ESG InvestingMar 29 2023

FCA considering changes to SDR and investment labels

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FCA considering changes to SDR and investment labels

The Financial Conduct Authority is considering adjustments to sustainability disclosure requirements, weeks after the head of an industry body urged the regulator to change a number of its original proposals.

In a statement today (March 29), the City regulator said it is “carefully considering” the 240 written responses it received to the SDR and investment label consultation.

Particular areas of focus for the FCA are the marketing restrictions in the draft regulation, refining some of the specific criteria for the labels and clarifying how different products, asset classes and strategies can qualify for a label.

The FCA is intending to publish a policy statement in the third quarter of this year.

Last month (February 23), the chief executive of the Investment Association told a Treasury sub-committee that the original draft for the labels excluded too much of the industry.

Chris Cummings said the FCA needed to reconsider some of the proposals, as if they were to go ahead in their current form, between 60 and 70 per cent of all retail investment products would be excluded.

The FCA added that it is balancing coherence with other countries’ equivalent rules, while ensuring the UK’s standards remain “robust”.

Gemma Woodward, head of responsible investment at Quilter Cheviot welcomed the news, and said it is “vital” sustainable and responsible and investing is a success, and part of this is ensuring advisers and investors can feel confident in what they are investing in.

“Alongside the likes of the consumer duty, this is a landmark piece of regulation from the FCA and it is clearly listening to those concerned. 

“The changes are going to be vast once they are introduced so firms will need time to implement these, along with other policies from international regulators and bodies.”

The regulation includes three labels for sustainable products: ‘sustainable focus’, ‘sustainable improvers’, and ‘sustainable impact’.

The first requires at least 70 per cent of the product to be invested in assets aiming to achieve a high standard of ESG, with the second looking at assets that are not sustainable now but are aiming to be in the future.

The ‘sustainable impact’ category will be for products with an explicit objective to achieve a positive and measurable contribution to sustainable outcomes, and products that do not align with any of these will be label-less.

Investment products that qualify for the regulation will also be required to meet certain principles in order to use a sustainable label, including their sustainability objective, investment policy and strategy, key performance indicators, resources and governance and investor stewardship.

The three categories of labels are intended to be mutually exclusive, and products with a blended strategy are expected to set a clear objective to determine which label is appropriate.

Sustainability regulation

The EU was the first country to implement sustainable investment regulations in summer 2020, which included the Sustainable Financial Disclosure Regulation.

The UK decided not to implement the EU’s regulation in legislation, instead choosing to work on its own taxonomy. 

It created a working group, the Green Technical Advisory Group (GTAG), to oversee the delivery of this including giving advice on developing the framework, supporting investors, consumers and businesses to make green financial decisions and clamp down on greenwashing. 

There was concern that the rules would be “perpetually kicked down the road” after they were delayed last year, however the FCA stuck to the timeframe announced in the delay, saying it wanted more time to examine the Securities and Exchange Commission’s own rules which had just been released.

The UK’s regulations go further than the EU’s regime, which has turned into a quasi-labelling system despite not being designed as one.

Regulators have been treading a careful line between pushing forward with their own reforms, and waiting for other jurisdictions to release their own, to ensure asset managers and investors are not overwhelmed with conflicting systems.

Behind this is the urgency with which some think these measures should be enacted, to ensure the positive impact on the environment is not delayed any longer than necessary.

sally.hickey@ft.com