City firms are feeling the pressure of impending environmental, social and governance (ESG) rules this year as regulators expand plans to clampdown on greenwashing, new research has found.
Financial firms in the UK have pointed to rules on sustainability as the main pinch point facing them for a second year running, ahead of a major overhaul to consumer duty this year, according to the regulatory barometer from big four firm KPMG.
The Barometer Impact Score now stands at 7 out of 10, KPMG said, nudging upwards from 6.9 in October 2022 due to “no let-up in the regulatory intensity facing UK and EU financial services firms”.
It comes as the Financial Conduct Authority prepares to roll out more formal rules governing claims around ESG and sustainability amid fears that the label has been abused by firms ‘greenwashing’ their activities.
The Competition and Markets Authority and Advertising Standards Authority similarly launched a number of probes into abuses of the terms last year to prevent firms making empty claims about environmental and social action.
Rob Smith, Head of KPMG risk and regulatory advisory said that regulators had not let up on their scrutiny of sustainability despite a “challenging six months” of market volatility and a cost-of-living crisis.
“[Regulators] could easily have distracted from progressing longer term priorities, however the drive towards a more responsible and sustainable sector continues with a relentless focus on ESG and sustainable finance,” he added. “We expect the pressure on firms to persist as supervisors and customers increase their expectations.”
The FCA is preparing to roll out firmer rules governing the labelling of sustainable products this year amid fears that the label has been abused by firms ‘greenwashing’ their activities.
The watchdog’s ESG chief Sacha Sadan announced plans in October to clampdown on “exaggerated, misleading or unsubstantiated claims about ESG credentials” that it said were eroding trust among consumers.
The watchdog tabled further plans on Friday to widen planned rules and include requirements for firms to include sustainability in their business plans and tie bosses’ pay to ESG and sustainability goals.
Regulators globally have been looking to clampdown on rules but fears have spread of a lack of standardisation across markets. KPMG’s global ESG head John McCalla-Leacy told City A.M. in November that firms were facing a sprawling and fragmented set of rules across global markets.
KPMG’s regulatory barometer today found that divergence of rules more broadly between the UK and the EU were also dominating firms’ thinking this year as politicians lean on regulatory freedom as a ‘Brexit dividend’.
The Edinburgh Reforms, rolled out by Jeremy Hunt in December, reopen 43 rulebooks creating “significant potential for further divergence”, KPMG, said
Kate Dawson, a director in KPMG’s regulatory insight centre said that as the UK scraps EU-era regulation firms will “need to adapt to an increasingly different set of requirements in the UK versus Europe”.
“The volume of emerging requirements for ESG and Sustainable Finance may lead to further differences despite global standard-setters’ best efforts to be aligned,” she added.