![Global rules on foreign direct investment](https://www.nortonrosefulbright.com/-/media/images/nrf/nrfweb/knowledge/publications/us_24355_legal-update--fdi-alert.jpeg?w=265&revision=a5124a65-abf9-40e4-8e96-9df39ffdb212&revision=5250068427347387904&hash=96B456347C3246E5649838DF281C5F5D)
Publication
Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Global | Publication | agosto 2020
The PRA’s Supervisory Statement (the SS) 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change,’ sets out the regulator’s expectations in relation to the way in which banks manage the financial risks from climate change.
Firms are expected to:
In the SS, the regulator identified the fact that several respondents had asked the PRA to clarify whether the SS applies to third-country branches. The PRA confirmed that the SS applies to regulated UK-incorporated entities, and “although it does not specifically apply to branches, those firms are welcome to advance these issues within their firm more broadly and can approach their supervisory contact to discuss the expectations if helpful.”
However, we are aware of UK branches of third-country firms, having received letters from the PRA which indicate an expectation that most firms’ business models will be impacted by climate change to some degree, and therefore that branches as well as subsidiaries should have regard to regulatory expectation in this area and be making changes to address this.
During 2020, the PRA expects firms to identify and assess their exposure to risk from climate change, and embed appropriate governance and risk management processes as well as making progress on their plans for scenario analysis and disclosure. On July 1, 2020, the PRA issued a Dear CEO letter in which it states that firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021. This means that by the end of 2021, firms should be able to demonstrate that the expectations set out in the SS have been implemented and embedded throughout their organization as fully as possible. In doing this, firms should take a proportionate approach that reflects their exposure to climate-related financial risk and the complexity of its operations.
There is a range of regulatory requirements and expectations globally, and this makes it extremely challenging for firms to ensure they are aligned with the market in all jurisdictions where they operate.
In several jurisdictions, the regulatory regimes in this area are still developing, and firms need to be in a position to respond effectively to changes.
There are also challenges around data.
In the market, there are a number of challenges to greater embedding of sustainable finance considerations that have been identified, including:
Another challenge for international groups is how to manage the dynamic between local branches/subsidiaries and head office to ensure that policies and procedures align with local and global regulatory requirements and expectations.
Sustainable finance is one area where different regulators are advancing their expectations at a slightly different rate – whilst some (for example those in the UK and EU) are already fairly advanced, others are still in the development pipeline stage.
In broad terms:
Some firms take a ‘one-way valve’ approach to applying standards across their group. This means that the firm can have strategic policies applied by head office globally, which then flow through the group to all local subsidiaries and branches. At the same time, local branches/subsidiaries might need to impose a second set of obligations on only the local business – these would not flow up to the head office or to the other global operations.
Ensuring that the UK business has the power to raise local issues and adopt a local position that might diverge from that taken centrally by head office, is important, and firms should consider questions such as:
Firms will need to document their decision making so that they could justify, if challenged, why certain decisions were made.
Financial risks from climate change can affect all firms, regardless of size. For instance, smaller firms with particular sector or geographical concentrations could be disproportionately affected by the financial risks from climate change.
Therefore, the PRA is keen to avoid being overly prescriptive in terms of how it expects firms to apply the requirements.
Instead, firms should consider how they best meet regulatory expectations in a way that is appropriate for them and proportionate to the nature, scale, and complexity of their business.
There is also an important element to this from a director/senior individual perspective.
Firms that are subject to the UK’s Senior Managers and Certification Regime (SMCR) will be aware that a cornerstone of the Regime is the requirement on firms to submit appropriate Responsibility Statements. Although climate change is not a prescribed responsibility, the SS reflects the fact that the PRA expects firms to identify and allocate responsibility for identifying and managing financial risks from climate change to an appropriate Senior Manager, and for this to be reflected in the individual’s Responsibility Statement and senior manager forms.
It is up to each firm to decide which senior manager should assume this responsibility – although firms asked for guidance on which individual(s) to appoint as relevant SMF holder(s), and whether they should be first- or second-line of defense, the PRA has, to-date, not wanted to be prescriptive in relation to which individual(s) should be appointed the responsible SMF(s). It is for firms to decide the individual(s) most appropriate in their organization.
Integrating sustainable finance considerations is a key consideration for institutional investors as part of the new Shareholder Rights Directive II (SRD II) in the EU and institutional investors and asset managers are required to:
The shareholder engagement policy must include detail of how institutional investors and asset managers:
It’s also worth noting that the sustainability agenda is becoming increasingly important for Independent Governance Committees (IGCs), which currently provide independent oversight of the value for money of workplace personal pensions in accumulation. The FCA has now extended the remit of IGCs to include a new duty for those groups to consider and report on their firm’s policies on sustainability issues, member concerns, and stewardship, for the products that IGCs oversee (https://www.fca.org.uk/publication/policy/ps19-30.pdf)
In the Green Finance Strategy, published in July 2019, the Government committed, in relation to green finance, to at least match the ambition of the three key objectives included in the EU’s Sustainable Finance Action Plan, which are to:
The UK will retain the framework of the EU’s Taxonomy Regulation, including the six environmental objectives, as it will enter into force on July 12, 2020, before the end of the transition period and will form part of retained EU law. However, the disclosure requirements will apply later (January 1, 2022 for climate change mitigation and adaptation; January 1, 2023 for the other objectives) and therefore will not form part of retained EU law. The Government has declined to comment on the extent to which the UK will align with the EU after the implementation period because the delegated legislation containing technical standards has not yet been published by the European Commission, meaning the UK does not “have clarity on the final outcome of the file.”
The EU Sustainable Finance Disclosure Regulation (SFDR) entered into force on December 29, 2019 and therefore forms part of retained EU law as the UK remained an EU Member State. Whilst most provisions of the SFDR are due to come into effect on March 10, 2021, some come into effect on January 1, 2022 (and have been omitted from UK law).
The amendments to the Benchmarks Regulation introducing the EU Climate Transition Benchmark and EU Paris-aligned Benchmarks enter into force on December 10, 2019 and benchmark administrators must comply with the new requirements by April 30, 2020, within the transition period. The amended Benchmarks Regulation will therefore form part of retained EU law and will apply in the UK.
Wider “lessons learned” reviews can be very valuable exercises to understand how businesses have performed through COVID-19.
Once the COVID-19 pandemic is under control, it is likely that the next major focus of regulators and rule-makers will be sustainability.
Firms would therefore benefit from considering sustainability as part of any future lessons learned reviews – both what has gone well and what could be improved:
They can also give confident positive cultural messages to stakeholders and regulators. Some areas we see as particularly relevant in this context include:
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Publication
Artificial intelligence (AI) raises many intellectual property (IP) issues.
Publication
We are delighted to announce that Al Hounsell, Director of Strategic Innovation & Legal Design based in our Toronto office, has been named 'Innovative Leader of the Year' at the International Legal Technology Association (ILTA) Awards.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023