It is pretty easy to criticise recent developments in sustainable investment regulation right now.
Experienced fund managers are concerned about the Financial Conduct Authority's implementation teams moving away from the client-centric, principles-based approach set out in the sustainability disclosure requirements regime, and some of the detailed questions they are asking as part of the labelling process.
This is a concern given that funds are central to portfolio management and advice processes.
However, context matters. When the SDR regime was conceived, greenwashing was widespread.
Funds that only integrated ‘environmental, social and governance risk’ were making exuberant sustainability claims and confusion was rife.
Addressing greenwashing was one of the SDR regime’s three core aims, and this problem has indeed receded as the regime differentiates between funds with and without positive intentionality and sustainability objectives.
SDR’s second core intended outcome is the delivery of more information about sustainability, an aim that talks to the purpose of my business.
However, post-SDR progress appears to be mixed.
Information may be generally improving, but there has been some overshoot, with valuable information being removed from websites just in case, which is at odds with this objective.
SDR’s third core intended outcome was the development of four new fund labels, in order to make sustainable funds easier to find and aid competition.
Underpinning all of this is the FCA’s 2022 Financial Lives Survey, which indicated 62 per cent of investors were interested in investing in responsible investments in future.
The consumer duty and climate risk also intersect here, in the sphere of client outcomes.
Yet none of this is easy.
Good things are happening
The issue was discussed at the SRI Services and Partners annual conference as part of Good Money Week in October, where I chaired fund manager sessions exploring the new SDR rules, the areas that sit beyond the labels, and communicating sustainability with confidence.
Although the mood was positive, recurring frustrations included working with compliance teams and regulatory professionals who find nuanced, complex, somewhat subjective and regularly evolving sustainable investment strategies hard to digest.
We are currently seeing this play out in the labelling related implementation challenges, with added complexity around who can and can’t, and will and won’t, be using labels.
With regard to whether or not people are broadly optimistic about labelling, I asked our 250 or so strong (mostly advisers and wealth managers) audience to indicate if they thought the SDR labels would be useful, once the current challenges had been worked through.
Almost every hand went up.
Overall, judging whether or not this year is better than last is not entirely straightforward as we are collectively still spinning lots of plates.
However, this time last year we were waiting for SDR to be published. There was no anti-greenwash rule, ESG and sustainability were being conflated, and there were no labels, no naming and marketing rules, and no adviser working group.
