UK Chancellor Rishi Sunak has published a roadmap detailing HM Treasury's new Sustainability Disclosure Requirements (SDR) for asset managers and investment products, which it has developed with support from the Financial Conduct Authority.

The requirements, which will also apply to pension schemes, will require businesses to begin to disclose the environmental impact of any activities they finance and "clearly justify any sustainability claims [they] make".

The aim of Greening Finance: A Roadmap to Sustainable Investing, alongside helping to eradicate greenwashing across the UK's asset management industry, will be for investors to gain a better understanding of whether their portfolios are aligned with net zero.

SDR was first announced at the Chancellor's Mansion House speech in July this year in a bid to streamline and further develop the UK asset management industry's commitment to spearhead green investing.

It has been billed by HM Treasury as the next step towards improving sustainability practices, following the Task Force on Climate-Related Financial Disclosures and what has been described as a "comply or explain" approach to green investing.

Now, for the first time, it will be mandatory for companies to publish their climate transition plans and explain how they are mitigating climate change risks.

The roadmap

The report outlines next steps for the new UK Green Taxonomy, which will define what investments are considered "green". Using science-based principles, the guidance will build on the precedent set by the EU and will be adjusted for a UK context.

The roadmap also focuses on how sustainability disclosures are implemented, with HM Treasury detailing that any information must be consumer-friendly, with "more detailed disclosures required for sophisticated investors".

Asset management firms will have to publish their sustainability risks, opportunities and impacts, a core set of product level climate-related metrics, and their Taxonomy alignment, including minimum safeguards.

Any product marketed as sustainable or those not making sustainability claims must disclose information about their sustainability performance, with the former having to substantiate any claims they make through evidence of their performance relative to their sustainability targets. These claims will have to be supported in a way that is "comparable between products and is accessible to clients and consumers".

The FCA is working alongside HM Treasury to create a sustainable investment labelling regime for funds, the finer details of which will be published by the regulatory body later in the year. They are expected to provide objective classification for products based on their objectives and strategies, and how their investments are allocated.

Ratings providers

SDR also applies to ratings providers, with the UK Government now considering bringing these firms "into the scope of FCA authorisation and regulation" given the industry's increasing dependence on ESG data.

According to research from Optimas obtained by the government, the ratings provider market could reach more than $1bn by the end of this year.

Plans for increased regulation of ratings providers will be outlined in 2022.

Progress

In order to assess the progress of the new requirements, the government will focus on five key areas and outline their findings at the end of 2023.

It will expect asset management firms to:

  • Progress work on stewardship within their organisation; apply to become a signatory of the UK Stewardship Code 2020; and encourage or require their service providers to sign up to the Code.
  • Take into account the information generated by SDR when allocating capital.
  • Actively monitor, encourage, and challenge companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation.
  • Be transparent about their own and their service providers' engagement and voting, including by publishing easily accessible, high-quality quantitative and narrative reporting.
  • Provide leadership, for example by joining a Race to Zero-accredited net zero initiative for the financial sector, and thereby joining GFANZ. They should back up this commitment by publishing by the end of 2022 a high-quality transition plan.

Chris Cummings, chief executive of the Investment Association, said the UK's investment management industry is "in a pivotal position to support the transition to a net zero economy" ahead of COP26.

"We welcome the Treasury's Roadmap to Sustainable Investing, which sets out a clear timescale for introducing economy wide sustainability-related disclosures," he said. "In particular, we are encouraged to see the emphasis on addressing the data gaps and the flow of sustainability information from investee companies through to investment managers and to consumers.

"This supports the responsible allocation of capital and ensures that savers have clarity, confidence, and choice when investing."

He added he is "pleased to see" emphasis on investors' role as stewards of their clients' capital in achieving the government's green finance agenda.

Cummings added: "We look forward to working closely with industry, the government, regulators and our clients to implement these proposals, which will underpin efforts to address climate change with the urgency that it demands."

Heather McKay, E3G policy advisor at UK Sustainable Finance, said net zero is the "biggest investment opportunity the UK has ever seen" and added that "appetite from the market is growing".

"To support investors in capturing the opportunities of net zero, clear signals need to be sent by government on what is green and what is not," she said. "The crucial step now is to ensure the UK Green Taxonomy is science based - critical to tackling greenwash."

First published by our sister title Investment Week