European Commission
ESG ratings providers - European Commission publishes summary report of consultation responses - 3 August 2022
The European Commission (the Commission) has published a report setting out a summary of responses to its April 2022 consultation paper on ESG ratings and sustainability factors in credit ratings. The consultation follows the European Securities and Markets Authority’s (ESMA’s) February 2022 call for evidence on ESG ratings providers.
Key findings from the consultation, which had 168 respondents, include:
- the majority of respondents stated they use ESG ratings. Among these, 77% use them ‘very much’ while a smaller share use them ‘a little’;
- the most used ESG ratings are those that provide an opinion on exposure to, and management of, ESG risks, with 86% of respondents using this type of rating;
- over 84% of respondents consider that the current market is not functioning well. Two thirds of respondents consider the quality of ESG ratings to be fine to very good, with about one third considering it poor;
- 94% of respondents consider that intervention in the ESG ratings market is necessary. Over 80% support a legislative intervention while the remainder support the development of non-regulatory intervention in the form of guidelines or a code of conduct. Over 90% of respondents indicate that the main element to be addressed by intervention should be improving transparency on the methodology used by ESG ratings providers;
- 60% of respondents believe it is ‘very important’, and 30% believe it is ‘important’, to understand to what extent individual credit rating actions have been influenced by sustainability factors; and
- 52 of 101 respondents consider that the current trends in the market are sufficient to ensure that credit ratings agencies incorporate relevant ESG factors in credit ratings.
The Commission explains that these findings will be reflected in any further initiative it takes in this area.
European Commission Summary Report: Targeted consultation on the functioning of the ESG ratings market in the EU and on the consideration of ESG factors in credit ratings
Updated webpage
UK Government
ISSB Draft Sustainability Standards - BEIS publishes letter to International Sustainability Standards Board - 1 August 2022
The Department for Business, Energy and Industrial Strategy (BEIS) has published a letter from Lord Callanan, Parliamentary Under Secretary of State at BEIS, to the International Sustainability Standards Board (ISSB) regarding their exposure drafts of IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) (the Standards). The ISSB published the exposure drafts for consultation in March 2022.
BEIS strongly welcomes the exposure drafts and makes four high-level and strategic points to support the development of the final Standards. In particular, it considers that the ISSB should:
- set a baseline standard that is accessible for use on a global scale;
- implement the Standards in a proportionate and scalable way to accommodate the circumstances of different organisations and jurisdictions;
- ensure that the Standards are principles-based, to enable jurisdictions to adopt them in a manner consistent with the local legislative framework while still delivering an effective global baseline of comparable disclosures; and
- provide precise definitions and clarify what is required to achieve compliance.
Given the critical importance of the Standards, BEIS has asked the Financial Reporting Council (FRC), the FCA, the UK Endorsement Board and the Bank of England to provide substantive comment letters on the exposure drafts.
The ISSB aims to publish the final Standards by the end of 2022.
BEIS Notice: Letter from Lord Callanan to the International Sustainability Standards Board regarding their exposure drafts IFRS S1 and IFRS S2
Webpage
Financial Conduct Authority and The Financial Reporting Council
TCFD disclosures for listed companies - FCA and FRC find significant progress, but further improvement needed - 29 July 2022
The FCA and the Financial Reporting Council (FRC) have each published a report detailing the findings of a review of the first climate-related disclosures made in line with Listing Rule 9.8.6R(8) (the Listing Rule). The Listing Rule was introduced in the FCA’s December 2020 Policy Statement (PS20/17) and requires commercial companies with a UK premium listing to include a statement in their annual financial report setting out whether they have made disclosures that are consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and to explain if they have not.
Key observations from the FCA’s review include that:
- 81% of companies indicated that they had made disclosures consistent with all seven recommended disclosures which the FCA would ordinarily expect a company to comply with;
- some companies indicated that they had made disclosures consistent with the recommended disclosures, but the disclosures themselves appeared to be very limited in content. The FCA is considering these in more detail and may take action as appropriate;
- the number of companies making disclosures that were either partially or mostly consistent with the TCFD framework increased significantly compared with 2020; and
- the most common reporting gaps were in respect of the more quantitative elements of the TCFD’s recommendations, such as scenario analysis and metrics and targets.
The FCA encourages companies making net zero commitments to consider the TCFD’s guidance on Metrics, Targets and Transition Plans and to ensure that their disclosures are not misleading. Companies should also ensure that they are ready to disclose effectively against the standards of the International Sustainability Standards Board (ISSB), once they are finalised and adopted in the UK.
The FRC’s report reflects a comprehensive review of the climate-related disclosures of a sample of 25 premium listed companies, weighted towards larger companies in climate-intensive sectors. It also provides examples of better practice to help companies develop and improve their disclosures. According to the FRC, companies may need to raise the quality of their disclosures by:
- providing more granular information about the effect of climate change on different business sectors and geographies;
- balancing the discussion of climate-related risks and opportunities appropriately;
- linking climate-related disclosures to other risk management and governance processes;
- explaining how they have decided which climate-related information should be disclosed; and
- explaining more clearly how the effects of different global warming scenarios, and their own net zero commitments, may affect the valuation of their assets and liabilities.
FCA Report: Review of TCFD-aligned disclosures by premium listed commercial companies
FRC Report: CRR Thematic review of TCFD disclosures and climate in the financial statements
Press release
Financial Conduct Authority
Appointed representatives regime - FCA publishes Policy Statement (PS22/11) - 3 August 2022
The FCA has published a Policy Statement (PS22/11) on improvements to the appointed representatives (AR) regime. The Policy Statement follows the FCA’s Consultation Paper on the improvements (CP21/34), which was published in December 2021.
Most respondents to the consultation support the FCA’s proposals. The FCA is proceeding with those proposals that received wide ranging support as consulted on, but is also making changes to the final rules to add flexibility, make it easier for firms to implement the relevant proposals, and reduce duplication and regulatory burden. The FCA explains that the changes will also ensure that the data requested from principals will be the most useful in identifying trends, issues and harms arising from the AR regime, while minimising the burden on firms. The FCA confirms that the rules will not apply to firms in the Temporary Permissions Regime or the Financial Services Contracts Regime.
In summary, the new rules will require principals to:
- apply enhanced oversight of their ARs, including ensuring they have adequate systems, controls and resources;
- assess and monitor the risk that their ARs pose to consumers and markets, providing similar oversight as they would to their own business;
- review information on their ARs’ activities, business and senior management annually, and be clear on the circumstances when they should terminate an AR relationship;
- notify the FCA of future AR appointments 30 calendar days before they take effect; and
- provide complaints and revenue information for each AR to the FCA on an annual basis.
The FCA highlights that the new rules do not change the fact that principals are responsible for the activities of their ARs. It also indicates that, as part of its new three-year strategy to improve outcomes for consumers and markets, it is undertaking targeted supervision of principal firms across the financial services sector as a whole, using improved data and analytical tools to focus its work, and increasing its scrutiny of firms when they apply for authorisation and appoint ARs.
The FCA will publish its response to the feedback received on the discussion chapter (Chapter 5) of the Consultation Paper separately in 2023. This chapter sought views on potential areas of future change and was developed alongside HM Treasury’s call for evidence on the AR regime, published in December 2021, which is exploring potential legislative changes. HM Treasury is currently analysing responses to the call for evidence and will set out next steps in its review of the AR regime in due course.
The changes to the AR regime will take effect on 8 December 2022 following a four-month implementation period. As part of the FCA’s enhanced reporting requirements, principal firms should expect to receive a request for data about their ARs later in 2022. The final Handbook rules and guidance and updated forms are set out in Appendix 1 to the Policy Statement through the ‘Appointed Representatives Instrument 2022’ (FCA 2022/32).
FCA Policy Statement: Improvements to the Appointed Representatives regime (PS22/11)
Appointed Representatives Instrument 2022 (FCA 2022/32)
Webpage
Press release
