After a discussion paper back in 2021, the Financial Conduct Authority's sustainability disclosure requirements and investment labels will finally begin to come into force this year.
While they address concerns about greenwashing and a lack of standardised information in sustainable investing, the measures still leave room for confusion.
For example, overseas funds that are classified as article eight and nine under the EU’s sustainable finance disclosure regulation are not subject to the UK’s labelling and disclosure requirements.
This requires an informed ESG retail investor to be familiar with both the EU’s SFDR and the UK’s SDR and labelling regime.
The FCA set out in its policy statement how their labels map to categories proposed in a European Commission consultation on what some have termed ‘SFDR 2.0’, which could see Brussels establish a similar system to the UK in terms of categorising sustainability products.
But the proposed categories represent one of two approaches put forward by the commission, whereby the distinction between article eight and nine either disappears (approach one), or the existing concepts of article eight and nine are used as the basis for establishing a categorisation system (approach two).
SDR | Approach one of the SFDR consultation |
|---|---|
Sustainability improvers | Category D: Products with a transition focus aiming to bring measurable improvements to the sustainability profile of the assets they invest in |
Sustainability impact | Category A: Products investing in assets that specifically strive to offer targeted, measurable solutions to sustainability related problems that affect people and/or the planet |
Sustainability focus | Category B: Products aiming to meet credible sustainability standards or adhering to a specific sustainability related theme |
Sustainability mixed goals | Mix of A, B and/or D |
Using sustainability-related terms | Category C: Products that exclude activities and/or investees involved in activities with negative effects on people and/or the planet |
While ‘SFDR 2.0’ could therefore end up working in a similar way to the SDR and labelling regime, making it easier for consumers who invest in UK and overseas funds, it could also not.
International compatibility (or incompatibility) aside, UK asset managers can choose whether or not to label their sustainable investment products, and can choose when, after July 31, to use a label.
Indeed, a straw poll during a webinar hosted by consultancy Alpha found that respondents were almost evenly split on whether they would be a ‘first mover’, ‘fast follower’ or adopt a ‘wait and see’ approach to using the sustainability labels.
Unlabelled products using sustainability related terms will, however, still be subject to naming and marketing rules that come into force in December.
So it appears that consumers will have the task of navigating a market of sustainable products with a label, and those that are sustainable but do not have a label (and which, the rules state, must not use the terms ‘sustainable’, ‘sustainability’, ‘impact’ and any variation of these in their name).
Besides deciding whether or not to label their funds, UK asset managers will be responsible for a fund’s classification if they choose to label it, and for ensuring that the label is appropriate.
Although the regulator’s anti-greenwashing rule should close any loopholes that come with self-certification, there is still the matter of consumer perception.
Indeed, qualitative research on sustainability disclosures commissioned by the FCA found that consumers presumed the regulator would be awarding the labels, and some expected the FCA would monitor them.
“The FCA need[s] to audit the products to make sure businesses are not being fast and loose with the labels,” said a consumer who had been investing for at least nine years, the research found.
