ESG and SDR
ESG (Environmental, Social and Governance) requirements have become increasingly important for firms providing financial and/or investment advice. On top of this, FCA have now proposed Sustainability Disclosure Requirements (SDR) alongside Consumer Duty. Efficiently navigating the complex interactions between all three requires experience and skill.
Environmental, Social and Governance principles require that investors consider the qualitative aspects of an investment (ie impact on environment and society, ethics, and proper accountability) rather than the purely quantitative aspects (ie the prospective returns).
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The problem with ESG is that it is largely voluntary, and unwarranted and misleading claims can be made about it (this is often called greenwashing).
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PS23/16 - Sustainability Disclosure Requirements (SDR) and investment labels - has now been published with a matrix of implementation dates for different firm types and sizes. All firms must have implemented the anti-greenwashing rules by 31st May 2024.
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SDR tightens up the use of language around ESG, and puts mandatory procedures in place to ensure that the qualitative aspects of investing are covered thoroughly.
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Over and above this, SDR will integrate with Consumer Duty to ensure that customers understand what they are being told and are not being misled by classic greenwashing practices.
The core presupposition is that customers will wish to engage fully with ESG principles: any departure will require a high degree of justification.
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Getting things wrong, and having to rectify later, will be massively expensive - as will gold-plating the requirements.
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The optimum combination of full compliance with process efficiency requires a deep understanding of the purpose of the requirements - and practical experience of regulatory implementation. We have both.
Issues for advice firms
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Testing and monitoring for good consumer outcomes
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Ensuring and demonstrating that clients have made an informed choice
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Include ethical issues in suitability assessments
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Removing barriers ('sludge') from ESG appraisals
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Maintain the firm's competence to meet the requirements
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Avoid accidental greenwashing
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MI to demostrate ongoing suitability
Issues for fund managers
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Testing and monitoring for good consumer outcomes
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Reviewing existing material relating to ESG and values investing
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Establishing compliant processes and documentation
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Training of key personnel
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Tools to maintain internal capability (rather than relying on external review)
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Stress testing new processes
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Language ('label') selection and reporting
Most of our work is confidential in nature so details cannot be published. We are happy to provide more specific information about work we have undertaken.