We have seen in recent years a growing demand from the financial services industry for increased transparency and a reduction in greenwashing within ESG and sustainability reporting. As a result, regulatory bodies around the world have begun imposing stricter compliance measures and disclosure standards.
In a previous article, we discussed the Corporate Sustainability Reporting Directive (CSRD), which will take effect on July 6th. Today, we'll discuss two more: the SDR set forth by the UK's FCA and the SFDR established by the EU. Despite the similarity in their acronyms, these frameworks differ considerably in their requirements and implications.
Understanding the Different Approaches to Sustainability Disclosures
The EU has taken a proactive approach to sustainability disclosures, implementing regulations for financial institutions through the Sustainable Finance Disclosure Regulation (SFDR), which came into effect in 2021, and for companies through the CSRD.
Following its departure from the EU in 2020, the UK has charted a somewhat similar but independent course. Despite feedback from stakeholders suggesting that adopting the EU's SFDR could simplify the ESG framework and promote standardisation, the UK chose to establish its own regulations. In November 2023, the UK's FCA issued a policy statement on the Sustainable Disclosure Regulation (SDR) and investment labels.
This new UK regulation builds upon existing disclosure requirements, including obligations outlined by the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD, which had been monitoring progress on climate-related disclosures, transferred its monitoring responsibilities to the ISSB at the start of this year.
The FCA is also set to introduce sustainable investment product labels to bolster consumer confidence and enforce guidelines on the use of certain terms like "ESG," "green," and "sustainable" in product names and marketing, aiming to prevent misleading promotions. The regulation also includes more comprehensive disclosure requirements for both institutional and retail investors and mandates that distributors, such as investment platforms, ensure that labels and disclosures are understandable and accessible to consumers.
While the SDR is the UK's version of the SFDR, several differences between them impact investors' reporting practices.
The Key Differences Between the SDR and SFDR
The UK SDR and EU SFDR share the same objectives: to reduce greenwashing, increase transparency of sustainable finance products, and inform investment decisions regarding sustainability matters.
Despite these shared goals, the UK's SDR differs from the EU’s SFDR, particularly with the introduction of sustainable investment labels, underscoring its commitment to precise and reliable sustainability reporting. These labels are:
Sustainability Focus: For products heavily invested in sustainable assets. Companies must develop and adhere to rigorous, factual standards that support the product's sustainability aims.
Sustainability Improvers: For funds investing in assets with potential for future sustainability. The focus is on assets' growth towards sustainability under the firm's guidance, emphasising careful asset selection.
Sustainability Impact: For funds addressing significant issues affecting people or the planet, with the goal of measurable, positive sustainability impacts.
Sustainability Mixed Goals: Funds should be spread across various sustainability strategies. Companies must report the asset proportion aligned with each sustainability label.
These distinctions underline the UK’s unique approach to promoting transparency and accountability in ESG initiatives.
A Quick Breakdown of the Key Distinctions
There are some other distinctions you need to be aware of as well:
The main takeaway you need to understand is that the SDR primarily operates as a labelling regime, while the SFDR is centred around disclosures. Both frameworks aim to improve sustainability practices, but they do so differently. The SDR provides distinct labels to help consumers and investors identify and understand the sustainability characteristics of different funds.
On the other hand, the SFDR mandates thorough and transparent disclosure by entities, giving investors and stakeholders detailed insights into their investments' sustainability impacts. This method seeks to improve the integration of sustainability considerations into financial and investment decisions throughout the EU, promoting greater understanding and accountability.
GaiaLens Simplifies Compliance with SDR and SFDR Regulations
At GaiaLens, we believe that economic growth should go hand-in-hand with environmental care, social inclusion, and strong governance. Our mission is to equip investors with the necessary tools to turn this belief into real-world results.
Our advanced sustainability platform, powered by artificial intelligence, is tailored for institutional investors and financial services firms. We recognise and advocate for technology's powerful role in making informed decisions that benefit investors, companies, and communities around the world.
We support investors and asset managers in adapting to the latest regulations, including the SDR framework by the FCA and the SFDR framework, helping them to navigate the complex landscape of sustainability reporting and compliance.
If you would like to learn more about GaiaLens, visit our website or request a demo today.
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