UK-based financial firms are being advised to undertake company-wide ‘greenwashing’ reviews and develop internal processes to identify and avoid misleading environmental claims, in order to comply with landmark Sustainability Disclosure Requirements (SDR) which enter into force today.
These are among 10 actions recommended by the UK Sustainable Investment and Finance Association (UKSIF) and consulting giant PwC, which have teamed up to produce a guidebook today for the SDR regulations in order to help asset managers and other financial firms get to grips with the new anti-greenwashing rules.
The phased introduction of SDR requirements, which have been developed by UK regulator the Financial Conduct Authority (FCA), are set to start today, initially applying to asset managers and other firms making sustainable investment claims about their financial products.
The package includes an “anti-greenwashing rule” which from today requires all sustainability-related claims about financial products and services to be “fair, clear and not misleading”, in a bid to help consumers make more informed decisions.
That is to be followed in July by the introduction of a new sustainable investment labelling regime, intended to set minimum requirements for investment funds to comply with. The use of labels, accompanying disclosures and naming and marketing rules will then come into force in December this year, according to the FCA.
Then, further down the line, entity-level disclosure rules as part of the SDR package are set to apply to large firms by end of 2025, with smaller firms following suit by the end of 2026.
Published yesterday to coincide with the new SDR rules, UKSIF and PwC said their guidebook was therefore designed to help financial firms address potential challenges surrounding the regulations, including around fund labelling interoperability across different jurisdictions; uncertainty over the qualifying criteria and standards for the labelling categories; product governance challenges; and tight timelines for compliance for the ‘anti-greenwashing rule’.
James Alexander, CEO of UKSIF, said the group was committed to supporting members through the “first crucial year of implementation” of the SDR.
“This regulation can empower our members to better demonstrate and evidence their sustainable investment approaches and strategies in an environment where consumers are increasingly looking to put their money into funds that more closely align with their values,” he said. “Working with our members, we want to ensure that consumers can access clear and consistent information on the sustainability characteristics of financial products.
“Whilst the SDR fund labels are not mandatory, they aim to encourage more consistent disclosure between firms, improve product comparability for retail investors and, in turn, allow consumers to make more informed choices when it comes to sustainable investments.”
Specifically, the guidance report urges affected firms to adopt a “strategic, long-term approach” to the new reporting rules, noting that – unlike the EU’s sustainability reporting regime – the UK had provided more flexibility for firms to prioritise reporting on issues material to them. That should enable firms to concentrate efforts on sustainability issues can impact value protection or creation, it states.
Recommendations set out in the report for financial firms include performing a broad, firm-wide greenwashing review to support compliance with the “anti-greenwashing” rule, and developing a taxonomy of terms applied internally to identify potential greenwashing and prevent it occurring in future.
The report also recommends that firm step up engagement with distributors at the earliest opportunity to ensure those distributors are comfortable with the core sustainability features of each product, the application of any labels, and any restrictions around non-labelled funds being offered.
Affected companies should additionally establish a “firm-wide product classification framework to manage the complexity within the SDR package as well as the international fragmentation of regulatory approaches”, it states.
Elsewhere, it urges asset managers and other firms to “carefully consider” what label – if any – to apply to products under the SDR, and to focus on demonstrating compliance with the 70 per cent threshold for sustainable-labelled fund.
The new SDR regulations mandate that funds marketed as sustainable must be comprised of at least 70 per cent “sustainable assets”. The report notes that this is less stringent tack that being taken in the EU, where proposed naming guidelines would require the same product meet an 80 per cent threshold.
“As asset managers continue to grapple with evolving sustainable finance regulation globally, it will be important for them to take a strategic view of the SDR package to help manage challenges around interoperability,” said David Crocker, a partner at PwC. “This means implementing changes to their product governance and sustainability reporting in a way that reflects their broader firm-wide strategy on sustainability.”
Commenting on the start of the phased introduction of the SDR rules today, Caroline Greenwell, partner at London law firm Charles Russell Speechlys, said the regulations could “change the game on the scope of greenwashing risk”.
“In the past, the majority of greenwashing allegations have featured consumer brands and their advertising and marketing,” she said. “Whilst these cases have raised the spectre of greenwashing as an issue and brought about warnings and commentary from the Advertising Standards Authority which may well have been noted in other sectors, activity concerning greenwashing issues has undoubtedly been centred on the retail and food & beverage sectors.
“These developments from the FCA could change all that. The new anti-greenwashing rule and guidance means that the risk of greenwashing no longer just concerns consumer brands, but now all FCA-regulated firms who make claims as to the sustainability characteristics of a product or service which they offer. This could change the game on the scope of greenwashing risk, and depending on how active and draconian the FCA’s enforcement of their rule is, we are likely to see a significant uptick in regulation and even litigation arising out of investment firms’ sustainability claims.”
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