When chancellor Rishi Sunak announced during his speech at Cop26 that the UK would be the world’s first net zero financial centre, there was real excitement among many in the financial sector about the opportunities this would create.
Not only will the UK be blazing a trail globally, but we will be creating the framework to place the climate at the heart of a wide range of decisions, starting with those that could have some of the greatest impact, namely, what we do with our personal investments.
But Sunak’s speech also emphasised to the UK’s financial services sector the huge responsibility that will be placed on its shoulders to drive the delivery of the UK’s net zero ambitions.
This ranges from the UK’s large businesses, which will be required to publish detailed plans on how they aim to transition to net zero, to standalone financial advisers or wealth managers, who will be required to consider clients’ ESG values in the recommendations they give.
Fortunately, developments at Cop26, including announcements made by the Financial Conduct Authority, have also made clear that the financial services sector would not be required to do this alone.
The net zero transition is no longer being framed as a burden on financial services companies, but rather a chance to create commercial opportunities by helping meet changing consumer and institutional demands, and by distinguishing the UK from competitors around the world.
Advisers should note a recent discussion paper published by the FCA seeking views on two initiatives that it will be responsible for implementing in the coming months and years; the first on sustainability disclosure requirements (SDR), and the second on consumer-facing labelling for investment products. These are likely to form the foundations of future regulation applicable to advisers.
The SDR aims to bring together a number of existing sustainability-related disclosure requirements into a new, single framework, considering expansion of the Task Force on Climate-Related Financial Disclosures' recommendations and reporting against new UK green taxonomy.
It will also integrate the global standards now being developed by the International Sustainability Standards Board, making the UK one of the first countries to apply these standards when they are published next year.
Under the FCA plans, investment products will also need to show the impact, risks and opportunities of the activities they finance using a new consumer-facing sustainability label.
As with the EU’s Sustainable Finance Disclosure Regulation, the bulk of which came into force earlier this year, SDR is designed to avoid greenwashing and instead give investors confidence that their money is being directed towards investments that genuinely support the transition to net zero.
Similar to the SFDR classification of investments into three categories, the FCA plans to create five categories for investments, with labels making it easier for clients to select investments that match their values on sustainability.