UK Updates Its Green Finance Strategy And Launches ESG Ratings Regulation Consultation

• Jurisdiction: European Union
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Subject Matter: Finance and Banking, Environment, Financial Services, Environmental Law, Climate Change
• Author: Mr Jason Halper and Duncan Grieve
• Published date: 17 April 2023

On March 30, 2023, the UK government announced the publication of its 2023 green finance strategy, updating its earlier 2019 strategy, which is intended to mitigate climate-related risk and damage while increasing the amount of capital available to finance "net zero and environmental objectives." Additionally, the government published a nature markets framework, which has been developed to scale up private investment in nature recovery and sustainable farming. The executive summary of the framework states that the "development of high-integrity nature markets is a key part of [the UK government's] strategy to enable firms to mobilise" private investment flows to nature.

As part of its updated strategy, the UK government has launched a consultation on the scope of a future regulatory regime for ESG ratings providers. Interested parties have until June 30 to submit their responses to the Financial Conduct Authority. The consultation states that "Treasury considers there is clear benefit to be gained from improving the transparency of methodologies, governance, and processes of ESG ratings providers. These outcomes could be brought about through regulation." In terms of its planned regulatory approach, the Consultation states that the "FCA has indicated that, subject to consultation, they anticipate their regulatory approach would take the main elements of IOSCO's recommendations as a starting point for rules," but would not "seek to harmonise the varying methodologies and objectives of ESG ratings as a regulatory outcome." The recommendations of IOSCO, the International Organization of Securities Commissioners, focus on transparency of methodologies and data sources, good governance, conflict of interest management, and the existence (or lack) of "robust systems and controls."

The government is currently proposing an extensive list of exceptions to coverage under the proposed regulation, which have been set out in the consultation document. For example, unprocessed, or "minimally processed," data that does not have an assessment element is not in scope. Also proposed to be excluded are credit ratings even if they consider ESG factors (which already are subject to regulation under the Credit Ratings Agencies Regulation), investment research even if it references ESG considerations, and proxy advisory services recommendations, which, "even if related to ESG matters, are provided for a specific purpose (informing shareholders) and therefore should not be...