The Financial Conduct Authority’s (FCA) latest draft for Sustainability Disclosure Requirements (SDR), which saw its consultation close for feedback yesterday, needs to provide clarity around definitions and thresholds for product labels to ensure it is implemented successfully, several UK consultants have said.
The FCA is proposing to introduce a package of measures aimed at clamping down on greenwashing, which include sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing.
The Authority proposed three categories for sustainability-labelled products: ‘sustainable focus’, ‘sustainable improvers’, and ‘sustainable impact’, mapping out the planned new labels against those already defined by the EU’s Sustainable Finance Disclosures Regulation (SFDR), and current proposals by the US Securities and Exchange Commission (SEC).
Cadi Thomas, head of ESG research at consultancy Isio, welcomed the anti-greenwashing rules in particular, as this is a major problem that causes a lack of trust and progress in the industry.
However, she said there were some points of clarity isio is seeking through the consultation to ensure it is “implemented effectively by firms and investment managers, as well as interpreted correctly by consumers”.
“The labelling requirements are strict, and we feel that in order for them to be successfully integrated, there is a need for more clarity in certain aspects such as the thresholds for each product label. For a product to classify as ’impact’, there is an additionality clause which requires the product to direct new money to the cause, which may be problematic for many of the impact products that are currently popular in the market,” Thomas said.
Similarly, Edina Molnar, vice president in Redington’s investment consulting team, noted that additional clarity on definitions and the introduction of minimum safeguards to ensure the proposals’ robustness in relation both to social and environmental sustainability was needed.
“For example, product-level disclosures should have clarity around the baseline requirements, including minimum technical standards on metrics to encourage standardisation and comparability. The UK green taxonomy could provide the appropriate tools and standards to measure such disclosures against. There is an urgent need for a UK taxonomy to provide a baseline for labelled assets – and the FCA’s regulation should ideally have moved in tandem with the implementation of the taxonomy,” she added.
Additionally, Molnar noted that the SDR proposals should also apply to products marketed for institutional investors, including pension schemes.
“In their current form, the proposals would allow firms to market certain products as sustainable to institutional investors but not to retail clients. We believe that this divergence would introduce significant complexity and could make it harder for institutional investors to assess the robustness of ‘sustainable/ESG’ products,” she said.
James Alexander, chief executive officer of the UK Sustainable Investment and Finance Association (UKSIF), suggested that the FCA should carefully consider tweaking labels’ applicability across a broad range of asset classes beyond equities, the treatment of fund of funds, and certain aspects of the qualifying criteria, particularly for the ‘improvers’ category.
Isio’s Thomas commented that the new rules are likely to have a large impact on the sustainable investment landscape in the UK.
She said: “Despite the fact that these rules are proposed as voluntary, we see these as becoming de facto for all investment managers in future in order to keep pace with the dynamic environment.
“There are therefore assumptions that may be drawn from the labelling requirements, such as that those firms and products that are not labelled are not sustainable. We think this is preferable and hope that this will push forward the level of ambition, understanding and awareness of sustainable products throughout the market.”