In terms of the phase 1 ambition of getting the right information to market participants, the Roadmap sets out more detail on the new SDR regime as announced by the Chancellor in July 2021. It is clear that this will build on the TCFD-aligned disclosures that already apply, or will apply, to various sectors as outlined above. It is unclear as to just how different in detail and in practice the SDR will be compared to the EU SFDR regime. Although the government mentions the EU Taxonomy Regulation several times when developing the outline framework of the UK Taxonomy, it is silent on EU SFDR.
The direction of travel is towards a single, integrated framework in the UK, but one that may be very different from EU SFDR.
SDR: outline - three types of disclosure
Building on (and going beyond) the TCFD-aligned disclosures, therefore, the SDR will cover three types of disclosure:
- Corporate disclosure – sustainability disclosures by certain companies, including those in the financial services sector, comprising reporting under international standards and under the UK Green Taxonomy (see below);
- Asset manager/asset owner disclosure – new requirements for asset managers and asset owners that manage or administer assets for clients and consumers (including occupational pension schemes) to disclose how they take sustainability into account; and
- Investment product disclosure – including the introduction of a new sustainable investment product labelling regime.
See the sections below that expand on each of these types of disclosure.
The intention is to establish a unified framework across the economy, using the same metrics which will be drawn from international standards, where they exist. The aim is to ensure that environmental sustainability information can flow from companies to the financial sector which, in turn, in offering its products, should make disclosures to the end investors/consumers to allow them to make financial decisions based on reliable and comparable data.
It is unclear, at this stage, as to how the government and the regulators will ensure that the new SDR requirements will dovetail with the TCFD-aligned disclosures to which firms will be subject.
SDR: the framework
The existing TCFD recommendations establish a framework for climate-related disclosure based on four pillars:
- Risk Management
- Metrics and Targets
The government expects that the standards developed by the International Sustainability Standards Board (ISSB) (see below) will build on these four TCFD pillars, focusing on information which is material to investors. Since the current intention is that SDR will integrate ISSB's standards into its own disclosures, SDR will likewise adopt the above four pillars. The ISSB will be established later this year. Early in 2022 it is expected that it will consult on a draft set of climate-rated corporate reporting standards, before going on to set standards in relation to a broader set of environmental and sustainability factors.
However, SDR will go further than the ISSB's standards insofar as it will also require disclosure of wider information on how the firms impact the environment, including disclosure against the UK's Green Taxonomy (see below).
Taking the three types of disclosure and the four pillars of the framework, the government has summarised what firms will be required to disclose – at a very high level – in tabular format.
If you are reading this briefing on mobile, please view the below table in landscape.
The details of what will need to be disclosed will be set out in high-level, framework legislation, fleshed out with sector-specific rules made by the relevant regulators – these will likely be quite granular.
SDR: corporate disclosure
The SDR will introduce new requirements for certain UK-registered companies and UK-listed issuers, including those in the financial services sector, to make sustainability disclosures in line with:
- reporting under international standards; and
- disclosures under the UK Green Taxonomy.
These disclosures will be made in the firm's Annual Report. The scope and timing of requirements for companies, and what they will have to report in terms of detail, will be determined following consultation.
The international standards in this regard are those that will be developed by a new body created by the IFRS Foundation: the ISSB. The ISSB will be established shortly and it is expected to consult on a draft set of climate-related corporate reporting standards early in 2022.
There will be specific requirements where asset managers/owners and investment products make ESG claims: they will be required to substantiate these claims in a manner that is "comparable" and "accessible" to clients and consumers and also disclose whether they take ESG-related matters into account in their governance arrangements and in their investment policies and strategies.
As regards disclosures under the UK Green Taxonomy, in-scope companies and financial services firms will be required to report the extent to which their activities align with that taxonomy. This will include disclosures against certain minimum safeguards relating to good business practice.
SDR: asset manager/owner disclosures
There will be new requirements for asset managers and asset owners that manage or administer assets for clients (such as pension scheme trustees, employers, corporate investors) and end-consumers (including occupational pension scheme members, retail investors) to disclose how they take sustainability into account.
Asset managers/owners will be required to disclose at entity level:
- how they are managing their sustainability risks, opportunities and impacts; and
- how they take sustainability into account in managing or administering investment on behalf of clients and consumers.
Certain UK occupational pension schemes will be required to disclose their sustainability-related risks, opportunities and impacts - subject to consultation, this information will be combined with existing TCFD-aligned reporting requirements and will stand separate from, but be linked to, the annual report/accounts. The scope and timing of the requirements for pension schemes, and the level of detail that they will need to report, will be determined following consultation.
SDR: product disclosures and sustainability labelling
The SDR will introduce a new requirement for creators of investment products to report on a product's sustainability impact and on relevant financial risks and opportunities.
All such disclosures will need to be "consumer-friendly". In outline, firms will need to disclose the following in relation to the products they offer:
- the risks, opportunities and impacts of the product, together with a core set of product-level climate-related metrics; and
- the extent to which the product is aligned with the UK Green Taxonomy (including minimum safeguards).
Disclosure will be required in relation to all products – even those that are not making any claims about sustainability – on their sustainability performance. Those that do make sustainability claims will be required to substantiate those claims.
The information so disclosed will form the basis of a new sustainable investment labelling regime. The FCA and HM Treasury are working together on the development of this regime.
The aim is to establish a labelling regime that will cover the spectrum of investment products, classifying them objectively against specified sustainability criteria considering:
- each product's objective, policies and strategies; and
- how the product's investments are allocated.
The FCA will be publishing further detail in a discussion paper, currently expected in November 2021. It will also be establishing an advisory forum.
SDR: transition plans
At the outset, SDR will require certain firms to publish transition plans that align with the government's net zero commitment – or provide an explanation if they have not done so. As standards for transition plans develop, and an accepted template emerges, the disclosure requirements will be expanded.
SDR: investment advisers
Investment advisers are not included within three disclosure types outlined above. HM Treasury and FCA are currently exploring how to roll out sustainability-related requirements for them but, for the time being, there are no concrete requirements.