Digesting the FCA’s Sustainability Disclosure Requirements

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FBC hosted a discussion of the FCA’s Sustainability Disclosure Requirements consultation (CP22/20) on 1 November 2022, including a presentation by Mark Manning, the FCA’s lead on policy work relating to sustainable finance and investor stewardship (recording and Mark’s slides available here for FBC corporate members).

Our panel, led by FBC senior adviser Brandon Horwitz, also included Sandra Carlisle, Head of Sustainability at Jupiter Asset Management and Julie Patterson, asset management and fund regulation expert, fund board iNED and chair of the Investment Association’s Sectors Committee.

Mark made clear that the FCA was aiming to achieve three key outcomes: helping consumers navigate the market for sustainable investment funds more effectively, improving trust in the market, and improve transparency more broadly through good information flows leading to improving market integrity.

Introducing labels and classification aims to ensure that consumers can distinguish between funds  that are genuinely seeking to achieve positive sustainability outcomes alongside a financial return versus those just consider Environmental, Social and Governance (ESG) factors as part of their investment process.  The clear message, from feedback provided to the FCA, was that while funds using exclusions, tilts or ethical overlays may meet a consumer need, these strategies alone are not deemed sufficient to plausibly deliver positive sustainability outcomes.

We heard about the expectations of consumer-facing disclosures which essentially should describe: what a product is seeking to achieve, how it is going about it, and how it is performing against its sustainability related claims and objectives over time. Mark also explained how the more detailed layer of disclosures build on existing Task Force on Climate-Related Financial Disclosures (TCFD) requirements which already apply to asset managers and other firms today. It was also clear that while environmental factors are the focus today, social and governance factors are likely to feature in the future as and when the International Sustainability Standards Board (ISSB) clarify disclosure frameworks and associated measures for these areas.

Turning to fund boards in particular, Mark’s message was that the board should satisfy itself that a fund that claims to pursue sustainability outcomes is designed and resourced appropriately to do so and to meet its commitments to consumers. He also made clear that the fund board should also own the ultimate disclosures that are made to consumers, as these are the basis upon which consumers will decide whether or not to invest in a sustainable investment fund.

There was a robust discussion about how implementing sustainable investing requires appropriate knowledge, skills and experience in the first line and assurance from the second and third line as well as the regulator being well equipped to supervise effectively.

The key messages from the discussion  echoed the findings of recent research led by FBC on overseeing sustainable investment funds, available in the new report ‘Sustainable investment: navigating the challenges for fund governance’.

Commissioned by the First Sentier MUFG Sustainable Investment Institute, the research provides practical suggestions for how fund boards can improve their oversight of sustainable investment funds to maintain investor confidence and avoid greenwashing.

See here for a copy of the report and a recording of the launch event.

The panel discussion and Q&A explored themes including why the FCA chose not to include ‘do no significant harm’ or ‘principal adverse impact’ disclosures, which are key features of the Sustainable Finance Disclosure Regulation (SFDR). The FCA view was that that while these disclosures are important, they have proved problematic in the EU regime and their focus has been primarily on addressing consumer needs and protecting consumers. Mark did clarify that the FCA does expect firms to be clear on how they have traded off different sustainability related considerations in designing and delivering on a product. In the example of an environmental focused fund, the FCA would expect the asset manager to describe how it has traded off these environmental objectives against social objectives.

A challenge was raised as to whether this level of regulation is really justified and whether it is edging into public policy. Mark’s view was that the FCA’s intervention was informed by issues identified in reviews of fund applications by the FCA and consumer research. He also noted that the proposed rules are justified in terms of the FCA’s responsibility to ensure that markets are functioning well and with integrity as well as ensuring competition is taking place in the interest of consumers

There was a discussion of if and when the regulation of ESG data and rating providers will be brought into the FCA remit, with Mark noting that it is up to the Treasury to decide this as these providers are currently outside of the regulatory perimeter, but that a first step will be a voluntary code of conduct based on the IOSCO recommendations on regulating data and ratings firms from October 2021.

FBC ESG and Responsible Investing Services in 2023

Sustainable Investment Fund Oversight Review

2023 sees the launch of FBC’s new consulting service for fund boards wanting to evaluate the way in which they oversee funds with ESG, responsible investment or sustainability objectives. Building on FBC’s in-depth research and our extensive regulatory engagement in this area, we will be offering firms a detailed, bespoke review of how their fund board oversees these funds to help identify areas of strength and opportunities to enhance their governance. This will include a key focus on controls to avoid ‘greenwashing’.

Sustainability Disclosure Requirements (SDR) – research and engagement

As firms prepare for the publication of the FCA’s SDR rules in 2023, FBC will be on hand to support fund board directors and their executive colleagues with a series of discussion events and insights building on our own research and engagement outlining what fund boards need to know and the actions they should consider taking.