{"id":10123,"date":"2023-06-26T13:34:00","date_gmt":"2023-06-26T13:34:00","guid":{"rendered":"https:\/\/iqeq.com\/?p=10123"},"modified":"2023-08-16T15:24:19","modified_gmt":"2023-08-16T15:24:19","slug":"marketing-sustainable-investments-in-europe-and-the-uk","status":"publish","type":"post","link":"https:\/\/iqeq.com\/insights\/marketing-sustainable-investments-in-europe-and-the-uk\/","title":{"rendered":"Marketing sustainable investments in Europe and the UK"},"content":{"rendered":"
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Keeping up with the rapid pace of regulatory change can be exhausting\u2014but when it comes to sustainability disclosures and ESG-related compliance, fund managers would do well to pay attention.<\/strong><\/p>\n

For the first time since Brexit, UK-based fund managers have a strategic choice to make about the sustainability regimes they will participate in. Each option contains unique pros and cons, so managers must understand each regime well to extrapolate their long-term impact. In addition, non-UK based fund managers aiming to target UK investors may benefit from a high-level understanding of the regime being developed in the UK, as it may allow future-proofing of their offering and align their internal ESG \/ SFDR compliance.<\/p>\n

At present, there are two primary regimes for fund managers to grapple with: the UK regime SDR, and the EU regime SFDR. Managers must understand the key practical differences between the two to make good decisions about how they market funds in the UK, the EU, or both.<\/p>\n

SFDR and SDR: an overview<\/h2>\n

SFDR<\/h3>\n

The EU\u2019s Sustainable Finance Disclosure Regulation (SFDR)<\/a>, introduced by the European Commission in 2018, outlines sustainability disclosure requirements for investment firms and managers. SFDR applies to entities established in the EU and products marketed in the EU, regardless of the marketing entity\u2019s location.<\/p>\n

SFDR aligns with the UN General Assembly\u2019s 2030 Agenda for Sustainable Development, which includes a broad scope of still-developing ESG indicators and metrics, including the Sustainable Development Goals (SDGs). SFDR also introduces Principal Adverse Impacts (PAIs), which take into account the impact of respective firms on the wider society, even when those matters may not impact the investment value.<\/p>\n

PAIs are also used for a \u201cdo no significant harm\u201d test for \u201csustainable\u201d investments, so that such investments do not cherry-pick certain sustainable objectives while causing societal harm. SFDR further offers the possibility of aligning products to a Taxonomy, thus aiming to create another level of assurance for sustainability focused investors.<\/p>\n

Large EU-based companies and all companies with securities listed in an EU-regulated market also fall within the scope of the Corporate Sustainability Reporting Directive (CSRD), a set of corporate sustainability reporting rules initially designed for large firms. Companies in scope of CSRD will soon be required to report on their sustainability-related impacts, risks and opportunities, including those represented by their value chain.<\/p>\n

SFDR has been in effect since 10 March 2021, but with significant changes unfolding at the time of writing.<\/p>\n

SDR<\/h3>\n

The UK\u2019s Sustainability Disclosure Requirements (SDR)<\/a> aims to provide investors with more accurate, consistent and easily comparable sustainability information and is currently in consultation, with the Policy Statement due in Q3 2023.<\/p>\n

It has as its starting point the recommendations of the international Task Force on Climate-Related Financial Disclosures (TCFD)<\/a>, a globally standardised framework focused solely on climate-related metrics. However, SDR goes beyond climate and also embeds other ESG considerations.<\/p>\n

SDR does not contain a \u201cdo no significant harm\u201d test, which the FCA views as too restrictive, nor does it reference reporting of PAIs. SDR also does not include references to Taxonomy alignment, though this will likely change when a UK Taxonomy is developed.<\/p>\n

SDR is expected to come into effect in Q3 2023, along with clarifications on greenwashing. Funds that make sustainability claims should review their marketing prior to Q3 and ensure that it is clear, fair and does not mislead investors.<\/p>\n

Post-Brexit divergence<\/h2>\n

There\u2019s no \u201cchicken or egg\u201d about it\u2014in the world of sustainability disclosures, SFDR came first, enabling the FCA to make deliberate policy decisions based on lessons learned from its rollout. SDR also received more industry-wide engagement than EU regulators had available before SFDR was rolled out. Because of that timeline, SDR enjoys some of the advantages of hindsight. On the other hand, significant uncertainties remain for the brand-new regime, such as a lack of clarity on whether non-UK funds will be within the scope of SDR.<\/p>\n

In many ways, SFDR and SDR are each the inverse of the other. SFDR began as a disclosure regime that ultimately became known as a hierarchical labelling regime. UK regulators thus started SDR as a labelling regime, eliminating the hierarchy\u2014but there\u2019s a good chance that it will ultimately become a disclosure regime.<\/p>\n

For the first time since Brexit, UK-based fund managers have a choice about the sustainability disclosure regulations they will adhere to. They have no obligation to comply with SFDR unless they are marketing funds to European investors under the National Private Placement Regime (NPPR). Managers who opt to market funds in the EU will need to adhere to the requirements of both jurisdictions.<\/p>\n

Key differences between SFDR and SDR<\/h2>\n

At their core, SFDR and SDR are both designed to increase investor trust, combat greenwashing, increase transparency around sustainable finance, and empower investors to make better-informed decisions. However, the mechanisms they employ to achieve those ends differ in a few key ways.<\/p>\n

SDR will employ three labels: focus, improvers and impact. These labels do not correspond to the three categories in SFDR (Article 6, Article 8 and Article 9).<\/p>\n

Through SDR, the FCA is working against \u201cexaggerated, misleading or unsubstantiated claims\u201d within sustainable investment products. Consumer-related disclosures are meant to help investors understand the key sustainability features of an investment product and compare different products to each other.<\/p>\n

Importantly, SDR\u2019s labels are not hierarchical. Instead, they are reflective of consumer preferences:<\/p>\n