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The Roadmap unfolds: FCA proposes new UK sustainability disclosure regime

The Roadmap unfolds: FCA proposes new UK sustainability disclosure regime

Overview

The FCA has issued a discussion paper seeking views on proposed new sustainability disclosure requirements and a sustainability labelling system.

Further to the government's Roadmap to Sustainable Finance (see our briefing), on 3 November 2021 the FCA published a discussion paper (DP21/4) on Sustainability Disclosure Requirements (SDR) and investment product labels.

The FCA envisages a three-tiered system with different levels of disclosures targeted at different types of investors. The discussion paper also includes the FCA's proposals for the classification of products according to their sustainability activities and objectives.

The FCA proposes that asset managers and certain FCA-regulated asset owners should be in scope of the new disclosure rules.  It tentatively suggests coverage similar to that proposed for its new TCFD reporting regime, but is open to alternative suggestions.  The FCA says that it is also considering whether to introduce specific sustainability-related requirements for financial advisers and how (if at all) the regime should apply to funds that are being marketed into the UK.

The deadline for providing comments is 7 January 2022 and a consultation is expected in Q2 2022.

We set out a high-level overview of the proposals and our initial thoughts below – including the interaction with other non-UK initiatives.

Classification of products

The FCA proposes the following potential product classifications:


Sustainable investments - impact, aligned and transitioning

Broadly, sustainable investments would be those products that pursue specific sustainability characteristics, themes or objectives alongside a financial return and which meet minimum criteria. They are sub-divided into three categories: impact, aligned and transitioning. 

In order to be considered "sustainable", the entity managing the investments would need to demonstrate key attributes such as meeting governance, systems and controls requirements, integration of ESG considerations and stewardship.

  • Impact: This would mean products which have the objective of delivering net positive social and/or environmental impact alongside a financial return. In terms of the EU Sustainable Finance Disclosure Regulation (SFDR), the FCA expects that these would correspond to a (small) subset of Article 9 products.  However, since recent European Commission guidance says that Article 9 products must have substantially all their investments in "sustainable investments", it seems more likely to us that most Article 9 products would fall into this category.

  • Aligned: This would include products with sustainability characteristics, themes or objectives and a high proportion of underlying assets (measured according to a minimum threshold) that meet the sustainability criteria set out in the UK taxonomy. The FCA says that it expects these would broadly be equivalent to SFDR Article 9 products but it seems to us that this category maps more closely to Article 8, perhaps with some falling into Article 9. 

  • Transitioning: This would include products with sustainability characteristics, themes or objectives that do not yet meet the threshold for meeting the sustainability criteria in the UK taxonomy (i.e. which do not meet the threshold for aligned products). The FCA expects that these would broadly be equivalent to Article 8 products under the SFDR.

 

Responsible investments

Responsible products would not have specific sustainability goals and may not necessarily have any allocation to sustainable investments but would need to show ESG integration, evidence of ESG analytical organisational capabilities and resources and demonstrable stewardship.  As with sustainable investments, the entity managing the investments would need to meet the entity-level criteria.  The FCA expects that these would broadly be equivalent to Article 8 products under the SFDR (although it is arguable that the correct correlation for many "responsible" products would actually be to Article 6).

 

Not promoted as sustainable

These are products which do not integrate sustainability risks into their investment decisions and do not have specific sustainability goals.   The FCA expects that these would broadly be equivalent to Article 6 products under the SFDR.

Three-tiered system of disclosures

Separately (and in addition), the FCA proposes a three-tiered system of sustainability disclosures building on the climate related disclosure requirements under Taskforce on Climate-related Financial Disclosures (TCFD) framework.  It also suggests that there could be independent third-party verification of the product level disclosures.

The disclosures would form a three-tiered system as follows: 


Product labels

These would reflect the product classifications discussed above

 

Consumer-facing disclosures

The consumer-facing disclosures would provide key, standardised sustainability information for consumers to make investment decisions.   The information to be included would be fairly prescribed, possibly with templates and/or ESG factsheets, and could include the sustainability objectives of the product, the investment strategy pursued and the proportion of assets allocated to sustainable investments. There may also be a baseline set of sustainability metrics to track the sustainable performance of the product over time.

 

Detailed underlying disclosures

These disclosures would supplement the information included in the consumer-facing disclosures and would be aimed primarily at sophisticated or institutional investors.  The disclosures would be made both at product level and at entity level.

At product level, the information would provide more granular detail and could include information on the methodologies used to calculate metrics, information on data quality and limitations and further contextual and historical information.

At entity level, the disclosures would build on the proposed TCFD-aligned disclosure requirements for asset managers and asset owners (see our briefing).

At this stage, the FCA does not specify whether the labelling and disclosure regime would be equally applicable to all in-scope firms and products (as for TCFD reporting), or whether it should only apply to some.  It is seeking input on that question.

 

Initial thoughts

As seen in recent government action, the UK is an enthusiastic supporter of sustainable finance and it was inevitable that the UK would seek to forge an independent path when establishing its own sustainability disclosure regime.  In many respects, it is reassuring, at this discussion stage, that the FCA says that it will be taking into account other initiatives such as the EU's own sustainability regime in SFDR and the IFRS Foundation international sustainability standards.  However, there will be some, possibly significant, differences.  For example, the FCA's proposed categories will not exactly map to the three main SFDR categories (see our thoughts on the classification of products above).  Firms which operate both in the UK and elsewhere (particularly the EU) will be watching closely to ensure that any divergence does not lead to the need to comply with two very different regimes and the related burdens that will bring.  It is also to be hoped that the FCA take note of the criticisms around the EU's sustainability measures – particularly the complexity of the rules and the large amounts of data required - and will seek to develop a more user-friendly regime which provides meaningful information to investors.

 

If you would like further information or assistance in understanding the proposals, please speak to your usual Travers Smith contact or any of the individuals below.

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