29 March 2023
If you are covering the FCA’s updates on its Sustainability Disclosure Requirements (SDR) and investment labels consultation, please find below a comment from Gemma Woodward, head of responsible investment at Quilter Cheviot:
“Given the complexity of the topic and the scale of the response from the industry, it is good to see the FCA take its time with its policy statement on the Sustainability Disclosure Requirements. There is a mass of sustainable and responsible regulation being introduced just now, so it is important firms are given the time to plan and resource effectively and make the new policies a success. It is also vital that time is taken to make these final policies clear, concise and not allow them to lead to further confusion. It is vital sustainable and responsible investing is a success and part of this is ensuring advisers and investors can feel confident in what they are investing in.
“It is particularly pleasing to see the FCA call out potential changes to its approach on marketing, specific criteria for the labels and how different products can qualify for a label. These are important sticking points, so it will be interesting to see what the FCA concludes from the consultation responses.
“For example, we must be crystal clear on what constitutes marketing. The FCA initially said it would prohibit firms from using certain terms in the naming and marketing of non-labelled products. As a result, there is a concern that things such as Stewardship Code responses or voting and engagement reports are deemed to be marketing documents and thus cannot be used in conjunction with non-labelled products, even if voting and engagement is going on under the bonnet. There are also potentially some unintended consequences with prohibiting the use of the word ‘sustainable’ to only labelled products given the use of terms like sustainable dividend. We understand the intent behind this, however, the reality is that certain words and terms are used to describe processes regardless of the sustainability credentials of a product.
“On specific criteria for the labels, it is important we do not exclude lower risk strategies from being able to qualify. The industry is split over the 70% threshold for ‘sustainable focus’ – for some it’s either too high, but for others it is not enough. For a client 70% might not seem very high however the difficulty is how do you classify underlying holdings? For example, you would struggle to classify government bonds or cash as sustainable but there will be a number of cautious investors who want a sustainable portfolio but cannot take on the risk investing solely in equities provides.
“Finally, much of the discussions around SDR have been seen entirely through the lens of a single strategy fund, with other products being ignored. For example, managed portfolio services would not be able to get a label and thus you are actually disadvantaging investors who invest in products more suited to those with fewer assets.
“Alongside the likes of the Consumer Duty, this is a landmark piece of regulation from the FCA and it is clearly listening to those concerned. The changes are going to be vast once they are introduced so firms will need time to implement these, along with other policies from international regulators and bodies."
