Navigating the sustainable finance agenda

In the years lead­ing up to Brex­it, both the UK and the Euro­pean Union had been busy devel­op­ing sus­tain­abil­i­ty pol­i­cy and leg­is­la­tion. Now the UK has left the EU, it remains com­mit­ted to being at the fore­front of the sus­tain­able finance agen­da.

When the UK retained EU laws as part of its domes­tic rule­book at the end of the Brex­it tran­si­tion peri­od, two sus­tain­able finance rule­sets were omit­ted.

The EU’s Sus­tain­able Finance Dis­clo­sure Reg­u­la­tions (SFDR) and the Tax­on­o­my Reg­u­la­tion were not ful­ly oper­a­tional at the time of the UK’s depar­ture and so were not includ­ed in the tran­si­tioned rules.

How­ev­er, the deci­sion not to adopt these mea­sures was cer­tain­ly not indica­tive of the UK’s future appetite. Instead, the UK has con­tin­ued to set ambi­tious pol­i­cy tar­gets across all areas of sus­tain­able finance.

“Some of the cam­paign­ing around Brex­it gave a per­cep­tion that the UK had been bound by envi­ron­men­tal rules it didn’t like. But in some areas, such as cli­mate change, it was the UK that had been lead­ing,” says Tra­vers Smith’s head of oper­a­tional risk and envi­ron­ment Doug Bry­den.

In the weeks lead­ing up to the end of the tran­si­tion peri­od, prime min­is­ter Boris John­son was keen to empha­sise the coun­try remained com­mit­ted to lead­ing on envi­ron­men­tal pol­i­cy.

In Decem­ber, he out­lined plans to cut green­house gas emis­sions by 68 per cent from 1990 lev­els, aim­ing to achieve this by the end of 2029. The com­mit­ment is part of the UK’s broad­er efforts to reach its tar­get of net-zero emis­sions by 2050.

Simon Wit­ney, senior con­sul­tant at Tra­vers Smith, explains such tar­gets show the appetite of the gov­ern­ment to main­tain its rep­u­ta­tion as a leader on envi­ron­men­tal mat­ters, adding the UK has pledged to at least match the ambi­tion of the EU’s sus­tain­able finance action plan.

“It is close­ly aligned with the EU in terms of out­comes,” he says. “It seems like­ly the UK will imple­ment its own ver­sion of the SFDR at some point.”

Wit­ney adds that, while the SFDR is sched­uled to become effec­tive on March 10, 2021, a UK ver­sion of the reg­u­la­tion will take longer, with any domes­tic imple­men­ta­tion like­ly to be more prin­ci­ples based.

“I would hope the UK ver­sion of these reg­u­la­tions will at least be con­sis­tent with the EU rules. What our clients don’t want is two dif­fer­ent rule­books with dif­fer­ent require­ments,” he says.

With the EU’s Tax­on­o­my Reg­u­la­tion, the UK has already agreed to retain the frame­work of the tax­on­o­my, includ­ing the envi­ron­men­tal objec­tives. Despite this, some mod­i­fi­ca­tions are being planned amid con­cerns that some ele­ments are not suit­ed to the UK mar­ket.

Cli­mate lead­er­ship

The UK’s rep­u­ta­tion as a leader in envi­ron­men­tal pol­i­cy is well estab­lished. It was the first major devel­oped econ­o­my to leg­is­late towards achiev­ing net-zero emis­sions by 2050. It has also com­mit­ted to ensur­ing com­pa­nies report on cli­mate risks using guide­lines from the Task Force on Cli­mate-Relat­ed Finan­cial Dis­clo­sures (TCFD), by 2025.

“The UK is mak­ing good progress in rela­tion to cli­mate change-relat­ed dis­clo­sures,” says Wit­ney. “It will be the first coun­try in the world to make TCFD manda­to­ry across much of the econ­o­my.”

With the UK host­ing the 26th Unit­ed Nations Cli­mate Change Con­fer­ence in Glas­gow this Novem­ber, cli­mate is like­ly to dom­i­nate the media agen­da in the months ahead. But busi­ness­es and investors will need to nav­i­gate a much broad­er set of reg­u­la­to­ry and pol­i­cy changes across the sus­tain­able finance land­scape.

“The sus­tain­able finance agen­da is incred­i­bly wide rang­ing, span­ning envi­ron­men­tal and social issues to busi­ness ethics, bribery and cor­rup­tion,” says Bry­den. “Over the com­ing years, I hope to see a con­ver­gence of many of the vol­un­tary and manda­to­ry report­ing stan­dards. This will be good for the mar­ket and pro­mote a more con­sis­tent dis­clo­sure of, and abil­i­ty to assess, a busi­ness’ sus­tain­abil­i­ty risks, per­for­mance and cre­den­tials.”

He explains that the pro­lif­er­a­tion of stan­dards in recent years has been a headache for organ­i­sa­tions to digest, some­times lead­ing to dif­fer­ent teams com­ply­ing with dif­fer­ent rules, albeit with the same objec­tive.

“What you don’t want is for every­body to need expen­sive advice, and for the only peo­ple who ben­e­fit from these com­pet­ing stan­dards and frame­works to be the ESG [envi­ron­men­tal, social and gov­er­nance] pro­fes­sion­als.”

Broad agen­da

In the com­ing three years, organ­i­sa­tions will be expect­ed to tra­verse a con­gest­ed timetable of changes to reg­u­la­tions, require­ments and imple­men­ta­tion dates.

Asset man­agers doing busi­ness in the EU, for exam­ple, will need to be aware of the SFDR from March 10, 2021, fol­lowed by the EU Tax­on­o­my Reg­u­la­tion, which becomes effec­tive on Jan­u­ary 1, 2022 for cli­mate change and a year lat­er for all oth­er envi­ron­men­tal objec­tives.

Larg­er UK com­pa­nies will need to take steps to imple­ment TCFD report­ing by 2023, in accor­dance with UK gov­ern­ment pro­pos­als out­lined in Novem­ber, with all com­pa­nies expect­ed to be com­pli­ant by 2025.

At the same time, the gov­ern­ment has also intro­duced new mea­sures to force com­pa­nies to have greater vis­i­bil­i­ty of their sup­ply chains. In an update to the exist­ing Mod­ern Slav­ery Act 2015, the gov­ern­ment is look­ing to intro­duce a new report­ing ser­vice in 2021, where com­pa­nies are being urged to pub­lish their mod­ern slav­ery poli­cies.

There are oth­er updates too. These include the next steps for TCFD report­ing for pen­sion funds and on eth­nic­i­ty pay-gap report­ing, fol­low­ing con­sul­ta­tions which have now closed.

Rachel Wood­burn, head of knowl­edge and learn­ing at Tra­vers Smith, says organ­i­sa­tions shouldn’t look at com­pli­ance with the reg­u­la­tions as a tick-box exer­cise.

“We often look at things through a reg­u­la­to­ry lens because we are lawyers, but the strong mes­sage we are hear­ing from our clients is these issues go to the heart of the busi­ness mod­el, and strat­e­gy should be the start­ing point,” she says.

“It is easy to get caught up in all the manda­to­ry regimes, but the most suc­cess­ful busi­ness­es will take a step back and define a clear strat­e­gy for meet­ing the expec­ta­tions of investors and the wider com­mu­ni­ty as well as reg­u­la­tors, and only then make sure they are aligned with reg­u­la­tion.”

Reg­is­ter your inter­est in our sus­tain­abil­i­ty-focused brief­in­gs and webi­na­rs here: www.traverssmith.com/navigatingsustainablefinance/

Spon­sored by

Tra­vers Smith