UK regulator mulls minimum criteria for investment products classified as sustainable or responsible

FCA proposes multi-tier classification criteria for planned sustainability labelling system, while UK government announces ‘Transition Plan Taskforce’

The Financial Conduct Authority (FCA) has proposed a series of minimum standards for sustainable and responsible investment products in a discussion paper published today.  

The regulator published its “refreshed” ESG strategy and launched a discussion paper seeking initial views on disclosure requirements for asset managers and FCA-regulated asset owners under the planned Sustainable Disclosure Requirement (SDR) regime, as well as the UK’s planned sustainable investment labelling system. The input will inform policy proposals to be issued for consultation in the second quarter of 2022.  

This summer it was announced that the FCA and UK Treasury were collaborating on a labelling regime for sustainable investment products, which would allow consumers to “clearly compare the impacts and sustainability of their investments for the first time”.

And the recently published UK Greening Finance roadmap also outlined plans by the UK Government to consult on the potential introduction of mandatory labels for sustainability related investment products in the next couple of years. 

In today's discussion paper, the FCA sets out its thinking on criteria that could underpin a UK labelling system as well as minimum criteria for funds saying they are responsible or sustainable.  

Funds classifying themselves as sustainable would pursue specific sustainability characteristics, themes or objectives, and would be divided into three groups: impact, aligned and transitioning, it says.   

Impact funds would require the intention and ability to deliver and measure additionality through stewardship and investment decisions, with aligned and transitioning funds utilising sustainability characteristics or objectives in their investments, with minimum asset allocation thresholds for aligned funds.  

Funds labelled as responsible would simply have to demonstrate some level of ESG integration and stewardship, but would not have to follow a specific sustainability goal.  

The FCA is also welcoming views on “whether it may be appropriate also to set a baseline of ‘entry-level criteria’ at entity level. These would apply to the firm responsible for delivering the product and managing the investments.” 

“The aim would be to ensure that the firm’s own approach is consistent with the product’s aims and reflected in the design and delivery of the product. Criteria could include matters relating to systems and controls, governance, ESG integration and stewardship,” it added. 

The FCA is asking for comments on the discussion paper by 7 January.  

The FCA paper comes after the European Commission said in July it was planning to propose minimum sustainability requirements for products falling into the ‘light green’ category of its Sustainable Finance Disclosure Regulation (SFDR). 

Other topics the FCA is seeking input on include the role of short selling and derivatives in sustainability and the classification of climate transition and Paris-aligned benchmark products. The FCA said that responses would guide its policy design ahead of new proposals in spring next year.   

The strategy also sets out the FCA’s key ESG priorities, including supporting the development of a green taxonomy and encouragement of an “effective ESG ecosystem” of data, ratings, assurance and verification services. In a consultation in June, the FCA asked whether ESG ratings and data providers should be brought into its purview, and the case for closer regulatory oversight, and will feed back on this by mid-2022. The strategy also repeats that the FCA will consider regulatory action if there is insufficient evidence of active stewardship to advance environmental and social goals. 

In other UK news, the government has confirmed plans to require all financial institutions and listed companies to disclose their transition plans as part of its ambition to become “the world’s first net zero financial centre”.  

Legislation will be introduced to force institutions and companies to publish their transition plans on a comply or explain basis, as previously reported, but they will not actually be required to set a Net Zero target. 

To prevent greenwashing and set a “robust” standard for transition plans, a Transition Plan Taskforce will be established, with representation from regulators, NGOs, academia and industry. The FCA will also be formally involved, with the group reporting back by the end of 2022. Think tank E3G and the Centre for Greening Finance and Investment will act as the secretariat. Heather McKay, a Policy Advisor at E3G and its UK sustainable finance lead, said that the UK’s announcements “kicked finance day [at COP26] off with a bang. Net Zero financial hubs are critical if we are truly going to rewire the financial system and prevent climate breakdown. However, the devil lies in the detail, and in the delivery” 

In addition to regulatory measures, the government also announced a £576m financing package to mobilise green finance in emerging markets. £200m will be allocated to the Lowering Emissions by Accelerating Forest Finance Coalition, with a further £200m for development finance institution CDC’s new Climate Innovation Facility, and £110m for a facility designed to support investment in sustainable infrastructure across ASEAN. 

As well as financing for existing initiatives and facilities, the government said that it would launch a new ‘Climate Investment Funds Capital Markets Mechanism (CCMM)’, funded with the UK’s returns from its investments through the climate investment funds. The CCMM will issue green bonds “worth billions of pounds” to fund clean energy projects.