The Financial Conduct Authority (FCA) has launched its long-awaited labelling regime for sustainability funds.
The final proposal was unveiled today, as part of a broader slate of updates to the Sustainable Disclosures Regulation (SDR).
After roughly a year of consultation with the market, the FCA has made a number of changes to the rules.
A fourth label has been introduced into the UK’s fund regime, to enable funds to combine more than one sustainability objective.
That means that funds will be able to be labelled as either ‘impact’, ‘improvers’, ‘focus’ or a ‘blended strategy’.
The FCA significantly reduced the proportion of assets that had to be allocated to sustainable assets in order for funds to qualify for the ‘impact’ label. Originally, 100% of the fund had to qualify, but this has dropped to 70% under the final rules.
Speaking during a press briefing today, Sheldon Mills, the FCA’s executive director for consumers and competition, said the decrease was “pragmatic”, and would allow more funds to be created in the impact category.
The regime still requires managers to be able to demonstrate that none of the assets in any labelled fund significantly harm broader sustainability objectives.
The revisions clarify that, while achieving additionality via primary market investment is an important part of achieving impact, that emphasis doesn’t preclude public equities strategies from being able to qualify for the label.
On stewardship, the FCA has explicitly said that fund managers do not have to demonstrate a causal link between engagement with a company and sustainability-related improvements by that company.
The FCA has also relaxed the rules around using language like ‘Paris Aligned’ and ‘Net Zero’ in fund names more broadly. Now, the regulator says, most sustainability-related terms can be used “if certain conditions are met”.
Seb Beloe, partner and head of research at London-based green investing firm WHEB Asset Management, described the revisions as “really helpful”, adding that the FCA had “really listened to what the industry said without letting it run roughshod over the plans”.
Implications for the SFDR
The labelling regime is particularly important on the global stage at the moment, because the European Commission is considering adopting the UK’s approach.
The EU recently committed to overhauling its controversial Sustainable Finance Disclosures Regulation, and proposed two approaches to making it more practical: either to beef up its existing methodology or to ditch the SFDR’s Article 8 and 9 categories in favour of formal labels based on sustainability objectives – mirroring the UK.
Earlier this month, the Dutch financial markets authority came out in support of ditching Article 8 and 9, echoing similar calls from France.
“It does feel like the road is opening up in front of the FCA in terms of their position and how that can influence other regimes around the world on this issue,” said Beloe.
The UK labels will come into force in summer 2024.
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