The Financial Conduct Authority’s (FCA) latest draft for the Sustainability Disclosure Requirements (SDR) needs to provide clarity around definitions and thresholds for product labels to ensure it is implemented successfully, according to market participants.
The FCA is planning to introduce a package of measures aimed at clamping down on greenwashing.
The aim is to build “transparency and trust” by helping consumers navigate the market of sustainable investment products and to ensure that the name reflects the sustainability profile of the product.
The FCA, which recently closed its consultation, proposes three categories for sustainability-labelled products. The first are sustainable foccus investments which are.assets that are environmentally and/or socially sustainable.
The second includes investments aimed at improving the social sustainability of assets over time, through stewardship while last but not least are sustainable impact funds or strategies that look to dedicate solutions to environmental and social problems.
The Authority also expects there will be more stringent naming and marketing rules around sustainability claims and more detailed disclosure standards for institutional investors as well as retail investors looking for more information.
The plans mirror the new labels already defined by the Europe Union’s Sustainable Finance Disclosures Regulation (SFDR), and current proposals by the US Securities and Exchange Commission (SEC).
The SFDR, which came into force in 2022, distinguishes between Articles 6, 8 and 9 funds. While Article 6 funds have no ESG credentials, Article 8 funds promote E or S characteristics but do not have them as the overarching objective.
Meanwhile Article 9 often referred to as dark green specifically have sustainable goals as their objective. For example, investing in companies whose goal it is to reduce carbon emissions.
However, there have been issues with the rankings. The European asset management industry has faced over $140 billion of downgrades from the strictest Article 9 category in recent months, and uncertainty remains over what constitutes a “sustainable investment” under the regulation.
Although in the post Brexit world, the UK is no longer required to implement EU legislation British regulators are responding to the challenge that most fund providers would de facto be marketing their products in both jurisdictions.
In fact, UK asset managers, which oversee around £10 trillion, manage many funds listed in EU centres such as Luxembourg and Dublin.
This explains why a close overlap between UK and EU rules was seen as advantageous by both sides. However, the UK, unlike the EU, decided not have any distinctions between its rankings of funds.
Market participants are also hoping that the SDR will strengthen the UK’s green credentials and propel the country onto the world’s ESG stage.
The UK Sustainable Investment and Finance Association (UKSIF), whose members represent over £19 trillion in assets, said the upcoming SDR will not only enhance transparency for investors, but also help the UK should it establish a world-leading regime that can build on other jurisdictions’ frameworks.
It added that there was “potential for the UK to proactively shape other countries’ approaches to disclosures and labeling in the coming years.”
UKSIF also noted that the proposals are “a positive departure from the arguably looser criteria” for ESG fund categories set out in the EU’s SFDR, which include an “unclear definition of ‘sustainable investment.”
However, the trade group was critical of parts of their FCA’s proposals and noted that the UK watchdog should clarify how the rules will impact overseas funds as soon as possible, warning that products registered in the EU and marketed in the UK could have an unfair advantage.
It also recommended that the The UK government should enforce appropriate corporate disclosure obligations so investors can evaluate companies’ sustainability credentials
In addition, UKSIF argued more clarity was needed on appropriate metrics for the ‘Sustainable Improvers’ label, to define what an improving fund looks like in practice. Otherwise the tag risks becoming a “catch all” label, with some funds exaggerating the impact of their engagement activities
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