Regulatory Outlook | Environmental, Social and Governance (ESG) | July 2021

Current issues

Mandatory reporting in accordance with the Taskforce on Climate-related Financial Disclosure (TCFD)

The UK government intends to require mandatory reporting of climate risk from large parts of the economy in accordance with the recommendations for the Taskforce for Climate-related Financial Disclosures (TCFD). The roadmap for this strategy can be found here.

Under TCFD, a business reports on the financial risk to it as a result of climate change covering both physical risk, due to changes in climate patterns, and transition risk, due to legal, technological and market changes that will happen as we move to a low carbon economy. Disclosures are made against four overarching pillars: governance, strategy, risk management, metrics and targets.

In accordance with the roadmap:

• The Financial Conduct Authority (FCA) has introduced a new listing rule and guidance which requires commercial companies with a UK premium listing to include a compliance statement in their annual financial report, stating whether they have made disclosures consistent with the recommendations of the TCFD or providing an explanation if they have not done so. This rule applies for accounting periods beginning on or after 1 January 2021. The first annual financial reports subject to this rule will be published in spring 2022.
• The UK government ran a consultation from March to May 2021 on how this would be implemented for the next group of entities in scope, which includes UK registered companies admitted to AIM with more than 500 employees, and large private companies and limited liability partnerships (those with more than 500 employees and a turnover of more than £500 million). The final regulations will be made by the end of 2021, to come into force on 6 April 2022, and to be applicable for accounting periods starting on or after that date.
• The FCA is consulting until 10 September 2021 on proposals to extend the application of its TCFD-aligned Listing Rule for premium-listed commercial companies to issuers of standard listed equity shares. And it is also to introduce TCFD-aligned disclosure requirements for asset managers, life insurers and FCA-regulated pension providers. The FCA will confirm its final policy on these consultations before the end of 2021.

Increasing focus on supply chain compliance issues

The European Commission was due to publish a proposed law on human rights due diligence in June 2021. At the time of writing, it is expected imminently. This builds upon existing state-level human rights due diligence laws, such as the "law of vigilance" in France, and conversations that are going on at senior government level in Germany and elsewhere. The UK government committed to strengthening the transparency in supply chains reporting obligation, under the Modern Slavery Act, in September 2020. Businesses need to be aware both of developments in specific regimes (in the UK and elsewhere) but also, the longer term trend in law and expectations on this issue. In this context, it makes sense to build for the future, developing existing due diligence systems to ensure they are effectively mapping, assessing and mitigating compliance risks in your supply chains.

SFDR Regulatory Technical Standards implementation delay

The effective date of the EU Sustainable Finance Disclosure Regulation (SFDR) Regulatory Technical Standards has been deferred by six months to July 2022 due to regulators and industry struggling with the complexity involved in implementing the standards. This highlights some of the practical challenges in implementing ESG commitments, and the need for regulators and businesses to commit sufficient resources and allow sufficient time to ensure commitments can be matched by actions.

Dates for the diary

Imminent: The European Commission proposal for a human rights due diligence law is expected to be published (it was due in June 2021). The practical implications, in terms of systems, policies and processes, could be significant, particularly for businesses that have not focused upon the operation and impact of their supply chains.

July 2022: SFDR Regulatory Technical Standards to become effective.

1-12 November 2021: COP26 will be taking place in the UK.

17 December 2021: Implementation date for EU Whistleblowing Directive for companies with 250 employees or more. A good whistleblowing system should be one of the "low hanging fruit" in implementing an effective approach to ESG. Even if your business is not subject to the process and outcome requirements of the EU Whistleblowing Directive, it provides another indicator of what good looks like for whistleblowing processes.

Late 2021/2022: Updates to the Modern Slavery Act transparency in supply chains obligation are anticipated to be brought forward, though no firm date has yet been set.

6 April 2022: Intended date for implementation of mandatory TCFD-aligned reporting for large UK companies and LLPs.

Spring 2022: First TCFD-aligned disclosures by commercial companies with a UK premium listing.