Environmental, social, and governance (ESG) risk management is increasingly shaping the financial industry. As a result, regulatory frameworks are continuously being updated to ensure that businesses are aligning with sustainability goals. Recent developments in the UK and Europe underscore the dynamic nature of ESG regulations. With significant updates to the UK Stewardship Code, the introduction of Sustainability Disclosure Requirements (SDR), and ongoing discussions on sustainable finance initiatives in Europe. Here’s a closer look at these key updates.

1. Key Updates to the UK Stewardship Code

The UK Stewardship Code is a cornerstone of responsible investment practices. Recently, the FRC announced five immediate changes to the Code significantly aimed at reducing the reporting burden for signatories. While these changes were confirmed ahead of a formal consultation, they are intended to provide prompt relief to firms as they prepare for the new Code, expected to take effect in 2026.

One of the notable updates involves the emphasis on collaborative investor engagement and escalation. The FRC’s approach here sparked mixed reactions, particularly concerning the need for clarity to ensure that these critical aspects are not downplayed in the revised Code. As the FRC prepares to release a consultation paper later this year, followed by the publication of the new Code in early 2025, several key areas are under review:

• Purpose: The FRC defines what effective stewardship looks like in practice and how reporting against the Code can support this.
• Principles: Giving consideration to what reporting will be necessary to fulfil the renewed purpose of the Code.
• Proxy Advisors: The FRC explores how the Code can enhance transparency in the activities of proxy advisors.
• Process: Making efforts to reduce the reporting burden for Code signatories, ensuring that the information provided is both useful and accessible.
• Positioning: Collaboration with other regulators, such as the Department for Work and Pensions (DWP), The Pensions Regulator (TPR), and the Financial Conduct Authority (FCA), will be crucial to avoid confusion and duplication in the implementation of the revised Code.

2. The UK’s Sustainability Disclosure Requirements (SDR)

The UK’s Sustainability Disclosure Requirements (SDR) are part of a broader effort to standardise sustainability reporting across financial institutions and investment products. The SDR labels are designed to enhance transparency and comparability. Consequently, this helps investors to better understand the sustainability credentials of various financial products.

Key aspects of the SDR framework include:

• Sustainability Labels: Financial products categorised by their sustainability characteristics, such as “Sustainable Focus,” “Sustainable Improvers,” and “Sustainable Impact.” These labels offer clear insights into the product’s sustainability approach.
• Disclosure Requirements: Products with SDR labels must provide detailed disclosures about their sustainability objectives, strategies, and performance, including how these goals are integrated into investment decisions.
• Avoidance of Greenwashing: The SDR aims to prevent greenwashing by imposing strict criteria for sustainability labels. This overall ensures that only products meeting specific standards qualify.
• Consumer Protection: The regulations are designed to protect consumers, to moreover ensure access to accurate, comparable information about the sustainability of financial products.
• Alignment with International Standards: The SDR framework is aligned with global standards such as the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB).
• Regulatory Oversight: The FCA is responsible for ensuring compliance with SDR requirements, maintaining the integrity of sustainability labels.
• Reporting and Transparency: Regular reporting for labeled products is required to maintain transparency and accountability, particularly with updates on progress toward sustainability goals.

3. European ESG Regulatory Landscape

Across Europe, there is ongoing anticipation regarding the incoming government’s approach to various sustainable finance initiatives. These include the taxonomy for sustainable activities, transition plans, and the adoption of the International Sustainability Standards Board’s disclosure standards. The outcomes of these discussions will likely have significant implications for firms operating within the EU and beyond.

French SRI Label 3.0: Stricter Rules for Socially Responsible Investments

The French SRI label (Label ISR) is a state-sponsored certification that was first introduced in 2016. It’s intent is to promote responsible investment practices among asset managers and investment funds. The label was designed to help investors identify financial products that adhere to strong environmental, social, and governance (ESG) criteria.

Key Aspects of SRI Label 3.0:

The latest update to this label, referred to as SRI Label 3.0, introduces stricter rules and guidelines aimed at enhancing the credibility and transparency of certified investment products. Primarily in response to concerns about greenwashing.

1. Enhanced ESG Requirements:
   • Broader ESG Integration: Asset managers must now demonstrate more comprehensive integration of ESG factors across their investment processes. This includes stricter criteria for how ESG factors are assessed, implemented, and monitored in the investment strategy.
   • Clearer ESG Objectives: Funds seeking the label must provide clear evidence of their ESG objectives and the impact of their investments. The label now demands more robust documentation and proof of how ESG factors are actively influencing investment decisions.

2. Transparency and Reporting:
   • Increased Disclosure: SRI Label 3.0 requires funds to offer more detailed disclosures on their ESG practices. This includes how they engage with companies on ESG issues, their voting policies, and the outcomes of these engagements.
   • Performance Measurement: There is a stronger emphasis on measuring and reporting the ESG performance of the investments. Funds must regularly report on how they are meeting their ESG goals and what tangible outcomes they are achieving.

3. Stricter Verification and Oversight:
   • Independent Verification: The process for obtaining the SRI label has been tightened, with more rigorous verification by independent bodies to ensure that funds genuinely adhere to the required ESG standards.
   • Regular Audits: Funds that receive the label are subject to regular audits to ensure ongoing compliance. Any failure to meet the standards can lead to the revocation of the label.

4. Combatting Greenwashing:
   • Clearer Criteria for Exclusions: The new rules set clearer criteria for the exclusion of companies that do not meet basic ESG standards, such as those involved in controversial industries like fossil fuels or arms manufacturing.
   • Preventing Misleading Claims: By tightening the rules, the label aims to prevent funds from making exaggerated or misleading claims about their ESG credentials, thus addressing growing concerns over greenwashing.

Impact and Importance of the Update

The update to the French SRI label is a significant step in ensuring that socially responsible investments truly reflect high standards of ESG performance. By introducing these stricter requirements, France is thus strengthening the credibility of its SRI label. Making it a more reliable benchmark for investors seeking genuinely responsible investment options.

These changes also align the French SRI label with global trends towards greater ESG accountability and transparency. Accordingly, it sets a higher bar for what qualifies as a socially responsible investment. As a result the label not only helps protect investors from greenwashing but also encourages more meaningful contributions to sustainable development.

Belgian ESG Updates:

Belgian ESG regulation aligns with EU directives, particularly the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD). It mandates financial institutions and large companies to disclose how they integrate ESG factors into their operations and investment decisions. The regulation also incorporates the EU Taxonomy, defining sustainable economic activities. Oversight by the Belgian Financial Services and Markets Authority (FSMA) ensures compliance and transparency. Certainly promoting responsible business practices while preventing greenwashing. Despite challenges in compliance and reporting, the framework enhances investor confidence and corporate sustainability.

Conclusion

The evolving regulatory landscape around ESG underscores the importance of staying informed and adaptable. The UK and Europe is refining their approaches to stewardship, sustainability reporting, and transition planning. Consequently, businesses must now be proactive in aligning with these developments. Whether through adherence to the updated UK Stewardship Code or compliance with the SDR framework, the focus remains on promoting transparency, accountability. And ultimately, effective stewardship in the pursuit of sustainable investment practices.