Industry warns of implementation timeline for SDR

On 28 November, the regulator published its SDR and investment labels policy statement, which introduces a set of new rules aimed at tackling greenwashing, including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ and ‘sustainable’ can be used.

Firms will be able to begin using labels from 31 July 2024, and the rules on naming and marketing will come into force on 2 December 2024.

Rules on ongoing product-level disclosures and entity-level disclosures for larger firms – with AUM of over £50bn – will become effective on 2 December 2025, and entity-level disclosures rules will be extended to smaller firms – with AUM of more than £5bn – on 2 December 2026.

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The FCA also published a guidance consultation paper on its anti-greenwashing rule, with the aim of helping firms better understand its expectations. The consultation period for the guidance is open until 26 January 2024, with the anti-greenwashing rule set to come into effect on 31 May 2024.

The rules have been largely welcomed by the asset management industry, but some sustainable finance regulation experts have raised concerns over the scope and speed of the product labelling regime’s implementation.

“The FCA clearly expects firms to adhere to this high regulatory standard by the deadline, and companies now face a challenge to meet tight implementation timelines, with many needing to review and adapt their current plans,” said Richard Monks, UK sustainable finance partner at EY.

Phuong Gomard, principal at Mazars, described the new regime as “proportionate and pragmatic”, but warned the implementation timeline to comply “may pose challenges”, emphasising the need for firms to proactively embed the rules without delay to navigate any potential obstacles “as soon as possible”.

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Michaela Walker, partner at law firm Eversheds Sutherland, said the considerable number of small changes made to SDR since the FCA’s consultation paper meant firms “will need to absorb the changes and start to think about how they want to react”, noting that there is a “lot of detail to process and a lot of decisions to make”.

Julia Dreblow, CEO of SRI Services, agreed, adding that while the FCA appears to have “tried to make this as straightforward as possible”, there was still the problem of varying expertise between firms.

“For example, some continue to struggle with what ‘sustainable’ and ‘’sustainability’ mean, so it will be easy for them to overstate their positions unintentionally,” she said.

Meanwhile, James Corah, head of sustainability at CCLA, stressed the importance of implementing SDR before it is properly assessed.

“As an industry, we will not really know until we really start trying to get into the detail of designing funds that meet these criteria,” he said. 

SDR has consumer at its heart but adviser role is now key

While he hoped SDR would make sustainability labels meaningful, which he said will “consign the days of meaningless ESG to recycling bin”, he warned that the industry will not know the full extent of the challenges ahead “until we get into it”.

“One thing we know for sure is that it is going to be a lot of work – but it is going to be worth it in the end?” he added.

Walker agreed: “What will be interesting will be how firms are able to put the regime in practice and how easy it will be to turn the FCA rules into meaningful investor disclosure. 

“Our experience so far in helping firms who wanted to be ahead of the game and start prepping for the new rules is that it is not straightforward,” she added.