impak’s response to the FCA consultation on the Sustainability Disclosure Requirements (SDR) and investment labels regime
At the end of last month, impak submitted its response to the UK Financial Conduct Authority’s consultation on the proposed Sustainability Disclosure Requirements and investment labels (SDR) regime. While impak broadly welcomes the regime, which counts tackling greenwashing, protecting consumers and building trust in sustainable investment products amongst its key themes, the following are some of the key points raised in our response :
- Interoperability – We are conscious of the potentially significant cost of compliance with the SDR regime for in-scope firms, which is reflected in a cost-benefit analysis included within the FCA consultation paper. This is particularly the case in circumstances where market participants may often be required to comply with both the SFDR and the SDR regimes. Although we recognize that there have been issues with the implementation of the SFDR, we suggest that a certain level of interoperability will be important to facilitate compliance with both regimes while avoiding an excessively heavy cost burden.
- Clarity – At various points, the SDR consultation paper highlights the need to strike a balance between principles and prescription. While such a balance is to be welcomed, clarity and precise definitions are also equally required to ensure that the scope of the regime is clear and the criteria for the various labels are distinct and easily understood. Clarity will be vital, for instance, to avoid the wave of reclassifications that we have seen in the SFDR context.
- Anti-greenwashing – The SDR regime has the elimination of greenwashing at its core, which is to be welcomed. Nonetheless, we highlighted in our response some aspects of the regime where the risk of greenwashing may persist. For instance, we noted that the ‘Sustainable Focus’ category requires a ‘credible standard of environmental and/or social sustainability’, and would welcome further guidance on this criterion to ensure that the category fulfils its purpose and that the risk of greenwashing is reduced.
- Sustainable impact – Finally, we were encouraged that the consultation paper references the Impact Management Project (IMP) as one of the initiatives consulted in the development of the SDR proposal, given that the IMP has been at the forefront of innovation in this field for the last decade. In terms of ensuring sustainable impact, particularly in the context of the ‘Sustainable Impact’ category, we welcomed the need for rigorous KPI reporting and the need for a stated theory of change, and suggested that the inclusion and consultation of relevant stakeholders as a criterion for products in that category.
The finalized SDR rules are expected around the end of Q2 this year and are expected to enter into force next year. Their introduction will bring welcome certainty for investment firms who operate in the UK.
Written by Laura Hegarty,
Senior Impact Analyst at impak