Both the current and previous UK governments have been clear about their aim for the UK to be a world leader in sustainable finance.
In 2023, the Global Green Finance Index ranked London as number one for sustainable finance.
However, the UK Sustainable Investment and Finance Association raised concerns earlier this year that the UK could easily lose this lead due to a lack of legal certainty, among other things.
In 2022, the Financial Conduct Authority set out its proposals for the UK’s sustainability disclosure requirements and labelling regime.
The FCA consulted widely before announcing the SDR, looking to learn lessons from the EU’s experience with its sustainable finance disclosure regulation, which came into force in 2021.
The SDR rules' main implementation date is December 2 2024, although UK firms are expected to take them into account in current FCA fund applications, and have been able to use the prescribed labels since the end of July.
Originally, the FCA intended the SDR to apply to fund operators and discretionary portfolio managers at the same time, to ensure a level playing field.
However, the FCA decided to consult separately on the application to portfolio managers, and whereas the final rules for these firms have not yet been published, the FCA has announced that the regime will not come into force until Q2 2025.
The FCA has also recently granted limited temporary flexibility on the “naming and marketing” rules for fund operators, extending the deadline to April 2 2025.
However, this forbearance only applies to firms which have applied for approval of amended disclosures by October 1, which only covers a small proportion of firms currently seeking to comply with the new regime.
To date, the FCA has said 10 funds have been granted an SDR label, three of which were approved to use ‘sustainability impact' for their respective funds, and another to use 'sustainability focus'.
Other firms have amended product names, or even suspended the sale of sustainable finance products to new customers, in order to avoid falling foul of the new rules.
The EU SFDR has not been an outright success, with the European Commission concerned about how it has been implemented, with a perceived lack of legal certainty, and how it has become a labelling regime rather than, as originally intended, a means of promoting transparency.
The European Commission issued a consultation last year on SFDR and although they had intended to report back by the summer, they have not yet done so.
Fund operators with funds domiciled in the EEA that wish to market to UK retail customers are preparing to apply for recognition under the UK overseas funds regime, which as of September 30 has been open for applications from firms not currently in the temporary marketing permissions regime.
However, for those funds currently subject to the EU SFDR regime there is still uncertainty on the application of SDR to such funds.
