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By Keith Maner, Compliance & Technical Manager, Thistle Initiatives 

ESG (Environmental, Social and Governance) considerations are now becoming standard practice as financial institutions implement ESG strategies while investors increasingly seek to invest in companies that adhere to ethical practices and move towards ‘impact’ investing. Figures released by the Investment Association in February 2022 showed that £16bn was invested in responsible investment funds in 2021, a figure that was £4.3bn higher than in 2020.

In the not too remote past, ESG and sustainability were little more than investment buzzwords, but they are fast becoming business as usual. The increasing popularity of sustainable and responsible investing, as well as the growing economic arguments in its favour, have resulted in regulatory and policy change across the world, with the UK often taking a pioneering role in this.

The impetus for financial services markets to help combat climate change initially stemmed from a series of global, European and UK initiatives. The UN began the process and in December 2015 the Paris Agreement added requirements for regulators, wealth managers, credit rating agencies and benchmark providers to ensure proper conduct. The EU has produced a sustainable finance action plan ( requiring companies to consider sustainability risks and to disclose how ESG is integrated into their investment process. The plan will also introduce new benchmarks and a European-wide taxonomy. The taxonomy already exists in draft and, although it is not mandatory yet, its existence means that financial institutions can start evaluating their portfolios from an ESG perspective, and individual companies can see how they measure up.

The European Commission plans to clarify in the very near future how the industry should integrate sustainability risks and factors into its governance and investment processes. This will be done either by amending delegated acts under, for instance, the UCITS, AIFMD, MiFID II, Solvency II and IDD Directives, or by introducing new delegated acts under these Directives. The UK Government has stated that it will comply with or exceed the new requirements. ESG is being treated as part of the government’s Clean Growth Strategy ( and relevant initiatives are underway from the FCA and PRA.

In 2021, the European regulator ESMA proposed changes to MiFID II requiring advisers to incorporate clients’ ESG or sustainability preferences as part of the existing suitability assessment process. Similar proposals are likely to be introduced in the UK, but the details and timing for this are still unknown.

It is clear that any requirement to take clients’ ESG or sustainability preferences into account when giving advice is likely to be significant for UK investment advisers. For the first time, advisers would have to consider specific, non-financial factors when carrying out a client suitability assessment under COBS 9, and when demonstrating ongoing suitability. The requirement would be applicable whether giving advice on a specific product or service or when managing a portfolio.

The European Union’s Sustainable Finance Disclosure Regulation (SFDR), also known as the Disclosure Regulation, came into effect in March 2021. SFDR, which does not apply in the UK, imposes transparency obligations and periodic reporting requirements on investment management firms at the product and manager level. For the largest investment firms, this means extremely onerous ESG disclosure requirements. However, some degree of additional disclosure will be required from all firms that market funds into the EU, while firms that incorporate ESG considerations into their investment process will be required to make detailed product level ESG disclosures.

All firms in scope of the SFDR (that is, non-UK firms), including those that do not purport to make sustainable investments, must include on their websites a description of their policies with respect to how sustainability risks are integrated into their investment process and remuneration practices. Here, “sustainability risk” means an environmental, social or governance event or condition – for example, widespread flooding across parts of the UK or high workforce turnover as a result of poor employment practices– that could cause a material negative impact on the value of an investment.

All products in scope of the SFDR, including products that do not purport to promote any ESG factors, must be accompanied with a pre-contractual disclosure that sets out the manner in which sustainability risks are integrated into investment decisions and the likely impacts of sustainability risks, such as environmental events, on the returns of the product. Even where sustainability risks have been deemed to be irrelevant, a brief explanation of the reasoning must be provided.

The UK Government has committed to at least matching the key objectives of the EU Sustainable Finance Action Plan. The framework of the EU Taxonomy Regulation, including the environmental objectives, will form part of UK domestic law as retained EU law, but not the disclosure obligations and technical screening criteria. 

The EU’s Capital Markets Union project includes a package of reforms on sustainable finance intended to define a harmonised ESG framework for European financial services firms in order to prevent ‘greenwashing’ – that is, the marketing of products as having an ESG component when in fact ESG considerations are not substantively taken into account in the investment process.

The UK will become the first country in the world to make Task Force for Climate-related Financial Disclosures (TCFD) – aligned disclosures fully mandatory across the economy by 2025, going beyond the ‘comply or explain’ approach. The cross-regulator taskforce published its interim report ( with a roadmap for implementing mandatory disclosures, many of which will come into force by 2023. The future rules and regulations will capture a significant portion of the economy including listed commercial companies, UK-registered large private companies, banks, building societies, insurance companies, UK-authorised asset managers, life insurers, FCA-regulated pension schemes and occupational pension schemes. Non-binding guidance was issued on this in February 2022 ( 

Additionally, the revised EU Shareholder Rights Directive (SRD II) requires asset managers to develop and disclose an engagement policy that describes how they combine shareholder engagement in their investment strategy. ESG issues are central to SRD II, with the engagement policy needing to describe how they monitor investee companies on relevant matters. These include strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance, conduct of dialogues, the exercise of voting rights and other rights attached to shares, communicating and cooperating with relevant stakeholders of the investee companies, and managing conflicts of interests.

The revised UK Stewardship Code ( took effect on 1 January 2020 and places ESG factors at the heart of effective stewardship. Within its twelve principles for asset owners and managers, signatories are required to integrate stewardship with investment, including on material ESG issues. Furthermore, signatories are required to explain how this integration has differed for funds, asset classes and geographies.

Since the major regulatory bodies  proposed new anti-greenwashing measures at COP26, the pressure is now on lenders and investors to ensure climate and ESG claims made by borrowers and investee companies stand up to detailed scrutiny. The International Sustainability Standards Board (ISSB) will replace the alphabet of different reporting standards with one rigorous yardstick, thereby facilitating comparison between different companies. In addition, the FCA’s discussion paper entitled “Sustainability Disclosure Requirements (SDR) and investment labels” ( is another significant development.

The FCA has explained its strategy in this space as follows (;

‘Transparency’ and ‘trust’ have been key themes of our work on climate change and ESG, reflecting the initial priorities we set out in October 2019 (FS19/6) and building on our extensive work over the years on corporate governance, senior manager responsibilities and culture and purpose.  

These remain core areas of focus, but our work is moving into a new phase. In mid-2021, we welcomed our first Director of ESG, Sacha Sadan. Leveraging the breadth of our powers and tools, Sacha has a mandate to embed ESG considerations, seamlessly and comprehensively, across our functions: a ‘golden thread’ approach.  

We are already working hard to ensure that we have the right arrangements and capabilities in place across the organisation to respond to the Chancellor’s expectation in our latest remit letter that we ‘have regard’ to the Government’s commitment to a net zero economy by 2050 in all our regulatory activities.  

But as society and the financial sector look beyond climate, we need to ensure that these arrangements are scalable to deliver a consistent, coherent and cross-cutting approach to ESG issues more broadly.  

So, building from our work so far, we have developed a refreshed ESG strategy. The strategy sets out how we plan to deliver on the target ESG-related outcomes included in our Business Plan 2021/22, along with some core principles that we have applied to identify the key themes of our work programme and our near-term priorities. 

Our work is based on 5 core themes:  

  • Transparency – promoting transparency on climate change and wider sustainability along the value chain 
  • Trust – building trust and integrity in ESG-labelled instruments, products and the supporting ecosystem 
  • Tools – working with others to enhance industry capabilities and support firms’ management of climate-related and wider sustainability risks, opportunities and impacts 
  • Transition – supporting the role of finance in delivering a market-led transition to a more sustainable economy 
  • Team – developing strategies, organisational structures, resources and tools to support the integration of ESG into FCA activities 

As we deliver our strategy across these themes, we are collaborating with the Government, other UK regulators, industry and other stakeholders to ensure UK financial services and the UK regulatory regime are at the forefront of ESG internationally.  

We are also working actively with our international partners to develop robust and commonly agreed international standards on ESG that can serve global markets effectively. We want UK consumers, financial services firms and securities issuers to interact and operate within a world-leading system.  

And we are looking closely at how technology, innovation and a data-led approach can be harnessed to support the integration of ESG both across markets, and in our regulation.  

Our strategy will continue to develop as we respond to – and deepen our knowledge, resources and understanding of – the changing landscape. We expect to provide further detail and granularity in certain areas as our thinking evolves – most notably, our long-term objectives and priorities under each of the E, S and G dimensions; as well as our success measures and performance indicators.  

This sets a clear standard that regulated firms must be prepared to follow.

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