With pressure mounting and a great deal for the FCA to consider following recent feedback, care should be taken to avoid a disjointed and confusing implementation of SDR, writes James Tinworth, counsel, Haynes and Boone, LLP
In November 2021, the FCA issued discussion paper DP21/4 (Sustainability Disclosure Requirements (SDR) and investment labels) for initial views on a new SDR regime for asset managers and certain FCA-regulated asset owners and a proposed sustainable investment labelling system. The FCA then issued consultation paper CP22/20, which revised the initial proposals and set out draft FCA rules. The consultation closed on 25 January 2023.
Subsequently, on 29 March 2023, an FCA update noted that “there is broad support for the proposed regime and outcomes we are seeking to achieve, and we have received rich, constructive feedback on some of the detail”.
Owing to this “significant response”, the June 2023 Policy Statement publication date has been postponed.
There must be political and other pressure to get the UK’s ESG fund regime up and running. In spite of this, the FCA should take as much time as required at this stage to be able to fully implement the new rules in accordance with the proposed timeline.
The UK should take a very different approach to deadlines and implementation from the EU’s Sustainable Finance Disclosure Regulation (SFDR) regime, which caused confusion and uncertainty due to twelfth-hour timing changes and a fragmented approach to implementation. The SFDR also came into effect without the fundamental concepts of the Article 8 and Article 9 fund being, at best, not fully understood and, at worst, not properly developed. This resulted in market participants being unwilling to launch products with Article 8 or 9 labels and a furore over greenwashing, particularly where products had incorrectly used the Article 9 label. The UK should learn from this and take additional time at the start – even beyond the current one-three-month delay - in order to deliver a fully formed and understood regime and to avoid either of these consequences. Fortunately, it is likely that a large number of the 240 respondents to the FCA’s consultation can draw on detailed thinking that was put into the SFDR consultation process to the benefit of the UK’s regime.
The updated timeline for implementation is as follows:
July – September 2023:
• The general anti-greenwashing rule requirement comes into effect upon publication of the final rules
July – September 2024:
• Labelling, naming and marketing, consumer-facing and pre-contractual disclosure requirements and rules for distributors become effective
July – September 2025:
• The first ongoing sustainability performance-related disclosures published
• Entity-level disclosures in the sustainability report published by the largest firms with smaller firms’ publishing requirements implementation staggered afterwards
Proposals under the microscopeThe full FCA proposals found in the discussion paper range from a general anti-greenwashing rule to restrictions on the naming and marketing of products to the provision of detailed consumer-facing, pre-contractual and entity-level disclosures.
Aimed at helping consumers navigate the product landscape and enhance consumer trust, three sustainability labels have also been suggested:
o ‘Sustainable focus’
o ‘Sustainable improvers’
o ‘Sustainable impact’
Firms need to assess whether to apply any of the sustainability labels to their products and also whether the products meet the FCA’s qualifying criteria.
Does the world need more ESG fund labels? I question whether the disjointed approach to ESG funds around the globe is the right way to proceed. I understand that each bloc will want to take its own regulatory approach, and I suppose that investors from the relevant region might have their own particular preferences when it comes to ESG, but surely it would be good news if the costs for complying with numerous ESG fund regimes were reduced through a level of conformity or mutual recognition.
Application of the proposed rulesThe application of the proposed rules is key because:
(1) Unlike the EU’s SFDR, the rules will not apply to non-UK managers and non-UK Alternative Investment Fund Managers. However, the FCA notes its intention to follow with a separate consultation on how the proposals may be applied in respect of overseas managers.
(2) Most of the rules apply only where a UK manager chooses to make use of one of the prescribed “sustainability labels”.
(3) Many of the rules only apply where retail investors are involved. However, managers will be aware of how easy it is for an individual UK investor to technically fall short of the professional investor criteria and trigger retail investor protections (e.g., PRIIPS KID requirements etc.).
(4) The “sustainability entity report” requirements do not apply where the UK manager’s AUM is under £5 billion (on a three-year rolling basis).
We look forward to the FCA’s Policy Statement in Q3…or whenever it is appropriate to be released.
* James Tinworth is counsel in the Investment Management Practice Group at Haynes and Boone, LLP
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