Under the UK SDR regime, for all labels, firms need to obtain or undertake an independent assessment of the standard for sustainability to confirm that it is appropriate for asset selection and fit for purpose. The independent assessment can be carried out either by a third party or via a firm’s internal processes as long as those carrying out the assessment are appropriately skilled. Firms also need to disclose the basis on which the standard is considered to be appropriate and the function or third party that undertook the assessment. Firms also need to ensure that the independent assessment remains valid on an on-going basis.
The EU SFDR only requires limited third-party verification of disclosed documentation. The Corporate Sustainability Reporting Directive goes further in the sense that it also requires assurance on the sustainability information that companies report and provides for the digital taxonomy of sustainability information. In addition, the position under the EU SFDR may be changing in that the Commission consultation solicited views on whether there should be mandatory third-party verification of product categories or self-declaration by the product manufacturer.
Taxonomy alignment
Another notable difference is taxonomy alignment. The UK aspires to develop its own green taxonomy although there have been delays. The EU has its own green taxonomy that helps companies and investors identify environmentally sustainable economic activities to make sustainable investment decisions but at present does not have a social taxonomy that aims to provide a classification system to determine whether an economic activity is considered socially sustainable.
ISSB
The UK remains a strong advocate of the standards developed by the International Sustainability Standards Board (ISSB). The ISSB issued its first standards in June last year. The FCA has already said that, where appropriate, it will consider updating product level disclosures requirements once the UK’s own green taxonomy is in use, and entity-level disclosure requirements in line with future ISSB standards. In addition, it will consult on updating its Taskforce on Climate-Related Financial Disclosures (TCFD) aligned disclosure rules for listed companies to reference the ISSB’s standards.
The EU has instead developed the European Sustainability Reporting Standards (ESRS) although it has sought to ensure a high level of alignment between these and the ISSB standards. In Q&As issued last summer on the adoption of the ESRS the Commission stated that “the EU goes further than any other major jurisdiction to date in terms of integrating the ISSB standards into its own legal framework”.
Incidentally, the market has previously queried the relationship between the ISSB standards and the TCFD standards. From a UK perspective in the 45th edition of Primary Market Bulletin the regulator noted that the ISSB standards build on the TCFD framework and IFRS S2 is consistent with the 4 core recommendations and 11 recommended disclosures published by the TCFD. The TCFD has now been consolidated into the IFRS Foundation and a comparison of IFRS S2 with the TCFD recommendations has also been published.
Conclusion
As illustrated above there are a number of important differences between the EU SFDR and the UK SDR regime that firms operating in both the EU and the UK need to get to grips with and many of these are summarised in the table below. But it feels that from the EU perspective change may be on the horizon following the outcome of the Commission’s consultation on the EU SFDR. Indeed in some Member States there have already been calls for the creation of labels. For instance, the Dutch Authority for the Financial Markets advocated the creation of three new sustainable product labels – “transition products”, “sustainable products” and “sustainable impact products”. Firms therefore need to keep a close eye on developments.
UK SDR
EU SFDR
Territorial scope
Currently limited to UK asset managers and UK domiciled products.
Extends to products marketed across the EU, regardless of the location of the entity.
Sustainability objective
Yes. Must be clear, specific and measurable.
For some products but not all (Article 9 funds).
Labelling scheme
Yes.
Not yet but this may be under consideration.
Product level disclosures
Yes.
Yes.
Entity level disclosures
Yes.
Yes.
Marketing
Anti-greenwashing rule and the restriction on the use of sustainability related words in marketing materials.
Not yet.
Sustainable asset thresholds
Yes at least 70% of assets must be invested in accordance with a robust, evidence based standard that is an absolute measure of environmental and/or social sustainability.
Only for Article 9 products but no specific link to a robust, evidence-based standard.
Do no significant harm principle
No.
Yes.
International Sustainability Standards Board (ISSB)
UK SDR expected to be based on the ISSB standards.
Not yet.
Principal Adverse impact indicators
No but there is a requirement to identify any material negative environmental and/or social outcomes that may arise in pursuing the sustainability objective.
Yes and further disclosures may be required of some firms.
Taxonomy alignment
UK aspires to develop its own Taxonomy.
Green Taxonomy, but no Social Taxonomy.
Key Performance Indicators (KPIs)
Yes – KPIs to measure performance against the sustainability objective.
Yes.
Ensuring there are appropriate resources, governance and organisational arrangements commensurate with the delivery of the sustainability objective
Yes.
No.
Source link : https://www.nortonrosefulbright.com/en-lu/knowledge/publications/2fd487aa/the-eu-sfdr-and-uk-sdr-examined
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Publish date : 2024-05-31 07:00:00
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