FCA's SDR intent welcomed; greenwashing fears remain

The Financial Conduct Authority's (FCA) proposals on sustainability disclosure requirements (SDR) have been welcomed by industry experts, although concerns remain over the need for one "harmonised" and understandable system for all investment products.

The regulator previously launched a discussion paper seeking views on the proposed SDRs for asset managers and FCA-regulated asset owners, which aim to “empower” pension scheme trustees to consider climate-related factors in their decision making.

Industry organisations have welcomed the FCA’s intention behind the proposals, with Interactive Investor (II) arguing that changes to ensure investors feel empowered when choosing responsible investment products “can’t come soon enough”.

II head of pension savings, Becky O'Connor, stated: “We’ve seen huge growth in investment products focused on this area in the last few years, and the UK’s presidency of the COP26 climate conference in Glasgow last year placed greater responsibility on the shoulders of the UK finance industry to deliver more.

“However, the variety of these products and their differing strategies can be confusing and overwhelming. It can even be totally off-putting, if someone feels let down by an investment that claims to be responsible or sustainable, but on further inspection, does not seem to live up to the label. Finding information about a fund or trust’s true sustainability credentials shouldn’t be an onerous task for any investor.

“As things stand, the risk of greenwash is high, so it is a priority that we have greater clarity and consistency of language when describing environmental, social and governance (ESG) products to investors, who should be able to feel confident that they are choosing products that live up to their expectations."

However, O'Connor suggested that, as every investment has an impact of some kind, no product should be considered out of scope and should still be subject to the labelling element of the regime.

This sentiment was shared by the UK Sustainable Investment and Finance Association (UKSIF), which, although “strongly" in support of the direction of travel outlined by the FCA, highlighted a number of areas that require further consideration.

In particular, UKSIF said that whilst it was “broadly supportive” of the tiered approach suggested, it would welcome further work to explore whether a “single harmonised set of disclosures for both groups [consumers and more sophisticated institutional clients] could be feasible in practice".

Alongside this, the group raised concerns that the proposed labels, across all product categories, could potentially neglect social and governance issues, warning that this could make it hard to identify where investors’ socially targeted funds and investments focusing on social objectives would sit in the UK labelling system.

These concerns were also raised by the Association of Investment Companies (AIC), which agreed that product labels should distinguish between products that focus on environmental sustainability and those targeting positive social change, although it acknowledged that it would be possible for a single fund to carry both labels if it met the standards.

In addition to this, the AIC argued that “demanding standards” should be set for funds that call themselves “sustainable” or make ESG claims, and that the same standards be applied to all retail investment products that fall under the PRIIPs and UCITS regimes, including investment companies.

AIC chief executive, Richard Stone, commented: “People buying investments that are labelled ESG or sustainable expect them to make a real difference, rather than being a marketing opportunity for product providers.

“Unfortunately, we are still in a situation where too many ESG claims do not stand up to scrutiny, as the FCA has already highlighted. This threatens to undermine investors’ confidence in ESG investing as well as getting in the way of positive change.

“We believe the bar for investment products to call themselves sustainable should be set high enough to clearly differentiate them from other products. Product labels should be clear, and disclosures should be short and jargon-free.

“Finally, rather than the new disclosure regime applying to some products but not others, all retail investment products should be within the scope of the regime including investment companies. Investment companies are well placed to invest in less liquid assets that can have a large environmental or social impact.

“They should be held to the same standards as other investment products so that investors choosing an investment for its sustainability credentials can compare like with like and have confidence that the label is meaningful.”

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