Review of Sustainability Regulations
Valentia Partners takes a closer look at recent sustainability requirements that may have implications for Financial Services businesses and their clients. On the 28th of November 2023, the UK Financial Conduct Authority (FCA) published the Sustainability Disclosure Requirements (SDR). This policy aims to address risks of ‘greenwashing’ and enhance transparency across sustainable investments.
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Regulatory Landscape
While decarbonisation remains a critical objective for governments, it is not mandated by regulation. UK and EU regulation is focused on transparency and accountability for firms who make sustainability-related claims.
This poses a strategic question to Financial Services businesses that need to create clarity around the substance and purpose of their products and ensure that governance, reporting and compliance practices are aligned with that substance and purpose.
As governments aim to fully decarbonise their economies by 2050, financial institutions have found themselves at the forefront of facilitating the transition through sustainable investment practices and conscientious behaviours. Global regulators continue to publish rules with the hopes of improving market trust and transparency around sustainable and ethical investment products and practices.
On 28th November 2023, the FCA published the Sustainable Disclosure Requirements (SDR), which introduced standardised investment labels to improve consistency across the market, working to reduce greenwashing and improve comparability for investors, while also seeking to protect consumers.
The SDR builds on antecedent regulation by international regulators, including the Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy, Corporate Sustainability Directive (CSDR), Sustainable Disclosure Regulations (SFDR), MiFID II, ESMA Proposed Fund Name Rules, International Sustainability Disclosure Standards (IFRS SDS). In addition, regulators have introduced ESG reporting guidelines including Task Force on Climate-related Financial Disclosures (TCFD), Streamlined Energy and Carbon Reporting (SECR), SFDR Templates, and the European Banking Authority Pillar 3 Disclosures. Accounting standards, Greenhouse Gas Protocols (Scope 1,2,3) published by the World Resource Institute were introduced to provide a structure for companies to assess and report their greenhouse gas emissions. In recent years, a new voluntary metric, Scope 4, has gained popularity among companies, covering emissions that occur outside of a product’s lifecycle or value chain.
These regulations from national and international regulators overlay guidelines, agreements and initiatives set by the United Nations (U.N). This contributes to the global discourse on sustainable practices, such as the Principles for Responsible Investment (PRI), Principles for Responsible Banking (PRB), and Principles for Sustainable Insurance (PSI).
The SDR regulation should be considered alongside other regulations, particularly the FCA’s Consumer Duty regulation, which shares the overarching theme of market transparency and accountability with the aim of assuring fair value and good customer outcomes. The regulator expects firms to apply SDR regulations keeping the aim of ‘The Duty’ in mind.
The landscape of sustainability regulations presents a web of interconnected layers involving national and international regulators, and intergovernmental organisations such as the United Nations.
These regulations can’t be read in isolation. Firms must take a holistic approach while considering the interplay between various levels of regulatory publications.
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