For financial services firms, 2023 was another year of intense regulatory pressure when it came to sustainable finance and environmental, social and governance factors.
New regulations and standards, expanding disclosure requirements, concerns about greenwashing and intensifying supervisory expectations were all contributing factors.
As firms continue to feel the pressure in 2024, with several new regimes coming into effect, which areas will have the biggest impact and where should firms focus?
Shifting gears on reporting and disclosure requirements
Financial services firms will need to shift gears and move from interpreting and planning for regulatory change to operationalising and implementing it – this is particularly relevant for sustainability reporting.
Firms cannot escape the fact that, even if they already report against the Task Force on Climate-Related Financial Disclosures (TCFD) framework, significant work will be necessary to meet the requirements of the EU corporate sustainability reporting directive (CSRD) or the planned UK sustainability disclosure standards (SDS).
Data availability and integrity will be an ongoing challenge. A rigorous approach to sourcing and verifying data is critical to not only to comply with reporting requirements, but also to enable better decision-making.
Building a successful reporting capability cannot be the sole responsibility of finance teams. A robust and comprehensive firm-wide disclosure strategy is key to bringing different teams together across the business, covering all disclosure requirements and opportunities and dependencies.
Getting a grip on greenwashing
There are clear reputational risks stemming from firms overstating a product's ESG credentials, and regulators and policymakers have made it clear that tackling greenwashing is a top priority.
Building on existing disclosure requirements and taxonomies, recent initiatives range from the introduction of product labels to rules for data and ratings providers, to efforts to enhance the stewardship role of asset managers.
For UK firms specifically, the rollout of the Financial Conduct Authority's sustainability disclosure requirements (SDR) will be a key milestone in the anti-greenwashing agenda.
Fund managers need to consider strategically whether they wish to apply the new labels. Those that do will need to upgrade their products to meet the exacting requirements.
For funds that do not qualify for a label, terms such as ‘green’ will only be permissible under limited circumstances.
Alongside this strategic choice and its commercial implications, fund managers need to work through challenges around the availability and reliability of data on investee companies, and the complexity of the SDR disclosure requirements.
More broadly, all FCA-regulated firms will need to be ready to meet the requirements of the new anti-greenwashing rule by the time it takes effect on May 31.
The realities of rule divergence
Although there is commitment from standard-setters to promote interoperability across corporate reporting and disclosures, there are likely to be sticking points that take some time to be worked through. In the meantime, firms may need to proceed on a ‘best efforts’ basis.
In financial services regulation, divergence in approaches and rules is much more pronounced, with contrasts emerging between the EU and the rest of the world.
