What’s next for UK sustainable finance regulation?

We can also expect regulation to continue playing a key role. In 2021, the previous Government first set out its vision for sustainable finance regulation in its Roadmap to Sustainable Investing, which has progressed relatively slowly. Labour’s election manifesto and earlier financial services strategy from January 2024 signaled plans to roll out and build on that roadmap, and in August the Chancellor signalled it will be introducing legislation to regulate ESG ratings agencies.

So, what do we know about what’s in store for sustainable finance regulation for the financial services sector under the new Government? The election manifesto and financial services strategy suggest a focus on embedding a sustainability disclosure framework, introducing a UK Green Taxonomy, enhancing transition planning requirements, and exploring the role of green mortgages in supporting the net zero transition. In this article, we unpack this further and consider the key implications for financial services firms.

A commitment to rolling out the UK SDR

In its financial services strategy, Labour signaled that it remains committed to delivering the UK Sustainability Disclosure Requirements (SDR) framework. This economy-wide sustainability reporting regime was a key pillar of the previous Government’s sustainable finance approach, with its plans to introduce requirements for listed companies, UK registered companies, and FCA-authorised asset managers. 

The FCA has successfully finalised the requirements for asset managers¹, introducing new sustainable investment product labels, entity and product-level sustainability disclosures, and  ‘naming and marketing’ rules placing restrictions on sustainability-related terms used during the marketing of unlabelled products. 

However, progress so far with the remaining elements has been slow. The original idea in the sustainable investment roadmap was for corporate-level reporting by UK listed companies and UK registered companies (including financial services firms) to be based on the ISSB standards. The latest update from the previous Government in May 2024 indicates that the UK-adopted version of the ISSB standards - referred to as the UK Sustainability Reporting Standards (SRS) - will be consulted on during Q1 2025. Once these are finalised, the FCA is expected to consult on applying the SRS to UK listed companies. 

While we wait for the SRS and formal listing rules to be finalised, financial services firms can be taking actions to prepare. We expect there will be minimal change to the UK standards compared with the ISSB S1 and S2, not least because the UK played a key role in shaping those and excessive divergence from the global standard is likely to be viewed unfavourably in the market. As such, firms could be getting on the front foot by performing materiality assessments to identify the decision-useful sustainability-related risks and opportunities to be reporting on. These exercises can be time-consuming and require engagement with various stakeholders, especially if starting from scratch and firms do not have TCFD or CSRD materiality assessments to leverage. Starting early can therefore help to remove pressure when full implementation gets underway.

_{¹ See a joint PwC and UKSIF report on the FCA’s SDR regime here: https://uksif.org/wp-content/uploads/2024/05/UKSIF-and-PwC-report-on-UKs-SDR-and-investment-labels-Final-Version-30-May-2024.pdf}

What about the UK Green Taxonomy?

The introduction of a UK Green Taxonomy was a key pillar of the previous Government’s sustainable investment roadmap. A number of delays have left the industry with uncertainty around the future of this work, so Labour’s announced intention to move this forwards will be welcome. As will Labour’s vision for a science-based approach that is interoperable with international standards, given challenges with international divergence in other areas of green finance regulation.

Uncertainty remains around the extent to which the taxonomy will be voluntary or mandatory under the Labour Government, as well the timetable for taking this forward. However, given the expectation for this to be based heavily on the EU Taxonomy Regulation, firms not already doing so should start preliminary work to assess alignment the relevant taxonomy criteria. 

Stronger requirements on transition planning expected

Existing UK TCFD-aligned regulation and the ISSB Standards require companies to disclose details about their transition plan, if they have one. In May 2024, the previous Government said it intends to ‘consult shortly’ on how the UK’s largest companies can most effectively disclose their transition plans. The FCA also intends to consult on strengthening its expectations on transition plan disclosure with reference to the UK Transition Plan Taskforce (TPT) Disclosure Framework as part of its 2025 consultation on implementing the UK SRS for UK-listed companies. 

Labour has said that it wants to require financial institutions and FTSE 100 companies to publish credible 1.5-C aligned transition plans. This goes further than any previous commitments we’ve seen from the UK authorities, and would be consistent with the EU’s approach under CSDDD. 

Given the clear direction of travel to more formally regulate transition planning, there are some steps that financial services firms can be taking now. These include performing a maturity assessment against the TPT framework, setting ambition, considering decarbonisation levers, and identifying key stakeholders who will need to be involved in the process.

Green mortgages

The Labour Party’s financial services strategy was clear that it considers reaching the UK’s 2025 net zero target relies on greening the housing stock. It therefore committed to working with the financial services sector to expand the offering of green mortgages available to homeowners who, for example, complete retrofitting work. It may follow that the new Government could look to some combination of conduct and prudential regulatory levers to help deliver this. This agenda is at an early stage, but is something that firms should keep a watching brief on. 

Three no-regret actions for firms to take

We expect the new Government will be keen to drive forward the net zero agenda, with a strong commitment to advancing key sustainable finance regulatory initiatives. Taken together with wider regulatory developments in this area globally, financial services will be kept busy. 

There are three actions that firms can take now to set themselves up to handle the next wave of sustainability regulation:

1. Establish a clear picture of your ‘regulatory baseline’: Firms should assess the existing and upcoming sustainability regulations that impact them across their group structure. This should take a global view and consider those applying at a corporate, entity and product level. Ultimately this will help firms to have a clear sense of what is relevant, the key existing and forward-looking requirements, and what to prioritise. 
2. Identify common requirements and data points across regulations: Many sustainability regulations have a number of similarities and overlaps - either in terms of requirements, the data points that need to be gathered/reported on, and the organisational impacts. We expect this to also be the case for the regulations the new Government intends to take forward. Firms should map the data points required for their disclosures across different regimes they are caught by, and leverage commonalities to avoid duplicative data collection. Firms should consider maintaining a central repository of sustainability data required so that they can easily assess overlaps and differences on an ongoing basis as regulations continue to evolve. 
3. Taking a strategic approach to responding to regulations: Given the fast-evolving regulatory landscape, firms could easily find themselves in a constant state of change. They should put in place an operating model that enables them to have a forward-looking view of how to implement and comply with sustainability regulations. Firms should also consider how to leverage regulatory drivers to create value for their business rather than taking a purely compliance-led approach. Depending on current maturity, this should involve considering how regulation could help to shape their sustainability strategy, or assessing how regulation should be implemented in a way that helps firms to deliver their sustainability strategy.