Asset managers in the UK are expected to face several challenges implementing the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDR) and investment labels rules, according to a joint report published by The UK Sustainable Investment and Finance Association (UKSIF) and PwC.
The FCA has published its final rules on UK SDR and investment labels on 28 November 2023. The package of regulation includes:
- an “anti-greenwashing” rule applying to all FCA-authorised firms, intended to ensure all sustainability-related claims in relation to products and services are “fair, clear, and not misleading”;
- four distinct, voluntary sustainability investment labels that set minimum requirements for funds choosing to apply a label, intending to give greater confidence to investors and savers;
- consumer-facing disclosures intended to provide consumers with more information on the sustainability investment activities within a fund;
- detailed pre-contractual, and ongoing entity and product-level disclosures for products applying an investment label or referencing sustainability features the product name and/or marketing;
- naming and marketing rules for funds that restrict the use of certain sustainability terms in product names and marketing to enhance the accuracy of sustainability references and claims; and
- additional rules specifically for distributors in the UK, including requirements relating to the provision of product-level information.
UKSIF and PWC collaborated alongside UKSIF members, including representatives from its SDR implementation group to offer asset management firms initial insights and recommendations for action as they implement various elements of the SDR package of regulation over this year.
Challenges identified include fund labelling interoperability across different jurisdictions; uncertainty over the qualifying criteria and standards for the labelling categories; product governance challenges, and tight timelines for compliance with the ‘anti-greenwashing’ rule.
The report sets out 10 recommendations for firms on responding to those challenges:
- carefully consider what label, if any, to apply to products under the SDR;
- focus on demonstrating compliance with the 70% threshold for sustainable-labelled funds;
- establish a firm-wide product classification framework to manage the complexity within the SDR package as well as the international fragmentation of regulatory approaches;
- step up engagement with distributors to establish the core sustainability features of each product, the application of any labels, and any restrictions around non-labelled funds being offered;
- perform a broad, firm-wide greenwashing review to support compliance with the ‘anti- greenwashing’ rule;
- develop a taxonomy of terms that is applied internally to identify potential greenwashing and prevent it in the future;
- focus sustainability reporting on what is most relevant and material to an asset manager and its clients;
- streamline data collection and leverage existing reporting processes to avoid duplication and drive efficiencies;
- align reporting cycles with Task Force on Climate-related Financial Disclosures (TCFD) reporting where possible;
- adopt a strategic, long-term approach to reporting that creates value for an asset manager.
PWC and UKSIF said that many firms interviewed for the report said appreciated the opportunity presented to validate and demonstrate their sustainability leadership and strategies according to a cohesive set of standards across the industry.
With a growing anticipation of increasing demand for sustainable investments in the market, firms were broadly of the view that the right approach to implementation could provide the opportunity for managers to design their reporting around what matters to their clients and what is best for their business, report said.
David Croker, partner at PwC UK, said that the SDR package represents a “significant development” in the UK’s sustainable finance regulatory framework, bringing with it wide-ranging impacts on the asset management sector.
He said: “It will shape how UK asset managers develop sustainable investment products, ensure that sustainability-related claims stand up to scrutiny, and report on the sustainability credentials of their investments.”
He added that as asset managers continue to grapple with evolving sustainable finance regulation globally, it will be important for them to take a strategic view of the SDR package to help manage challenges around interoperability.
“This means implementing changes to their product governance and sustainability reporting in a way that reflects their broader firm-wide strategy on sustainability, helping to preserve and create value for their organisation alongside regulatory compliance,” he noted.
James Alexander, chief executive officer at UKSIF, added that while the SDR fund labels are not mandatory, they aim to encourage more consistent disclosure between firms, improve product comparability for retail investors and, in turn, allow consumers to make more informed choices when it comes to sustainable investments.
Anti-greenwashing rule
A rule to protect financial services customers from greenwashing claims, which forms part of the SDR package, comes into force today.
The rule is designed to ensure that consumers are protected from misleading sustainability-related claims, enabling them to make informed decisions that are aligned with their sustainability preferences.
All sustainability-related claims made by financial services companies about their products and services must be fair, clear and not misleading. Financial firms that fail to comply could face supervisory action by the regulator.
And while the final guidance was only published last month, Richard Weighell, financial services advisory partner at BDO, said that firms have had a significant amount of time to prepare for the introduction of the FCA’s anti-greenwashing rule.
He said that given the long lead time ahead of the introduction of the rule, he expects the FCA to immediately be monitoring firms’ sustainability-related claims, taking supervisory action where necessary.
Cadi Thomas, investment consultant at Isio, said that the new rules not only reaffirm and expand the existing frameworks established by the Advertising Standards Authority and the Competition and Markets Authority, which have long provided guidance on greenwashing and green claims.
She said that Isio is “particularly supportive” of the alignment with the broader EU-led initiative to combat greenwashing on a larger scale.
However, the wide reaching approach comes with ambiguities, particularly regarding the required level of due diligence on third-party information and the management of past communications, Thomas highlighted.
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