This Focusing on Funds looks at new changes in the UK's approach to the Sustainable Finance Disclosure Regulation (SFDR). The Financial Conduct Authority (FCA) has confirmed that the SFDR will not apply in the UK because it has an application date after 31 December 2020.
It was previously expected that Level 1 of SFDR (which contains the majority of the substantive disclosures and applies from 10 March 2021) would apply in the UK, while the more onerous and quantitative provisions of the Level 2 Regulation (which are still not yet finalised) would be replaced with UK specific disclosures instead. However, the FCA have confirmed that neither Level 1 or Level 2 will apply.
SFDR imposes a series of new disclosure obligations that will require all relevant financial market participants (including investment management firms) to make sustainability-related disclosures at a product and entity level. However, although named the “disclosure regulation”, there are material business and policy decisions that in scope firms will need to make before the disclosures can be made – particularly around the impact of sustainability on their investment processes.
We expect that the FCA will be consulting on its own sustainability related proposals for investment management firms early next year and that these are likely to be more aligned with the TCFD. The FCA have also previously stated that their overall aims will be aligned with those of the EU in this area, even if the disclosure requirements diverge.
This obviously causes confusion for those clients already deeply involved in the preparation for SFDR. Practically, we must think not only of the legal requirements but also the potential business and reputational impacts. This is not an area where we are looking only to “tick the box” on a legal requirement but to ensure that the market shift on sustainability is maintained and continues to improve. As such:
Pan-European clients: for managers with entities and ranges across Europe, this will have little impact and your SFDR projects will need to continue apace with less than 5 months until implementation. For many clients, the UK position will have little impact where the main services are provided across product ranges in the EU. Although the disclosures may not legally be required in the UK, we have been seeing clients look to make the strategic decisions for SFDR on a global business level: it is not realistic that entities/products in the EU and entities/products in the UK, where still very much linked in terms of management and strategies, will have different approaches to sustainability.
Reputation and market position: we do not have clarity on the FCA’s approach and so it may be considered best practice to continue with the preparation for more detailed disclosure for the UK ranges in any event. The UK has been market leading in sustainable investment to date and we do not consider that clients will want to endanger this position simply because the disclosures are not required. Reputationally – and from a competitive perspective – this is not an attractive proposition.
Influence on FCA position: with a consultation paper expected early in 2021, the industry has a change to influence the FCA’s eventual rules on sustainability related disclosures. Where clients consider that having harmonised rules in this area is key to driving change, demonstrating this and responding to industry calls for feedback will be crucial.
How can we help?
We have experts on sustainable investment across Europe and are advising many clients on the pan-European implementation of SFDR. We would be delighted to speak to you about your plans and provide guidance on the impacts of the UK position.
In any event, with less than 5 months until European implementation there remains a lot of work to be done at a business and product level – please do contact us if you require assistance.
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