Regulator’s ESG head underlines need for market confidence, highlights importance of investor engagement.
The UK’s Financial Conduct Authority (FCA) will closely monitor funds’ use of incoming green investment labels, potentially stopping asset managers from using them in the event of misuse.
Speaking at ESG Risk & Investment Asia, co-hosted by ESG Investor, the FCA’s Director of ESG, Sacha Sadan, said the market needs to “feel confident” in the statements made by asset managers about green funds.
“We want to have confidence that when people say something’s green, sustainable, or diverse, that they are measuring that [via] particular outputs, KPIs metrics, and they are used in the right way. And if they don’t, they will not be able to use those terms in the future,” said Sadan.
The FCA is expected to release plans for its labelling regime for green funds later this quarter. The framework will form part of the UK’s Sustainability Disclosure Requirements (SDRs), the UK’s equivalent of Europe’s Sustainable Finance Disclosure Regulation (SFDR). The SDRs are an essential part of the UK’s Roadmap to Sustainable Investing, which also includes the introduction of an environmental taxonomy and the Transition Plan Taskforce (TPT), formed in April this year.
The FCA first outlined plans for a fund labelling regime in November last year, announcing the proposal in its ‘Sustainability Disclosure Requirements and investment labels’ discussion paper. The outcome of the consultation, which closed for comment in early January 2022, has been pushed back to this autumn.
The FCA said it intends to “develop and implement labels to build on existing work under other domestic and international initiatives by industry and official sector initiatives”. Certain investment products will be required to display a label reflecting their sustainability characteristics, complementing entity- and product-level SDR disclosures.
The UK financial markets watchdog also intends to regulate providers of ESG data and scores, which Sadan confirmed in his remarks.
Abusers cannot be users
Sadan’s comments on abuse of green labels by funds could be a key indicator of how the new regime will operate in practice. “Our job is to protect consumers. to make sure markets perform adequately, and competition is enhanced. Consumers need the right information to make decisions,” said Sadan. “They have to feel credible products are out there”.
A number of asset managers have revised the categorisation of their funds under SFDR, in light of further regulatory guidance, to avoid claims of greenwashing.
Sadan said: “We need to make sure that the market feels confident in the statements that they make. We wrote to asset managers last year about their disclosures, and about what we will be looking for. We’re trying to get the ecosystem so we might be starting to regulate ESG ratings as well.”
The US is also due to introduce rules on the labelling of funds designed to minimise ESG risks and negative impacts.
Sadan also advised that in order to affect change on firms’ ESG practices, investors need to engage over the long term rather than divest investment. Large asset owners are increasingly under pressure to ditch carbon-intensive firms from their portfolios, such as the Church of England recently coming under fire for its holdings in Shell.
Divestment may not necessarily lead to real world emissions reductions, even though it allows investors to claim rapid portfolio decarbonisation. It can mean ownership of carbon-intensive assets is shifted, rather than actually being decarbonised, while their oversight may be reduced by removal from the public markets sphere.
“I really want you to make sure that this is not about just divestment. This is about getting all industries and all areas to be involved in all doing their bit,” said Sadan.
“ESG really is about good business practice. It is about long term. And when I say sustainable, I mean repeatable profits or repeatable investments, not just something that happens one time”, he said, which continued engagement is key in achieving.
International, not isolated
Sadan highlighted that FCA’s approach to regulating sustainable investments is informed by collaboration with international bodies including the International Sustainability Standards Board (ISSB), the International Organization of Securities Commissions (IOSCO) – the securities regulators’ global body which approves the ISSB standards before they are used by member regulators – and the Task Force on Climate-Related Financial Disclosures (TCFD).
The UK’s first TCFD-aligned reporting requirements for the private sector came into effect on 6 April 2022. This means that private sector firms need to disclose information including descriptions of the organisation’s governance-related arrangements for measuring and managing climate-related risks and opportunities, the processes in place for measuring and managing climate-related risks and opportunities, and key climate-related risks and opportunities arising from the organisation’s operations. At this point, 1,300 firms are subject to TCFD reporting requirements.
Since 1 January 2022, the FCA’s larger regulated asset owners and managers have had to disclose how they take climate-related risks and opportunities into account in managing investments and make disclosures about the climate-related attributes of their products. Smaller FCA-regulated firms are expected to have to do the same from early 2023.
The ISSB released its first two draft disclosure standards in March, with them being open to public consultation for a 120-day long period. The ISSB has received more than 600 responses to its draft climate disclosure standard and close to 700 responses to its draft general requirements disclosure standard. The ISSB is now “assess[ing] and discuss[ing]” the feedback, with no firm date yet set for their publication.
“We really do not want to work in isolation. that’s why [our work] with other authorities around the world is central”, said Sadan. “It’s very important we listen to other regions and other areas so that we go at the right pace. We do want this to be something that is achievable, as well as aspirational”.