City firms feel the heat from fresh ESG clampdown

Charlie Conchie

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 KPMG’s the regulatory barometer.

The Barometer Impact Score now stands at 7 out of 10, nudging upwards from 6.9 in October 2022 due to “the regulatory intensity facing UK and EU financial services firms”, KPMG said, The Financial Conduct Authority is preparing to roll out more formal rules governing ESG and sustainability claims amid fears 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 Competition and Markets Author- ity and Advertising Standards Authority similarly launched a number of probes into abuses of the green 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 costof-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.

An expanded set of plans from the watchdog include requirements for firms to tie bosses’ pay to ESG goals.

The divergence of rules more broadly between the UK and the EU were also dominating firms’ thinking, KPMG found.

As the UK scraps EU-era regulation firms will “need to adapt to an increasingly different set of requirements in the UK versus Europe”, Kate Dawson, a director in KPMG’s regulatory insight centre added.