Navigating the FCA’s Sustainability Disclosure Requirements: A Comprehensive Guide

Financial services and markets have an important role to play in the transition to a more sustainable future. The pressure on businesses to be more purposeful is growing into a mandatory consideration for firms. These changes to the regulatory and legislative approach aims to create an environment in which market participants can manage risks by moving to a more sustainable economy, in line with the UK government's commitment to a net zero economy by 2050.

The Financial Conduct Authority (“FCA”) recently implemented various sustainability rules and guidelines to promote transparency and accountability on how firms mange environmental, social and governance (“ESG”) risks. The Sustainability Disclosure Requirements (“SDR”) is a framework to facilitate and streamline disclosure of financial firms’ approach to managing ESG risks, their environmental and social impact assessments and their governance structures for overseeing ESG matters. The SDR will allow information to flow through to key players – corporates, consumers, investors and capital markets.

Key components of the FCA Sustainability Disclosure Requirements (“SDR”)

1.      Anti-greenwashing Rule

All UK authorised firms must comply with the anti-greenwashing rule which recently came into force on 31 May 2024. These rules require sustainability-led claims to be clear, fair and not misleading.

2.     TCFD-aligned Disclosure Rules

Regarding climate-related financial disclosures, the FCA adopted the recommendations of the Task Force on Climate-related Financial Disclosure (“TCFD”). These guidelines require firms to disclose their governance, strategy, risk management practices, and metrics related to climate-related risks and opportunities.

3.     Product-level Sustainability

These rules require firms to provide sustainability-related information for certain financial products, such as investment funds and pension products. This includes disclosure on the ESG elements of the product, as well as its sustainability-related risks and impacts, with a view to disclosing the sustainability characteristics and performance of their funds over time.

4.     Entity-level Disclosures Regime

These rules require firms to disclose information on their overall sustainability approach, policies, and performance at the entity level. UK asset managers with assets under management of £5 billion or more will be required to make entity-level disclosures on how they are managing sustainability risks and opportunities.

Scope and applicability

The SDR applies to asset managers, asset owners, listed companies, financial advisers and FCA-regulated firms. For asset managers and asset owners, the rules require them to disclose information about their policies on integrating sustainability risks into their investment decision-making processes and how they consider principal adverse impacts of investment decisions on sustainability factors. They must also provide periodic reports on the sustainability-related impacts on their portfolios.

Financial advisers will be required to provide information to clients about their approach to integrating sustainability considerations into their investment advice or product offerings. They must also disclose any sustainability-related remuneration policies and the potential impacts of sustainability risks on the returns of investment products.

How to comply with the SDR

1. Data collection: Establish robust processes to gather relevant ESG data from across the organisation. This may involve engaging with various departments, suppliers and stakeholders to obtain accurate and comprehensive information.

2. Reporting templates: Utilise the FCA’s prescribed reporting templates to disclose sustainability-related information. These templates cover areas such as governance, strategy, risk management, metrics and targets. Ensure that the required information is presented clearly and concisely. 

3. Assurance requirements: The FCA mandates that sustainability disclosures be subject to independent external assurance. This involves engaging a qualified third-party assurance provider to review and validate the accuracy and completeness of the reported information. The assurance provider will assess the firm’s data collection processes, controls and reporting methodologies.

4. Governance and oversight: Establish a robust governance framework to oversee the sustainability disclosure process. This may involve forming a dedicated committee or working group responsible for reviewing and approving the disclosures before submitting to the FCA.

5. Continuous improvement: Treat sustainability disclosure as an ongoing process. Regularly review and enhance data collection processes, reporting methodologies and assurance procedures to ensure alignment with evolving regulatory requirements and best practices.

These suggested practical steps will assist firms in complying with the FCA’s SDR, enhance transparency and demonstrate their commitment to sustainable business practices. 

If you have any queries about the Sustainability Disclosure Requirements, please do not hesitate to get in touch with our specialist team by telephone on 0207 052 3545 or by email info@kaurmaxwell.com

Be sure to follow @km_mariamadara on Instagram for more updates on the rules and requirements imposed on organisations in relation to their sustainabile practices and efforts!

This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice.

Please contact KaurMaxwell for advice before taking any action in reliance on it. 

By: Maria Madara