By Karen Brolly, Head of Products, Kate Fry, Head of Insurance Innovation and Sam Bird, Summer Intern from Hymans Robertson
The FCA issued a consultation paper, CP22/20, on the topic of the new Sustainability Disclosure Regulation (SDR) in October last year. Such was the volume of responses from market participants that the resulting Policy Statement, which was initially due in the early part of the year, has now been delayed to the fourth quarter of this year.
The regulation will aim first and foremost to rid the marketplace of greenwashing through misleading labels and false advertising. Many firms may face challenges aligning their products with the new requirements, partly due to the fact we’re still not certain of what these regulations will be. Although there has been a delay in issuing the guidance, there is an expectation that the anti-greenwashing elements will be immediately enforceable once the final Policy Statement is published. This is due to the existing requirements for transparency and the expectation that all regulated firms must be clear, fair and not misleading, especially now that we have the high standards of the Consumer Duty to uphold.
Why there’s a need for SDR
We see climate change as a top article on the news most days and we know that many firms have issued statements on their plans for being net zero. As such, it can seem tempting for firms to capitalise on the growing demand for environmentally friendly products and services. So, customers need to be wary of falsely labelled products, consisting of surface-level climate-friendly investing, which use a term like “ESG” in their name or marketing materials, and see massive upside.
To combat this, the FCA will be issuing anti-greenwashing regulations later this year. The regulatory body has specified that this rule would require ‘factual information’, which has been met with some scepticism from firms. The Investment Association (THEIA) said “We would therefore strongly urge the FCA to provide clarity on what it means by providing ‘factual information’. Again, this ultimately links back to Consumer Duty, with the goal being to provide clarity and peace of mind for consumers when navigating the marketplace.
This is only the first of multiple new stipulations SDR will implement over several years including naming and marketing disclosures and ongoing sustainability-related performance information. We expect the anti-greenwashing legislation to pave the way when it comes into effect later this year, and we await to see the full reach of the additional SDR guidance in the Q4 release of information from the FCA.
How firms will be impacted
In line with Consumer Duty and all it entails; firms should be more conscious of the products and services they are providing, with well-outlined target demographics and accurate product disclosures. Firms may be keen to reshape some products to align with Consumer Duty, but an element of caution is required for anything with an ESG slant, as further reshaping may be required when SDR comes into effect.
In summary
The full extent of SDR is not yet clear, but we can already see the strong overlap with the requirements of the Consumer Duty. Following the introduction of the Consumer Duty firms may be keen to develop new products and services however they should also be mindful of further legislation in the pipeline, starting with anti-greenwashing regulation later on this year.
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