The FCA has recently published its policy statement on Sustainability Disclosure Requirements (SDR) and investment labels. This follows the consultation issued by the FCA late last year in aid of its objectives to help consumers effectively identify and compare financial products which are in some way advertised as having ESG credentials.
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A key component of the FCA’s policy is a new anti-greenwashing rule, which will apply to all FCA-regulated firms when it comes into force in May 2024. Although there is some overlap with the FCA Consumer Duty to act in good faith, the anti-greenwashing rule seeks to reinforce that sustainability-related claims must be “fair, clear and not misleading”. To support firms in their interpretation of and compliance with the new rule, the FCA has also opened a consultation on its guidance.
The other stand-out feature of the policy is the new investment labels regime. The purpose of the four new labels is to mark out products that genuinely represent one of the following sustainability objectives:
- Sustainability Focus: for products that aim to invest in assets that are environmentally and/or socially sustainable. For example, a fund that tracks an index reflecting the performance of companies in the renewable energy sector.
- Sustainability Improvers: for products that aim to invest in assets that have the potential to improve environmental and/or social sustainability over time. For example, a fund that invests in bonds of companies in emerging markets that have committed to improving their business practices in line with key global standards on human rights and working conditions.
- Sustainability Impact: for products that aim to achieve a pre-defined positive, measurable impact in relation to an environmental and/or social outcome. For example, a fund that aims to invest in and own socially positive real estate assets.
- Sustainability Mixed Goals: a new label introduced following the response to the consultation. Covers products that invest in a mix of assets that are already sustainable, have the potential to improve their sustainability over time, and/or aim to achieve a positive impact.
If a financial product is to use one of these labels, it must have at least 70% of its assets invested in accordance with the stated sustainability objective. Assets in the remaining 30% must not conflict with that objective (and in any event are subject to the anti-greenwashing rule).
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The FCA is clear the assets must be selected with reference to a “robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability as applicable for each of the labels.” Though firms have freedom to decide what that standard should be, the FCA goes some way in describing the required features. “Robust” means it has to stand up to scrutiny; “evidence-based” means the standard must derived from an objective and relevant body of data or other evidence.
Some of the examples of standards set out in the policy (“general environmental and/or social criteria” and “emissions profiles”), if used, would leave asset managers heavily reliant on information published by the companies themselves. As more companies fall within the remit of UK and global standards on sustainability disclosures and reporting, this should hopefully lead to an improvement in and expansion of the data available for asset managers to feed into their methodologies for the investment label standards.
Asset managers could look to external sources such as ESG ratings providers. However, the FCA has recognised the issues in the current ESG ratings landscape and has opened a separate consultation for improvements to that sector. Another possibility is for asset managers to reference an authoritative taxonomy, but there is still no clear sign as to when the forthcoming UK Green Taxonomy will be published.
Ultimately, the FCA’s SDR and investment labels policy statement feels like a step in the right direction, but the availability (or lack thereof) of robust and objective underlying data will have a big impact on how effectively asset managers can implement these labels without falling foul of the rules.
