FCA Praised For “Globally Harmonised” ESG Strategy

UK regulator invites feedback on funds labelling policy as well as overhauling its general ESG plan, aimed at protecting market participants and creating more alignment.

The standards-based approach of the Financial Conduct Authority’s (FCA) new ESG strategy, announced last week, has been praised by law firm Linklaters and others as “highly desirable.”

The UK financial services regulator also released a Discussion Paper, which invited views on potential criteria to classify and label sustainable investment products.

The FCA called the launch of its new ESG Strategy a “refresh”.

The watchdog said its revamped ESG strategy “will develop clear standards for sustainability, diversity and net-zero targets, build information for market participants and financial services firms to rely on”. It also aimed to create an ecosystem that “ensures firms take ESG seriously, deliver on promises and avoid ‘Greenwashing’.”

The industry praised the proposed overhaul on its alignment to The Task Force on Climate-related Financial Disclosure (TCFD).

“Creating globally harmonised approaches are highly desirable, and what’s been really well received in the FCA’s approach is that it does harness global TCFD standards,” said Victoria Hickman, Senior Associate, financial regulatory group at Linklaters, to ESG Investor. Hickman added that the FCA approach could help align the UK’s methodology around ESG frameworks with “the direction of travel globally”.

Strategy for ESG

The FCA said the new strategy will build on the commitments identified in its Business Plan 2021/22. It sets out the FCA’s role in supporting the transition to a more sustainable economy, working with industry, listed companies and international partners, said its statement.

The new strategy will be built around five key themes: ‘transparency’, which will include promoting transparency on climate change and wider sustainability along the value chain; ‘trust’, which will be building integrity in ESG-labelled instruments and products; ‘tools’, which includes “working with others to enhance industry capabilities and support firms’ management of climate-related and wider sustainability risks, opportunities and impacts”; ‘transition’, which the FCA said will involve the finance industry’s role in delivering a market-led transition to a more sustainable economy; and ‘team’, which comprises “developing strategies, organisational structures, resources and tools to support the integration of ESG into FCA activities”.

The FCA will gather feedback on supporting entity-level and product-level disclosures. “The FCA will leverage existing initiatives in this area to ensure coherence with market practice and other regulation,” it said. The input will then guide the FCA’s policy design in this area, ahead of consultations on new proposals in spring 2022.

“It is fantastic to see the regulator giving responsible investing the attention it deserves,” said Emma Wall, Head of Investment Analysis and Research at Hargreaves Lansdown. “We welcome the particular focus on transparency, which we know investors are calling for.”

“Risk of harm”

The fund labelling discussion paper was separately announced but is scheduled to form part of the FCA’s new wider ESG Strategy.

The paper said it wants to look at ways to protect the market and stop fraudulent funds from claiming ESG credentials. “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. We have previously highlighted the risk of misleading ESG-related claims by-products and providers.”

The ESG Strategy overhaul is part of the FCA’s consultation on a UK regime for labelling green funds, similar to the European Sustainable Finance Disclosure Regulation (SFDR), which came into force earlier this year.

UK-based investors and managers have been anticipating the UK’s version since the government decided not to onboard the European framework. SFDR Level 1 came into effect in March and requires asset managers selling ESG-labelled funds into Europe to categorise their products across three progressively greener categories – Articles 6, 8 and 9. Level 2 will require asset managers to supplement these categorisations with supporting evidence, with reference to the EU Taxonomy of sustainable economic activities.

The FCA discussion paper lists the similarities between its proposed system and SFDR, advising that it hopes not to overload business with similar legislation. “We recognise that many UK firms are subject to SFDR in respect of their EU business and have already invested in systems and processes to classify products according to SFDR provisions,” said the FCA’s paper. “We, therefore, consider it important to explore how products already classified under SFDR can map against the UK framework.”

The labelling announcements have been well received. “Our view was that it was sensible, well-managed approach,” said Hickman.

“The FCA’s discussion paper has a well-designed list of labels. It was clear, and intuitive and the overall impression was that it was a workable approach. There was a lot of good information,” she added.

Last week at COP26, Sacha Sadan, the FCA’s Director of ESG, on a panel on impact investing, said there was a need for more industry-level coordination and emphasised the need for greater use of data, both in impact investing and more broadly across sustainable investing.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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