ESG InvestingFeb 27 2023

FCA’s fund labelling regime ‘too reliant on voluntary action’

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FCA’s fund labelling regime ‘too reliant on voluntary action’
'We need a tougher regime that gives regulators full powers to drive the transition' [Financial Times]

The City watchdog’s fund labelling regime, which would see investment funds categorised according to their environmental and social impact, needs to be “tougher” and should include red alerts for products which harm the planet.

That’s according to the not-for-profit policy group Financial Inclusion Centre (FIC), which published a 116-page report today (February 27) with charity Friends Provident Foundation recommending a series of improvements to the proposed regime.

Other recommendations included broadening the scope of products it applies to, clarifying the definitions to avoid ‘impact washing’, and statutory regulation of environmental, social, and corporate governance (ESG) ratings providers.

“We know that a huge amount of work has gone into the development of a labelling regime, but we remain concerned about its effectiveness,” said Mick McAteer, director of FIC.

“It is too reliant on the goodwill and voluntary actions of asset managers and product providers. 

“It is far too limited in scope in terms of the products, vehicles and portfolios it applies to and many of the actions are not fully mandated, nor the underpinning data independently verified.

“We need a tougher regime that gives regulators full powers to drive the transition.”

McAteer said the labels need to be communicated in an easily understood manner, and this includes alerting investors to products which damage the environment or dealing with instances where an investor has already been misled.

The FCA's proposed regime

Last year, the Financial Conduct Authotiy published a discussion paper on potential criteria to classify and label investment products.

The proposals involve categorising funds as "sustainable", within which there will be three sub-categories, ‘sustainable focus’, ‘sustainable improvers’ and ‘sustainable impact’.

The EU’s existing Sustainable Finance Disclosure Regulation came into force at the start of 2021.

However, its rules were not on-shored before the UK left the EU leaving it up to the FCA to define how sustainable funds would be regulated here.

Advisers in particular have been struggling amid a lack of transparency on definitions of the various terms used, and concerns are mounting that advisers will be judged on asset allocation decisions made today by criteria developed in the future.

As part of the labelling regime, the FCA will require advisers to take sustainability issues into account when advising clients.

FIC’s recommendations

The FIC said in its report that the FCA’s current labelling proposals conflate different ESG goals - which are environmental, responsible corporate behaviours, and social impact - making it difficult for investors to identify funds which meet their preferences.

It argues that there is an essential difference between the core purpose of ‘green’ and ‘social’ funds and that distinction is currently not made clear.