Regulatory outlook 2024: The year where waiting turns into action

ESG Clarity asked industry bodies and regulatory experts about what to expect for the year ahead

Last year the responsible investment space saw the introduction of multiple new regulations and standards, with the Financial Conduct Authority (FCA) finally unveiling it’s Sustainability Disclosure Requirements (SDR) and the International Sustainability Standards Board’s (ISSB) publication of the first standards to name a few.

However, it was also a year of revision for some, with the European Commission criticised for failing to remove the confusion around the criteria to determine funds’ sustainability disclosures, only to end the year with a consultation asking whether the Sustainable Finance Disclosure Regulation (SFDR) should become a formal sustainability classification system.

While 2023 could be summarised as “hurry up and wait”, new regulations coming into effect and others under review could see 2024 be the point at which waiting “turns into action”, according to Mikkel Bates, regulatory manager at FE Fundinfo.

Given this assessment, ESG Clarity asked industry bodies and regulatory experts about what to expect for the year ahead.

SDR comes into effect

The UK’s anti-greenwashing rule, naming and marketing rules and consumer-facing pre-contractual disclosures will all kick in for funds with sustainability characteristics in 2024, whether or not they adopt a label, noted Bates (pictured left).

Groups will need to go through the process of assessing whether their funds qualify for one of the four labels, which they can use from the end of July. But Bates stressed that groups must first publish their consumer-facing and pre-contractual disclosures before adopting a label, with a hard deadline of 2 December.

“If a fund might not qualify for a label, groups will need to look carefully at their use of sustainability-related terms in their fund names and any marketing, taking particular care to avoid the terms ‘sustainable, ‘sustainability’ and ‘impact’,” added Bates.

“All firms, including distributors and advisers, should take note of the FCA’s draft guidance for the anti-greenwashing rule, even if they don’t manage or promote sustainability funds, as the ‘fair, clear and not misleading’ principle is going in the ESG Sourcebook.”

According to Bates, any fund group planning to adopt one of the labels will need to ensure they have appropriate skilled resources and robust processes – independent of the investment function – to assess funds’ compliance with the labels’ qualification criteria, or they need to outsource.

“The FCA has said that it will not prescribe disclosure templates for funds or entities under SDR but is encouraging the industry to come up with some. If this is to happen, there needs to be something workable by the end of July, when the first sustainability funds could adopt labels and therefore need to publish their first disclosures,” asserted Bates.

Green Taxonomy

Meanwhile, for James Alexander (pictured right), chief executive of UK Sustainable Investment and Finance Association (UKSIF), the start of 2024 must bring about the long-overdue launch of the government’s consultation on a green taxonomy.

“As a member of the Green Technical Advisory Group (GTAG), advising HM Treasury on the taxonomy’s design, we pushed for a purely science-based approach to defining sustainable economic activities for consumers, businesses and investors – one which does not include natural gas,” said Alexander.

“Following the publication of the consultation – which we expect will focus on the taxonomy’s climate objectives – we want to see a clear direction of travel outlined for the UK’s taxonomy ahead of the general election, including timelines for consulting on the remaining objectives.”

Further detail on the UK’s approach on the full adoption of the ISSB’s sustainability-related and climate-related standards is also firmly on the agenda for Alexander, alongside an outline for implementation timeframes for the application of the standards across the economy.

“We support countries seeking convergence with the ISSB’s disclosure standards, while recognising that a ‘global baseline’ should not imply low ambition in the UK,” concluded Alexander.

“Progress in each of these areas of ESG regulation in the UK can help to provide important clarity to our industry, while fulfilling a number of pledges made by the government in last year’s Green Finance Strategy.”

SFDR under review

In the EU, Arthur Carabia (pictured left), director of ESG policy research at Morningstar , noted 2024 will be the first financial year to issue the first report based on double materiality as per the Corporate Sustainability Reporting Directive (CSRD). Priority will be given to climate and social and governance standards, and approximately 11,000 companies.

Other items of the EU action plan will also start applying this year: early 2024 will see banks, insurers and asset managers having to disclose how their assets align with the EU classification system of sustainable activities for the first time at company level, while also needing to meet reporting requirements related to impact climate risks on their balance sheet.

However, there are challenges on the horizon. European elections could get in the way of progress on several initiatives, including proposals to add a section to the key information documents for the Packaged Retail & Insurance-based Investment Products (PRIIPs) legislation on how environmentally friendly a product is, as well as proposals to change the SFDR into a fund labelling regime. With elections due in June, either of both of these could fail to make the cut.

“Talking of the SFDR consultation, the responses showed that fund groups were much less enthusiastic than the regulators about the proposals, as they just want the regulation to be left alone for a while. It will be interesting to see which side holds sway,” said Bates.

See also: – SFDR review responses: Go further with mandatory disclosures and formalise fund labelling

Despite these challenges, Bates added: “On a positive note, it is just possible that different regulations or reporting standards could come closer together to make it possible for groups operating internationally to avoid duplication of effort.

“But at a corporate disclosure level, the industry will need to navigate the vagaries of the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations, the ISSB standards, the European Sustainability Reporting Standards for disclosures in the EU under CSRD, and start thinking about the entity-level disclosures under the SDR.”

Positive efforts on transition planning

Sarah Peasey, director of European ESG investing. Neuberger Berman

One positive trend likely to continue over the next year, highlighted by Sarah Peasey (pictured right), head of Europe ESG investing at Neuberger Berman, is the increasing regulatory effort to consider the role of sustainable finance in supporting transitioning companies in their journeys to net zero.

This, she said, is reflected by the work some jurisdictions are doing to provide frameworks for credible transition planning (UK and Singapore), the development of sectoral pathways for companies (EU) and the adoption of transition taxonomies (the Singapore-Asia Taxonomy).

 “While traditional measures such as carbon footprint and carbon intensity are useful in that they are comparable across companies and portfolios, there are major pitfalls associated with relying heavily on them when assessing net-zero alignment,” said Peasey.

“As an active investor, we welcome this growing focus on forward-looking metrics and objectives which, in conjunction with investor engagement and stewardship, could lead to the achievement of real-world decarbonisation.”

Increasing use of AI

No matter what regulation, however, compliance is always underpinned by the combination of good data from multiple sources and a good data management architecture to cope with all of this information. That’s according to Volker Lainer (pictured left), head of connections, ESG and regulatory affairs at GoldenSource.

“Going into next year, the adoption of artificial intelligence (AI) is set to become more widespread to help both firms and vendors handle the depth and breadth of ESG data more efficiently,” asserts Lainer.

“Taking data management as an example, AI could be used to trawl through existing reports, and return with the reasoning as to why a specific KPI – such as a decrease in carbon emissions – has changed over the last year. Firms can then quickly turn this into an understandable interpretation of why particular metrics have evolved in a particular way. This functionality can be weaved into current data management systems, bringing more automation to the very lengthy ESG assessment process, and creating immediate value for buyside firms.

“Nonetheless, the whole ecosystem requires transparency, and AI is no exception. It is incredibly important to be clear about exactly where and how firms engage with it. I’m sure this will occupy the minds of the regulators next year.”