UK Sustainability Disclosure Requirements (SDR) proposals – who will bear the cost?

March 13, 2023
1 minutes

The Treasury Sub-Committee on Financial Services Regulations has published a letter expressing concerns over the FCA’s anti-greenwashing proposals, set out in its consultation on Sustainability Disclosure Requirements (SDR) and investment labels (which we previously covered here). 

The FCA’s proposals are labelled as ‘lop-sided’, highlighting that further work is ‘clearly necessary’ on what the costs will be, who will pay and how the FCA will enforce the proposed rules. The Treasury Sub-Committee’s letter to the FCA follows an evidence session at the end of February in which industry representatives and the FCA were asked to provide their views on the proposals to the Treasury Sub-Committee.

Where the mis-selling of ‘sustainable’ funds causes investors to divest from such funds (because they no longer meet investors’ ESG requirements), the Sub-Committee raise concerns that the FCA has not yet considered who will bear the additional costs potentially incurred by investors divesting from such products. The potential detriment to consumers in a seller’s market in the event of a large-scale simultaneous exit by investors with ESG mandates (where a fund is no longer able to market itself as ‘sustainable’) is also highlighted.

Further concern is raised by the Sub-Committee on the FCA’s appetite for enforcement against firms where consumers have been misled by greenwashing. During the evidence session on the proposals, the FCA stated that it would not be investigating cases of mis-selling ‘sustainable’ funds or issuing fines retrospectively on the basis that the industry would be given time to adjust to the new rules. The Treasury Sub-Committee highlights how this is seemingly at odds with the fact that such firms have breached the FCA’s fundamental principle of being fair, clear and not misleading (which is itself a cause for enforcement).

The Treasury Sub-Committee also posed questions to the FCA with regards to:

  • Whether establishing tighter FCA requirements could be too onerous for EU or US funds to meet, resulting in such funds choosing not to meet the UK criteria and thereby reducing choice for UK consumers.
  • Whether UK based funds’ compliance with divergent EU, US and UK ESG criteria will result in additional management costs for UK consumers.

The Sub-Committee’s letter highlights how the ESG regulatory landscape continues to evolve and that greenwashing remains a key area of focus for both the FCA and the Government.