Investment - Articles - The Edinburgh Reforms and ESG

On 9 December 2022, the Chancellor of the Exchequer, Jeremy Hunt, announced from Edinburgh a set of reforms to the regulation of the Financial Services Industry in the UK: these have collectively been termed the “Edinburgh Reforms”, and may lead to further fundamental changes in the regulatory system, but what does this mean for Financial Institutions?

 By Claire Nightingale, WTW Global Head of Finex FI Claims Advocacy

 In the first of a series of articles addressing the impact of the Edinburgh Reforms, we take a look at the impact they may have on environmental, social and governance (ESG) initiatives. Look out for the next article in the series on the management liability (D&O) implications of ring fencing and changes to the Senior Management & Certification Regime.

 Edinburgh Reforms
 The Reforms are a set of proposed measures and consultations which are broadly designed to drive growth and competitiveness in the financial services sector. They include proposals around:
 maintaining and building a competitive marketplace and promoting the effective use of capital;
 securing the UK’s leadership role in sustainable finance;
 ensuring the regulatory framework supports technology and innovation; and
 delivering for consumers and businesses.
 Some of these proposals, such as the potential reform of the ring-fencing regime, itself introduced following the Independent Commission on Banking chaired by Sir John Vickers in reaction to the global financial crisis, have led to commentary that the extent of deregulation could be dangerous. The suggestions in respect of sustainable finance, however, seem to be more positively framed to align with the regulator’s stated objectives.

 ESG strategy
 The strategy of the Financial Conduct Authority (“FCA”) for 2022 – 2025 sets out a view of positive change. It highlights the reality that both companies and consumers are increasingly considering environmental, social and governance issues when choosing products, services and investments. This was further underlined by the publication in November 2021 of an ESG strategy which recognised that the financial sector has an important role to play in helping the economy adapt to a more sustainable long-term future. It specifically drew out the risk of greenwashing and stated that:

 “consumers, industry participants, civil society, regulators and the media are all increasingly questioning the integrity of some of the ‘green’ claims made by companies and financial firms (Costantini, 2022)”.

 This is extremely topical; for example, recently we have seen a UK bank criticised - the Advertising Standards Authority ruled for the first time that a bank had misrepresented its green credentials and engaged in so-called “greenwashing”.

 A clear commitment was made by the FCA in its strategy document to:
 building trust in the market for sustainable investment products and tackling greenwashing through work on sustainability disclosures and product labelling
 supporting integrity in the ESG ecosystem, by encouraging improvements in ESG data, ratings, assurance and verification services
 promoting well-designed, well-governed, credible and effective net-zero transition plans as a member of the Government’s

 Transition Plan Taskforce
 consulting on a new regulatory framework and data requirements to accelerate the pace of change on diversity and inclusion
 publishing final rules on diversity and inclusion on company boards and executive committees.

 The Edinburgh Reforms build partly on this commitment and promises further progress as an updated Green Finance Strategy will be published early in 2023. Whilst there is no mention of Inclusion and Diversity Initiatives in the Edinburgh Reforms (more on that in another article), there are plans to consult in Q1 2023 on bringing ESG ratings providers into the regulatory perimeter. This strikes us as a key step towards ensuring conformity and tackling greenwashing.

 We continue to carefully monitor greenwashing allegations and how they may play out in court (and thus in the insurance industry, for those of our clients and prospects with the benefit of professional liability and management liability protection). A more defined regime with clearer regulatory oversight will surely make it easier for claimants to articulate where and how they have been victims of greenwashing and to frame claims accordingly.

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