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SRI Services response to FCA SDR and labels discussion paper DP21/4

January 17th, 2022

I am delighted to share our response to the FCAs recent ‘Sustainability Disclosure Requirements (SDR) and investment labels‘ discussion paper.

Our response was rather lengthy,  so you may prefer to focus on the summary of key points below (the text below is ‘as submitted’):

Summary of key points

1. For most of the questions below I have put ‘consumers who care’ centre stage as I believe it is their needs
we must focus on serving. This means we should focus on how relevant clients think, not how the
investment industry sees things. I recommend the FCA seeks to further explore their thought processes,
interests, fears and what they believe constitutes ‘greenwash’. You will find that their views vary. Many
will favour exclusions, most will be interested in ‘real issues’ and few will understand stewardship or be
industry constructed methodologies (although many will probably agree with the aims and purpose of

2. We need to cater for the full range of relevant funds and the environmental and social issues they cover –
making it clear what issues a fund considers and how they approach each issues.
I. We need to reflect and encourage (not shut down) diverse, dynamic, new and old strategies – in
order to solve the problems and reflect different client opinions.
II. To do this we need a wide range of methodologies, which will also help reach a greater number
of listed entities and guard against bubbles. Focusing on ‘transition’ (and its subset ‘alignment’) is
not appropriate. These speak to ‘how’ a fund works (which elements of the investment
community focus on) rather than ‘what’ is being considered, what is held in the fund – or what is
its ‘purpose’ (which individual clients are more focused on.)

3. I disagree with the view that this is about ‘end investor training’ – it is the investment community that
needs to upskill. Trying to upskill clients is looking down the wrong end of the telescope. Two reasons:
I. We have proven largely unsuccessful raising basic financial awareness in the UK – so focusing on
upskilling the public on this would be a major headache.
II. We need to take responsibility and recognise it is our job to create products that can be
understood, not the other way round. The investment community has failed to take account of
‘real world’ issues for too long. Clients are often ahead of us here. We need to listen and learn
from others – recognising that our methodologies are only a means to an end. Real world issues
need to be our starting (and end) point. This would also help improve trust.

4. Why figure 3 structure won’t work. Figure 3 highlights many of the useful fund approaches that are high
profile today, particularly in the climate investment arena. It is not however flexible enough to cope with
the full range of sustainability issues, it is also not client friendly and does not cater for other strategies –
such as funds that specialise in only environmental issues or only social issues (many of which have a
valuable role to play). You also need to be mindful of the responsibilities of investors with strategies that
use to earlier/other methodologies – and the fact methodologies will continue to change over time. There
are also potentially serious implications with a regulator to labelling some providers as ‘responsible’ – and
by implication others being ‘not responsible’. There are better ways of encouraging higher standards.
Questions 2 and 4 and Appendix 1 ‘A possible pathway’ should help.

5. The work you did on the ‘principles’ – Dear Chair letter – was excellent. Future work should reflect this
ethos. (If there has been a lack of specific criticism that should probably be read as ‘a success’).

6. If we can get the language right – focusing on ‘real life issues’ we should be able to help shift the mindset
of all investment professionals – which is ultimately what needs to happen. Almost everyone will need a
knowledge of sustainability issues in order and identify the part they and their companies can most
usefully play (‘purpose’) in helping to address meet their clients’ needs ever better.

7. Sustainability information should be as high profile as possible if we are to play our full part in driving the
necessary shifts. This means it should be embedded in all existing client facing literature. Levels of detail
will necessarily vary, but no document (required by law) should be allowed to ignore sustainability
entirely. Some will simply tell readers where to look for sustainability information, others will include a
list of criteria / key aims – and there will also be a need for detailed policy/strategy explanation document
also. We need to ensure all clients are aware of the relevance of sustainability issues and be able to see
how a fund deals with them. This will both help raise standards and where necessary redirect capital.

8. You should not put too much emphasis on recently designed metrics, methodologies or collaborative
initiatives yet – no matter how useful they appear to be. Further evolution is inevitable for ‘early stage’
work. The focus should be the ‘real issues/challenges’ (eg reducing emissions, ending deforestation,
improving equality). Initiatives should be highlighted as example/preferred means of achieving these
goals. (Maybe something like ‘Preferred Methodology Given Current Capabilities’? PMGCC?)

9. There must be no chinks in the chain. This information must get through to end investors and must be
seen as ‘business as usual’ from manufacturer to client. (We can discuss further – see notes on
intermediaries in appendix).

10. The FCA should focus on what only a regulator can do, which I’d suggest would include requiring
transparency and agreeing some core disclosure structures and definitions. Aim to keep the ‘rules’ as
simple and flexible as possible is important as is reflecting or using other initiatives where possible.
Reducing duplication and contradictions will help keep costs down and benefit all – providing core aims
can be achieved (eg addressing climate change).

11. To replace Figure 3, I am suggesting a structure that mostly highlights key issues a fund focuses on . This
would be explained in a corresponding disclosure grid or report. Top level classifications could be ‘Basic,
Hybrid or Sustainability themed’ with a supporting ‘image’ along the lines of the following:

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