The Sustainability Disclosure Requirements (SDR) regulation is a key part of the UK government’s strategy to use the finance sector as a driver for the green transition. So what do businesses need to know about it, as of June 2023?
The story so farThe UK government recognises that aligning the financial sector with sustainability goals requires strong policy support. This means encouraging investors to take climate risk seriously by making those risks more transparent. This is why, in November 2020, the UK pledged to make climate risk disclosures mandatory across the economy – becoming the first country in the world with such a commitment. The first measure to come into force relates to the Task Force on Climate-Related Financial Disclosures (TCFD). As of April 2022, the mandatory requirement for TCFD-aligned climate reporting applies to 1300 UK-registered organisations. Following the TCFD guidelines forces businesses not just to consider the potential impact of climate change on the value of their assets, but to make this information public so that investors can use it for their decision-making. The requirement currently applies to some of the UK’s largest companies and financial institutions, and it is highly likely that it will apply to many more as time goes on. The SDR is intended to build on mandatory TCFD reporting by broadening the focus from climate to all aspects of a company’s impact on the environment. It introduces the important new legal concept of “double materiality”. This is the acknowledgement that environmental risks can have a material impact on a company’s value, and that a company’s activities can have a material impact on the environment.
Green Taxonomy: a key roadblockThe SDR was first announced in the government’s Greening Finance roadmap, published in October 2021 just before the UK hosted COP26. But since then there have been several roadblocks to progress. To create a framework for assessing a company’s impact on the environment, you first need to define which areas of potential environmental impact you mean. So the UK government has been developing a Green Taxonomy to make these metrics clear. But in late 2022 the government formally confirmed that finalisation of this would be delayed. The EU established the basis for its own Green Taxonomy in July 2020 by setting out six environmental objectives (in areas such as water management, waste reduction and pollution control). It also sets out four conditions that a business activity has to meet in order to qualify as sustainable. It was originally thought that the UK Green Taxonomy would closely follow the EU version and therefore not take too long to develop. But the Green Technical Advisory Group (GTAG) advised that some elements of the EU Green Taxonomy were “problematic”. It therefore recommended a two-track approach where most of the EU taxonomy is onshored as straightforwardly as possible, but the difficult bits should be revised prior to adoption. It also advised publishing a clear timetable for both aspects, but this has not yet appeared. Multiple sources have reported that a consultation on the UK Green Taxonomy is expected in autumn 2023. It is hard to see how the SDR could be finalised until this consultation is over and the responses digested.
Consultation on ESG ratingsTo reliably assess businesses on their environmental impact, we also need a consistent system for rating that impact. So the UK government needs to develop a regulatory regime for environmental, social and governance (ESG) ratings providers. In March 2023, it opened a consultation on this, which closes on 30 June 2023.
What next for the SDR?The Financial Conduct Authority (FCA) has already carried out its own consultation on how to label sustainable investment products, which ended in January 2023. It is proposing an anti-greenwashing rule to ensure that “sustainability claims must be clear, fair and not misleading”. This is part of a broader strategy to build increased trust in ESG-labelled products through greater transparency. There was a significant response to the consultation and the FCA is still working through it. The ESG labelling consultation will feed into the FCA’s development and implementation of the SDR. The next thing we can expect on this front is a policy statement in Q3 of 2023. In conclusion: various processes need to be completed before the SDR can become a reality, and none of the stakeholders involved have promised any news before autumn 2023. This pushes the expected date for SDR implementation into 2024. But the intention and policy direction is very clear: businesses will soon be expected to offer detailed, verifiable information on their environmental impact. In the absence of a timetable, UK businesses still know what they need to do to prepare themselves for the SDR.
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