FMLC letter raises concerns about UK-EU divergence in the field of sustainable finance post-Brexit

Written by Harrison Folland

On 21 April, the Financial Markets Law Committee (“FMLC”) published a letter sent to HM Treasury in relation to the topic of the International Platform on Sustainable Finance (“IPSF”).

The FMLC describes the IPSF as "a forum for public authorities in charge of
developing sustainable finance policies/initiatives to help investors contribute to
climate and environmental objectives. The IPSF aims to provide a forum to allow
members to share best practices, compare initiatives and identify barriers to, and
opportunities for, sustainable finance".  HM Treasury announced that the UK had joined the IPSF in February of this year.

Potential risk and regulatory uncertainty

As well as offering congratulations to HM Treasury on its participation in IPSF, the letter outlines the FMLC's concerns surrounding the potential for divergence between sustainable finance standards adopted between the EU and the UK. 

In particular, the FMLC is concerned with post-Brexit divergence in respect of:

• Regulation (EU) 2019/2088 sustainability‐related disclosures in the financial
  services sector (the “Sustainable Finance Disclosure Regulation” or the
  “SFDR”);
• Directive 2014/95/E.U. as regards disclosure of non-financial and diversity
  information by certain large undertakings and groups (the “Non-Financial
  Reporting Directive” or the “NFRD”); and
• Regulation (EU) 2020/852 on the establishment of a framework to facilitate
  sustainable investment (the “Taxonomy Regulation”).

Certain operative provisions of the above regimes became applicable from 10 March 2021. Separately, further specific periodic disclosure requirements will take effect from 1 January 2022; two further sets of requirements, concerned with areas such as climate mitigation objectives, will then come into force in 2022 and 2023 respectively. 

However, the operative disclosure obligations in respect of the above regimes were not retained in UK law following the end of the Brexit transition period at 11 pm on 31 December 2020.

As such, the FMLC considers that there is a risk posed by the fact that the UK has not clarified its approach to implementing and amending these EU measures following the decision not to onshore their relevant provisions. 

Next steps?

The letter ends with the FMLC's suggestion to:

"[use] either an approach which takes into account E.U. standards (but potentially enhancing detailed disclosure requirements at Level 2, where appropriate) or an outcomes-based approach which is consistent with the direction of travel in the E.U. and beyond, to avoid regulatory conflict" 

Finally, the FMLC has urged HM Treasury to provide additional clarity on the approach it intends to take towards the "SFDR and other pieces of legislation" post-Brexit.