From the end of this month, the UK’s Sustainability Disclosure Requirements (SDR) regime comes into force which the Financial Conduct Authority says has a simple aim: “Financial products that are marketed as sustainable should do as they claim and have the evidence to back it up.”
But simplicity could be the SDR’s downfall with detractors calling the requirements insufficient and claiming they fail to deliver real transparency for ESG investors.
Mikael Homanen, Head of Scientific Research, Innovation and Partnerships for independent data company The Upright Project, says SDR “does not go far enough by simply tackling how ESG funds are named and labelled”, and he is pushing for “bolder, more significant leadership from the FCA to better understand the true impact of an ESG fund”.
Homanen says: “[The SDR] is well intentioned but it doesn’t go far enough to meaningfully deliver fund transparency. Understanding the material impact of funds on people and the planet – including their underlying assets – should be a fundamental data point for investors and stakeholders.”
Homanen argues that investors and stakeholders should be able to access scientific information on the actual and relevant impact of a fund’s underlying assets, which should be presented in comparable formats.
“Rather than sticking at the level of defining greenwashing as a naming and labelling issue, we should be looking at the specific metrics applied, thresholds and binding elements used to define impact intensity of an ESG fund. This means interrogating the actual methodology and value chain of the underlying assets,” Homanen says.
The main concern, from Homanen’s perspective, is the lack of substance demanded by SDR, with the focus instead being labels rather than material impact.
“It is in the interest of funds to consider, and communicate honestly, the full extent of their associated material impact on people and the planet, based on scientific knowledge. We would like to see the FCA be bolder about encouraging this behaviour,” he says.
Meanwhile lawyers are warning that fund managers should demonstrate integrity when disclosing information under SDR, noting that the FCA is prepared to act against firms posing consumer harm or serious misconduct, with potential penalties including fines and suspensions.
Lucy Blake, Partner at law firm Jenner & Block, says: “Firms need to avoid cherry-picking data and ensure transparency by considering the full life cycle of products in sustainability claims. It’s not a one-time tick-box exercise either – continuous monitoring and updating of a product’s sustainability status is required to maintain compliance.”
She adds: “Firms must also be cautious about relying on third-party information, as they are responsible for verifying and transparently sourcing all data.”
And, according to Blake, it is not just the FCA’s scrutiny firms need to watch out for.
She says: “Greenwashing can lead to actions from other UK regulators such as the Competition and Markets Authority and the Advertising Standards Authority, civil claims from consumers, and severe reputational damage.”
