The chief executive of the Investment Association has said the Financial Conduct Authority needs to reconsider some of the proposals it has released around sustainability disclosures for funds.
Speaking to the Treasury sub-committee on financial services regulations yesterday (February 22), Chris Cummings said the labels in their current form exclude too much of the industry.
“We support the FCA’s ambition to bring greater clarity to retail investors over where their money is going and ultimately how it gets deployed into the real economy,” he said.
“The FCA needs to reconsider some of their proposals…if the labels [in their current form] were to go ahead unchanged, they would exclude between 60 and 70 per cent of all retail investment products.”
The current proposals do not exclude specific asset classes, however it would be tricky for a lot of passive funds to actively exclude stocks that do not align to the sustainability criteria.
While the ambition behind the proposals is correct, and the FCA did listen to the industry, it would be encouraging for the FCA to have “another look” at the proposals, Cummings said.
We think a balance has been struckJames Alexander, UKSIFHe went on to say the proposals in their current form would mean substantially higher costs, which would “absolutely” be passed onto retail investors.
“The industry would seek to mitigate these costs as much as possible,” he said.
Cummings also criticised the extra complexity the proposals would add for consumers, highlighting that the FCA’s proposals indicated “extra sheets” of information from customers.
“According to the FCA's own figures, 3 per cent of customers actually read the literature [about funds] that they get given," he said.
Cummings said making this information available digitally would be a good solution to this problem.
However, one area where the FCA has got it right is the balance of timings, said James Alexander, chief executive of the UK Sustainable Investment and Finance Association.
He said it is important to create a high bar that is having the positive impact that savers are getting what they expect from a fund’s label, while making sure the industry has adequate time to implement these rules internally.
“We think that balance has been struck,” he said.
An FCA spokesperson said: “As the Treasury Committee indicated in its green investment and net zero report, higher standards are needed to support the growth of and faith in sustainable investments.
"Investors have already shown great interest in these types of investment so we must make sure they know exactly where their money is going.
“We are listening to industry feedback and will publish a response to our consultation in due course.”
New labels
The committee met to hear evidence on the FCA’s sustainable disclosure requirements and investment labels, the first draft of which was released at the end of last year.
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 since it left the bloc at the beginning of last year, 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
