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The ESG Review: Growing gap between UK and EU regulation poses ESG headaches

With companies facing rising regulatory pressure around ESG disclosures, a new report this week has pointed to a growing post-Brexit gap between how those rules may be implemented in the UK versus the European Union.

The KPMG Regulatory Barometer drives regular reports that aim to chart the key areas of pressure across the evolving UK and EU regulatory landscape, and measure the impact of the likely change.

In the latest version, ESG and sustainable finance again had the highest regulatory impact score across the key themes impacting business. No huge surprise there perhaps, and KPMG said “we expect the pressure on firms to persist as disclosure requirements are implemented, supervisors increase their expectations around climate risk and initiatives around ESG data and ratings, product labels and carbon markets ramp up.”

Yet it also pointed to how the divergence between the UK and the EU over relevant regulations continues to increase, according to Reuters. And while it has implications for all businesses operating internationally, that widening gap stands to create the greatest burden for the financial services sector, with City AM framing the story as ‘more greenwashing pressure being landed on the shoulders of City firms’.

There are multiple areas of regulation in play here. One set, the wide-ranging Edinburgh Reforms, which ‘reopen’ - and broadly deregulate - 43 sets of rules inherited from the EU, were rolled out by Chancellor Jeremy Hunt late last year. They’re intended to help the UK’s financial services sector remain globally competitive post-Brexit, but their implementation will create “significant potential for further divergence” from the EU approach, according to KPMG.

And some sector observers have gone further, outlining why the reforms - that effectively deregulate some aspects of sustainable finance rules and are softer on ESG reporting stipulations than counterpart measures brought in by the EU - may be “dangerous”. In other words, lighter ESG disclosure requirements in the UK may cause longer-term problems if they’re profoundly out of kilter with EU ones.

Meanwhile, in the eyes of one French regulator at least, the EU has not gone far enough with its ESG regulatory clampdown. The rules for labelling sustainable investment funds need tightening to avoid 'greenwashing' investors who want to help cut carbon emissions, markets watchdog AMF said.

And a major trade association in Asia this week said there was “no escape” from the new legislative demands from the EU that would be placed on Asian companies exporting to the EU bloc in compelling them to share data on their ESG performance.

Perspectives and politics were always destined to make the UK’s take on regulation in this area different to the EU route. With the rubber now hitting the road, the compliance implications - and multinational complexities - for companies are finally becoming clearer.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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