Posted on: March 31st, 2022
A similar version of the following text was first published in our March 2022 newsletter.
FCA Disclosures and labels (DLAG) – my involvement with the FCA, on their Disclosures and Labelling Advisory Group is proving both interesting and tough.
We have had many meetings and the level of engagement has been impressive – but the FCA has a real uphill struggle on their hands. They are dealing both with people who are experienced in sustainable investment and those who are new to the area, people who really care about sustainability and people who see it as being lower down the pecking order. All have opposing views, often strongly held. Many are uplifting.
There is of course also a vast range of moving parts within the sustainability sphere – all of which in theory need to be condensed into a label or two (or three).
As such, my view is that we must aim to make very significant progress in terms of improving client understanding (and therefore the reallocation of assets) – rather than seeking a miracle cure that does not exist.
One of the biggest nuts to crack is the ‘engagement vs screening’ dynamic. Too many people seem to think it is ‘either /or’ – it is not. We need both – and both need to be presented carefully. To my mind we do however need to stay in line with the ‘reasonable expectations’ of regular people who understand and care about sustainability issues. If we fail managers will continue to be accused of greenwash even if or when they are doing good work.
Muddling up the differences between the future of ‘all investments‘ – which will have to consider climate change either as a regulatory requirement or because a fund group has signed up to a commitment like GFANZ and related net zero initiatives – and ‘sustainable funds’ is another challenge, particularly for those who are newer to this area.
Sustainable funds should go well beyond ‘Paris Alignment’ – which requires managers to shift towards net zero CO2e (carbon dioxide equivalent) emissions. Paris Alignment is of course essential – and all funds should adopt adopt this right away.
A sustainability themed or focused fund should however go further. They must also consider big topics like nature loss, inequality (including health etc) and pollution – and ideally focus on companies where solving sustainability problems and building a brighter future are central to their existence. In other words – funds marketed as ‘sustainable’ (with no clear caveats) must remain the ‘leading edge’.
This means they should not be expected to hold controversial stocks – particularly those that are knowingly undermining our survival (and have been impervious to engagement for decades). Muddying the water with controversial holdings in funds labelled as ‘sustainable’ is a big risk. It fuels greenwash and undermines trust.
Decent, responsibly managed funds including passives can of course hold controversial companies providing they are seriously pushing for higher sustainability standards. Their lead strategy must however be active stewardship (engagement) – and they must make that clear with different labels, as some do.
We use the labels ‘Sustainability Tilt’ and ‘ESG Plus’ on Fund EcoMarket, to set this funds of this kind apart from other often outwardly similar looking funds, but again – strategies vary – so read the detail. These strategies are entirely legitimate if well managed because in order to prosper we must both effect change amongst existing companies and finance greener companies. (When talking to these managers you should ask for evidence of their activity so you can discuss it with clients – particularly voting records (if not available on Fund EcoMarket). Some supply us with this information – others do not.
Our SRI Styles (on Fund EcoMarket) try to capture this dynamism – alongside our 200+ ‘issues and approaches’ sub filters – which aim to help you match clients views to fund options . We highlight both ‘depth of consideration’ (mostly in terms of stock selection) and the different topics funds focus on. (Roughly one third of our filters are about responsible ownership related activity). To my mind being open about the existence of this variety makes far more sense than oversimplification, which can and does mislead people.
I am hopefully much of this will come through in the disclosure requirements, as labels alone can not capture this – but time will tell.
So where are we now? You will know there was a discussion paper in November . The FCA has considered the feedback they received and are now discussing variations of what a version two should look like. we are expecting a consultation paper somewhere around the middle of the year.
We know (barring disaster) there will be a sustainability labels and a disclosure regime, but its shape is not yet decided. It appears very likely IFAs/intermediaries will see some action within the year – probably along the lines of ‘a requirement to discuss this area’, but again, this remains work in progress.