ESG Regulation update

The United Kingdom is working on a set of rules to make companies more transparent about sustainability reporting. They should be published by the end of the first half of 2023. ESG criteria are environmental, social and governance analysis criteria used to assess the involvement of companies (and their strategy) in sustainable development and long-term issues. On October 25, UK's Financial Conduct Authority (FCA) published its proposals for a UK equivalent to the European Sustainable Finance Disclosure Regulation (SFDR). The project is called "Sustainability Disclosure Requirements" (SDR), in reference to the disclosure requirements in terms of sustainability. Through our article, we propose to have a look at the three main lines, to have a better understanding of their impact on financial documents.

An anti-greenwashing rule

This measure should be clarified and published at the end of the first half of 2023. Its ambition is to fight against companies that claim themselves “green” for purely commercial and marketing purposes. The text provides a series of requirements for all companies qualifying as environmentally friendly. A first regulation is already existing, but it should be updated, with new criteria. We will have to wait a bit to better understand how to clarify it in financial documents, especially in reports. In the United Kingdom, a major bank has already been warned by the FCA of its lack of clarity around its green arguments, promoted through its advertising campaigns.

Sustainable investment labels

A labeling system should allow investors to have better visibility of the landscape of investment products and thus wisely select them. Each of them meets established criteria and can evolve over time. Three categories will be distinguished: sustainable focus (for environmentally and socially sustainable products),, sustainable improvers (for active ingredients that encourage sustainability) and sustainable impact (for products that invest in positive impacts on environmental and social issues).

Naming and marketing rules

Again, this will take some patience to get a better understanding of these rules, but the FCA has unveiled draft restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable investment’ – may be used in product names and communication materials (including financial reports) for products that do not qualify for the sustainable investment labels mentioned above. This should be taken into account in the drafting of financial reports and make sure that these terms will not be used lighlty.

These new rules will soon be clarified by the end of the first half of 2023 by the FCA. For listed companies that do not publish on the European market, they will have to consider complying with this new green regulation, particularly in the preparation of their financial report.