The Financial Conduct Authority is seeking industry feedback on new sustainability disclosure requirements (SDRs) for asset managers and the labelling of ESG products, but it has been urged to work fast to keep up with Europe and avoid hindering the UK’s path to becoming a net zero financial centre.
Input to the paper will be used to form policy proposals for consultation in the second quarter of 2022 to help investors make sense of the ballooning ESG funds sector, the FCA said on Wednesday.
According to the Investment Association, funds under management for responsible investment products grew by 151% between Q1 2020 and Q2 2021.
The regulator said it welcomed the growing market and innovation in ESG products, but warned there is a risk of harm if the market responds to rising demand without adequate regulatory checks and balances and delivers poor outcomes to consumers.
“Without common standards, clear terminology and accessible product classification and labelling, there is also a risk that consumers find it difficult to navigate the landscape of products and assess product suitability,” the FCA said.
In July the FCA wrote to asset managers warning that applications for new ESG products are often poorly drafted, fall below its expectations and can mislead investors.
The regulator is therefore seeking industry views on the design of:
- -sustainable investment labels
- -consumer-facing disclosures for investment products
- -client- and consumer-facing entity- and product-level disclosures by asset managers and FCA-regulated asset owners
The FCA said it will develop and implement the fund labels, building on existing work under other domestic and international initiatives.
Earlier this year the European Union’s Sustainable Finance Disclosure Regulation (SFDR) was set in motion under which fund groups highlight funds that “promote environmental or societal characteristics,” as Article 8, and those that have “a sustainable objective,” Article 9. Funds that do neither are classed as Article 6.
The UK has not adopted SFDR wholesale although some asset managers are categorising their funds under the different articles if they operate in the European market. The FCA said: “We are seeking views in this paper on the extent to which we can remain as consistent as possible with SFDR, while reflecting the needs of the UK market.”
FCA chief executive Nikhil Rathi added: “Developing consistent, trusted standards are a vital part of that, giving investors the confidence to put their money where it can deliver the most sustainable outcome.”
FCA needs to work to tight deadlines
EQ Investors head of impact investing Damien Lardoux said he was seeing too many inconsistencies in reporting between asset managers which can only confuse investors.
He added: “We welcome the fact that the FCA is leveraging on the work that has already been done by the EU through the SFDR regulation. However, we urge the FCA to work on tight deadlines as the SFDR regulation – or its first version – was adopted already two years ago and put in place earlier this year.
“Delaying the publication of such an important regulation could hinder the credibility of the UK to become the first net zero financial centre.”
Underlying subject matter isn’t straightforward or objective
AJ Bell head of investment analysis Laith Khalaf said the FCA is “taking on a massive challenge”, but one which will have big rewards for investors if it can make ESG investing simple.
He added: “The difficulty is that much of the underlying subject matter isn’t straightforward or objective. While net zero is an almost universal goal, the methods of getting there are not quite so unanimously agreed.
“Investors themselves may prioritise different ESG issues and take a hard or soft line on whether to invest in companies that are heading in the right direction, but we’re not there yet.
“A successful labelling and disclosure plan will result in investors being able to pick funds that tick their own ethical boxes, without taking up too much of their time.”
Investment Association director for investments and capital markets Galina Dimitrova said the industry body recognised the need for clearer, more consistent disclosure.
“The considerations in this discussion paper reflect the evolution of the fund market and the expectations investors have for greater transparency and consistent, trusted standards,” she added. “We look forward to working closely with the FCA and our members to help drive these initiatives forward and to create well-functioning, globally-aligned sustainability standards with the consumer and ESG matters at the core.”