God Save the UK Sustainability Disclosure Regime
In conjunction with the COP26 held in Glasgow, the UK takes another step forward on the path to supporting sustainable finance with the FCA discussion paper on the UK Sustainability Disclosure Regime. Largely driven by the compelling need to build trust in the market towards investment products with ESG claims, as emerged in all its pivotal relevance already in one earlier Dear CEO letter of the same year, the FCA discussion paper on the UK Sustainability Disclosure Regime is of interest also for the implications that the new regime will have on international players.
Whilst the UK FCA in its approach shows to be clearly mindful of the compliance obligations with EU SFDR requirements imposed on many UK asset managers, many more cross-border dynamics that we may have really wanted to see, are still left uncovered at this stage by the FCA discussion paper.
And the issue of the UK sustainability disclosure regime is particularly pressing also for those US managers used to market under national private placement regime in the UK. Will compliance with the UK Sustainability Disclosure Regime going forward be necessary in order to be able to be authorised for inward marketing in the UK or simply advisable from a commercial perspective?
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UK Sustainability Disclosure Regime and EU SFDR
Since the time of the preparatory works for Brexit, UK authorities made it clear that the newly introduced EU framework on sustainable finance would have not been onshored in UK legislation. Far from being expression of oblivion towards sustainability issues, this approach has allowed the authorities to work more autonomously on the UK sustainability disclosure regime and tailor it to the exact needs of its internal market. Similar to other EU regimes not onshored in the UK – like the investment firm directive for instance – this has resulted in a time lag, compared to Europe, in the design, implementation and entry into force of the rules. More importantly though, the UK is so allowed to diverge, where required, from the EU corresponding framework, provided it remains aligned in the main principles and goals. For instance, as highlighted also in the FCA discussion paper on UK Sustainability Disclosure Regime, separate sustainability disclosure requirements have not yet been imposed also on investment advisers, albeit this is in principle believed to be necessary.
Product classification under the UK Sustainability Disclosure Regime
The framework of the UK Sustainability Disclosure Regime is more nuanced than the European one for what concerns product classification, for instance. According to the UK FCA discussion paper, one of the approaches to be adopted would entail that product classification covers the full range of investment products available on the market, including the ones actively making any sustainability claim. There would be at one end of the spectrum products not promoted as sustainable, going all the way through responsible, transitioning, aligned and impact.
As we said already, one of the concerns of the FCA is to ensure that, even though unique and autonomous, the UK sustainability disclosure regime can dovetail with the EU SFDR, with a view to make compliance less cumbersome for UK managers with international business. Accordingly, the so-called article 6 SFDR products would be associated to the corresponding not promoted as sustainable ones under the UK regime, whilst article 8 SFDR products both to the responsible and the transitioning ones under the UK regime. Lastly, article 9 SFDR products would correspond to the aligned and impact. On this point, it is interesting to see how according to the UK Sustainability Disclosure Regime, a specific niche has been carved out for impact investment products, to the contrary of the EU regime, where impact products fall indistinctively under the broader category of article 9 SFDR.
Entity level requirements and disclosures
The UK FCA discussion paper on Sustainability Disclosure Regime is also interesting for the proposed approach on the sustainability disclosure requirements imposed at entity level. Based on the need for investors to know also how asset managers or product manufacturers themselves are managing sustainability risks, opportunities and impacts, UK authorities will demand a demonstrable connection between the ESG identity of the asset manager or product manufacturer and the corresponding labels for its products. Accordingly, for a sustainability claim to be made at product level, in conjunction with the use of the Sustainable or Responsible label for investment products, there should be some minimum entry-level criteria to abide to at entity level. Those criteria are, by and large, revolving around governance, systems and controls areas and essentially boil down to demonstrable evidence that ESG considerations are integrated into investment processes to minimise risks and take advantage of investment opportunities.
For what concerns the disclosures at entity level, instead, the FCA discussion paper on the UK sustainability disclosure regime proposes an approach based on the principles of the Task Force on Climate-Related Financial Disclosures, already adopted for climate change related disclosures. In expanding those principles beyond the climate change, the UK authorities intend to strive to maintain a flexible approach, including taking into account the entity level disclosures under SFDR with a view to selectively capture them under the UK SDR.
Implications on Inward Marketing in the UK of the UK SDR
Whilst from the standpoint of European relations it is reassuring to see that regained sovereignty for the UK doesn’t equal to de-regulation, there is still uncertainty on the new dynamics that the UK SDR will introduce for cross-border distribution. And where the FCA discussion paper makes it clear that the new regime will dovetail with the EU SFDR, there is much less clarity for what concerns the broader implications of the new UK SDR regime on inward marketing in the UK carried out also by non-EU managers.
The FCA discussion paper on the UK Sustainability Disclosure Regime does hint however at the soon to be introduced Overseas Scheme Regime as one of the relevant frameworks to take into consideration when defining into more details the implications of the UK SDR in the context of inward marketing in the UK.
Will it be required to abide in full to the new UK SDR in order to be able to market in the UK? It is very hard to say at the moment. Whilst we can only speculate that the path might be easier for Europeans, given the similarity of the regimes, this remains an open question for managers at the other side of the Atlantic, where regulation is taking longer to adjust to the sustainable finance revolution.