The FCA has asked us what our members want in terms of UK regulation against the background of the EU’s moves in sustainable finance. Ben Nelmes sets out the background before we outline how we will seek member input.
Ben Nelmes, UKSIF Head of public policy:
“The UK’s exit from the EU this year comes at a time when the EU is pressing ahead with its sustainable finance agenda. The EU is creating a new body of sustainable finance policy and law, with the laudable aim of making all of finance sustainable. Last year, the EU passed a major new law to make all asset managers, asset owners and financial advisers consider sustainability issues and risks in the course of their business. This Sustainable Finance Disclosure Regulation (SFDR) establishes a framework for how sustainable finance will be conducted the European Union.
In the EU considering financially material risks from environmental, social, or governance factors will no longer be optional – all must do it, and all must publish how they do it. But more significantly, SFDR introduces strong and requirements for large firms (with more than 500 employees) to consider the impact of their investment decisions on sustainability factors. Those who do this face extensive and technical disclosure requirements, and must publish how investee companies fare on issues such as their gender pay gap, their carbon intensity, and various other measures of environmental, social and governance impacts. In short, SFDR requires investors to think about the non-financial performance of companies in a way that has never been mandated by regulation before. These regulations will affect UK member firms selling into the .
Significantly for UKSIF members, the SFDR contains additional requirements that only apply to firms which offer a product that is marketed as a sustainable investment. Firms that do this must make extra disclosures showing that they have rigorous methodologies to back up their claims, and that they are using appropriate benchmarks.
SFDR applies from 10 March 2021. The European Supervisory Authorities are consulting on regulatory technical standards which put the detailed flesh on the bones of SFDR. UKSIF will respond to this consultation and we encourage members to get in touch with their views about the EU’s proposals (see below).
In the UK, there is some question about whether the rules will apply, since they come into force after the end of the Brexit transition period. But in terms of UK ambition, the UK government has a commitment (using language UKSIF suggested) to ‘at least match the ambition’ of the EU’s sustainable finance agenda. The new development, and the reason for this piece, is that the UK government and financial regulators are starting to think about how the UK will go about doing this.”
– What are these? Lower disclosure if they do it or something else?
It’s basically a kind of enhanced comply or explain. Either you do it, in which case you have to do a lot of reporting on how. Or you don’t do it, in which case you have to publish quite a long explanation of why you don’t consider impacts on sustainability factors. And for firms with more than 500 employees, you don’t get a choice, you have to do it.
UKSIF’s mission to grow UK sustainable finance benefits members. Shaping regulation such that society and the environment gain, and so that our members –the leaders- grow by doing right is central to our work. There are great opportunities and threats for the world and for members as this regulatory process plays out. Done well we will see rapid growth in sustainable finance and the best –our members- will do best, done badly and we will see missed opportunities in the real world and a loss of momentum, innovation and quite possible existing excellence in UK responsible finance.
We are determined that in leaving the EU the UK does not fall behind, but we know that not everything the EU is proposing is favoured by all members. We now need to decide what we want and how we want it delivered in the UK.
The FCA has asked for our initial thoughts to help shape their programme and a lot more work will follow in that programme, – but we will be working with the outcomes for longer.
So we need your views. Our plan is for an initial webinar in June to explore these issues in more depth. Currently we see the following as key questions but we welcome your thoughts:
- Which parts of the EU action plan are most likely to effectively drive up standards in the EU and UK markets?
- Are there are other actions the UK should consider implementing?
- What, if any, parts of EU sustainable finance legislation pose the biggest practical challenges for UK practitioners?
- Are any parts of the EU sustainable finance legislation likely to have deleterious effects on the UK market?
- What are the challenges that different sizes and types of firms would face when adapting to the EU sustainable finance legislation if it were replicated in the UK?
- In which areas of the legislation are UKSIF members keen to see alignment between UK and EU sustainable finance legislation? Is alignment likely to bring practical benefits?
Please send any thoughts to Ben.Nelmes@uksif.org and keep an eye out for the webinar invitation