaccurate or misleading and is consistent with the information contained in the prospectus. Finally, the FCA encourages issuers and their advisors to consider verifiers’ and assurance providers’ expertise and professional standards, and to engage with second party opinion (SPO) providers and verifiers who adhere to appropriate standards of professional conduct, such as ICMA’s Guidelines for External Reviewers.

With regard to ESG data and rating providers, the FCA ”sees a clear rationale for regulatory oversight of certain ESG data and rating providers” and “supports the bringing of ESG data and rating providers within the FCA’s regulatory perimeter”.


EU Parliament committees’ preliminary votes to reject inclusion of nuclear and gas into the EU Taxonomy

In February 2022, the European Commission proposed criteria and disclosure rules for the inclusion of gas and nuclear-related activities into the EU Green Taxonomy because they are often viewed as transition energy sources that will be required to facilitate the shift from even more carbon-intensive fossil-based power to greener alternatives [14]. However, on June 14, Members of the European Parliament voted to object to the inclusion. The main reason for this was an argument that the inclusion does not respect the criteria for environmentally sustainable economic activities as set out in Article 3 of the EU Taxonomy.  The resolution is scheduled for a vote during the parliament’s plenary session of 4-7 July 2022. Parliament and Council have until 11 July 2022 to decide whether to veto the Commission’s proposal. If an absolute majority objects to the Commission’s proposal, the Commission will have to withdraw or amend it [15]. Notably, it is still not clear which direction of travel will be taken by the UK in relation to its own green taxonomy. Recently, leading investor groups called for natural gas to be excluded [16]; with regard to nuclear, some market participants have suggested that UK is more amenable to nuclear in its taxonomy although the final decision is yet to be revealed. This is a very relevant debate as it goes to the heart of both the purpose of the taxonomy and the degree of taxonomy alignment of certain sectors, such as power generation.


EU Law on Nature Restoration

The European Commission proposed a new legislation “Nature Restoration Law” [17] with the aim to repair 80% of European habitats that are in a poor condition. All EU member states would be legally bound to targets for nature restoration in different ecosystems. The proposal is seen as a key step in protecting against the worst impact of biodiversity loss thereby ensuring the security of food supply in the EU and across the world.  The rules include an expectation to reduce the use of chemical pesticides by 50% as well as prohibiting the use of all pesticides in urban green areas, such as public parks, schools, and sports grounds.

Next 3 months – what to look out for?

July 2022: The UK Government is due to launch a consultation on the UK Green Taxonomy

After several delays, there is an indication that the draft technical screening criteria will be published for public feedback “imminently”. The UK Taxonomy of environmentally sustainable activities may include natural gas-related activities, as proponents of this development say gas is needed as a transition fuel to replace coal in power generation. However, many sustainable finance experts say it undermines the push towards renewable energy and may conflict with the UK’s ambitious decarbonisation targets.


July 2022: UK FCA to publish consultation paper on SDR and sustainable investment labels

Alongside the introduction of SDR for investment managers, the FCA is working to introduce a sustainable classification and labelling system for investment products. This will help consumers navigate investment products based on their sustainability characteristics and find those meeting their sustainability preferences.


July 2022: EU CSRD final legislation 

The European Council and Parliament have reached an agreement [18] on the requirements of the Corporate Sustainability Reporting Directive (CSRD) which will replace the 2014 EU Non-Financial Reporting Directive (NFRD). It introduces more detailed sustainability reporting rules and requires companies to have these disclosures independently audited.

The new directive will also expand the requirements on companies to provide sustainability disclosures. The rules will apply to all large companies (with over 250 employees and a EUR 40 million turnover) and all companies listed on regulated markets, listed SMEs (beginning in 2026) and non-European companies (EUR 150 million net turnover in Europe and at least 1 subsidiary or branch in the EU).

The new rules will apply:

  • 1 January 2024 for companies already subject to the EU NFRD (large public-interest entities with more than 500 employees)
  • 1 January 2025 for companies that fall into the new scope that have not been subject to the NFRD
  • 1 January 2026 for listed SMEs and some smaller banks and insurance companies


The agreement is still subject to a formal approval by the Council and the European Parliament. The directive will enter into force 20 days after its publication in the Official Journal of the EU.

As covered in our previous newsletter [19], EFRAG is currently working on detailed European sustainability reporting standards that will underpin the CSRD framework.


1 October 2022: UK Pension schemes disclosures on how their investments support the Paris Agreement climate goals

UK Pension schemes will be required [20] to measure and publish how their investments support the Paris Agreement climate goal of limiting global warming to 1.5oC above pre-industrial levels. Pension savers will be able to see the impact of their investments and better understand how climate risks are being considered and mitigated via climate risk reports published by their pension scheme. Together with existing climate regulations, the new measures will mean from October 2022 more than 80% of UK pension scheme members will be invested in pension schemes subject to these new rules.

For those looking to discuss any of the above further, please reach out to our authors:

Tonia Plakhotniuk, Vice President, Climate & ESG Capital Markets

Daniel Bressler, Vice President, Climate & ESG Capital Markets, Corporates

Tyler Mayzes, Analyst, Climate & ESG Capital Markets, Corporates


*For any unfamiliar terms used within this article please refer to our Insights glossary.


1.  The Glasgow Financial Alliance for Net Zero (GFANZ) was launched in April 2021 by UN Special Envoy for Climate Action and Finance Mark Carney and the COP26 Presidency, in partnership with the UN-backed Race to Zero campaign launched by UN High-Level Climate Champions Nigel Topping and Gonzalo Muñoz, to unite net-zero financial sector-specific alliances from across the globe into one industry-wide strategic alliance. The members of the alliance currently include more than 450 member firms from across the global financial sector, representing more than $130 trillion in assets under management and advice. Source: gfanzero.com

2.     GFANZ: Recommendations and Guidance on Net-zero Transition Plans for the Financial Sector June 2022 (PDF)

3.     GFANZ: Guidance on Use of Sectoral Pathways for Financial Institutions June 2022 (PDF)

4.     GFANZ: 2022 Concept Note on Portfolio Alignment Measurement June 2022 (PDF)

5.     GFANZ: Introductory Note on Expectations for Real economy Transition Plans June 2022 (PDF)

6.     GFANZ: Managed Phaseout of High emitting Assets June 2022 (PDF)

7, 8, 19.  ESG policy and regulation round up May 2022

9.     sec.gov : Press-release 2022-92

10.   FCA: Discussion paper 21-4 (PDF)

11.   bis.org - d532

12.   FCA: Consulatation paper cp21-18 (PDF)

13.   FCA: Primary market bulletin 41

14.   EU Taxonomy: Complementary Climate Delegated Act

15.   European Parliament: Taxonomy: MEPs object to Commission’s plan to include gas and nuclear activities

16.   IIGCC Leading investor groups call for natural gas to be excluded from the UK’s ‘green taxonomy’

17.    Pioneering proposals to restore Europe's nature by 2050 (europa.eu)

18.    New rules on corporate sustainability reporting: provisional political agreement between the Council and the European Parliament - Consilium

20.   gov.uk - New measures to propel superpower of pensions in UKs net-zero journey

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