UK investment community embraces FCA’s new sustainability labelling regime

Investment professionals in the UK largely welcome Britain's new sustainability disclosure and labelling regime as rolled out by the country's watchdog, the Financial Conduct Authority (FCA) yesterday.

While the package of measures mostly meets market expectations, it does differ substantially from the EU's approach. Nevertheless, investors appear confident that the measures will help to increase trust and transparency within the green investment market.

The FCA  regime is aimed at minimising greenwashing and make investment products that are labelled as sustainable more transparent.

In a first response to the new rules, Shantanu Naravane, a partner at London law firm Herbert Smith Freehills, told Net Zero Investor that "while there is a lot of detail to be unpacked, the rules appear to be largely consistent with market expectations."

To highlight the importance of the new regime for the UK investment space, Navarane stressed that "more than two years after the initial Discussion Paper, these sustainability disclosure standards and investment labels are one of the most eagerly anticipated pieces of regulation in recent memory."

Engagement

The FCA said that with an estimated $18.4 trillion of ESG-orientated assets now being managed globally, it felt the need to put in place new Sustainability Disclosure Requirements and an investment labels regime after detailed engagement with a range of stakeholders, including investors, other regulators and consumer groups.

"This package of measures, including the consumer-focussed labelling regime, should strengthen the UK's position as a centre for asset management and sustainable investment," the FCA stressed.

The FCA's stance is backed up by research that showed that many investors were not confident that sustainability-related claims made about investments were genuine. This did not help by a lack of consistency when firms use terms such as 'green', 'ESG' or 'sustainable'.

Scrutinising the new regime, Hortense Bioy, global director of sustainability research at Morningstar, said "the FCA took on board most feedback from market participants and made the final rules simpler, less prescriptive, and more principles-based."

Package of measures

To increase investor confidence and market transparency when it comes to green investment products, the FCA said it will introduce an anti-greenwashing rule for all authorised firms to make sure sustainability-related claims are fair, clear and not misleading.

It also plans to launch "product labels" to help investors understand what their money is being used for, based on clear sustainability goals and criteria.

Moreover, the FCA will name and market requirements "so products cannot be described as having a positive impact on sustainability when they do not," explained Sacha Sadan, director of environmental, social and governance at the watchdog.

'We are putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs," Sadan said, stressing that "this is a crucial step for consumer protection as sustainable investment grows in popularity."

He went on to argue that "by improving trust in the sustainable investment market, the UK will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international centre of investment."

Sadan disclosed that the package of measures "was tested with over 15,000 people."

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'Trust is crucial'

London-based Nathaniel Lalone, financial markets and funds partner at Katten Muchin Rosenman, embraced the new regime.

“Engendering trust in the sustainable investment market is critical to its success and for the UK to reach its net zero targets," Lalone said.

He expects "market participants should be prepared for the FCA to have little patience for poor behaviours in this space.”

Labels

The ‘Sustainability Focus’ label that product manufacturers will choose a offers  ‘robust standard’ that aligns with the fund's sustainability objective and invest in assets that meet the standard, said Bioy.

"A robust standard' should be based on a methodology determined by industry practice, an authoritative body, such as the EU taxonomy, or proprietary standards," she added.

Moreover, as the FCA is introducing a 'Sustainability Improvers’ label, Bioy said "stewardship is no longer a requirement. Assets must have the potential to meet a 'robust standard'."

On a more cautionary note, Bioy highlighted that the new ‘Sustainability Impact’ label, defined impact in very broad terms in broad terms, she warns that there is currently: "no requirements of additionality, but a theory of change must be specified and positive impact demonstrated" she added.

"This is consistent with existing impact investing frameworks," Bioy noted.

Finally, a fourth, newly-created 'Sustainability Mixed Goals' label accommodates for funds with mixed strategies that meet the criteria for a label.

"Effectively, this label provides greater flexibility for product manufacturers and broadens the scope of eligibility," she said.

With regards to the current regime in the EU, As expected, Naravane remarked that "the final rules follow a very different approach to the EU ESG regime, which will be welcomed by market participants."

He said "it now appears more likely that any convergence will take the form of the EU aligning itself to the UK than vice versa."

With regards to the FCA's new marketing rules, non-labelled funds using sustainability-related terms in their names and marketing must produce the same disclosures as labelled-funds and explain why they do not have a label, the watchdog said.

Naravane called this "significant" as she stressed that "asset managers will now be able to market funds with sustainability characteristics to retail investors even where they do not use the investment labels."

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