Environmental, social and governance | UK Regulatory Outlook September 2024

Commission publishes FAQs on CSRD

On 7 August 2024, the European Commission published detailed  FAQs on the implementation of the Corporate Sustainability Reporting Directive (CSRD) which was required to be transposed into national law by 6 July 2024.

The FAQs give an overview of the sustainability reporting requirements introduced by the CSRD as well as answers to questions about individual and consolidated sustainability statements and the reporting of information from non-EU undertakings. With the first reports due in 2025, companies due to report should be collecting and preparing the relevant information ready to meet this first deadline.

Calls for EU to delay EUDR implementation

The EU's Regulation on Deforestation-free products (EUDR) is coming into effect on 30 December 2024 and requires companies to carry out extensive supply chain due diligence before a product is placed on the market in the EU, or exported from the EU. The regulation covers seven commodities: cattle, cocoa, coffee, oil palm, rubber, soya and wood. Many products deriving from these materials (such as leather and chocolate) are included in the annex of the regulation.

As implementation gets closer with technical documents still to be produced by the Commission, there have been numerous calls for the regulation to be delayed, including from the head of the World Trade Organization and the German Chancellor, Olaf Scholz, who this month has said he has discussed with Ursula von der Leyen delaying the implementing the EUDR.

Despite the number of reported calls for the delay, the European Commission is yet to comment. It has been reported that the European Commission President Ursula von der Leyen is looking to put forward a proposal which is yet to be announced. Businesses affected by the regulation should ensure they are preparing for its implementation at the end of this year but should keep abreast of any updates from the Commission in response to these calls for delay.

Temporary flexibility on new Sustainability Disclosure Requirement rules

The Sustainability Disclosure Requirement (SDR) rules were introduced by the Financial Conduct Authority (FCA) in November 2023, comprising of sustainability product labels, disclosure requirements for products and entities and an anti-greenwashing rule.

The FCA  has released a statement extending the deadline for complying with the naming (ESG 4.3.2R) and marketing SDR rules (ESG 4.3.8R) to 5pm on 2 April 2025. This extension only applies in relation to sustainability products, which are UK authorised investment funds, where the firm:

• has submitted a completed application for approval of amended disclosures in line with ESG 5.3.2R for that fund by 5pm on 1 October 2024; and
• is currently using one or more of the terms "sustainable", "sustainability" or "impact" (or a variation of those terms) in the name of that fund and is intending either to use a label, or to change the name of that fund.

However, if possible, firms should comply with the rules without needing to be flexible. The temporary measures should only apply to the firms in the above circumstance.

Circular Economy (Scotland) Act 2024

The Circular Economy (Scotland) Act 2024 received Royal Assent on 8 August 2024. The Act requires the Scottish ministers to prepare and publish a circular economy strategy, make provision about circular economy targets, and make provisions about the reduction, recycling and management of waste and for connected purposes.

The powers given to ministers will allow them to: set local recycling targets; set statutory targets for delivery of a circular economy; restrict the disposal of unsold consumer goods; place charges on single-use items like disposable cups (see the Products section for more on this); and give local authorities additional enforcement powers.

The Scottish government has also published its analysis of responses to the 2024 consultation on Scotland's Circular Economy and Waste Route Map to 2030, which will complement the provisions set out by the Act. The analysis found that more than 70% of respondents backed proposals to reduce household food waste, introduce a charge on single use, disposable items and set new circular economy targets from 2025. The Scottish government will now use these responses to finalise the policies and will aim to publish the finalised strategy later this year.

Businesses should be aware that this new legislation could lead to further regulatory obligations in Scotland and should stay informed about any developments.

New ESG guidelines in force from November

The official translations of the EU's guidelines on funds' names using ESG or sustainability-related terms have been published, meaning they will apply from 21 November 2024.

Despite being guidelines, they include substantial provisions that go beyond ensuring that fund names are not inherently fair, clear and misleading. For example, they include substantial provisions that regulate fund portfolio constituents.

The guidelines have been drafted by the European Securities and Markets Authority (ESMA) and are intended to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names. They also provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.

The financial regulators from each EEA member state must now notify ESMA to what extent they will comply with these requirements.

The guidelines will apply immediately for any new funds created on or after the application date. However, there is a transitional period for funds that existed before the application date and that lasts until 21 May 2025.

Law proposed to regulate ESG raters

The government has proposed that it will introduce a law next year to regulate Environmental Social and Governance rating providers. The chancellor, Rachel Reeves, said that the law would follow the recommendations on ESG ratings from the International Organisation for Securities Commission (IOSCO). We are awaiting further developments and publications for these ESG raters.

Right to Repair Directive enters into force

Please see Products section.