Author: Clausematch– clausematch.com
Aiming to guarantee the UK’s place at the forefront of sustainable investment internationally, the FCA has just launched its consultation paper on Sustainability Disclosure Requirements (SDR) and investment labels.
According to the regulator, the market for UK-listed investment funds grew 64% in 2021 to reach 79 billion pounds ($89.34 billion). However, there are concerns that companies may be making exaggerated or misleading sustainability-related claims about their investment products that don’t stand up to scrutiny – the so-called greenwashing – that may lead to consumer harm or to a lack of trust in the market for sustainable investment products.
The new rules
As a next step towards the regulation of ESG financial products, the FCA proposes measures that they believe will build transparency and allow consumers to make well-informed decisions. The regulator’s proposals encompass the following:
- Sustainable investment labels
- Consumer-facing disclosures
- Detailed product disclosures that would cover:
- Pre-contractual disclosures
- Ongoing sustainability-related product performance information
- A sustainability entity report
- Naming and marketing rules
- Requirements for distributors
- A general anti-greenwashing rule, applicable to all FCA-regulated companies, ensuring that any references to the sustainability characteristics of a product are consistent with its sustainability profile and are clear, fair and not misleading.
The figure below, extracted from the consultation paper, presents the proposed requirements, actions that will need to be taken and expected outcomes:
Companies and individuals should provide feedback by 25 January 2023 and the regulator aims to publish their final rules by the end of the first half of 2023. The general anti-greenwashing rule would become effective immediately upon publication, while companies would have 12 months to prepare for the labelling, naming, marketing, pre-contract disclosure requirements and rules for distributors. Required sustainability reports would need to be provided 24 months after the publication of the rules.
While this is a necessary step to protect the consumer, the market reputation, and ultimately, the planet, it will bring a new challenge to investment companies, who, once more, will have to adapt at speed to comply, mitigate financial and reputational risks, and retain the right to have their products called sustainable. The organisations who operate internationally can expect new rules from the EU and the United States to be released soon.
It might be easy to communicate to the consumer that an egg is farmed in a free-range property, and prove that this is the case, but when it comes to an investment, it is much more complex and subjective. The FCA is proposing to guide investors on what can be considered a green or sustainable investment, with the use of three different labels for funds that offer only sustainable assets, for those that are working to become more sustainable and for the ones that are focused on having a positive, real-world impact. Funds that don’t fit the criteria to own one of these labels will face limitations in the use of green, ESG-related terminology to market to customers. While, in the long run, it might be beneficial to the ESG investment market, it now means that companies will have to invest time and resources to acquire the right data, tighten policies, produce new reports and, potentially, change the way they are doing marketing.
Preparing for it
Companies that want to enter – or continue to be a part of – the growing sustainable investment market will have to up their game. Even though it may seem like there’s still time, it would be wise to start preparing now. Here are a few things to consider:
- Human resources: Is your team prepared to handle this additional task? Do you have the right expertise in-house? Is your headcount too stretched to manage?
- Data: Are you ready to capture internal and external data? Do you have access to the independently verified data?
- Collaboration: Is ESG an integral part of your organisation? Can departments collaborate and communicate effectively? Different teams, including Finance, Compliance, Operations, Marketing, and the C-suite, will need to be connected to:
- Build a strategy
- Gather and collate data
- Prepare reports
- Create and amend practices, policies, procedures, and controls
- Drive employee engagement and adherence
- Communicate internally and externally in accordance with the new rules.
- Technology: Having the right tools in place will be instrumental to the success of the project. Make sure you’re partnering with best-in-class technology providers that will help you address all of the points listed above. If there are any gaps, research options proactively – asking industry peers for referrals is usually a good way to find the right vendors.
These are just some of the considerations arising from the topic. Each organisation will have specific needs and challenges, but, in a nutshell, you should ask yourself: are we able to verify and prove our investment funds’ sustainability claims? If not, you better hurry. Consequences of greenwashing will be dire, not just for your organisation’s reputation and finances but also for the planet we’re living in.