CCLA on SDR: ‘There will be a degree of testing, and that takes time’

CCLA's Peter Hugh Smith and James Corah express their views on the FCA's final policy statement

On Tuesday (28 November), the Financial Conduct Authority (FCA) released the final policy statement for its much anticipated Sustainability Disclosure Requirements (SDR), with many industry commentators reacting positively to the changes compared to their previous update.

ESG Clarity spoke with Peter Hugh Smith (pictured right) and James Corah (pictured left), chief executive and head of sustainability respectively at CCLA Investment Management, to hear their thoughts on the new disclosure requirements.

As an initial reaction, do you feel like the FCA have got SDR right?

Peter: Generally, yes, we think this is a good step in the right direction. There will, of course, be some challenges along the way, as there are with any regulations, and those challenges will vary from business to business, and from fund type to fund type. But the principle that the FCA is focusing on, guided by the considerable consumer research they have conducted over the last couple of years, is that consumers want their money to assist in building a better world or delivering real outcomes, and that’s important.

What SDR will focus on is separating people who build portfolios based on things that are already good, and others who build portfolios of things which they’d like to make better. We’re not saying the former is wrong or bad, but we do think that if you want to change the world, you have to buy the stuff that’s not quite so good so you can change it. SDR has been a very helpful way of achieving that, helping consumers understand what they’re buying, but it will also help the industry get better at defining what it does.

What are your thoughts around the introduction of a ‘mixed goals’ label, and how will funds be comparable under that label given that their goals may be different?

Peter: On the ‘mixed goals’ label, it was something that we, among many other firms, commented on in the consultation. Multi-asset funds have become an incredibly important part of the retail industry and having that excluded from SDR would have ultimately made the policy unworkable because so much of the industry would have had to be outside it on a technicality. So, including it was good, but it’s complex. What the FCA is doing with all these regulations is they’re pushing a set of principles, but not telling the industry exactly how to do it, and that makes it quite difficult for the industry and means that there’s always a degree of testing, which takes time.

James: For me, this has always been the obvious solution for multi-asset funds. When you’re looking at multi-asset funds, you’re quite clearly going to want a different change philosophy in infrastructure, than you’re going to want in equity, and you’re going to want something different in fixed to what you do in property. So, I think this is the only solution the FCA had for it.

On comparability, it can only improve what already exists, because there is currently no way of really comparing a multi-asset fund with another multi-asset fund on sustainability. So, I can see why people aren’t thinking it’s ideal. But I genuinely think it’s the best of a bad bunch of solutions, and we should really applaud them for it.

Investment strategies will no longer need to be assessed as credible by an independent party, with assessments conducted in-house. Do you think that’s a good thing as well?

Peter: Yes, I think so. If you’re constantly having to get an external audit, it ends up being about ticking boxes and ensuring you’re auditable rather than focusing on being impactful. Obviously, that doesn’t mean that managers won’t be held to account, and we expect the FCA will be quite strong in terms of enforcement with firms who they don’t feel are doing this correctly.

James: Taking this in a slightly different direction, at the end of the day, the people who are really going to judge the products are the underlying consumers. They’re the ones that will decide whether a product is credible or not. And there’s another important link in that chain – advisors and advisory firms need, through SDR, to be upskilled to the point where they can be a credible check and balance on what sustainability processes their managers are using. One of the CCLA’s core KPIs is making sure that our industry is increasingly a force for good, recognising that advisors probably don’t have the capability right now to assess or conduct engagement themselves. That’s why we launched AdvisorAction, which helps bring advisors together to work on that.

Do you think SDR policy exhibits and encourages interoperability between international standards, and what could the impact of the SFDR reviews in Europe be?

Peter: I think that’s one of the challenges in terms of SDR: they’re quite different to the SFDR articles being reviewed in Europe, which obviously makes things more difficult when you’re trying to sell a product both in the UK and in Europe. But I don’t think SDR is wrong because of that.

James: Without trying to sound like a populist: why should the UK not have a fit for purpose regulatory regime on sustainability, particularly when the alternatives such as SFDR are not fit for purpose and are causing so much chaos? Why shouldn’t we be looking after UK consumers by creating a very good regulatory regime? And that’s what I think SDR does. The asset management industry has to recognise that, actually, the UK is a leader in sustainable finance, has always been a leader in sustainable finance, and UK clients want something that is world leading. Let’s not rely on someone else’s regulation when it’s substandard, let’s get something really good. And the FCA should be applauded for doing that.

Anti-greenwashing rules are still in consultation, but we’ve got a timeframe for when that could be implemented. What are your thoughts, and how do you hope it shapes up?

Peter: The anti-greenwashing rule is important, because SDR does not cover all funds, and it’ll be interesting to see how much of the industry will decide they want to be in the SDR labelling regime compared to how many want to stay out of that regime. This anti-greenwashing rule will be of particular importance for those that stay outside the labelling system because it’ll set a minimum standard to ensure that funds can demonstrate that they are doing what they say they are doing. Without it, SDR will just become a corner of the market, rendering it a bit pointless.