As regulators engage in discussions with one another, there is a noticeable convergence in the developments across various regulatory frameworks. The Australian Government recently unveiled its Sustainable Finance Plan, introducing labelling and disclosure obligations for financial products, reflecting the approach taken by the FCA.
Additionally, in response to ongoing feedback, the European Commission has reopened for consultation on the Sustainable Finance Disclosure Regime (“SFDR”). It is currently exploring the possibility of transitioning to a labelling regime from the current classification system. Multiple European asset managers have expressed their support for reformation of the SFDR due to a lack of clarity on certain definitions and approaches; it has thus been characterised as not fit for purpose. For example, there has been feedback regarding issues associated with the Principal Adverse Impacts (“PAIs”): certain PAIs are deemed non-material to companies, leading to confusion in the ESG reporting cycle. In contrast, the FCA has decided not to include an equivalent regime within the SDR. This may place the FCA and the UK in a favourable position, as multiple jurisdictions have expressed interest in emulating their approach.
Regarding the initial Consultation Paper, our opinion was that the proposed three sustainable investment labels should not be mutually exclusive, and a blended approach should be available. However, the FCA has listened to the concerns of certain stakeholders concerning this issue and has now introduced a fourth product label called 'Sustainability Mixed Goals'. This is a welcome development, and it will be interesting to see the distribution of the labels from fund managers as take-up begins.
The SDR introduces rules that affect various categories of financial market participants, including asset managers, FCA-regulated asset owners, listed issuers, and financial advisers. Additionally, the regulation establishes a labelling and classification system for investment products. The SDR final Policy Statement was released on the 28th of November 2023.
Key points about the SDR and its impact on alternative asset managers include:
Scope of Regulation: The SDR applies to a range of financial market participants, including firms involved in portfolio management, UCITS management companies, ICVCs that are UCITS without separate management companies, full-scope UK Alternative Investment Fund Managers (“AIFMs”), and small-authorised UK AIFMs.
Requirements for Asset Managers: Asset managers must adhere to the relevant elements of the regulation, including labelling and classification of their investment products, disclosure requirements at product-level and entity-level, and an anti-greenwashing rule.
Phase-in of rules: Different rules will come into effect at various stages, as seen below, and firms must organise and prepare accordingly.
