Before we jump into this article on SFDR regulation, it’s acronym heavy. Therefore, here are some definitions:
- FCA: Financial Conduct Authority
- TCFD: Task Force on Climate-Related Financial Disclosures
- FMP: Finance Market Participants
- EU: European Union
- ESG: Environment, Social and Governance
- SFDR: Sustainable Finance Disclosure Regulation
- UCITS: Undertakings for the Collective Investment in Transferable Securities
- AIFMs: Alternative Investment Fund Managers
- PIA: Principle Adverse Impacts
What is the Sustainable Finance Disclosure Regulation?
SFDR regulation was put into effect by the EU and is under consultation for adoption by the UK until September 2021.
Essentially, Finance Market Participants should ensure their cash flow has a positive impact on the world’s climate.
We are starting a new chapter in the history of financial services and renewing the UK’s position as the world’s pre-eminent financial centre. By taking as many equivalence decisions as we can in the absence of clarity from the EU, we’re doing what’s right for the UK and providing firms with certainty and stability.
Our plans will ensure the UK moves forward as an open, attractive and well-regulated market, and continues to lead the world in pioneering new technologies and shifting finance towards a net zero future.Rishi Sunak, Chancellor of the Exchequer, November 2020.
Who Would Need to Comply With UK SFDR Regulation?
FMP Types that will be impacted by SFDR are currently UK FCA regulated companies:
- Asset Managers.
- Life Insurers.
- Non-insurer FCA-regulated pension providers, including platform firms and self-invested personal pension (SIPP) operators.
- FCA – Regulated Pension Providers.
- Portfolio Managers.
- UK UCITS Management Companies.
- UK AIFMs.
Non-UK regulated finance companies would not fall under UK SFDA.
From what we understand, asset managers with assets under management of greater than £5 billion over a three-year rolling period will need to be compliant.
This is assuming the SFDR regulation is fully adopted by the UK, which looks likely albeit with a narrower scope of participants than the EU.
What Does SFDR Mean for UK FMPs?
This means that companies dealing with finance and investments disclose to their investors and the TCFD where their money is being invested. This type of positive investing and analysis is also known as “Green Finance”.
For example, investors may not want their funds to be invested in “green” and positive climate-related countries or companies.
SFDR also aligns with the UK governments green approach and goal to make climate-related finance disclosures fully mandatory.
What Will Need to Be Disclosed?
This is a very complex area, and large companies will need to implement compliance teams to ensure they are reaching the requirements.
Basically, the ecological primary adverse impact (PIA’s) of all investments will need to be disclosed. In other words, how bad the investments are perceived to be for the worlds climate and ecology.
However, how this is mapped and modelled and what criteria it is set against will provide the biggest challenge for FMP companies.
When will SFDR Regulations come into effect in the UK?
It is thought that SFDR regulations will come into effect for UK regulated finance companies in 2023.