FCA to introduce ESG rules for advisers 'in due course'

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FCA to introduce ESG rules for advisers 'in due course'
Rodrigo Capote; 2018 Bloomberg Finance LP

In a discussion paper published today (November 3), to coincide with COP26 Finance Day, the FCA invited views on potential criteria to classify and label investment products, and said it was minded to introduce specific rules for advisers.

Europe's Sustainable Finance Disclosure Regulation, which came into force at the start of 2021, already makes sustainability-related demands of advisers. However, its rules were not onshored prior to the UK's exit from the EU.

The FCA is now introducing its own Sustainability Disclosure Requirements for firms involved in investment management and decision-making processes.

The regulator said: "Building on existing rules, a key aim will be to confirm that [advisers] should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. 

“We will develop proposals on this in due course, working with government.”

"We welcome any views on this approach and any particular considerations that we would need to take account of in our proposals.

Plans to classify sustainable investments into distinct groups may also be aligned with existing SFDR categories, the regulator said in its discussion paper.

The changes will focus specifically on sustainable investment labels, consumer-facing disclosures for investment products, client- and consumer-facing entity- and product-level disclosures by asset managers and FCA-regulated asset owners.

The labels and criteria are intended to help consumers navigate their sustainability characteristics and the input received will guide the FCA’s policy design in this area, ahead of consultation on new proposals in spring next year. 

The FCA said these proposals aim to build trust in the market, enhance transparency in the interest of consumers and meet certain information needs of institutional investors. 

This paper comes as last month, chancellor Rishi Sunak yesterday published a roadmap for the UK’s SDR to help investors understand whether the firms’ practices align with their own sustainability preferences.

ESG priorities

Alongside the discussion paper, the FCA also published its ESG strategy and priorities.

The regulator said its aim is to support the financial sector in driving positive change, including the transition to net zero.

Ahead of COP26, there has been a strong focus on climate change and the role of finance in supporting the transition to a net zero economy, it explained.

Companies and consumers are increasingly looking beyond climate change as they consider wider environmental issues, such as nature and biodiversity, as well as social and governance issues, such as diversity and inclusion, the living wage, fair taxation and supply chains. 

“But there is a risk of harm if the financial sector responds to rising consumer demand and awareness of ESG issues without a supportive regulatory foundation and adequate guard-rails,” the FCA said. 

“So, ESG matters are high on the regulatory agenda. If the financial sector is going to help support the transition to a more sustainable future, market participants and financial services firms need high quality information, a well-functioning ecosystem and clear standards.”

As part of this, ‘transparency’ and ‘trust’ have been key themes of the regulator’s work on climate change and ESG, reflecting the initial priorities set out in October 2019.

These remain core areas of focus, but the FCA said its work is moving into a new phase. 

“We are already working hard to ensure that we have the right arrangements and capabilities in place across the organisation to respond to the chancellor’s expectation in our latest remit letter that we ‘have regard’ to the government’s commitment to a net zero economy by 2050 in all our regulatory activities,” it said.

Building on its existing work, the FCA has developed a refreshed ESG strategy which sets out how it plans to deliver on the target ESG-related outcomes included in its business plan 2021/22.

The City watchdog’s work is based on five core themes, which include:

  • Transparency – promoting transparency on climate change and wider sustainability along the value chain
  • Trust – building trust and integrity in ESG-labelled instruments, products and the supporting ecosystem
  • Tools – working with others to enhance industry capabilities and support firms’ management of climate-related and wider sustainability risks, opportunities and impacts
  • Transition – supporting the role of finance in delivering a market-led transition to a more sustainable economy
  • Team – developing strategies, organisational structures, resources and tools to support the integration of ESG into FCA activities

The FCA said: “As we deliver our strategy across these themes, we are collaborating with the government, other UK regulators, industry and other stakeholders to ensure UK financial services and the UK regulatory regime are at the forefront of ESG internationally.

“We are also working actively with our international partners to develop robust and commonly agreed international standards on ESG that can serve global markets effectively. We want UK consumers, financial services firms and securities issuers to interact and operate within a world-leading system.”

sonia.rach@ft.com

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