The UK’s Financial Conduct Authority is asking for feedback on its plans to create labels for ESG and sustainability-related investment products.
In a 179-page consultation released today, the regulator outlines its current thinking on rules that will sit under the upcoming Sustainability Disclosure Requirements (SDR).
“This [consultation] sets out our proposed sustainability labelling and classification system for funds and portfolio management arrangements as well as disclosure requirements for asset managers, initially, with a view to expand the regime to certain FCA-regulated asset owners and other investment products (eg pensions),” it said.
The FCA proposes three categories for sustainability-labelled products:
- ‘Sustainable focus’, for strategies invested in “environmentally and/or socially sustainable” assets;
- ‘Sustainable improvers’, which would apply to strategies using stewardship and other tactics to improve the sustainability performance of holdings over time; and
- ‘Sustainable impact’, for strategies investing in environmental and social solutions to achieve real-world benefits.
The consultation document maps the planned new labels against those already defined by the EU’s Sustainable Finance Disclosures Regulation, and current proposals by the US Securities and Exchange Commission.
Initially, the rules will apply to UK-based financial products being sold to retail investors, but are expected to be broadened out over time to cover overseas products and savings options such as pensions.
“We recognise that the potential harms that we are seeking to address with the proposals in this [consultation] may arise with respect to pension products and other investment products offered to retail investors, such as IBIPs [insurance-based investment products],” the report stated. “So, we are considering how we might bring these products into scope of the regime in the future.”
“Our early view on labelling is that it would be most decision-useful to apply a sustainable investment label to pension products at the level at which the consumer invests, rather than at the pension scheme level,” it continued, adding that if the FCA applied the same approach as it proposes for retail products, “an overall pension product e.g. default arrangement would be able to use a sustainable investment label if 90% of the total value of the constituent funds qualified for the same label”.
However, it acknowledged that many pension strategies change over time to accommodate the risk appetite of the beneficiary, and called for feedback about “what would be a feasible approach for these products”.
Major challenge to integrity
James Alexander, chief executive officer of the UK Sustainable Investment and Finance Association (UKSIF), said: “Greenwashing has been consistently cited as a major challenge to the integrity, trust and growth of sustainable investment in the UK. We strongly welcome the proposals published by the FCA which seek to address this and develop a new and ambitious approach to fund labelling and disclosures. This will boost investor confidence at this crucial time for tackling global environmental and social challenges.”
Across the sustainable label categories, Alexander said he was pleased that the approach recognises savers’ diverse preferences for addressing the real-world sustainability challenges people face. “Setting out clear criteria for funds that aim to invest in solutions, achieve positive impact and help to make improvements to the companies that are still on a sustainability journey,” he said.
“We’re proud to have been an active member of the FCA’s Disclosures and Labels Advisory Group (DLAG). We look forward to continue working with the regulator and the DLAG to consider new ways to further enhance the regime as we seek to build a world-leading framework,” Alexander added.
Galina Dimitrova, director for investment and capital markets at the Investment Association, welcomed the FCA’s consultation and said: “A labelling system can play a valuable role in providing a useful shorthand to help savers navigate the growing number of sustainable and responsible investment products and to compare the sustainability credentials of their investments.”
She added: “We look forward to working with our industry, regulators, and other stakeholders to deliver an effective labelling system, which can be easily understood by investors and help build trust in this important area of the fund market.”
The consultation is open until 25 January 2023. The FCA plans to develop its final rules for UK-based retail products by next summer, suggesting they should come into force no earlier than June 2024 to give the market a chance to prepare for them. It will turn its attention to creating rules for pension and overseas products next year.
The latest digital edition of IPE’s magazine is now available
No comments yet