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The regulatory landscape around the sustainability of financial products is currently in a state of flux, and the UK is keen to stay in the race while avoiding the pitfalls currently faced by its European counterpart. Indeed, in 2021, the government set out its intention to make the UK the preferred place for sustainable investment, publishing its roadmap, Greening Finance. This intention will come to fruition this year with the arrival of new UK regulations.
While the European Commission is already reviewing its regulations on the sustainability of financial products, and on the other side of the Atlantic, the SEC has made a regulatory proposal, their Anglo-Saxon counterpart, the FCA, has formalized a proposal for sustainability requirements.
Almost a year ago, on October 25, 2022, the FCA published a regulatory proposal to combat greenwashing, known as the Sustainability Disclosure Requirements (SDR). These measures include transparency requirements and the classification of investment products according to a system of labels.
The consultation, which opened at the end of 2022, closed on January 25, 2023, and the FCA announced that changes would be made to incorporate the extensive feedback (over 240 responses) received on the proposals. These modifications shift the final publication of the regulations to the end of Q3 2023 (originally planned for the end of the first half of 2023). The UK SDR is expected to come into force 12 months later, at the end of 2024.
The regulation will apply to UK-based asset managers.
The current proposals will therefore not apply to foreign products marketed in the UK.
However, the FCA plans to deal with the latter at a later date, with the launch of a dedicated consultation (no publication date known at present).
In addition, given the importance of cross-border activity between the EU and the US for the UK investment fund industry, the FCA is proposing equivalence routes with the SFDR and the SEC proposal (see mapping p. 83 of the FCA consultation, available here).
In developing its proposals, the FCA drew on established standards and recommendations from a number of international bodies, including the Climate Disclosure Task Force, IOSCO and ISSB IFRS.
The proposed measures include;
Please note that these labels are exclusive: a financial product cannot fit into more than one category!
For a product to be eligible for a label, it must first satisfy "transversal" criteria, then criteria specific to its label.
One of the highlights of the SDR proposal is the Improvers category. This is the first regulatory approach to include a specific category for "going green " and not just "being green". Responsible transition can now be a strategy in itself.
⚠ Potential problems:
Theserules govern the use of sustainability-related terms in product names and marketing materials. For managers whose products do not have sustainability labels or features, restrictions apply with, for example, a ban on the use of terms such as "ESG", "green" and "sustainable" in customer literature.
For the moment, the FCA has no intention of providing templates for the various documents to be published, considering that this could be too restrictive and risk stifling innovation in this developing market.
ESG Connect's functionalities meet 100% of the FCA's proposals, while helping to limit the costs and risks associated with ESG processes. Our ESG Operating System enables:
Navigating between regulations is made easier, and future developments are anticipated for easy implementation.
Below is a link to a demo of ESG Connect
