Green Market Moment
Next Wednesday is an important date for investors. European investors, that is. On March 10th, the long-awaited EU Sustainable Finance Disclosure Regulation (SFDR) kicks in. The first-of-its-kind regulation asks asset managers to bed sustainability risks into their investment process and disclose the ESG profile of their funds.
The SFDR is a landmark regulation, with far-reaching ramifications for the global financial industry. The message, now enforceable, comes from the top: ESG is no longer optional.
Before Brexit, UK firms were working hard to ensure compliance with SFDR. As of late last year, however, it became clear that SFDR would no longer be implemented into domestic law. The government publicly refused to align with EU legislation.
Despite optics, a belief in sustainable finance is not another issue on which the UK is diverging from the EU. Quite the opposite. Boris Johnson is positioning the UK as a fierce competitor, with plans to turn the nation into a global green finance leader. Just this year, the government announced a £10 million investment into the UK Centre for Greening Finance and Investment, with two research hubs in London and Leeds.
Of course, while investment is important, action truly starts with regulation. Here too, Johnson has doubled down. The government has pledged to match the level of SFDR and align with global standards. In addition, a core part of the government’s Green Finance Strategy is to make TCFD-aligned disclosures mandatory across the UK economy by 2025 latest, with some financial institutions subject to the rules as soon as 2023.
The fact that disclosures will be mandatory is a critical differentiator. SDFR does not enforce disclosure. Instead, investors can choose to not comply and explain their rationale. In forcing companies to disclose, the UK effectively leapfrogs the EU in terms of boasting green credentials.
Positioning the UK at the vanguard of sustainable finance is a daunting ambition. It demands collaboration and careful attention to detail. But it’s also a brilliant opportunity. It attracts bipartisan public support, in an era where that is a rare commodity.
More importantly, it offers the UK an opportunity to reclaim some of the financial clout lost while leaving the EU.
There’s much the government can and must do to rise to the top of the green finance market, particularly in the sphere of disclosure regulation. As Impact Investing Institute CEO Sarah Gordon recently told Raconteur, “This moment represents an opportunity to take advantage of the momentum around sustainable investing and show global leadership. The UK has an opportunity to lead development of European and global thinking on a social or ‘just transition’ taxonomy, which provides a framework for connecting climate action with an inclusive economy”.
Just as it does for governments, the race to the top of sustainable finance presents a set of risks and opportunities for UK companies. On the one hand, you need to prepare now for a future in which you must disclose your ESG credentials. But on the other, you can work towards building and being at the heart of the green capital of the world -- and enjoy the investment that could bring.