The Financial Conduct Authority (FCA), the conduct regulator for financial services firms and financial markets in the UK, revealed that it is extending the process to introduce sustainability disclosure requirements for asset managers and ESG labelling rules for investment products, pushing back the consultation on the proposals.
The rules form part of the Sustainability Disclosure Requirements (SDR), a major part of the UK’s Green Finance Strategy aimed at establishing the UK as a center for international green finance, and aligning the financial sector and capital flows with the delivery of global and domestic climate and environmental objectives.
The disclosure and labelling rules are aimed at improving transparency through common standards, and clear terminology and product classification to assist investors to navigate the rapidly growing and proliferating sustainable investment landscape, and to help reduce the risk of greenwashing.
When implemented, the rules will require asset managers to disclose how they take sustainability into account, and manage sustainability risks, opportunities and impacts, report on the sustainability attributes of the investment products and portfolios they offer. The FCA is also working to implement an investment labelling system with information on the sustainability characteristics of investment products.
On its website, the FCA stated that the consultation on the new disclosure and labelling requirements, part of the implementation process for the new rules, is being delayed from its original target of Q2 2022 to the autumn. The FCA explained that the delay is being made to “allow us to take account of other international policy initiatives and ensure stakeholders have time to consider these issues.”
Other major regulators are in the process of also introducing disclosure rules for fund managers and investment products, including the EU’s Sustainable Finance Disclosure Regulation (SFDR) framework, and new proposals from the SEC.
According to Kate Fowler, Senior Responsibility Analyst at Federated Hermes, part of the challenge facing the regulator in the implementation of the new rules relates to the still evolving landscape of sustainability disclosures globally, most notable the ongoing development of international reporting standards by the International Sustainability Standards Board (ISSB).
“Whilst we are keen to see the UK SDR framework, which will play a similar role to the EU’s SFDR, move forward to improve the flow of sustainability information across the investment chain, the FCA does face challenges given its commitment to use the ISSB standards to create a baseline level of international interoperability as the ISSB standards are still themselves in relatively early stages of development. Greater international interoperability through alignment with ISSB standards should help to reduce the burden on companies and investors required to report in multiple jurisdictions.”
Fowler noted the importance of ensuring that sustainability disclosure rules are in place for corporate issuers before requiring asset managers to report on the sustainability aspects of their portfolios, adding that “the most comprehensive way to do this would be through primary legislation, and the omission of the SDR from the Queen’s Speech earlier this year has likely impacted the FCA’s decision to postpone consultation on the application of SDR to asset managers.”
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