Industry raises concerns as regulator's SDR consultation closes

Three categories of investment labels to be used

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As the deadline for the Financial Conduct Authority's (FCA) consultation on Sustainability Disclosure Requirements (SDR) closes today (25 January), industry commentators have revealed the changes they would like to see made to the proposals.

The regulator unveiled the SDR consultation paper on 25 October, which included proposals for three categories of investment labels to be used for sustainable investment products: ‘sustainable focus'; ‘sustainable improvers' and ‘sustainable impact'. While the introduction of labels has been widely welcomed, the FCA has received considerable feedback on how they can be best deployed and areas of concern.

UK Sustainable Investment and Finance Association (UKSIF) chief executive James Alexander raised concerns about how the labels would be applied to asset classes other than equities and the qualifying criteria, which he said could prove disadvantageous to smaller firms.

"We are strongly supportive of many aspects of the proposed approach, though of course there are areas for the FCA to carefully consider tweaking following this consultation phase," Alexander said. "This includes the labels' applicability across a broad range of asset classes beyond equities, the treatment of fund of funds, and certain aspects of the qualifying criteria, particularly for the ‘Improvers' category."

He added: "We do have some concerns that the proposed regime, particularly the qualifying criteria for the three sustainable labels could disadvantage smaller asset managers, which we expect to have relatively fewer resources to comply with the measures. We see this as an important consideration given the FCA's operational objective to promote competition in the interests of consumers."

Pensions, wealth and investment advisory business Isio head of ESG research Cadi Thomas suggested further guidance on the parameters of the product labels is necessary.

"The labelling requirements are strict, and we feel that in order for them to be successfully integrated, there is a need for more clarity in certain aspects such as the thresholds for each product label," he said.

"For a product to classify as ‘impact', there is an additionality clause that requires the product to direct new money to the cause, which may be problematic for many of the impact products that are currently popular in the market."

Meanwhile, Redington investment consulting teal vice president Edina Molnar called for more stringency from the regulator, proposing the external verification of labels and an enforcement policy.

"Given the inconsistency in the quality of some sustainability data, we encourage the FCA to consider requiring external verification of labels. We believe this would allow for greater accountability and stronger consumer trust. We also encourage the FCA to provide clarification around how the labelling and disclosures requirements will be enforced, including details on the consequences of breaching the regulations."

Molnar also said the SDR rules should cover institutional products as well as retail funds, while product disclosure requirements should be standardised.

"We strongly believe the SDR proposals should also apply to products marketed for institutional investors, including pension schemes. In their current form, the proposals would allow firms to market certain products as sustainable to institutional investors but not to retail clients. We believe this divergence would introduce significant complexity and could make it harder for institutional investors to assess the robustness of sustainable/ESG products."

She continued: "We also welcome additional clarity on definitions and the introduction of minimum safeguards to ensure the proposals' robustness in relation both to social and environmental sustainability. For example, product-level disclosures should have clarity around the baseline requirements, including minimum technical standards on metrics to encourage standardisation and comparability. The UK green taxonomy could provide the appropriate tools and standards to measure such disclosures against. There is an urgent need for a UK taxonomy to provide a baseline for labelled assets - and the FCA's regulation should ideally have moved in tandem with the implementation of the taxonomy."

The final rules are expected to be published by the end of the first half of 2023. 

Read more: Bringing clarity: The importance of ESG labels 

This article first appeared on PA sister title Sustainable Investment

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