The UK has implemented the latest stage of its sustainability disclosure requirement (SDR), which is designed to encourage manufacturers of investment products to adopt measures that will prevent greenwashing.
Before the measure was even introduced by the Financial Conduct Authority (FCA), however, it was apparent that fund managers’ likelihood of adopting the guidance would be limited by their data setups. Experts have told Data Management Insight that solving this challenge would be critical to meeting the goals that underpin the SDR.
Since July 31, managers have been asked to voluntarily label their products according to the degree to which they can be considered sustainable.
Those labelled “Sustainability Improvers” denote assets that have the potential to become sustainable but may not be now. “Sustainability Impact” products are those that invest in solutions that bring beneficial ESG impacts. “Sustainability Mixed Goals” labels indicate investment vehicles that combine the other two. A fourth, “Sustainability Focus”, is reserved for products that have at least 70% of allocations to sustainable assets.
Those seeking to adopt the labels must show they meet the requirements by the beginning of December.
Clarity Needed
Critics have predicted a slow uptake of the labels by fund houses, with some arguing that more clarity is needed about how the labels can be properly applied. At the heart of that challenge is likely to be firms’ ability to gather and use the data necessary to make those decisions.
The FCA said last year that asset managers and manufacturers must have robust data, governance and technology setups to adopt its measures. A poll during a webinar by consultancy firm Bovill Newgate, however, found that 90% of financial services respondents said they were not equipped with the correct ESG reporting data.
Emil Stigsgaard Fuglsang, co-founder at ESG data and consultancy firm Matter said data would be a potential pain point for firms operating in the UK.
“While many global investment managers already have these competencies in place thanks to the requirements of other regulations, the majority of smaller British firms do not,” Fugslang said.
“This means they face the challenge of accurately defining sustainability in their investments and implementing data and analytics solutions to track and document their performance against these definitions at the fund-level. This will be no easy task, but those who take action now will be best prepared by the December 2 deadline.”
Investor Protections
The labelling guidance follows the publication of anti-greenwashing advice by the FCA earlier this year, which seeks to protect investors from abuse by encouraging asset managers and manufacturers to be clear and precise in the descriptions of their products.
The FCA is keen to safeguard investors against being lured by false claims of an asset or product’s sustainability. The threat of greenwashing has been wielded as a weapon in an ESG backlash, most notably in the US, that has seen billions of dollars pulled from sustainability-linked funds.
While the measure is designed primarily to protect retail investors, it is expected also to have an impact on institutional capital allocators. One of the first funds to adopt an SDR label, AEW’s impact fund, has taken the Sustainable Impact categorisation and is offered only to institutions.
The SDR is also widely predicted to set transparency standards that institutions are likely to follow.
ESMA Guidance
The UK’s latest SDR implementation came as Europe’s regulators sought changes to some of the European Union’s disclosure rules. The European Securities and Markets Authority (ESMA), last week suggested changes that would affect the bloc’s lynchpin Sustainable Finance Disclosure Regulation (SFDR) and other measures.
In an opinion piece it set out a set of proposals that urge tweaks to the EU’s wider sustainable finance framework, arguing that there needs to be greater “interconnectedness between its different components”.
Among ESMA’s proposals are a phasing out of the phrase “sustainable investments” within the SFDR and a recommendation that market participants should instead make reference only to the green Taxonomy that underpins European market rules. Further, it suggested an acceleration of the Taxonomy’s completion, incorporating a social taxonomy.
It also urged that ESG data products be brought under regulatory scrutiny to improve their quality.
Clash of Standards
Other recommendations on how sustainability products should be described could conflict with the new measures introduced by the FCA.
ESMA suggests that all products provide basic information on their sustainability, with greatest detail given to institutional investors. It also urges the introduction of a “best in class” product categorisation system. That would include at least a “Sustainability” classification, denoting products that are already green, and a “Transition” grouping of funds that aim to be sustainable.
Martina Macpherson, head of ESG product strategy and management at SIX Financial Information, said institutions would need to familiarise themselves with each code.
“Challenges for asset managers remain to categorise funds in line with the UK’s labelling regime, and to align them with the EU’s fund labelling rules introduced by ESMA,” MacPherson said. “Overall, ESG fund labels represent a significant next step to address transparency and greenwashing concerns. Meanwhile, the mounting public and regulatory attention surrounding sustainable investment demands firms to use the most reliable, legitimate, and timely data to inform their decisions.”
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