This year needs to be the one where UK regulation moves up a few gears. Whether it moves up enough remains to be seen.
The Financial Conduct Authority (FCA) discussion paper Sustainability Disclosure Requirements (SDR) and investment labels, published last November, will frame many of these developments. It’s a detailed document, and something of a curate’s egg. That UK regulation will take a qualitative step forward in 2022 is a definite positive.
The FCA has indicated that it will toughen up on greenwashing on ESG fund marketing, and I expect the screws will be further tightened over the year. But there are some rather odd formulations that will need addressing. For example, those product categories of “sustainable” and “transitioning” set a very low—and in the latter case confusing—bar that I suspect won’t make the final cut (see graphic from the discussion paper, below).
Source: FCA
UK regulators could do a lot worse than see how the Investment Association approached this in its 2019 report IA Responsible Investment Framework, which lays the basis for a common categorisation and retail investor labeling. That, of course, and learning the lessons from the EU rollout of SFDR. After all, while it’s good to learn from your own mistakes, it’s even better to learn from others’.
Which brings us to the EU. There will likely be ongoing pressure from asset managers for alignment with the bloc. That’s overall a good thing, especially as I think the SFDR—warts and all—is in better shape than the UK SDR. However, the EU continues to kick the can down the road. More regulation needs more resources, taking time to put in place, exacerbated by the failure to link up the different elements of SFDR to start with. Also, no one is eager to absorb higher cost as margins grow ever tighter—understandable, except, of course, we are running out of road.
Last year’s COP26 highlighted that the window for timely action is fast closing. The investment industry has a pivotal role to play in addressing this, but only if it seriously and collectively puts pedal to metal.
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