ESG Investing  

FCA 'clearly listened' to industry over ESG labels

FCA 'clearly listened' to industry over ESG labels

The Financial Conduct Authority has been praised for seeking the views of the financial sector for its new sustainable labelling scheme.

Earlier this week (October 25), the regulator released a consultation laying out its proposed sustainability disclosure requirements (SDR) and investment labels for the first time.

The FCA had been encouraged by the industry to engage with it through the creation of these labels, after the EU was criticised for developing its sustainability rules behind closed doors.

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James Alexander, chief executive officer at the UK Sustainable Investment and Finance Association, told FTAdviser the FCA had clearly learnt from the EU’s process.

“The FCA has done a good job of getting the industry involved in the development process of this…it was very open,” he said, adding that the UK regulator had listened to experts in its Green Technical Advisory Group (GTAG).

The regulations, which will be implemented next year after a consultation period, aim to clamp down on greenwashing, and restrict how investment managers use terms such as “ESG” and “green”.

Greenwashing not only undermines trust in the industry, Alexander, said, it harms those companies and organisations who are going the extra mile in creating products that do have a tangible positive impact on ESG issues.

“If a competitor is not doing all this extra effort and [instead] just has a good marketing team behind them, it is hard for retail investors and even financial advisers to tell the difference between the two," he said.

“That’s a problem.”

Proposed labels

The regulation includes three labels for sustainable products, which are ‘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 amount invested in funds that sit in the IA's "responsible investment" category totalled £90.3bn in August 2022, out of a total £1.4bn of funds under management in the UK.

This is £10bn higher than the £81.1bn sat in these funds in August last year.

Criticism of the labels

There has been some criticism that these labels do not go far enough in terms of defining exactly what constitutes green investing.

Phil Spyropoulos, partner at Eversheds Sutherland said the FCA’s thesis could be summarised as “say what you do, then do what you say”.