UK SDRs Will “Empower” Institutional Investors

Anti-greenwashing rules and guidance may become “diamond standard”. 

Anti-greenwashing guidance proposed by the UK Financial Conduct Authority (FCA), announced alongside plans to extend the finalised Sustainability Disclosure Requirements (SDRs) to pension products, has been welcomed by the investment industry. 

First outlined in the UK government’s ‘Greening Finance: A Roadmap to Sustainable Investing’ report in 2021, the much-delayed SDR package of measures aims to combat greenwashing in investment managers’ products for retail and institutional clients.  

Margarita Pirovska, Director of Policy at the UN Principles for Responsible Investment (PRI), told ESG Investor that the development of the SDRs should help asset owners feel more “empowered” to challenge asset managers on their investment practices, to identify greenwashing, and improve ESG integration and engagement. 

The anti-greenwashing guidance, which is open to consultation until 26 January 2024, intends to make sure that sustainability-related claims made by finance firms are “fair, clear and not misleading”. 

It will apply to all FCA-authorised firms which make sustainability-related claims about their products and services. 

The FCA said that a sustainability-related claim may be any claim which includes references relating to the sustainability characteristics of a product or service. For example, an investment or pension fund claiming it is sustainable as it is looking to deliver positive outcomes for people or the planet. 

In line with the guidance, sustainability-related references should be correct and capable of being substantiated, clear and presented in a way that can be understood, complete, and fair and meaningful in relation to any comparisons to other products or services. 

“This rule allows us to challenge firms if we consider they are making misleading claims about their products or services and, if appropriate, take further action,” the FCA warned.  

It follows the development of greenwashing guidance in other jurisdictions, such as the EU and Australia. 

Piece of the puzzle 

The anti-greenwashing guidance provides a “strong foundation”, but Pirovska has urged the FCA to “consider ways to mitigate negative outcomes on wider portfolios”. 

“The production of clear, fair and not misleading statements assumes that sustainability in and of itself is well-defined and measured, which we know is more of an evolving process than in a final state, and it also assumes that sustainability at a fund level is a mirror for the sustainability of an organisation,” added Charlotte O’Leary, CEO of Pensions for Purpose. 

“The latter of these issues is often where there are gaps and misalignments.” 

The anti-greenwashing rule was initially expected to come into effect immediately upon the publication of the policy statement, but industry feedback indicated additional guidance and more time to implement changes was needed. 

It is therefore set to come into force from 31 May next year. 

A number of financial institutions have [already] been speaking to us about having their documentation ready and making sure they are not using language that could be misconstrued,” according to Michaela Walker, European Head of the Financial Services Sector at law firm Eversheds Sutherland.  

“They have been trying to get ahead of this rule with this analysis of their existing documentation to make sure it is up to scratch.” 

While the anti-greenwashing guidance is helpful, it forms “just a piece” of the wider landscape in this space, noted Tiffany Tsang, Head of DB, LGPS and Investment at the Pensions and Lifetime Savings Association (PLSA). 

“A well-rounded, robust anti-greenwashing regime will also include the IFRS Sustainability Disclosure Standards, net zero transition plan disclosures, a UK Green Taxonomy, clarity on rules around ESG rating providers, and the development of nature-related disclosures,” said Tsang, adding that these are “all segments that will take time to develop and stitch together”. 

Serious about sustainability 

The long-awaited SDR policy statement includes changes such as a fourth fund label, an implementation timeline for the new rules, refined disclosure requirements, and less-prescriptive stewardship disclosure rules. 

[The FCA] haven’t sawed pieces off the block of wood, but they have sanded it down,” said Phil Spyropoulos, Partner, Financial Services, at Eversheds Sutherland.  

The labels are predominantly geared towards investment products marketed to retail investors, but Spyropoulos noted that the firm’s conversations with institutional-only asset managers suggest that asset owner clients “would like them to opt-in to the SDRs”.  

“There’s an expectation in the market that this is going to be the ‘diamond standard’,” he told ESG Investor.  

“Many investors want to be seen as serious about sustainability, and they will need and want to have an SDR label in their product range.” 

In the medium term, the FCA said it will consider expanding the labels to pension products, noting that “that the potential harms we are seeking to address with this regime may also arise with these products”. 

“Pension fund capital going to sustainable and impact investments is essential for the transition, so the move to incorporate pension fund products in the regime is important,” O’Leary from Pensions for Purpose noted.  

“It is not the whole story though and more needs to be done to get pension funds invested in private markets where some of the most significant sustainable and impact opportunities sit, but also integrating sustainability in all investment products rather than via separate regimes.” 

However, pension schemes are already subject to “intense climate change governance and disclosure requirements, through Task Force on Climate-related Financial Disclosures (TCFD) reporting”, pointed out Tsang from the PLSA. 

Tsang said the FCA’s planned expansion of the SDR to pension products will therefore need to be “carefully considered […] to ensure that there isn’t unnecessary overlap of purpose and outputs, which would take away precious resource from the day-to-day running of a pension fund”. 

A more integrated regime

Nonetheless, if pension products are successfully integrated under the SDRs, the PRI’s Pirovska noted that this will promote a more integrated, sustainability-focused disclosure regime across the financial system. This, in turn, will “make it easier for trustees to meet their obligations in the long run”.  

Pirovska called on the FCA to work with the UK’s Department for Work and Pensions and The Pensions Regulator to ensure that any requirement for pension schemes to provide SDR-type data to their members is delivered via pension fund regulation, rather than fund manager regulation.  

In the nearer term, O’Leary emphasised the importance of pension funds continuing to scrutinise asset managers “beyond the fund level” to understand how sustainability is embedded within the organisation, including in their governance, resources, budget, and incentivisation.  

“Alignment on sustainability is an important element of understanding an organisation’s commitment to sustainability and any potential reputational risk,” she said. 

Additionally, the document provides comparisons to other sustainability fund-focused disclosure and labelling regimes – most notably, the EU’s Sustainable Finance Disclosure Regulation (SFDR), which is currently under review.  

The UK SDRs and the EU’s SFDR do not currently completely align, O’Leary acknowledged, adding that it is therefore “tricky” for asset managers to navigate differing requirements, which may mean that they decide to only opt for one regime – or neither – to avoid potential reputational risk.  

“The SDR categories are, however, clearer and therefore easier for an investor to interpret and seek alignment with,” added O’Leary. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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