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As regulatory measures in the UK and EU tighten to combat greenwashing, the financial sector faces an increasingly complex set of obligations, led by both the Sustainable Disclosure Finance Regulation and the Sustainable Disclosure Requirements and Investment Labels. When dealing with multiple environmental, social, and governance regimes, it’s important to have a clear understanding of your sustainability strategy in relation to the running of your business, and the offering of products and services. It’s worth paying close attention to how your governance arrangements, collection and analysis of data, and approach to reporting seek to reduce duplication of effort when adhering to both sets of requirements.
SDR regulatory activity so far
Ever since the Sustainable Disclosure Requirements (SDR) were announced by the FCA back in October 2022, the regime has been adapted to take into account developments in the EU, and a wide range of opinions from the UK financial sector on what the final requirements of the SDR should be.
Fast forward to 31st May 2024, the first rule from the SDR came into force: the anti-greenwashing rule, applying to all regulated firms in the UK. This rule is designed to ensure any claims made regarding the sustainability of a product or service are both fair and verifiable. This sent a clear message from the FCA: there’s no use of green or sustainable language without impunity.
By mid-June 2024, the consultation period closed on the proposed extension of SDR to firms providing portfolio management services, including discretionary and wealth managers. While no policy statement has been released yet, it’s anticipated that these firms won’t be brought into scope until mid-2025, providing some breathing room for firms to prepare for implementing the SDR accordingly.
For those asset managers that are in scope now, they’ll already be assessing their options to label in scope products and services, and prepare for the ongoing and consumer facing disclosure requirements later this year and into 2025. Since 31st July 2024, managers have been able to apply for an investment label by going through a thorough review to determine whether a fund meets the general sustainability criteria and the specific criteria for any of the of the four labels: Sustainability Focus, Sustainability Improvers, Sustainability Impact, or Sustainability Mixed Goals label.
The introduction of naming and marketing rules, set to come into force by the end of 2024, further tightens the requirements for retail products, ensuring that only appropriately labelled products can be marketed as ‘sustainable’ to retail investors.
Looking ahead, 2nd December marks an important deadline for firms marketing to overseas funds, as they’ll need to produce a specific notice to retail investors clearly highlighting if the SDR applies to the fund.
Larger asset managers with over £50 billion under management will l be required to produce entity-level disclosures by the end of 2025, with Assets Under Management reducing to £5 billion by the end of the following year.
Those in scope should really be thinking about the SDR and how it may apply to products and services, with a plan to achieve a successful implementation of the regime.
Safeguarding integrity in communications
The anti-greenwashing rule stands as the overriding principle to uphold the integrity of the SDR. In the EU, the same principle has been recognised as integral to ensure consumers rights are protected, and that sustainable financial products and services can be promoted fairly and accurately. Since the approval of the rule banning greenwashing in January 2024, EU countries still have 24 months to incorporate this update into their national law.
Once the guidelines have been published in all EU languages, EU competent authorities will have two months to notify ESMA whether they choose to comply or not.
Guiding investor decisions
The introduction of sustainability investment labels offers investors a clear way to assess the sustainability credentials of different UK funds. Under the SDR, for a fund to qualify for a label, at least 70% of its assets must align with the general sustainability criteria as well as the specific criteria set out for that label.
To meet these criteria, you must demonstrate a robust, evidence-based standard, although it’s important to note that independent verification is not mandatory. Key performance indicators play a crucial role in measuring progress against sustainability objectives and are required alongside detailed analysis, monitoring, and assessment at senior management level to support these efforts. This includes developing a clear investment stewardship strategy that aligns with the chosen label.
In the EU, ESAs have proposed improvements to the Sustainable Disclosure Finance Regulation (SFDR), including a product classification system to guide consumers decision making and navigate sustainable investment product options. This system has been proposed to feature categories such as: “Sustainable” for products that have a clear and objective based criteria based on the EU taxonomy for environmental sustainability, “Transition”, for transition investments, which could have cross over to “Sustainability Improvers under the SDR, and “Non-Categorised” for products outside these categories. A sustainability indicator has also been proposed that could be used to reflect the environmental and social aspects of a product, graded on a scale from green to not green (using an A to E scale).
ESG reporting regimes
The UK and EU regulators have both stressed the increased the focus on transparency and consistency in environmental, social, and governance (ESG) reporting.
Asset managers, in response to consultation for the development of the SDR, expressed concern over the potential difficulties with complying with both regimes. SFDR is currently disclosure-focused, with SDR emphasising pre contractual labels. The FCA did address this in its final policy statement by tracking how SDR compares with the current and proposed versions of SFDR. You’ll need to ensure you’re playing your part by establishing a robust internal reporting framework confirming to a methodology for how labels / categories can be attached to products. This will demonstrate sufficient evidence for the chosen label / category, and will allow the information gathered to create detailed and meaningful disclosures for consumers.
Where relevant, we recommend adopting specialised software solutions or speaking to external specialists to ensure the integrity and accuracy of ESG data is met and in line with the rest of the market. These solutions tend to be more light-touch and cost effective compared to building them in-house and spreading them across an entire client base. Creating a transparent and consistent approach ensures that the accuracy and integrity of your ESG data is upheld, while maintaining investor trust.
Bovill Newgate can help you prepare for incoming SDR and SFDR regulatory changes
Our specialist team can help you create the internal framework for understanding and attaching sustainability investment labels / categories to your products and services, catering for both SDR and eventually the new and improved SFDR. This will then also include the capability to produce the necessary disclosures required for each product, resulting in a set system internally for you to successfully implement the SDR and best prepare for a revised version of the SFDR.
For those firms who may already have a system for attaching a label to a product, we can provide sustainability disclosure templates that offer you a foundation to begin drafting your disclosures whilst also having the flexibility to tailor the structure and content to your style.
First appeared on Money Marketing.
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