Under the SDR, money managers and asset owners operating in the U.K. will have to report on their sustainability risks, opportunities and impacts, building on current disclosure guidelines under the Taskforce on Climate-related Financial Disclosures and the forthcoming U.K. Green Taxonomy. It follows the European Union's Sustainable Financial Disclosures Regulation, which captures EU-licensed firms in its net — something U.K.-specific firms have escaped thanks to Brexit.
How the SDR builds on the EU's rules will be closely watched by industry sources. "That, coupled with SEC activity to scrutinize funds that have ESG-related keywords in their name, will continue to elevate and increase complexity for managers to comply," said Oliver MacArthur, senior consultant, impact research lead at Aon PLC in London. International managers "will be navigating a patchwork quilt of regulations, which could lead to ancillary issues," he warned.
Mr. MacArthur said that situation could be a boon for large money managers with trillions in assets under management because of their huge amount of resources, and also for the smaller boutique managers for which ESG is "anchored through every element of the firm."
However, the middle-tier money managers — those without "massive scale or deep sustainability expertise flowing through the entire firm might struggle," he said. ESG data and compliance is a growing cost line for managers, he added.
Jonathan Doolan, Paris-based managing partner at asset management strategy adviser Indefi, added his voice to the warning: "My American bias (on the regulations and definitions) is that it's going too far and limiting the ability of asset managers to be able to operate cross-border. They are already operating in a deglobalizing world," he said.
Managers are also facing pressure from investors, buoyed by high-profile cases of greenwashing allegations and increased awareness of the importance of being environmentally aware in everyday life.
Pension funds and other large asset owners "are definitely becoming more educated on the kind of questions to ask" and they want to better understand what a fund manager's internal taxonomy looks like, said Marina Severinovsky, New York-based head of sustainability for Schroders PLC, North America. With regulators circling the wagons and clients asking more questions, "you start to see who has been just using third-party metrics and who has really been doing the work," said Ms. Severinovsky.
"We are on notice. We have to do a better job of articulating," she said.
As asset owners, managers and regulators push for more clarity to avoid greenwashing, "It's really down to investor expectation. That's why we always say you need to look under the bonnet," said Hortense Bioy, London-based global director of sustainability research for Morningstar Inc., which encourages investors to use multiple data sources. "There is no single metric that will give you the whole story," she said.
