Friday Highlight  

What advisers need to know about the FCA's ESG labels

What advisers need to know about the FCA's ESG labels

With the M25 regularly being brought to a standstill; Van Gogh and King Charles suffering the indignity of being 'souped' and 'caked' respectively, and commentators debating the rights and wrongs of protestors’ methods, one thing is clear: we are facing a climate emergency. 

Against this backdrop, with growing lines at food banks in the sixth largest economy in the world, investors are increasingly looking to put their money to work to help solve pressing environmental and social challenges.  

This is not a new phenomenon. Impact and environmental, social and governance investing have been hot topics in the investment world for some time, particularly given the increase in interest that the ongoing generational shift in wealth is expected to bring.  

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New sustainability disclosure requirements and investment labels 

It is also high on the regulator's list of priorities.

In October, the Financial Conduct Authority published consultation paper CP22/20, which set out the proposed SDR and investment labels for sustainable investment products.  

While these proposed rules are primarily aimed at funds and portfolio management, they have application to advisers as 'distributors' of the products in terms of providing information to consumers.  

The FCA has made clear that it will be consulting separately on suitability rules, which will be aimed at advisers.

The proposals introduce three labels for sustainable products:

  1. Sustainable focus;
  2. Sustainable improvers; and
  3. Sustainable impact

The labels are accompanied by disclosure requirements at product and entity level and rules regarding the naming and marketing of investment products, intended to help consumers distinguish between products that have earned a label and products that display certain sustainability characteristics but do not qualify for a label.

The FCA expects the labelling, naming, marketing and certain disclosure requirements will become effective in June 2024.

Advisers have plenty of time before they need to think about this, don’t they?

Given the focus of the new rules and the fact that the FCA has told advisers to 'watch this space' for suitability rules, many advisers will be planning to sit tight and wait for further updates.  

However, it is important not to lose sight of the fact that sustainability-linked investment products are already available, and the new consumer duty will become effective in July 2023 for all new and existing products on sale or open for renewal.

CP22/20 has got us thinking about sustainable investing and the consumer duty and what 'good outcomes' for consumers will look like in the context of sustainable investment products (even before the new rules become effective).

Regardless of suitability rules introduced in respect of new sustainable products, to comply with their obligations under the consumer duty, advisers will need to ensure they have clear processes to address.

Provision of information regarding sustainable products

Advisers will need to ensure that information regarding sustainable products is provided in a manner that enables consumer understanding and for consumers to make informed decisions under the consumer duty.