What UK investors need to know about ESG regulatory reporting
Wendy Walford, Head of Climate Risk, Legal & General, discusses how to mix adherence for country-specific ESG reporting frameworks with international precedents.
Insurance Investor Editorposted on Wednesday, September 27, 2023
Having clear sustainability disclosure labels is necessary to help end users understand what they are buying.
This was Wendy Walford’s view – Head of Climate Risk at Legal & General. She was speaking at a recent Clear Path Analysis webinar in conjunction with Clarity AI, on the topic of “Maximising visibility in ESG regulatory reporting through the investment chain”. The transcript has been published as a report, featuring insights from senior leaders at Manulife Investment Management, Invesco, and American Century Investments.
"People’s interpretations of the terminology are still nascent. We’re grappling
with what these terms mean, so the development of the regime is critical.”
Walford was asked as a representative for a UK-domiciled company if she felt the Financial Conduct Authority’s (FCA) – the regulator for financial services firms and financial markets in the UK – Sustainability Disclosure Requirements (SDRs) and investment labels were a good blueprint for the future of the ESG industry. If not, what could be improved?
Walford said it was a complex issue. One of the biggest areas of contention, she added, was that, “people’s interpretations of the terminology are still nascent. We’re grappling with what these terms mean, so the development of the regime is critical."
In July this year, the FCA agitated some market players by delaying its announcement around the SDRs and investment labels until Q4 2023. The SDRs were previously scheduled for Q3.
The SDRs are supposed to be a flagship part of the UK’s post-Brexit independent financial services industry that focuses on sustainability.
“The devil is in the details in terms of what these labels mean, their criteria, how they meet
client expectations, and how they can be integrated throughout the value chain.”
They were designed to provide more clarity and surety for investors via labelling on sustainability and were declared an integral part of the government’s “Greening Finance” roadmap, which was released in late 2021. They focus largely on providing clarity around greenwashing.
Impact of the reporting changes
Walford said that digging deeper into operability costs and changes will be key to ensuring that the regime is practical and implementable. For investors, this also means ensuring it can deliver the benefits it initially set out to deliver.
“Whilst I’m supportive of the principles and can see that there will be clear benefits to having product labels, the road will be difficult and bumpy,” she said. “The devil is in the details in terms of what these labels mean, their criteria, how they meet client expectations, and how they can be integrated throughout the value chain.”
At Insurance Investor Live | Europe 2023, Walford participated in a panel that said that “reporting fatigue” was a real issue – and that more had to be done to make the legislation less of an ‘alphabet soup’ and more applicable to the day-to-day operations of investment teams.
Fellow panellist Hetal Patel, Head of Climate at Phoenix Group, said the sentiment is still prevalent, particularly when it comes to the SDRs and the framework provided by the Taskforce on Nature-Related Disclosures (TNFDs).
Solutions for the industry
Walford was adamant that there could be more done on the topic – and that holding feet to the fire for industry stakeholders was key, especially given the FCA delays.
“There needs to be more attention here to ensure that the desired outcomes are achieved,” she said. “We are still waiting for the final SDR regulations to come out in the second half of .”
“We have to consider developments in the international landscape and ensure there
is interoperability because clients are going to want to invest globally.”
However, she added that it was encouraging to see the FCA taking extra time to go back and review these regulations after their consultation. The delays weren’t all bad, she continued. This was “because there were quite a few practical considerations to be taken into account” for the implementation that needed fine details worked on, such as:
- How do multi-asset funds work?
- How do they get aggregated?
- What does this mean for different product labels?
- What happens if you’re investing in one fund with assets that have different labels?
- How do you ensure comparability?
Like many others, Walford stressed that a rushed or botched rollout could reduce enthusiasm or wear out the industry, resulting in less cooperation or adherence going forward.
“We have to consider developments in the international landscape and ensure there is interoperability because clients are going to want to invest globally,” she said.
You can see more of Wendy’s thoughts and read the report in full, by clicking here.