ESG: will the United Kingdom align with European standards?

In June 2022, “The Summit for Asset Management” (TSAM) was held in London, an annual event that brings together leading asset management companies to discuss the latest challenges facing the buy-side community as well as the evolution of the technological and regulatory landscape. There were therefore big names in asset management such as Vanguard, Amundi, Schroders but also Aviva or Allianz and Axa.

Several panels have been organized to address recent issues related to ESG. These panels as well as the exchanges we had with the various stakeholders are an opportunity for us to give you an up-to-date overview of regulatory developments on both sides of the Channel.

Regulations at the level of the European Union

On the European side, the SFDR and the Taxonomy Regulation apply to financial market players, including investment companies, UCITS and alternative investment fund managers.

The SFDR requires that “sustainable” funds be classified in one of the categories of Article 8 or Article 9 (or under Article 6 for the rest) and that they provide more information on their approaches in order to strengthen the protection of end investors.

The European Supervisory Authorities (ESA) published in October 2021 their final report on their draft regulatory technical standards (RTS) which aim to promote greater harmonization between the various European standards. This RTS project therefore seeks to establish standardized rules for sustainability-related information concerning pre-contractual and periodic information on SFDR products, including product information related to Taxonomy.

These standards will also help define requirements for Article 8 and Article 9 products that are products that “promote environmental or social characteristics or that have sustainable investment goals.”

Advances in ESG in the United Kingdom

In the United Kingdom, the government said it wanted to trigger a “green industrial revolution”, A ten-point plan to stimulate recovery from the COVID-19 pandemic, including by making climate-related reporting mandatory in annual financial reports by 2025.

One sustainability reporting framework (SDR) is under development and should be aligned with the EU sustainable finance framework. It also includes a sustainable investment labelling system that will apply to asset managers and portfolio managers and will have significant implications for funds and the wider financial services sector in the United Kingdom.

The Financial Conduct Authority (FCA), the British financial markets authority, has also published its general policy statement in December 2021, establishing the final rules and guidelines for a new climate reporting framework for asset managers and institutional investors certified by the FCA.

These rules, which came into force in January this year, require these players to make annual statements on how they take climate risks into account in the management of investments and the products they offer.

Unlike the SFDR, the FCA rules only apply to asset managers, life insurers, and pension funds that are licensed by the FCA.

And now?

As regulations continue to develop across the Channel, it is therefore also a question of making an extra effort to align with the evolution of global ESG reporting standards and to ensure that they do not diverge to avoid adding a layer of complexity to a current system that already lacks harmony and readability.

To cite just one example, we can mention the principle of materiality, which is now emerging as the new cornerstone of sustainable finance reporting and regulations on extra-financial information. American initiatives, in particular the SASB and the ISSB, are more in the direction of simple materiality than of double materiality, contrary to the European vision.