Brexit and the EU’s sustainable finance disclosure regulation, smart contracts and Israel

Brexit and the EU’s Sustainable Finance Disclosure Regulation (SFDR)

On 7th November 2021, The Sunday Times published a supplement entitled “Sustainable Investing”, including an article headed “Muscle from Brussels: EU law retains its reach”.

The article describes the SFDR which came into force throughout the EU on 10th March 2021. This was after the end of the post-Brexit transition period on 31st  December 2020 and, therefore, the Regulation is not binding on the UK.  The thrust of the article, however, is that the Regulation will have a strong indirect effect on the UK.

In the words of the article, the Regulation is “likely to be a disruptive force across the EU, obliging a broad range of organisations participating in the financial markets to publish more information about their environmental, social and corporate governance (ESG) performance. But the regulation also has significant implications for players in the UK, as its requirements apply to any non EU- based asset manager that deals with EU investors.”

The article sets out its view that the SFDR’s main aim is to prevent “greenwashing” and safeguard investors by establishing a clear framework under which investment products can be compared. In this context, according to the article, the Regulation requires asset managers and financial advisers to demonstrate their ambitions towards, and engagement in, ESG, placing the burden on them to collect ESG data and report on this data. The article says that they must also share how they plan to integrate the associated risks into the investment decisions that they make.

The article points out that the obligation to publish information is not restricted to ESG funds, adding, however, that those funds that promote environmental and social characteristics (article eight funds) and those that have sustainable investment as their key objectives (article nine funds) may be required to make additional disclosures.

The UK is clearly thinking along similar lines to the EU in relation to the SFDR’s objective of combatting greenwashing and indeed the Sunday Times article states that, as well as signalling its intent to make the requirements of the international Task Force on Climate-Related Financial Disclosures obligatory for all large companies by 2025, the UK Government has established an independent Green Technical Advisory Group to confront greenwashing. The UK’s Financial Conduct Authority (FCA) has in addition, according to the article, published a consultation paper on climate-related financial disclosures for asset managers.

(In a separate but related development, the UK government has published draft legislation in the form of the draft Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021, intended to come into force on 6th April 2022, which will require publicly quoted companies, large private companies and limited liability partnerships to include climate-related disclosures in their strategic reports.)

Investopedia, the online resource, defines “greenwashing” as “the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound….Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.” These are as good working definitions as any for identifying the phenomenon of greenwashing at a time when environmental issues (and ESG-related issues more generally) are so much in the public eye.

The likely impact of the SDFR on the UK’s asset management industry demonstrates the need for the UK and EU authorities to work closely together on combatting greenwashing, if they can.

Brexit and Smart Contracts

On 25th November 2021, the Law Commission for England and Wales published its document: “Smart Contracts – Advice to Government”.

The tenor of the publication is about reviewing the appropriateness of the English and Welsh Common law to regulate smart Contracts and the technology which drives them or whether there needs to be statutory reform in some way – the reality being that in the post-Brexit era the UK has to drive the reform of its own laws and is not subject to new laws promoted by the EU.

On page 1 of the 212-page Advice to Government, a “smart legal contract” is defined for the purposes of the Advice as “a legally binding contract in which some or all of the contractual obligations are defined in and/or performed automatically by a computer program. Smart contracts, including smart legal contracts, tend to follow a conditional logic with specific and objective inputs: if “X” occurs, then execute step ”Y” .”

On page 5, the Advice states that “our findings conclude that the current legal framework is clearly able to facilitate and support the use of smart legal contracts. Current legal principles can apply to smart legal contracts in much the same way as they do to traditional contracts, albeit with an incremental and principled development of the common law in specific contexts.”

In a separate paragraph on page 6, the Law Commission does express the view that further work needs to be done around the law of deeds and the rules on jurisdiction to improve the regulation of smart legal contracts by the law of England and Wales but this does not appear to detract from the Law Commission’s general findings on the current legal framework, as outlined above.

The Law Commission’s Advice is likely to be influential because of the nature of its subject matter and affects an important area of developing legal interest in the post-Brexit era.

Brexit and Israel

On 29th November 2021, the UK and Israeli Foreign Ministries entered into a Memorandum of Understanding on the UK- Israel Strategic Partnership. The Memorandum provides that the two countries would “immediately commence consultations on the development of a bespoke UK-Israel Bilateral Roadmap to extend and deepen bilateral and multilateral cooperation, across shared priorities”.  These shared priorities are stated to include diplomacy, defence and security, economy, cyber, science, technology, climate, health, development and gender – quite a broad brief!

On 2nd December 2021, The Times reported that an Israeli tech company, Windward, was set to float on the UK Stock Exchange’s AIM market next week with a view to raising £34 million. According to The Times, Windward promotes itself as a “predictive intelligence” technology company, providing live maritime analysis and shipping surveillance information. This is an example of the interest by Israeli tech companies in establishing links with the UK.

These developments are particularly interesting, given the growing economic and political relations between Israel and the United Arab Emirates and other regional actors in the Middle East and given also the UK’s steps to increase its own trade relations with those countries, particularly in the light of Brexit.

The strengthened interest of the UK in Israel and friendly countries in the Middle East may reflect the UK’s changed focus, now that the UK is no longer in the EU.

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Disclaimer: Nothing in the Legal Insights section and this blog is intended to provide legal or other professional advice and, if readers are interested, they should consider taking separate legal or other professional advice accordingly.

David Glass

Partner in Business & Corporate, Commercial Contracts
& Insolvency & Corporate Recovery

E: [email protected]
T: +44 (0)845 257 9449