Sustainability Disclosure Requirements – where do we go next? The inside view.

The sustainability disclosure requirements (SDR), announced in July last year as part of the UK’s ambition to improve sustainable investment labeling and prevent greenwashing, were initially met with huge support from the financial industry. At last, a UK comparable to the EU’s Sustainable Finance Disclosures Regulation (SFDR), helping us to ensure that funds who claim sustainable credentials, truly have them, and a framework to guide the industry on what sustainability really looks like.

However, in the wake of delays and a lack of clarity around detail, developments around SDR have seemingly ground to a halt, with a raft of questions from the industry around what comes next. To uncover some answers, WA Communications spoke with three exceptional individuals, exploring their experience of the pending regulation and their involvement therein.

At a well-attended roundtable last week, we were joined by Andrew Death, Deputy Director for the Dept for Business, Energy and Industrial Strategy;  Louisiana Salge, Senior Sustainability Specialist at EQ Investors; and James Alexander, CEO of UK Sustainable Investment and Finance Association.

The main takeaway, expressed by each of our speakers, was that regulation in this area was essential, but undeniably a challenge – and one for which we’re not quite ready. EQ investors has been focused on investing impactfully and sustainably for nearly 10 years, however, Louisiana Salge highlighted that the vast majority of the asset management sector simply “aren’t there yet”. This sentiment was echoed by James Alexander, suggesting that there is an inherent lack of skills on sustainability and that we need to encourage training in this area.

Similarly, Andrew Death explained that for the SDR to be effective, we need to concentrate on what is actually feasible and deliverable. While this might not be completely perfect at the outset, it will help businesses to transition to a more sustainable framework, rather than risk a lack of engagement and compliance from the very beginning. “We need to get people on board, and then we can up the ambition”, he said, adding that there is a real opportunity for the UK to be a leader in this sector.

Of course, effective labelling to better inform the end investor is at the core of the SDR. Salge, who was part of an industry group providing feedback on this area, recommended better alignment of the labels with other terms already in existence across the financial industry. She also urged the FCA to not simply concentrate on the end output, but to ensure the labels measure the intentionality and processes employed by asset managers when considering their sustainability focus, “this should prevent against a huge amount of greenwashing,” she said.

Another of the key aspects of the SDR is its alignment to the UK ‘s Green Taxonomy. This itself is yet to be finalised, though our speakers were vocal about the importance of getting this right. Indeed, recent suggestions that the taxonomy may include natural gas as “green” have been met with dismay. Alexander, who has already written to the Government to encourage them to remove this, asserted, “for taxonomy to be genuine, it needs to be aligned to the science…natural gas is not green!”. Death, who is working closely on the reporting framework for the Green Taxonomy added that there are certainly lessons to be learnt from the EU’s taxonomy, but simultaneously recognised that the UK’s version must be rolled out quickly to allow for the SDR to be impactful.

While we await the FCA’s draft rules, mooted to be announced this month, it’s clear that there remain a number of gaps and question marks over what the SDR should look like and how it can deliver on its objectives. What’s deeply encouraging is the appetite from the industry at large to do this correctly and to drive development and investment into the right areas. As Salge pointed out, the SDR needs to be a “tool for change” to ultimately help money flow into the right places and transition the whole economy to a more sustainable future.

We do have a way to go, but based on the insight shared and the overwhelming engagement from those in the room, it looks as though the SDR, and the industry’s response to it, might really be successful.