In recent years, the surge in environmental, social, and governance (ESG) investing has prompted regulatory bodies in the European Union (EU) and the United Kingdom (UK) to combat the phenomenon of greenwashing in the financial sector. To address this, stringent regulations have been introduced, shaping the landscape for fund managers operating in these regions.
At the forefront of EU efforts is the Sustainable Finance Disclosure Regulation (SFDR), enacted in 2021. SFDR aims to foster transparency and comparability in disclosures made by financial products, thereby thwarting greenwashing practices. The regulation imposes three tiers of obligations on fund managers:
EU-based managers are subject to all these obligations, while non-EU managers’ marketing funds in EU countries are also within scope. Funds are categorized into Articles 6, 8, or 9 based on their sustainability objectives, with Article 9 funds having a sustainable investment objective.
Additionally, the Corporate Sustainability Reporting Directive (CSRD), effective in 2025, mandates large EU companies to include sustainability information in their annual reports, requiring a “double materiality” assessment. This directive aims to enhance the completeness and accuracy of ESG reporting, expand reporting obligations, increase awareness of environmental impacts, and standardize reporting across the EU.
Key differences from the previous Non-Financial Reporting Directive (NFRD) include broader applicability, detailed reporting standards, comprehensive impact analysis, risk assessments, and independent audits. Companies affected include European entities meeting specific criteria, listed SMEs, and international firms with significant EU sales. The implementation schedule varies, with large companies and enterprises facing initial deadlines in 2025 and 2026, while publicly traded SMEs and multinational businesses have later compliance dates.
The UK’s Financial Conduct Authority (FCA) introduced an anti-greenwashing rule effective May 31, 2024, targeting communications within the UK financial sector. Similarly, the UK has devised the Investment Label and Sustainability Disclosure Requirements (UK SDR), mirroring the EU’s SFDR.
The UK SDR, phased in from July 31, 2024, mandates labels to protect retail investors, with criteria for sustainability-focused funds. Notably, the FCA has confirmed that the UK SDR will not apply to non-UK funds or their managers.
Enforcement mechanisms vary across jurisdictions. Each member state’s financial services regulator oversees enforcement in the EU, while in the UK, the FCA regulates and enforces anti-greenwashing measures. Though private litigation against greenwashing funds is rare, future stakeholders like investors and climate-based activist organizations may initiate actions against funds for alleged misrepresentations.
