Institutional investor body expresses ‘serious concerns’ over UK’s ESG labelling scheme

In a response document to a proposed ESG labelling system put forward by UK regulator the Financial Conduct Authority (FCA), the Institutional Investors Group on Climate Change (IIGCC) has expressed “serious concerns” over a perceived failure to address assets within a “blended strategy” approach.

The FCA’s Sustainability Disclosure Requirements (SDR) are being framed as a response to the EU’s own Sustainable Finance Disclosure Regulation (SFDR). The SDR has gained plaudits for being a more clearly dedicated labelling system than its EU counterpart.

However, the IIGCC pointed out that, under the current plans, the three categories of labels created by the FCA are intended to be mutually exclusive. According to the IIGCC, many investors are pursuing sustainable objectives, including net-zero portfolios, across a range of asset classes, and will in practice adopt a “blended strategy” to achieve this.

“Given these nuances, it is not entirely clear which label a fund operating such a strategy would qualify for. If holdings in the fund are not demonstrating the necessary level of improvement over time, and key engagement objectives are not being met, would the fund lose its label? Where investors are pursuing climate adaptation objectives, or investing in emerging markets, they may also incorporate elements of the criteria for ‘sustainable impact’ label as well”, said the IIGCC response.

The IIGCC also claimed that the SDR in its current form would be incompatible with the Paris Aligned Investment Initiative’s Net Zero Investment Framework (NZIF). This was due to a lack of clarity over how the SDR would define asset owners that have set portfolio coverage goals to increase the percentage of their holdings that are achieving net zero.

The IIGCC response was receptive to the proposed definition of sustainable investments, yet encouraged the FCA to consider how this definition relates to that established under SFDR Article 2.17, noting that many investors will have put in place processes for categorising funds in line with that definition.

The consultation period for the SDR concluded on 25 January. The FCA proposals focus on asset managers and their UK-based fund products and portfolio management services, though the authority expects the SDR to “expand and evolve” over time.

In November 2022, the FCA launched a group to develop an ESG Code of Conduct for data and ratings providers, developed in conjunction with M&G, Moody’s, the London Stock Exchange Group and Slaughter and May