It was a huge relief when I learned the sustainability disclosure requirements consultation would be published on October 25.
As a member of the DLAG – the Financial Conduct Authority’s Disclosure and Labels Advisory Group – and deeply committed to improving this area, I had started to fear it might be delayed.
My first thought when I saw it was that it was longer than I expected (although the last 70 or so pages are mostly annexes). My next impression was pleasure. Even though there are areas that need further work, the proposals were sensible and as discussed. So it was easy to welcome.
The accompanying media release happily packed no punches. The FCA’s focus was greenwashing – making sure clients are not misled.
Greenwashing is a tricky concept as it takes different forms. Commentators sometimes use the term when what they should be saying is that they disagree with a strategy. More often, however, it is borne of overstated environmental credentials, omitting key information, and\or meaningless, unproven marketing statements.
And whether greenwashing is intentional or accidental – it has damaged the credibility of ‘sustainable investment’ as a franchise.
Greenwashing has been turbo charged by the recent boom in sustainable investment, underpinned by a lack of relevant knowledge, experience or ambition.
I do not believe that intent to mislead is common, but in the real world it is actions not words that matter, so this needed to be dealt with. And preferring principles to rules, like many I am pleased the FCA is talking about "guardrails".
You may be aware that I have made it my mission to help retail intermediaries understand what funds in this area ‘actually do’ for many years. Accepting that there is no magic formula or strategy is something many find hard to accept – and there are many imperfections.
But the reality is that transitioning our entire economy to become clean, green and fair is complex.
In order to continue to thrive as a species most sectors will have to change significantly – some entirely. We must also do what we can to supercharge businesses that are solving problems, ensure higher sustainability standards are rewarded, and clients’ preferences are met. This is why the FCA has three proposed client-friendly labels.
- Sustainable focus: for funds that invest in assets that are widely regarded as sustainable.
- Sustainable improvers: for funds that aim to encourage a transition primarily through engagement (stewardship) activity.
- Sustainable impact: for funds that focus on delivering measurable real world environmental and social benefits.
The labels distinguish between different intentions.
The proposed labels are a victory for informed common sense in my view, and summarise core strategies well, by focusing on how funds are helping to deliver a sustainable future.
Use of the labels will be optional, but only labelled funds will be able to use certain terms – funds will only be able to use one label; portfolios will be able to describe their breakdown of each label, subject to a proposed 90 per cent rule.