Sustainable finance in the UK Mansion House speech lays out ESG developments for 2024

On 14 November 2024, the HM Treasury announced the much awaited Consultation Paper to gather views on the value case for a UK Green Taxonomy as part of the wider UK sustainable finance regulatory landscape.

Originally scheduled to be published in Autumn 2023, the consultation requests feedback on whether a UK Taxonomy would promote market integrity and support the mobilisation of capital for the transition and sustainable finance.  And a strong theme in the consultation is supporting the development of transition finance in line with the Transition Finance Market Review recommendations.

The consultation seeks to “establish whether a UK Taxonomy would be additional and complementary to existing policies” in meeting the objectives of: (a) promoting market integrity and mitigating greenwashing and (b) channelling capital in support of the government’s sustainability objectives.  It builds on the non-binding advice provided by the Green Technical Advisory Group (GTAG) on a number of topics, including interoperability of a UK Green Taxonomy with other taxonomies used globally, analysing possible models for a UK Green Taxonomy, exploring the value case and ensuring that any UK Green Taxonomy is adapted to the UK’s short- and long-term needs. The consultation closes in February 2025.

We expect the next stage to be a consultation on the content of the taxonomy itself (assuming the government decides to proceed).  No indication has been given of the timeframe for such a consultation or for the ultimate implementation of a UK Green Taxonomy.

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As part of the Edinburgh reforms, the UK issued a consultation on implementing a regulatory regime for ESG ratings providers. 

The consultation closed in June 2023 and the government published the Consultation Response on 14 November 2024 as part of the Mansion House announcements, together with its proposals for the new regime and draft legislation implementing the proposals.

The main features of the proposal are as follows:

• The regulatory perimeter will be expanded to include a new regulated activity of providing ESG ratings. As a result, a person who provides ESG ratings will have to become authorised by the FCA and meet the conditions for FCA authorisation at all times.
• There will be an exemption for firms who are already authorised by the FCA and provide ESG ratings in the course of carrying on other regulated activities. This should allow such firms to avoid having to apply to the FCA to vary their permission, but it is likely that they will become subject to FCA rules regarding the provision of those ESG ratings that are similar to the rules that will apply to people who have to obtain authorisation to do the new activity.
• The definition of an ESG rating will cover the situation where the person is making an assessment regarding one or more ESG factors. The provision of ESG data will not itself be a regulated activity, but the government says it will continue to monitor whether it should.
• In terms of territorial scope, any UK firms who provide ESG ratings (to users anywhere in the world) will be subject to the regime. In addition, overseas firms who provide ESG ratings to UK users by way of a business relationship will be caught by the new regime. The Consultation Response says that, as part of its own consultation on the new regime, the FCA will consider its approach towards overseas ESG ratings providers who wish to apply for FCA authorisation. This is likely to include consideration of the situations in which overseas firms will be required (e.g. as a result of their size, significance or market impact) to establish a business in the UK.The draft legislation also provides for the possibility of the UK entering into market access arrangements with third countries, which may allow overseas firms to provide ESG ratings to UK users without having to obtain separate authorisation in the UK. This is still under consideration.

The government is inviting technical comments on the draft legislation by 14 January 2025.  The legislation is expected to be laid before Parliament in early 2025 (subject to Parliamentary time). 

No timeline has been specified for the ultimate implementation of the proposals.  However, the FCA will have to consult on its own rules and ESG ratings providers will have to apply to the FCA for authorisation.  The Consultation Response says that the regime is expected to go live at the end of the authorisation gateway.  Those requirements are likely to push the timeline into late 2025 or 2026.

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In the Mansion House speech, the government announced its intention to consult on streamlined sustainability disclosures for economically significant companies. 

This builds on the existing commitment by the previous government to establish a framework to assess the suitability of endorsing IFRS S1 and IFRS S2 in the UK.  Endorsement of these accounting standards would result in the creation of the first two UK Sustainability Reporting Standards (SRSs).

The reference to “economically significant companies” and “streamlining” are new.  In the previous discussion, reference was made to UK-listed companies.  Curiously, the term “streamline” echoes the language being used in relation to reporting requirements in the EU.  We await the upcoming consultation for further information on the government’s plans.

On 15 November 2024 at COP 16, the government launched a set of integrity principles for voluntary carbon and nature markets (VCNMs) and announced an intention to consult on the implementation of these principles in the new year.

The government states that it sees a clear and appropriate role for high-integrity carbon and nature credits by entities that wish to use them as part of their nature and climate strategies. VCNMs are markets in which carbon or other credits are produced and purchased voluntarily, rather than for legal compliance purposes, and do not include compliance schemes such as the UK Emissions Trading Scheme.  

The UK government wants to maximise finance mobilisation from all possible sources towards achievement of its climate goals, and in order for VCNMs to support those aims, it is critical that they are operated and used with integrity.  The government had identified a number of concerns with the current approach – for example, that buyers purchase and retire (‘use’) credits instead of undertaking the internal action needed to further environmental goals.

The integrity principles are intended to address these concerns.  The principles are as follows:

1. Use credits in addition to ambitious actions within value chains – that is, purchasing credits is not a substitute for actions within an entity’s own value chain.
2. Use high integrity credits – that is, ensure they are independently verified and validated and, amongst other things, respect the rights of local communities and Indigenous peoples through Free, Prior and Informed Consent.
3. Measure and disclose the planned use of credits as part of sustainability reporting – voluntary disclosure is required if not mandatory.
4. Plan ahead – where an entity is making transition planning disclosures use best practice guidance disclosing long-term and interim targets.
5. Make accurate green claims using appropriate terminology – for example, avoid claims such as “carbon neutral” or “biodiversity positive” if not substantiated.
6. Co-operate with others to support the growth of high integrity markets – including supporting standardisation, wider information sharing, reduced transaction costs, transparency and interoperability.

The government has announced that it intends to issue a public consultation in relation to the published integrity principles in early 2025.  That will include clarifying the government’s expectations and elaborating on the principles.

The Chancellor said in her speech that she wanted London to become a global hub for financing the energy transition.  These announcements came alongside speeches at COP 29, where the UK’s representative had laid out the UK’s commitment to making the UK the sustainable finance capital of the world. 

The two main proposals were:

• Consultation on transition plans

The government announced that it will consult in the first half of 2025 on how best to take forward its manifesto commitment on transition plans in support of its ambition to become the global hub for transition finance - ensuring the UK’s regulatory framework is growth-focused, internationally competitive and maintains the UK’s status as a global financial hub.

• Transition Finance Council

  The government announced that it will be co-launching a Transition Finance Council with the City of London Corporation as recommended by the Transition Finance Market Review (TFMR), which was published in October 2024. According to the Review, the Council is intended to:

  • act as a central hub of thought leadership in relation to transition finance in the UK; and
  • provide a governance and delivery function for tracking and implementing the recommendations of the TFMR and periodic reporting on implementation, thus providing an additional layer of accountability to the UK’s transition finance market.

As part of the Mansion House initiative, the Chancellor has issued new growth-focussed remit letters to the FCA, the Bank of England’s Prudential Regulation Committee and Financial Policy Committee and both the FCA and the Payment Systems Regulator in relation to payments regulation. 

In her letter to the FCA, the Chancellor said that she is particularly keen to ensure that UK financial services firms are supported to play a significant role in supporting the Net Zero transition globally and to benefit from the opportunities that brings.  Alongside the PRA, the FCA will have to have regard to the government’s aim to unlock the full potential of the financial services sector to fund the green transition.

In relation to the Bank of England’s Prudential Regulation Committee (which is the body that adopts new PRA rules), the Chancellor said that the government’s economic strategy includes accelerating the transition to a climate resilient, nature positive and net zero economy. 

The PRC is asked, when advancing its statutory objectives, to have regard to the government’s policy towards the financial services sector, where the government’s top priority is to promote its growth and international competitiveness.  As part of this, PRC is also asked to have regard to leading the world in sustainable finance, including by unlocking the full potential of the financial services sector to fund the green transition, making the UK a global hub for sustainable finance activity and delivering a world-leading sustainable finance regulatory framework.  The remit letter leaves a wide margin of discretion to the Bank of England in how it embeds these “have regards” into its decision making, but they could lead not just to more demanding expectations for risk management by banks and insurers, but (in particular) more expectation setting and incentives around the transition to a climate resilient, nature positive and net zero economy.

In relation to the Bank of England’s Financial Policy Committee (FPC), the Chancellor identified a number of risks that the FPC should have regard to when considering the Bank of England’s financial stability objective – namely (i) climate change and nature; (ii) risks from the non-bank financial sector; (iii) geopolitical risks; and (iv) non-financial risks (including cyber and operational risks, and emerging technologies).  The first item on that list is climate change and nature, and on that issue the remit letter specifically says:

“The climate and nature crisis is the greatest long-term global challenge that we face. The Committee should therefore continue to regard the risks posed by climate change, including physical and transition risks, as relevant to its primary objective. The Committee should consider how these risks could impact financial stability over the near and longer-term, including, where appropriate, through its stress testing frameworks, ensuring that risks stemming from possible and severe global climate scenarios are reflected in its analysis on climate risks and that sufficient time horizons are considered. Over the next year, the Committee should continue to consider the materiality of nature-related financial risks for its primary objective.”

The FPC has already acknowledged that assessing climate risks is relevant to its primary financial stability objective.  However the government recommendation to consider this over the near and longer term, and to ensure that sufficient time horizons are considered, is potentially very significant – and could lead to the Bank of England setting more robust climate stress tests.

As the regulators adapt and respond to these government recommendations, we are likely to see a greater emphasis on ESG matters from the regulators, and an increased commitment to the sustainable finance market.

How the regulators respond will be of interest to firms, environmental NGOs and wider society. Parliamentary committees will be keen to understand from the regulators how they are fulfilling their remit in line with these government priorities.  One obvious question will be whether or not the Bank of England is now scaling up resourcing to pay more attention to government climate and nature related policies, given Governor Bailey’s previous admission to the House of Lords Economic Affairs Committee that the resourcing had shifted away from climate matters after this was removed from a previous government remit letter.